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

Saturday, April 30, 2011

week ending Apr 30

US Fed balance sheet approaches $2.68 trillion - The size of the U.S. Federal Reserve's balance sheet reached another record in the latest week, spurred by its $600 billion bond buying program aimed at supporting economic growth, Fed data released on Thursday showed.  The balance sheet expanded to $2.675 trillion in the week ended April 27 from $2.67 trillion the previous week.  The central bank's holdings of U.S. government securities grew to $1.413 trillion on Wednesday from last week's $1.402 trillion total.  For balance sheet graphic:  Meanwhile, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae. Freddie Mac  and the Government National Mortgage Association (Ginnie Mae) totaled $927.02 billion, down from $933.22 billion in the latest week. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system totaled $126.19 billion, below $128.46 billion a week earlier.

US Fed Total Discount Window Borrowings Wed $16.80 Bln‎ - The Fed's asset holdings in the week ended April 27 climbed to $2.695 trillion, from $2.690 trillion a week earlier, it said in a weekly report released Thursday. Holdings of U.S. Treasury securities rose to $1.413 trillion on Wednesday from $1.402 trillion the previous week.  Thursday's report also showed total borrowing from the Fed's discount window fell to $16.80 billion Wednesday, from $17.62 billion a week earlier. Borrowing by commercial banks increased to $13 million Wednesday, from $6 million a week earlier.  U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, rose to $3.447 trillion from $3.423 trillion.  U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.686 trillion from $2.663 trillion. Holdings of agency securities rose to $761.26 billion from the previous week's $760.29 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--April 28, 2011 

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

Parsing the Fed: How the Statement Changed - The Feds statement following the April meeting noted no change in policy, as the central bank signaled it will complete its bond-buying program this quarter as planned. (Read the full April statement.)

The FOMC Statement: No Change in Course - Here's the FOMC statement. A quick reading doesn't reveal any surprises. Rates will remain at "exceptionally low levels for the federal funds rate for an extended period," QE will continue as scheduled, and long-term expectations of inflation are stable even though prices have ticked up recently due to oil and commodity price increases. The Fed doesn't explain why, if both inflation and employment are below target levels, QE3 is out of the question. It merely states that "The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability." If it's prepared to do so, why not take action?: Hopefully someone will ask something along those lines at Bernanke's press conference later today. It's likely fear of inflation in the future that is holding the Fed back, but I'd like to hear the basis for those fears:

Federal Reserve's Actions May Increase Unemployment, Fed Economist Says - The Federal Reserve's purchases of more than $2 trillion in mortgage and U.S. government debt may cause an upswing in unemployment, a top regional Fed official argued Thursday in a new paper that counters the central bank's position. The forecast by Yi Wen, an assistant vice president and economist at the Federal Reserve Bank of St. Louis, challenges a chorus of pro-purchase research published by the Fed's Board of Governors in Washington and its regional banks in San Francisco and Boston. The Fed's $2.3 trillion asset-purchase programs could lead to a 2.2 percent rise in the unemployment rate in the long term, Wen wrote. The economist argued that the increase in bank reserves -- a result of the Fed's buying programs -- could lead to an increase in the amount of money flowing through the economy, which in turn would lead to inflation. Over time, that would lead to an increase in joblessness, he reckoned.

Fed Searches for Next Step - The Federal Reserve is likely to begin closing a wide-open credit spigot this week—but faces a major decision: when to start draining the excess credit out of the economy by raising interest rates. Federal Reserve officials on Wednesday are expected to signal that in June they plan to end their controversial strategy of buying $600 billion in U.S. Treasury bonds to spur the economy. That would mark a milestone in the historic efforts by the central bank to stimulate economic growth.  While analysts and investors debate whether the end to the bond-buying effort will have a significant impact on financial markets, the Fed is contemplating when and how to begin draining the credit it pumped into the economy during and after the global financial crisis. That tightening of credit still looks at least several months off, if not longer, and could take a while to unfold. Most Fed officials, as well as many economists and investors, think the end of the Fed's two major bond-buying efforts—often called "quantitative easing" or dubbed QE and QE2—will pass without any significant disruptions to markets or the economy.

Feds Bullard:‘Reasonable To Expect First Fed Tightening By End of 2011 - The Federal Reserve is likely to pause before making any changes to monetary policy when its bond-buying program ends in June, but a stronger economy and rising inflation could lead the central bank to start tightening credit by the end of 2011, a Fed official said Friday.In an interview, Federal Reserve Bank of St. Louis President James Bullard said it was “reasonable” to expect the central bank would slowly begin to unwind its easy-money policies before the end of the year.The first step is likely to be allowing the Fed’s huge balance sheet to gradually shrink by no longer reinvesting the cash it receives when its mortgage and possibly also its Treasury bond holdings mature.“We do have rising inflation and rising inflation expectations making me a little bit nervous,” Bullard said. “We’ve got to start taking some steps to start to tighten monetary policy as we continue on through 2011 to make sure we don’t allow inflation to get away from us.”

Inside the Fed, Not When but How - As the Federal Reserve waits for the right moment to begin tightening credit, it is working at hashing out a plan for how to do it. Though the Fed is still months away from actively unwinding its easy-money policies, the intensity of the internal discussion about how to tighten has picked up in recent weeks. It is likely to be debated, though not resolved, when Fed officials meet Tuesday and Wednesday The first step toward a tightening is fairly straightforward: stop easing. The Fed is widely expected to end its planned $600 billion of Treasury purchases in June. The Fed likely will embark on some combination of raising short-term interest rates and reducing more than $2 trillion of Treasury and mortgage securities on its balance sheet. But in doing so, it faces several challenges. First, the short-term interest rate that it controls, the federal-funds rate at which banks lend to each other overnight, could be harder to push up than in the past. The Fed has pumped so much money into the financial system that banks are flush with reserves, and that supply will work to hold the rate down. Second, the Fed's purchases of longer-term securities, an effort to keep long-term rates down and aid the economy, left the Fed bank with $1.3 trillion of long-term Treasury debt and $934 billion in mortgage-backed securities. Over time, officials want to reduce these holdings.

Dudley Seeing Interest on Reserves as Tool of Choice Sparks New Fed Debate - Federal Reserve officials are staking their inflation-fighting credibility on an untested tool: the power to pay interest on bank reserves.  Congress granted the Fed this ability in 2008, and Chairman Ben S. Bernanke, Vice Chairman Janet Yellen and New York Fed President William Dudley have all cited it as a main reason why they’ll be able to keep the U.S. economy from overheating after pumping record amounts of cash into the financial system. Raising the rate, currently at 0.25 percent, is intended to entice banks to keep their money on deposit at the Fed instead of loaning it out and stoking inflation.  With the benchmark overnight lending rate trading at 0.1 percent, less than half the deposit rate, it isn’t clear how much control the central bank can exert over borrowing costs by raising the interest on reserves, said Dean Maki, chief U.S. economist at Barclays Capital. Internal critics also have cast doubt on the tool’s effectiveness. Philadelphia Fed President Charles Plosser said last month it isn’t a cure-all because it doesn’t address the need to shrink the central bank’s balance sheet and reduce the amount of reserves in the system.

Stimulus by Fed Is Disappointing, Economists Say - The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.  But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.  As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.  “It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, referring specifically to the bond-buying program.

Dissatisfaction with QE2 - This Sunday New York Times piece captures some disquiet about what has been, or has not been, accomplished as the result of the Fed's QE2 asset purchases. The piece illustrates all of the problems with the policy that one might have anticipated at the outset.
1. Central bankers should not claim credit for things they cannot control.   Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. So, where is the economic growth we were promised? The employment/population ratio is still in the toilet, and by all reports the upcoming first-quarter 2011 GDP numbers will be weak. For anyone paying attention, Bernanke has now lost credibility.
2. Economists who might have supported your policies will run the other way when the going gets tough. When QE2 was announced, Mark Thoma seemed to like it, but had some quibbles. He thought it wasn't big enough, and that the Fed should be purchasing longer-maturity Treasuries. The New York Times now quotes him as saying:  It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power
3. The Fed is seen as screwing up, so everyone wants to butt in with their own stupid suggestions. Here are some examples. The first is the suggestion, again, that it's not working because the Fed is not doing enough, i.e. it should buy all of the available Treasury debt: So, quit treading water, and swim across the Pacific Ocean.

QE2 Disappointment (Wonkish) - Krugman - People have been asking me about this article on the disappointing results of the Fed’s quantitative easing. What I would say is that QE2 has been implemented in such a way that there was no reason to expect a lot of traction on the economy; the only channel through which we might have had large effects was via expectations. And that part mainly happened before the policy actually began. What is the Fed actually doing? It isn’t “printing money”; it has been buying long term bonds, paying for them by adding to (interest-paying) bank reserves. In effect, it has been borrowing short and lending long. As Jim Hamilton explains, the right way to think about this is in terms of the consolidated balance sheet of the Fed and the feds — of the central bank and the Treasury. When you look at it that way, we’re talking about a reduction in the average maturity of the debt held by the public, which should, other things equal, raise the price of long-term debt and hence reduce long-term interest rates. But as Hamilton points out, even as the Fed has been acting to reduce that maturity, the Treasury has been increasing the maturity of its borrowing, to such an extent as to swamp the Fed’s efforts.

Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets! - Yves Smith - You heard it first in the blogopshere. From the New York Times: The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates. But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs…. We’ve argued repeatedly, as have others, that well targeted fiscal stimulus and more private sector debt restructuring were the right medicine. But Obama and his bankster friendly advisors had no stomach for much of either remedy.  For what it’s worth, QE and QE2 have gotten a barrage of criticism. Jim Hamilton looked at the much bigger first round of QE and concluded that it lowered long bond yield by only 17 basis points. Paul Volcker thought making a fuss over the program was silly, since the Fed used to buy bonds as a matter of course. And as Marshall Auerback has pointed out, the idea of a fixed dollar amount of purchases was bizarre. There was no way of knowing what if anything it would accomplish. It would have made more sense for the central bank to set a rate target (say for whatever longer-dated maturity it chose to target) and buy whatever it took to keep that level.

Operation Twist and the Effect of Large-Scale Asset Purchases - SF Fed Economic Letter - The Federal Reserve's current large-scale asset purchase program, dubbed "QE2," has a precedent in a 1961 initiative by the Kennedy Administration and the Federal Reserve known as "Operation Twist." An analysis finds that four of six potentially market-moving Operation Twist announcements had statistically significant effects and that the program cumulatively caused a significant but moderate 0.15 percentage point reduction in longer-term Treasury yields. These results can be used to estimate QE2's effects.

Worrying about QE2 - What happens in June when the U.S. Federal Reserve stops buying $100 billion in U.S. Treasury notes every month as part of the program of quantitative easing know as QE2? You've heard the wails of worry. Which buyers, if any, will pick up the slack when the Fed exits this market? At the least, U.S. interest rates will have to rise to attract those additional buyers. At the worst, a lack of buyers will tip over the entire tower of cards that is U.S. government finances. And I'm starting to hear another, still-building cacophony of worry. The Fed's most recent program of bond buying will have put $600 billion into the U.S. money supply by the time it's over in June. A significant portion of that hasn't stayed in the United States. Instead, some of that money has gone overseas, seeking better returns in Brazil, China, Turkey and Indonesia than it can get in any domestic U.S. market. What will happen, the emerging worry goes, when this hot money starts to flow out of the financial markets in Brazil, China, Turkey and Indonesia? Won't the flight of this hot money create another global financial crisis akin to the Asian currency crisis of 1997 that brought the world to the brink of a financial meltdown? The key thing that both these scenarios have in common is that they envision a big blow-up -- that things will go wrong quickly and in a big way.

Who's disappointed in QE2? - BINYAMIN APPELBAUM has written a story that's gotten a lot of attention today, headlined "Stimulus by Fed is disappointing, economists say". I have to say, I find the piece itself a bit disappointing, for two reasons. First, it provides almost no sense of against which benchmarks QE2 has disappointed; Mr Appelbaum names an estimated impact of QE2 purchases on interest rates, but he doesn't make any explicit macroeconomic comparison using numbers from before the Fed began talking about QE2 and from now. And second, the piece does illustrate the way in which the Fed left itself open to this kind of criticism and potentially reduced its ability to respond appropriately to economic conditions.

Was the Fed's QE2 a Failure? - There is a lot of analysis out today on the Federal Reserve's controversial plan to buy $600 billion in U.S. Treasury bonds to spur the economy. The program, the second round of quantitative easing (ergo QE2) since the start of the financial crisis, is scheduled to end in June. The Fed is likely to announce later this week that they plan to stick to that schedule. So that has sparked a lot of discussion about whether QE2 should earn Bernanke an A or an F. On sister blog Swampland, Michael Grunwald, who wrote TIME's 2009 Person of the Year profile of Bernanke says he thinks the plan deserves an F or close to it. Perhaps a D. But no better than a C. My own feeling is that the lack of recovery is not a Bernanke failure but an Obama failure. Bernanke's job as the central banker was to push to maintain an expanding money supply. That's Milton Friedman's playbook. And he has done about everything you can do to do that.

Joe Stiglitz and Joe Gagnon Debate QEII - This video comes via Mike Konczal. Mike adds: Side note: Gagnon earlier in his talk said that “one of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse. I have nothing but incredible, there’s just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn’t take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.” I haven’t heard this critique before and I thought it was really interesting.

QE2 and the Laffer Curve. - I am not able to get anyone to debate me on monetary policy in a liquidity trap. Therefore I resort to crude provacation. I recall two claims about monetary policy which were not controversial until this year. First that the effects of a shift in monetary policy peak after roughly 6 months. Second that it acts through investment and especially housing investment (the second follows from the view that it acts via interest rates but not the short term rates which the Fed can control but medium and long term rates which matter a lot for housing and some for investment in productive capital). After fiddling with the dates to avoid the inconvenient fact that medium term nominal interest rates went up when the actual QE2 purchases began the money supply side economists decided that the date the policy began was late August. That means that the data you present here would, in a sane world, be the last nail in the coffin of the hypothesis that the Fed can stimulate the US economy when it is in a liquidity trap by buying 7 year Treasury notes. I get rude after the jump.

QE2 is Irrelevant - How can government policy make us better off? To bring about a welfare improvement, there must be some collective action we can take through our government that cannot be replicated by the private sector. The government must have some particular advantage in the activities it chooses in order to be doing anything useful. If the government is bad at running coal mines, it should let private firms run coal mines, and if the government is a bad banker, it should stay out of the banking business. However, we know that the government has an advantage in doing some things. For example, I think we can all agree that the government has an advantage in running the army. If the government is no better or worse than the private sector in some activity, then if the government engages in more of that activity this is irrelevant. The government's activity simply displaces the same private activity one-for-one. If the government and the private sector have exactly the same technology for producing coffee cups, the government cannot increase the supply of coffee cups by producing more, unless it drives the private sector producers out of business.

Marshall Auerback: QE2 – The Slogan Masquarading as a Serious Policy - The U.S. Federal Reserve signaled the end of its controversial $600 billion bond-buying program as planned. And not a moment too soon. This was probably the most over-hyped event since the launching of the Titanic. Frankly, I’m not surprised by the lack of impact of QE2. I’ve always regarded it as a slogan, rather than a policy, and contended that its effects were oversold and predicated on a fundamental misunderstanding of basic monetary operations. The Fed introduced a program whose central thesis was that the unprecedented central bank intervention would reboot bank lending. Yet three years later, total bank loans are lower than they were before the Fed undertook quantitative easing. The inability of monetary policy initiatives to do anything more than stabilize a very shaky financial system was always clear from the outset, if only policy makers truly understood what the problem was. There wasn’t a shortage of credit nor were interest rates punitive with respect to intended borrowing. People just didn’t want to borrow because the economy was collapsing and they were carrying too much debt. As Stephen Randy Waldman has noted, the mainstream belief that quantitative easing would stimulate the economy sufficiently to put a brake on the downward spiral of lost production and increasing unemployment was nonsensical and based on a completely wrongheaded understanding of basic monetary/banking operations.

Holding Bernanke Accountable - - Mr. Bernanke spent much of his academic career arguing that the Fed should be less opaque, and, as chairman, he has put his ideas into action. Now it’s time for those of us in the media to hold up our end of bargain. In the spirit of democratic accountability, we should ask hard questions — and we shouldn’t let him get away with the evasions and half-answers that members of Congress too often allow Fed chairmen during their appearances on Capitol Hill. One question more than any than other is crying out for an answer: Why has Mr. Bernanke decided to accept widespread unemployment for years on end, even though he believes he has the power to reduce it?  The Fed’s own forecasts suggest that the unemployment rate won’t fall below 5 percent for perhaps another five or six years. Mr. Bernanke believes the Fed “retains considerable power” to reduce unemployment faster, despite the fact that its benchmark interest rate is zero, as he’s said before. Yet he has been hesitant to use that power.

The Biggest Show On Earth Is Coming to Town - Bernanke will be giving his first real press conference on Wednesday, April 27, 2011, at 1:00 p.m. EDT.  This particular Fed meeting is crucial, because on June 30, 2011, the Fed is planning to end its second round of quantitative easing (Fed purchases of treasury bonds). Through this program they are currently purchasing up to 85 percent of the bonds issued by the U.S. Treasury since November 2010. What will the Fed do next, stop altogether or phase the program out? Future Fed actions are based on current statistics, and the Board might do either, or they might just decide to continue easing a bit longer if the numbers so indicate. The consensus seems to be that the Fed will stop their purchases but continue trying to hold down interest rates in other ways. However, a consensus does not a crystal ball make. Bernanke is probably hoping he doesn't gaff and send the world's markets into fits of dyspepsia. The slightest misplaced word, sudden bead of sweat, or uncontrolled twitch of Ben's brow could add an unknown dimension of insecurity to his studied words. Will the end of QE2 cause bonds to fall into a tail spin? Will it turn the recent stock market recovery into a bursting bubble? Will it cause a flight from the dollar? Will a misplaced comma or tremble of the voice start World Recession III?

Fed Sweat the Details of First News Conference - The Federal Reserve is doing some careful stage planning for its first-ever public news conference Wednesday afternoon following a two-day policy meeting. Details that would be extremely mundane for most other institutions—such as who gets in, how Chairman Ben Bernanke should kick things off, and how questions will be asked—have potentially market-moving importance in this instance. Analysts and traders on Wall Street have been scrambling to find out what to expect. "People are trying to get their arms around the whole thing," said David Greenlaw, chief U.S. economist with Morgan Stanley. He has quizzed colleagues who follow the European Central Bank, which, like other central banks, has held news conferences for years, to understand how it might unfold.

Pimco's Observations As The US "Reaches The Keynesian Endpoint" - The QE2 Ponzi Scheme Is "Nothing But A Profit Illusion - Once again, it is the world's biggest bond manager which either is really tempting fate by telling the truth in an increasingly more aggressive manner day after day, or is engaging in the most acute case of reverse psychology ever seen, coming out with the most critical opinion of the Fed's actions on the verge of the Fed's historic first press conference. And this one is truly a stunner, far more real than anything even Bill Gross has said in the past: "Just as Charles Ponzi needed donuts to turn back a suspicious crowd of investors, the Fed needs “donuts” in order to fill the bellies of the literally millions of investors worldwide who worry about the alarmingly large U.S. budget deficit and the impact that the U.S. debt dilemma could have on their Treasury holdings...Their collective buying has created what we believe to be a profit illusion with many investors mistakenly believing they can continuously reap profits from perpetually falling bond yields and rising bond prices, just as they have had opportunity to do over the past 30 years, amid the great secular bull market for Treasuries and the bond market more generally...For many reasons, this “duration tailwind” for Treasuries can’t last, particularly because the United States has reached the Keynesian Endpoint, where the last balance sheet has been tapped."

Ben and the Fed's excellent adventure - The Federal Reserve chairman's first regular press conference in the US central bank's 98-year history was supposed to make more news when it was announced than when it actually took place. And so it proved. There was nothing much to rile the markets in Ben Bernanke's comments - on the dollar, interest rates or the US deficit. The news, such as it was, had come earlier, in official confirmation that the second round of quantitative easing would be completed, on schedule, by June. Oh yes, and central bank has revised down its US growth forecast for 2011, from a midpoint of around 3.65% to 3.2%. Here were the few nuggets from the press conference that caught my ear.  First was the gloomy tone on inflation, in what seemed to be almost a throwaway comment from the Fed chairman. Officially, the Fed does not think that inflation poses a long-term risk to the economy, and it does not see any immediate reason to tighten policy to confront it. That was what the markets took from the official statement. But Bernanke had this to say, later on, when asked whether the Fed could, or should, be doing more to raise employment: "... the trade-offs are getting less attractive at this point. Inflation is higher... inflation expectations are higher, and it's not clear we can get additional improvements in payrolls without extra inflation risk... in my view if we're going to have a sustainable recovery with healthy job growth, we need to keep inflation under control."

Ben meets mike - THE Federal Reserve’s April policy statement was a dull one by central-bank standards, which is saying something. Growth looks softer than expected and inflation is a smidgeon more energetic. Still, America’s central bank will complete its $600 billion programme of asset purchases as scheduled, and the language promising near-zero interest rates for an “extended period” didn’t change. Markets yawned. The financial press, however, was astir. The April 26th-27th meeting of the Fed’s policy committee concluded with an historical first, as Ben Bernanke, the Fed chairman, welcomed journalists into the central bank’s Washington, DC headquarters for a press conference.. There were some tidbits. Probed on the large increase in forecast inflation for 2011, up to between 2.1% and 2.8% from the 1.3-1.7% January estimate, Mr Bernanke blamed rising energy costs which, he said, should stabilise or fall in the near future. The slow pace of recovery in labour markets was of great concern, he admitted, but the inflation trade-offs from additional asset purchases are “getting less attractive”. Markets should not expect another round of quantitative easing, or QE3.

Bernanke Defends Fed’s Role in Running Economy - The Federal Reserve1 chairman, Ben S. Bernanke2, on Wednesday conducted the first scheduled press conference in the central bank’s history, sitting behind a mahogany desk as cameras clicked and flashed. Mr. Bernanke explained his management of the economy in the calm, patient and serious manner of the college professor that he used to be.  He mostly retraced familiar ground, and the markets rose only slightly as he spoke, suggesting that investors learned little of consequence, although the three major indexes ended the day strongly. The news was in the spectacle of a Fed chairman addressing public concerns on live television.  The central bank, so careful for so long to cultivate a sense that it was above politics, will now hold regular news conferences just like so many others in Washington, hoping to improve its image and build support for its policies.  Mr. Bernanke’s message Wednesday was that the Fed was doing all it could to spur growth and increase employment without causing inflation to rise. He said that inflation must take precedence over employment because inflation would result in job losses.

Bernanke Wimps Out - Krugman - So Bernanke did get asked why, given low inflation and high unemployment, the Fed isn’t doing more. And his answer was disheartening. As far as I can tell, his analytical framework isn’t too different from mine. The inflation rate to worry about is some underlying, inertial rate rather than the headline rate; the Fed likes the core personal consumer expenditures deflator; and this rate has actually been running below target, indicating that inflation isn’t a concern: So this says that there is no tradeoff: more expansionary monetary policy is good in terms of both unemployment and achieving the Fed’s inflation target. But then, when asked why no further expansionary policy, he replied that he’s concerned about the “tradeoff”, that inflation might rise. This doesn’t make any sense in terms of his own expressed economic framework. I think the only way to read it is to say that he has been intimidated by the inflationistas, and is looking for excuses not to act.

There Will Be No NGDP Targeting - Here is a word cloud of words used by Bernanke during the press conference which was held today: As you notice, inflation was mentioned quite a bit, which, really, is something that you should expect from a QA with a monetary policymaker. Many are lamenting the fact that unemployment took a back seat, and Reuter’s itself challenges us to find the word “jobs” in the word cloud. Personally, I enjoyed the fact that Bernanke basically said jobs are someone else’s policy purview — which I view as the right response. However, the fact remains that monetary policy is not on target, and that is a problem for Bernanke. A bigger problem may be that 2% inflation isn’t a target at all! Could the US be following Japan’s lead into self-induced paralysis? In any case, here is the question (and rest of the e-mail, references removed) that I sent to be asked, which did not get asked:

Fed Existentialism - Questions at the Federal Reserve’s first-ever press conference broadly fell into three categories:

  1. Why isn’t the Fed doing more to ward off inflation?
  2. Why isn’t the Fed doing more to lower unemployment?
  3. Can the Fed actually do more?

The first two kinds of questions sort of canceled each other out, in that “doing more” on one-half of the dual mandate would undermine efforts to “do more” on the other half. It was the third category of questions that was more provocative, and that provided an important reminder that economics is not as precise or powerful a “science” as we often imagine or hope it to be. In one case Ben S. Bernanke, the Federal Reserve chairman, was asked “whether there’s anything that the Fed can or should do about” rising gasoline prices. And Mr. Bernanke lightheartedly acknowledged that this was beyond the Fed’s control: There’s not much that the Federal Reserve can do about gas prices per se. At least not without derailing growth entirely, which is certainly not the right way to go. After all, the Fed can’t create more oil. We don’t control the growth rates of emerging market economies. What we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation which will be much more difficult to extinguish.

QE3 or not QE3? That is the Question - That is the question.  Whether ’tis stupider in the US to erode its buying power with outrageous inflation or to take loans from overseas nations and, by defaulting, to end them?  Ben lies: we’re sheep; No more; and by being sheep we suffer the heart-ache and the thousand pricing shocks unmeasured by the CPI, ’tis a consumer tax, despite what you had wish’d.  Ben lies; we’re sheep: living a dying dream: Aye, there’s the rub; when fleecing sheep what jobs may come when we have scuttled all their buying power?   While Obama’s all talk and no action style of governing does tend to remind us of a short-lived Danish Prince, Ben Bernanke is no Polonius – more like Claudius who poisons our Father the Dollar and spends the rest of the play attempting to cover it up, mostly through word play and various machinations.  The prince, meanwhile, although told of Claudius’ guilt by his Father’s ghost and seeing a mountain of evidence build in front of him – does virtually nothing until, at the end, everyone dies.

Very High Bar for QE3 - My first thoughts: The FOMC statement was consistent with my expectations, while Federal Reserve Ben Bernanke sounded slightly more hawkish than I anticipated.  The latter confirms the view I took two weeks ago – near term inflation gains were not sufficient to justify altering the current policy stance, but would derail any additional increases to the balance sheet beyond June. In response to the Q&A portion, he said the impending weak Q1 growth numbers are the result of transitory factors (defense spending, exports, weather), and “possibly less momentum.”  The latter phrase was a bit disconcerting and should suggest a predilection toward additional asset purchases beyond June, but apparently the FOMC intends to focus on the transitory nature of the numbers.  See again my earlier piece.  The most interesting comments came in response to questions about whether the Fed should do more to lower unemployment and if QE2 is effective, shouldn’t the program continue?  Here was a more hawkish Bernanke.  As I noted earlier, growth forecasts returned to the pre-QE2 range, which should be a red flag.  Unemployment remains high, with only moderate job creation.  Core-inflation remains low, while the impulse from commodity prices on headline inflation is expected to be temporary.  Finally, he claims that QE2 was in fact effective.  So why not do more?  Because the Fed needs “to pay attention to both sides of the mandate” and the “tradeoffs are less attractive.”

Bernanke's Stock Answer - Krugman - A rather technical (but important point) from Bernanke’s press conference. From Floyd Norris’s live blog: Mr. Bernanke makes clear there will be no QE3. And he hopes that it will not have much impact when the purchases end: “We are just going to let the purchases end. Our view is that the end of the program is unlikely to have substantial effects on the economy or financial markets.” He bases that on the fact that all this has been well telegraphed, which is true enough, and then goes into jargon. “We subscribe to the stock view,” he says. That is not the view held by the stock market. Rather it is the size of the Fed’s portfolio — the stock of securities held by the Fed — that matters. And that will not change because the Fed will reinvest proceeds from maturing securities.  That’s exactly what I was saying in this post. Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.

Easy Street - Yes, Fedstock: That’s Woodstock for Federal Reserve watchers. Today was the most exciting day in all of recent financial history, because the Federal Reserve held its first post-statement press conference. Everyone had something to say about it! Here are the best:  What the Fed said, in decoder-ring form: Marketplace contributor Jill Schlesinger has a great, accessible conversation with experts, breaking down today’s meeting.  Play-by-play: In case you didn’t DVR it, the Journal’s Real Time Economics live-blogged the event.  Traders agree: Which means it may be time to worry. But Wall Street is betting it will take at least two more Fed meetings before the central bank even starts to think about raising interest rates.  B+: Pimco portfolio manager gives The Bearded One a more than passing grade.   Long-term unemployment: Our problem and every other country’s. When the dollar cries: The greenback dove downward after today’s Fed press conference. Your questions: Today I talked with Brian Lehrer about the Fed meeting. Listeners called in and compared banks with gangsters and grasshoppers.

FOMC TV - Ben Bernanke held his first post-FOMC meeting press conference today: Reactions: Mark Thoma, Tim Duy, Paul Krugman, Brad DeLong, David Beckworth, Calculated Risk, Free Exchange, Catherine Rampell. The conference was liveblogged by the Times' Floyd Norris and by WSJ reporters. The general tenor of the reactions (particularly the first five in the list above) is disappointment that it sounds highly unlikely that the Fed will undertake further expansionary policy beyond the $600 billion quantitative easing program currently in progress.  This is particularly frustrating in light of the Fed's own revised projections, released today:The "longer run" unemployment number can be taken as the Fed's estimate of the "natural rate," the lowest rate consistent with non-inflationary growth.  The Fed is saying that it expects the unemployment rate to be significantly above the natural rate for at least three more years.

When Is A Target Not A Target? - A further thought on Bernanke’s press conference, not too different from what Yglesias says, but I’ll put in in economese rather than English. So here it is: it turns out that the Fed’s 2 percent target for core inflation is not a target, it’s an upper bound. That’s not supposed to be how it works. If you really think that around 2 percent inflation is right (I’d prefer 4, but that’s a different issue), you’re supposed to view 1 percent inflation as being just as bad as 3 percent; in a situation in which inflation is below the target rate, you’re supposed to see a rise in that rate as a good thing. And correspondingly, if you’re where we are now, with below target core inflation and high unemployment, all lights should be flashing green for expansion. Instead, however, it’s clear that below-target inflation is considered no big deal, but that the Fed is extremely averse to seeing inflation rise above target, even temporarily.  This is really bad, especially when you combine it with the strong evidence that slight positive inflation can be consistent with a persistently depressed economy.  My verdict is that the Fed has now been bullied into ineffectuality.

A few takeaways from Bernanke Press Briefing -- First, there were no surprises.  Here is the video of the press conference (about 57 minutes).
• Bernanke commented that "extended period" probably implies that the Fed would not raise rates for a "couple of meetings" after the "extended period" language is removed from the FOMC statement. Back in 2003/2004, the Fed raised rates in June 2004, about six months after the last appearance of the "considerable period" language in December 2003.
• Bernanke discussed the "stock" versus "flow" view of the QE2 purchases, and he said the Fed does not expect any significant impact on markets when QE2 ends in June (we already knew this was the Fed's view). Bernanke also said the program would not be tapered off, but would just end.
• When asked if the Fed could do more about unemployment, Bernanke responded: "Going forward we'll have to continue to make judgments about whether additional steps are warranted. But as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate.

The next bank crisis is coming - We interrupt the bipartisan failure of our political class to address America’s budget, debt and jobs crises with an important update on the bipartisan failure of our political class to manage the fallout from our financial crisis. Or, as someone should have shouted at Ben Bernanke’s maiden news conference Wednesday, “What about bank capital levels, Mr. Chairman? Why are you letting the big banks gut them?” It’s shocking enough that not a single financier has gone to jail for helping usher in the financial meltdown — as compared with the thousands who did time in the far smaller savings and loan fiasco two decades ago.  But the more depressing thought is that the entire system is being booby-trapped to fail again. By fighting adequate capital standards, the big banks are lighting a fuse whose explosion one day could be even worse than the most recent eruption.

Jobs, Inflation and What Bernanke Said - NYT Room for Debate - Ben Bernanke, the Federal Reserve chairman, broke with the Fed's long tradition of being opaque about its decisions by holding a news conference with reporters after the regular meeting of the Fed’s policy-making committee on Wednesday.  The committee released a statement saying that the central bank would try to foster job growth without risking higher inflation. We asked some analysts to critique Mr. Bernanke's responses to reporters' questions about unemployment and the slow recovery -- and to point out what he didn't say.  Here are some responses to Bernanke's Press conference from The Room for Debate:

Green Shoots and the Fed - The Fed’s dual mandate requires it to pursue both full employment and price stability. Currently, however, the Fed is falling short on both of these goals. Employment is far below its full employment level, and inflation is running below the Fed’s preferred range of 1.5 to 2.0 percent. Inflation is expected to rise a bit in the short-run due to rising commodity prices, but the Fed says it expects commodity price increases to be transitory. Thus, none of the Fed’s forecasts show any long-run concern about inflation at all. The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why the Fed isn’t doing more to help with the employment problem? Why not a third round of quantitative easing? Bernanke was asked this question, but his answer was unsatisfactory. The potential benefit of further policy moves by the Fed is higher growth and lower employment. The potential cost of more quantitative easing is inflation. So the decision on whether to provide more help to labor markets comes down to a comparison of the expected employment benefits to the expected inflation cost.

Mark, Brad, and Ben - I thought I would take apart some of the commentary in this forum in the New York Times. There are five people writing here, and most of it is innocuous, except for the first two, Mark Thoma and Brad DeLong. Of course, those two opinions are guaranteed to be extremely close, but maybe the people at the New York Times who set these things up do not know that. In standard form, Mark Thoma's heart goes out to the unemployed, as mine does. However, Mark is much more certain than I am that the Fed can actually help these people out. Here is what Mark would have asked Ben about, if he could:  The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why isn't the Fed doing more to help with the employment problem? Why not a third round of quantitative easing?  Well, the answer to the question: "Why not a third round of quantitative easing?" should be: "Because it does not do anything." (see here). This is tag team. Thoma does labor market, DeLong does inflation. Brad's problem with Ben is pretty straightforward.  It thus looks like 1 percent is the new 2 percent: with current Federal Reserve policy, we are looking forward to a likely 1 percent core inflation rate for at least another year, and more likely three.

Stephen Williamson’s Baffling Conjecture - I, for the life of me, can not understand where Stephen Williamson is coming from in the recent posts he’s done claiming that Quantitative Easing is ineffective, and that the Fed is completely out of tools which it can use to boost the economy. Here are the points he made from his most recent post, entitled “Mark, Brad, and Ben“:

  1. Accommodative monetary policy causes inflation, but with a lag. I think Brad’s inflation forecast is on the low side, as maybe Ben does as well. The policy rate has been at essentially zero since fall 2008. Sooner or later (and maybe Ben is thinking sooner) we’re going to see the higher inflation in core measures.
  2. Maybe Ben is more worried about headline inflation (as I think he should be) than he lets on.
  3. Maybe in his press conference Ben did not want to spend his time explaining why the Fed spends its time focusing on core inflation. What every consumer sees is headline inflation, and they are much more aware of the food and energy component than the rest of it.
  4. As with my comments on Thoma, there is really no current action that the Fed can take to increase the inflation rate. More quantitative easing won’t do anything, so the Fed is stuck with saying things about extended periods with zero nominal interest rates in order to have some influence through anticipated future inflation on inflation today.

Is the Fed satisfied? - As I mentioned yesterday, the Fed's new economic projections revise down growth projections for this year (and for 2012 and 2013) and revise up headline inflation projections for 2011 substantially. Higher headline inflation is not expected to persist, however, and the upward revision to core inflation was smaller. At no point going forward does the Fed project a year with a core inflation rate above 2%. The unemployment numbers for 2011 have been nudged downward to take into account the surprising drop in the unemployment rate observed in recent months, but the general path of employment recovery is the same: gradual and protracted.Policy-wise, little has changed.  When the Fed decides to tighten, the first thing it will do is allow its balance sheet to contract naturally as securities mature. So, the big question: is this the right policy path? Just listening to Mr Bernanke, one might be excused for thinking that it actually is not. The chairman said that the FOMC is confident that its purchases supported growth and job creation, and he said that the FOMC was confident that it could tighten effectively when it needed to, and it projected that employment would remain above target and inflation below target. Add that up, and it's difficult to see the risk in committing to additional purchases.

Bernanke Calls For Anemic Recovery - The key moment in Ben Bernanke’s press conference was when he explained that the Fed wasn’t doing more to ensure full employment because it’s worried that additional action might cause inflation expectations to come unmoored and ”if inflation expectations were to become unmoored the cost of that in terms of employment loss in the future would be quite signifiant.” In other words, he’ll make sure to err on the side of policy that’s too tight because if he tries to get policy right he might accidentally end up being too loose and then he’d need to tighten in response and that would be bad.  Imagine you’re teaching a kid archery. You tell him to aim for the bullseye. But you also warn him that if the arrow goes to the left of the bullseye, he’s going to be in big trouble while if it goes to the right of the bullseye you won’t really mind. Well, naturally the kid’s never going to hit the bullseye. He’s going to shoot too far the right. And that’s the Fed right now.

Bernanke's press conference: The Fed chairman's grand plan to do absolutely nothing about unemployment, GDP growth, and gas prices. - Take gas prices. The average American is paying $3.89 a gallon, up from $2.89 just a year ago. Bernanke showed sympathy, noting that "higher gas prices are absolutely creating a great deal of financial hardship." But he described the problem as decidedly not his. "There's not much the Federal Reserve can do about gas prices, per se, at least not without derailing growth entirely. … After all, the Fed can't create more oil."  Well, what about GDP growth? Bernanke mostly addressed the topic during his opening remarks, an elaboration of a Federal Open Market Committee statement released just before the press conference. He noted that the median "longer run" projections for output growth range from 2.5 to 2.8 percent. Those figures do not sound particularly good. The United States routinely saw 4-percent annual growth in the 1990s—and we weren't catching up from a savage recession then. But growth, too, was described as outside the Fed's jurisdiction: "determined largely by non-monetary factors, such as the rate of growth of the labor force and the speed of technological change." What about joblessness? Surely the Fed has something to say about that, given that full employment makes up one-half of the bank's dual mandate? Bernanke said, "Progress toward more normal levels of unemployment seems likely to be slow." He continued with this not-so-rousing call: "We're going to have to, you know, continue to watch and hope that we will get stronger and increasingly strong job creation."

Will the Fed let America catch up? - THERE are two more monetary policy points I'd like to make before letting the discussion of the April Fed meeting end. First, there are two potential ways to approach a monetary policy target: rate-targeting and level-targeting. Officially, the Fed doesn't do either, but it more or less aims to keep core inflation at a shade under 2%. That's a rate target; when inflation gets too high you tighten, when it gets too low you loosen. An alternative would be a level target. The aim, in that case, is to foster a stable rate of long-run growth in whatever variable you're targeting. When price growth falls below target for a period of time, for instance, you then allow a spell of catch-up inflation sufficient to return the price level to the long-run trend line (and vice versa for periods above growth above target). Now, you can focus on prices or inflation. Or, as Scott Sumner recommends, you can focus on nominal GDP. Nominal output is just real output plus inflation, and it's equivalent to total spending in the economy. One thing that makes dovish writers uncomfortable with the increasing emphasis on controlling inflation is just how far both the price level and the level of nominal output have fallen below their long-run trends. Here's the core price level, for instance:

Damned If You Speak, Damned If You Don't - Ben Bernanke's performance at the Federal Reserve's historic first-ever press conference succeeded in pleasing no one while further stoking criticism from all sides. Congressman Ron Paul, Fed critic-in-chief, certainly wasn't impressed. He dismissed the event for most part, charging that Bernanke's media event was little more than "smooth talking, to make current policy sound reasonable." For Paul and other critics, there was only disappointment that the Fed didn't raise interest rates to fend off what some say is an approaching wave of higher inflation fed by increasing commodity prices. Yet the policy of keeping rates near zero rolls on, as noted in yesterday's FOMC statement and reiterated in Bernanke's public chat. If the lack of tightening frustrated some, others were distressed for what Bernanke didn't say, or at least didn't say clearly, in defense of QE2 and monetary stimulus.

Echoing Good Ideas From Brad Delong: Hey! Obama! Recess-Appoint Somebody to Kevin Warsh’s and to Peter Diamond’s Seats on the Federal Reserve Board Already! I recommend Joe Gagnon and Christie Romer. But any of a huge number of people would be good… Joe Gagnon is famous in the mainstream for his proposal to buy $2 trillion in Treasury debt (7-year average portfolio maturity, I believe). The problem with this plan (to the point that it is a problem, relative to baseline) is that it stipulates a quantity. $2 trillion may be (or have been) enough to raise NGDP expectations to a level consistent with rapid recovery (i.e. forcing real interest rates negative)…but then again, it may not be (or have been). In my mind, there is no reason to engage in quantitative targets such as these, unless you’re looking to put yourself in handcuffs. Will the Fed need to buy $2 trillion in securities…or even the entire national debt? I don’t know. That’s not the target. The target is the previous trend level of NGDP. Christina Romer has endorsed my plan above, and is, indeed (I believe), firmly (Suggestion II) in the “quasi-monetarist” camp:

The future of the Federal Reserve (Konczal) The videos from the panels at the Roosevelt Institute’s Future of the Federal Reserve Event are now online. There’s a video for introductory remarks by Joe Stiglitz and then videos for the full-length panels as well as videos broken down by speakers. I hope you check it out. I moderated the first panel on what the Fed needs to do now with unemployment, monetary policy and financial reform. Matt Yglesias made the point that this is a political problem, both because the macroeconomy determines political success and well as as a problem for liberal governance as well as liberal infrastructure. Joe Gagnon, who executed QEI for the Federal Reserve and wrote the paper that outlined a $2 trillion dollar purchase for QEII in December 2009 (which the Fed did a quarter of a year later when it actually executed QEII, a delay that Gagnon said cost the United States 1 million jobs) talked about his time at the Fed and argued for extending and expanding QEII through the end of the year.

Thomas Palley on How to Fix the Fed - Yves Smith - The Roosevelt Institute hosted a conference yesterday on the future of the Federal Reserve, with the speakers including Joe Stiglitz, Jeff Madrick, Matt Yglesias, Joe Gagnon, Dennis Kelleher, Mike Konczal and Matt Stoller. Yours truly broke her Linda Evangelista rule to attend.  The discussion included the contradictions in the central bank’s various roles, its neglect of its duty to promote full employment, and its overly accommodative stance as a regulator, which has been enlarged thanks to Dodd Frank. You can visit the Roosevelt site to view each of the three panels in full (they include the Q&As, which were very useful), the introductory remarks by Joe Stiglitz, or the presentations by each speaker separately. I encourage you to watch some of the panels, and to entice you, I’ve included videos from two talks I particularly liked below. Thomas Palley put forward a very straightforward program for making the Fed more accountable: Thomas Palley, Future of the Fed from Roosevelt Institute on Vimeo. Another eye-opening presentation was Tim Canova’s discussion of how the Fed operated in World War II, which seems to be virtually expunged from official histories:  Tim Canova, Future of the Fed from Roosevelt Institute on Vimeo.

Ron Paul on Bernanke's Press Conference - CNBC interview with Congressman Ron Paul yesterday (April 28, 2011); click here. The interviewer begins by quoting a statement Paul made after Bernanke's news conference: Bernanke continues to ignore his culpability for the inflation all Americans suffer due to the Fed's relentless monetary expansion. Let's take a look at U.S. inflation since 2008. Here it is. The average annualized rate of inflation over this time period is a dizzying 1.6%. Note the significant deflation experienced during the economic crisis. Ah, good times. The rate of return on your money was really high back then! I can recall clearly how savers were rejoicing...praising the Fed for the deflation. PCE inflation measures the nominal price of a basket of consumer goods. You know, the stuff people buy to maintain their material living standards. This price index was actually falling in 2010. For better or worse, the Fed interprets "price stability" as 2% inflation. This explains QE2.

Bernanke Falls Flat - Despite loud huzzahs from a variety of boosters who proclaimed that Chairman Bernanke spoke with gravitas and wisdom at the first ever Federal Reserve press conference, the wider investing public clearly saw the performance as unconvincing. During and immediately after the proceedings the prices of gold and silver rose strongly to new highs as the U.S. dollar plummeted. The affair seemed to solidify the understanding that Bernanke and his cohorts have no intention whatsoever to reverse the current trend of inflation and a weakening dollar. With all the preliminaries swept away, it appears that the great dollar slide that we have long feared will not be interrupted. In the last year alone, the dollar has fallen 25 per cent against the Swiss Franc, (the gold standard of fiat currencies) - with one quarter of that decline coming since the beginning of April alone. Against gold itself (the gold standard of all forms of money), the decline has been even worse, 31 per cent so far this year, and 8 per cent this month. 

Inflation expectations my butt - So, Bernanke has given markets what they need to hear. First, it’s damn the lifeboats on commodities inflation: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. Next, it’s whatever you want, whenever you need it:

The 70s Are Over - A lot of monetary policy discussions, including Ben Bernanke’s press conference today, spend a frighteningly large quantity of time dwelling on oil price increases. There are a lot of cuts at what’s misguided about this, but one particular way of seeing the problem is to fire up the wayback machine and think about the economics of the 1970s. At that point in time labor unions were an important force in the American economy, representing a large share of workers. And it was common for unionized workplaces to have contracts that stipulated workers would get automatic cost-of-living increases in their wages. But part of what the monetary hawks of today seem to have forgotten is that circa 1980 there was a great Reagan Revolution and America spent the bulk of the next 25 years grinding labor unions into the dust. And for better or for worse, the union-busters won and there is now absolutely no chance that a rise in commodity prices will lead to generalized inflation in the face of a slack labor market. There’s no mechanism through which this could happen.

Fears of return to the 1970s are overdone - As unpleasant as the thought of disco, polyester and bell-bottoms making a comeback might be though, the real spectres of that decade lie in the realms of economics and politics, not fashion. Certainly for those who toil on Wall Street, this is nearly as worrying as a repeat of 2008 Of course, one sees few actual veterans of that era on a visit to any Manhattan trading floor as most “masters of the universe” are below the age of 50. Even that now familiar moniker was not coined until seven years after the decade ended in Tom Wolfe’s Bonfire of the Vanities. But institutional memory runs deep and the unease is real. Google, as reliable a barometer of the zeitgeist as any, indicates as much. Search “worse than the seventies” or variations on that phrase and, with the exception of several pessimistic (and inaccurate) predictions in 1980, there is an explosion of references in just the past two years, most of them having to do with the economy. But there are parallels galore. As if surging food and oil prices, Middle East turmoil and a Democratic president with a fondness for regulatory overkill were not enough, there is suspicion that the Fed is playing with fire by continuing with quantitative easing.

A simple model of a reluctant Fed - Imagine there is incipient downward pressure on real wages, just as real wages have fallen in Japan and male real wages have been flat or falling in the United States, both across longer-run periods of time.  Yet for the usual reasons of morale and uncertainty, employers do not wish to cut real (or nominal) wages.  An extra three to four percent price inflation would cut real wages by three to four percent for a large segment of the employed.  It would accelerate a trend which is already underway, and will eventually happen anyway, yet it will telescope a lot of that trend into pre-2012.   Which politician wishes to accelerate a decline in real wages? Most generally, I suspect that electoral opposition to inflation will rise to the extent median wage stagnation is a problem.

How the Inflationistas Have Shaped Fed Policy - Kash Mansori - The noise that has been generated about the Fed's expansionary actions over the past 3 years is substantial, and has only gotten louder in recent months. This has not gone unnnoticed within the Fed. Some loud voices in the business press, as well as many prominent politicians (mostly Republican), have been squawking incessantly about the awful dangers (imaginary though they may be) of the Fed's expansionary policies. And I think that this, unfortunately, has had a direct impact on Fed policy. I think that there are genuine concerns at the Fed about its reputation and its independence, and that protecting both of those has forced Bernanke into the position of acknowledging the concerns of the Fed's critics, even though from a purely economic perspective they are absolutely misguided. In short, I believe that we are seeing a Fed that is sensitive to the political winds swirling around its actions, and that the inflationistas out there have had a real impact on Fed policy -- not because they have good economic arguments, but because they have a frightening amount of political power. And perhaps that should be the most concerning thing of all.

The Economic Consequences of Mr. Paul - Krugman - Kash Mansori pursues the same line of thought I followed after Bernanke’s press conference, and fleshes it out.  Basically, if you listen to Bernanke’s analytical comments, they make a powerful case for more expansion. Underlying inflation is low; unemployment is disastrously high, and the corrosive effects of long-term unemployment are hurting the future as well as the present. More quantitative easing — QE3 and beyond — might not work, but it’s very much worth trying. And yet Bernanke balks at doing anything, suddenly seeming to abandon his own analytical framework. What’s going on? Mansori and I agree: he’s afraid of the inflationistas, and is accommodating them even though he believes they’re completely wrong. Maybe that’s what he has to do. But it’s truly tragic.

The Intimidated Fed, by Paul Krugman - Last month more than 14 million Americans were unemployed by the official definition... Millions more were stuck in part-time work because they couldn’t find full-time jobs. And we’re not talking about temporary hardship. Long-term unemployment, once rare in this country, has become all too normal: More than four million Americans have been out of work for a year or more.  It all adds up to a clear case for more action. Yet Mr. Bernanke indicated that he has done all he’s likely to do. Why? He could have argued that he lacks the ability to do more, that he and his colleagues no longer have much traction over the economy. But he didn’t. On the contrary, he argued that the Fed’s recent policy of buying long-term bonds, generally referred to as “quantitative easing,” has been effective. So why not do more? Mr. Bernanke’s answer was deeply disheartening. He declared that further expansion might lead to higher inflation. What you need to bear in mind here is that the Fed’s own forecasts say that inflation will be below target over the next few years. What’s going on here? My interpretation is that Mr. Bernanke is allowing himself to be bullied by the inflationistas: the people who keep seeing runaway inflation just around the corner and are undeterred by the fact that they keep on being wrong.

Inflation Hawks and the Modern State - Even among folks that I respect there seems to be this weird fear that the US government is going to attempt to inflate away its debts. There are a couple of problems with this from my perspective. First, its actually not that easy from a technical point of view.  A significant portion of the US debt is in very short term securities, like 90 days. If I remember correctly the bulk of foreign holdings is in securities with a maturity of less than a year.So what happens with this massive inflation? It simply drives up the interest rate of Treasuries. You get to screw investors for 90 days and then much of the jig is up. Second, large domestic holders of Treasuries are folks the US government has implicitly agreed to backstop: pension plans, major US banks, insurance companies, state and local governments. What is the point of screwing these folks out of their money if you are just going to turn around and give the money right back to them? Third, why is this better than a structured default? Its not as if people are going to be oblivious to the fact that they were screwed. Having done it raises the risk premium on US debt. Not the default risk premium but the inflation risk premium. What do you really accomplish with inflation versus structured default?

The Fed and The GOP Weren’t Always Enemies -  The Fed chairman was testifying before the House banking committee. When he explained the central bank’s planned course of action, the members reacted with fury.  Rep. Henry Gonzalez (D-Texas) called for the chairman’s impeachment. That was in July 1981. The Fed chairman was Paul Volcker and the course of action the members were decrying was a further tightening of monetary policy. As the economy fell into recession, public outrage toward the Fed grew. Volcker’s mail included bricks from contractors to symbolize the houses they couldn’t build, and keys from car dealers for cars they couldn’t sell. Yet the Fed stuck to its guns and ultimately won widespread plaudits for taming inflation. An underappreciated aspect of this episode is that President Ronald Reagan not only refrained from jumping on the anti-Fed bandwagon but also defended the institution and its independent role in making monetary policy. “This administration will always support the political independence of the Federal Reserve Board,” he said in a February 1982 press conference in the midst of recession.

Fed Confidence in Transitory Inflation Hinges on Low Wage Gains - Brady Miller is paying more for vinyl siding for his construction business and for groceries to feed his family. He can’t charge customers more, showing why some Federal Reserve officials say inflation will ease.  “We don’t spend money on anything, we don’t take vacations, and I am not saving money right now,” Miller, 36, says. The Mossville, Illinois, homebuilder also hasn’t given his crew of two a raise in two years and says they shouldn’t expect one soon. Their predicament illustrates the downside of what Fed Vice Chairman Janet Yellen calls “transitory” inflation: Household purchasing power is shrinking because wages and salaries aren’t keeping pace with food and energy prices. Researchers at the Federal Reserve Bank of New York are also finding no evidence that higher prices are boosting expectations for wage increases, suggesting underlying inflation and consumer spending will remain low. That’s why officials led by Fed Chairman Ben S. Bernanke will be in no hurry to withdraw record stimulus after completing a $600 billion bond-purchase program in June, said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC.

Fed Watch: Quick Note on Inflation Expectations - The FOMC will render judgment on the economy today, followed by the inaugural post-meeting press conference by Federal Reserve Chairman Ben Bernanke. Policy is expected to remain essentially unchanged, with the large-scale asset program continuing through June. The FOMC statement will likely be similar to the last, maybe upgrading the state of the labor market but acknowledging weak first quarter data. I am curious to what extent they have adjusted their full year GDP forecast. Any downward adjustment would be further reason to maintain the current path of policy, and it is difficult to see reason for any upward revision.I am hopeful that the Chairman’s press conference will be illuminating but ultimately something of a nonevent – that the general consensus on the direction of monetary policy is consistent with that of the gravitational center of the FOMC, and thus Bernanke’s comments will be largely non-disruptive. Or at least it should be, as I anticipate we will learn that it was correct to heavily discount the more hawkish sounding regional bank presidents. The Wall Street Journal focuses on the inflation expectations issue here and here. To be sure, I think the Fed is following this closely, but I think we should nuance the issue a little more carefully to account for a transmission mechanism from inflation expectations to actual inflation. I expect Bernanke would tie a discussion of inflation expectations to a discussion of labor costs. Vice Chair Janet Yellen did just that earlier this month:

Data Misconceptions - Krugman -Just a quick note on three misconceptions I often see in comments: First, about core versus headline inflation: core inflation, which excludes food and energy prices, has been used for many years to guide Fed policy, on the grounds that food and energy are highly volatile, and basing policy on headline inflation would lead to overreaction to temporary shocks.  However, whenever you hear about cost-of-living adjustments — for example on Social Security — they’re based on the full consumer price index. As far as I know, there are no contracts or laws based on inflation excluding stuff. Oh, and this post used the overall CPI, not the core, precisely because I didn’t want to get into all that. Second, about unemployment: the U.S. unemployment numbers have nothing to do with unemployment benefits. The Census surveys households, and asks whether adults are employed, and if not, whether they are actually searching for a job. So searching but not employed is the definition. Third, about life expectancy: when you see comparisons of life expectancy in 1950 or even 1970 with those today, bear in mind that a lot of the improvement comes from lower infant and child mortality; the expected number of remaining years to someone aged 55 or 65 has risen, too, but not nearly as much.

Core Notes - Krugman - A few things worth mentioning about core inflation:

  • 1. The logic of it comes from the notion that some prices are sticky, revised only at intervals, while others are not. I tried to explain that logic here.
  • 2. It’s not a new idea, invented on the fly to cover up for recent price rises: Otto Eckstein argued for something like it in the early 1970s, and Bob Gordon laid it out in more or less modern form in 1975.
  • 3. The Fed has focused primarily on core inflation for a long time — I think since 1990, although the earliest Fed transcript I have where the core focus is clear is from 1996.
  • 4. Has core inflation been lower or higher than headline inflation? It depends on the time period you choose. If you start fairly recently, then the big rise in commodity prices since around 2005 — presumably reflecting rising demand from emerging markets — makes headline inflation exceed core on average:But if you pick an earlier start date, it’s the other way around:

The CPI and houses - Semi-retired blogger Scott Sumner commented on Karl’s post about how the CPI calcuates inflation of owner-occupied housing. So long as he keeps commenting around the econ blogosphere, we can effectively keep him from retirement by hoisting these comments. Here is Scott on Angus, to whom Karl was responding: I read his argument differently. Reading between the lines, here’s what I think he meant:

1. The Fed doesn’t care about the “cost of living” per se, they care about the price level because supposedly a stable price level produces macroeconomic stability.
2. The price of new homes is an important part of the overall price of goods and services produced in the US.
3. If the Fed stabilizes a price index, that index should include the price of new homes.
4. It’s fine if we have a cost of living index that excludes the price of new homes, just don’t have the Fed target that index.

Commodities, Inflation & Strange Bedfellows - Although consumer price inflation is low by historical standards, there's no shortage of worries about the direction for pricing pressures. Fed critics are quick to note that the consumer price index (CPI) is higher by 2.7% for the year through last month. More worrisome, we're told, is that the trend is up sharply from as recently as last November's 1.1% annual pace. Bernanke defends the central bank's near-zero interest rate policy in part by emphasizing that unemployment is still high. Meanwhile, core inflation is far lower than the trend in headline prices. CPI less food and energy rose by just 1.1% over the past year through March, or near the lowest annual rate of change since the early 1960s. The rationale for giving greater weight to so-called core inflation is that it ignores those commodity prices that bounce around a lot in the short run, a tendency that can generate misleading signals for setting monetary policy. In fact, a number of studies demonstrate that core inflation has a better history of capturing the true inflation trend, thus the Fed's greater emphasis on overlook food and energy prices for monitoring broad pricing trends. But nothing's sacred in economics and so it could be different this time.

Who Cares About Inflation? - Normally, inflation is one of the most harmful taxes, but these days inflation may do less harm than good. During most of our lifetimes, the prices of things we buy have generally increased over time. We can name some exceptions, but most items (even houses) have prices that are higher now than they were 10, 20 or 30 years ago. This general increase in consumer prices is called inflation. The Federal Reserve is charged with limiting the rate of inflation, which it can do over the long run by limiting the supply of money and similar assets in the hands of the public. Inflation is widely disliked. A number of economists think that inflation’s bad reputation is undeserved, and that, while people complain that inflation makes things more expensive, they fail to recognize that inflation also raises their wages.  The net result of inflation could be to increase wages and prices in the same proportion, without harming consumer’s purchasing power.

5 Government Statistics You Can't Trust - If readers want to find a "messy" stat, they need go no further than the inflation measures reported by the U.S. government. Generally speaking, the most important inflation measure is the Consumer Price Index. As manufacturing becomes an increasingly smaller part of the U.S. economy, the Producer Price Index becomes somewhat less relevant.  Inflation reporting used to be based on a fixed basket of goods, but that has changed with time. Substitution effects have infiltrated the measurement of inflation such that it is now assumed that when certain goods get expensive, consumers will substitute with cheaper goods. This clearly understates inflation. Likewise, the weighting has been shifted from an arithmetic basis to a geometric basis, another change that helps to minimize the appearance of higher prices. Last and not least is the impact of hedonics. The idea of hedonic adjustment is that at least some of the price difference between a good bought today and a good bought yesterday can be ascribed to significant quality improvements. Unfortunately, this is a highly subjective determination and one that does not always sync with reality.

Anatomy of a Crisis: 2011 - There is a great disturbance in the world's financial Force. Many sense it as a storm on the horizon, something not yet visible but telegraphed by a rising, swirling wind and a new electric scent in the air.  I don't claim to have a complete narrative that accounts for all the points of friction wearing down the moving parts, nor do I claim a "solution." But a few observations might help inform our awareness of the disturbance.  As many of you know, readers provide most of the intelligence on this site ("of two minds, yours and mine"). I am the student and skeptic who learns from you and tries to make sense of a few dynamics, and extend them to some sort of coherent end-state. We share the same project of encouraging critical thinking.  There is a rising loss of faith in the conventional (i.e. propaganda) account of the U.S. economy. Readers tell me their local coin store has no silver coinage left, as the public has been buying with a vengeance. This is significant.

Your Pick, Ben, But One Goes Off the Cliff - Now that you've pushed the dollar down, Ben, it's your pick on what to push off the cliff: your beloved risk trade or the real economy. Here's a chart of the U.S. dollar and crude oil. Notice they're on a see-saw: when the dollar tanks, oil skyrockets. When the dollar recovers a bit, oil declines.  Ben Bernanke and the Fed are replaying their 2008 game plan: drive the dollar down to goose the risk trade in stocks. But a funny thing happened on the way to blowing another equity bubble: oil bubbled up, too, and that killed the real economy.  For the past three years, Ben has been trying to resuscitate the real economy via "the wealth effect": if your portfolio of stocks is rising, then you'll feel richer and your "animal spirits" of borrowing and spending will be aroused. The only proven way to goose stocks is to crush the dollar so overseas corporate earnings will be boosted by the currency depreciation (when transferred back into dollars, even flat profits look like they're rising), and U.S. exports will be cheaper to our trading partners.

Thinking About Macroeconomics - Krugman - My view is that we had a deleveraging shock that landed us in a liquidity trap — a situation in which short-term nominal interest rates are close to zero, so that conventional monetary policy has no traction.  And I had worked out the implications of a liquidity trap long ago. In a liquidity trap even large increases in the monetary base aren’t inflationary; even large government deficits don’t drive up interest rates.  And so it has proved: What’s striking to me is the way people who reject this framework keep inventing special reasons to explain why things aren’t going the way they “should” — e.g., it’s QE2 that’s holding down those interest rates, so just you wait, or the surge in commodity prices (driven by growth in emerging markets) is a harbinger of huge inflation here, never mind the flatness of wages. But as I see it, things have gone pretty much the way a model that we had before the crisis said they would.

Fed raises inflation forecast above goal -  The Federal Reserve has raised its inflation forecast for this year above its goal, but chairman Ben Bernanke told a first-of-its-kind news conference that the rise in prices would be “transitory”. Mr Bernanke’s comments on Wednesday show the tightrope that the Fed is walking as it tries to keep policy loose to support a stuttering economy while reassuring the public about inflation driven by rising oil prices. Fed officials now expect headline inflation of between 2.1 and 2.8 per cent in 2011 – above their long-term goal of “2 per cent or a bit below” – before dropping back to between 1.4 and 2 per cent in 2012.  “The [Federal Open Market] Committee expects the effects on inflation of higher commodity prices to be transitory,” said Mr Bernanke. “As the increases in commodity prices moderate, inflation should decline toward its underlying level.”After a little-changed statement by the rate-setting FOMC, all of the focus was on the first scheduled press conference by a Fed chairman, which was widely judged to be a success. Mr Bernanke signalled the Fed would complete its current ‘QE2’ programme of asset purchases at the end of June and then buy no more

The 'Miracle' of Compound Inflation - Albert Einstein is famously quoted as saying, “Compound interest is the eighth wonder of the world.” And compounding is indeed the topic of this week’s shorter than usual letter, but compounding not of interest but of inflation. As you might expect, I am giving a great deal of thought as to how we get out of our current financial dilemma of too much debt and deficits that are far too high. While I will use US data for our illustration, the principles are the same for any country. Let’s start with a few graphs from the St. Louis Fed database (a true treasure trove of numbers). First, let’s look at nominal GDP over the last 11 years, from the beginning of 2000. The data only goes through the third quarter of last year, so sometime this year it is quite likely that GDP will top $15 trillion.So, the economy has grown by roughly 50%, right? Give or take, that’s close to 4% growth (back of the napkin calculation). And in dollar terms that is correct. But what if we took out all the growth that was due to inflation? The economy would only have grown to $12.5 trillion.

Without Wage Pressures, Stagflation Fears Are Overblown - The word “stagflation” is being whispered about as a coming danger for the U.S. economy. Those who lived through the 1970s-80s experience know current conditions are nowhere near the sorry state of that time. Importantly, today’s inflation generator is missing a key gear: wage pressures. You just have to look at Friday’s report on employment costs. The word stagflation, which describes a situation where the inflation rate is high and the economic growth rate is low, became popular about three decades ago when U.S. economic growth hit a brick wall and inflation surged to the stratosphere. From 1979 to 1981, real gross domestic product grew an average of just 1.8%, Yearly inflation, as measured by the consumer price index, averaged a painful 11.7%. Core inflation, which excludes food and energy, also surged, averaging 10.9% across those three years. In today’s situation, real GDP did slow in the first quarter. But the drags look mostly temporary, and growth is expected to be above 3% this year. The CPI is up 2.7% over the year ended in March. The core rate is just 1.2%–hardly stratosphere levels

Visualizing Priorities - Krugman - A few charts to illustrate what you are and are not supposed to be worried about. I start these charts in 1985, that is, after Morning in America, so that our view isn’t distorted by the high inflation and interest rates of the 70s and early 80s.  So, here’s what we’re supposed to be deeply worried about. First, bond market confidence: Second, inflation: Meanwhile, we’re not supposed to worry about unemployment: A naive observer might note that interest rates are low by historical standards, making you wonder why we’re obsessing about the bond market; that inflation is also low by historical standards, making you wonder why it’s an issue at all; and that unemployment is immensely high. But Washington has its priorities.

Grantham Comes Face-To-Face With A Paradigm Shift - The last time we caught up with GMO’s Jeremy Grantham he was bemoaning the ruinous costs of asset price manipulation by the US Federal Reserve. In his latest quarterly letter he returns to one of those themes — runaway commodity prices — but on a much bigger canvas. Grantham reckons we are witnessing the most important economic event since the Industrial Revolution. Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

Inflation vs. Hyperinflation: The Crucial Difference - "Hyperinflation." You've heard the word. You may have talked about it on the golf course or at the dinner table. There is a difference, though, between inflation and hyperinflation. They are not the same thing. And for the most part, there is no gradual path from one to the other. To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control - the populace has to completely lose faith in the system - or both at the same time. By faith I don't mean liking what the government is doing, or being happy about where the direction of the country is going. I mean basic things, like keeping your money in the bank. Here are a few simple questions to determine whether you still have "faith" or not:

  • Do you still have a meaningful amount of cash in checking or savings accounts?
  • Do you rely on electronic payment systems (credit cards, bill pay etc.) for most of your transactions?
  • Are you still comfortable with your employer paying you in legal tender -- or, if you own a business, with your customers paying in same?
  • Does the percentage of your net worth tied up in physical hard assets, i.e. metal bars you can drop on your foot, count as less than 50%?

Housing Bubbles -  Angus at Kids Prefer Cheese is shocked at the disconnect between housing prices and CPI. Chairman Ben’s point of view is that the Fed should do so only to the extent that the bubble bleeds into overall inflation.Here’s a graph, courtesy of Dr. Housing Bubble. The red line shows the growth rate in the Case-Shiller housing price index, the blue line shows the growth rate of housing component of the CPI.YIKES!!!From 1998 to 2006, there was a complete disconnect between housing prices (rising like crazy) and the BLS measure of owner equivalent rent (which never went up more that 4% in any of those years). Hard for a bubble to bleed into inflation when it’s been defined out of the index! We can argue that one should target asset bubbles, but not having housing prices in the CPI is appropriate.  People buying homes in the bubble were making bets on housing prices, interest rates and/or future rents.

Fed Trims Its Growth Outlook - The Federal Reserve on Wednesday trimmed its outlook for growth and signaled it expects higher inflation amid a slightly lower unemployment rate for 2011. The forecasts released by the Fed detail the core, or “central tendency,” expectations of central bankers as well as the full range of views held by Fed governors and regional bank presidents.The projections on Wednesday update those from the FOMC meeting held on Jan. 25 and 26. The central bank releases its forecasts as part of a move to increase the transparency of its policy making. The projections are also intended to give financial market participants a sense of how unexpected events in the economy can potentially affect the course of monetary policy.The Fed said that it had revised down its projection of 2011 growth to 3.1% to 3.3%, from its January estimate of 3.4% to 3.9%. The 2012 estimate moved to 3.5% to 4.2% from 3.5% to 4.4%, while the 2013 projection was between 3.5% and 4.3%, versus the 3.7% to 4.6% range central bankers expected at the start of the year. Long run, the Fed expects the economy to grow from 2.5% to 2.8%.

Economic growth slows, inflation surges (Reuters) - U.S. economic growth braked sharply in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years. Another report on Thursday showed a surprise rise in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter. Growth in gross domestic product slowed to a 1.8 percent annual rate after a 3.1 percent fourth-quarter pace, the Commerce Department said. Economists had expected a 2 percent growth pace. Output was also restrained by harsh winter weather, which depressed construction, rising imports and the biggest drop in government spending in more than 27 years amid sharp cut backs in defense spending. Though consumer spending took a step back, it did not slow as much as economists had feared, leaving many still hopeful of a re-acceleration in the growth pace in the second quarter.

Advance Report: Real Annualized GDP Grew at 1.8% in Q1 - This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) - and very weak for a recovery, especially with all the slack in the system. A few key numbers:
• Real personal consumption expenditures increased 2.7 percent (annual rate) in the fourth quarter, compared with an increase of 4.0 percent in Q4 2010. This is higher than the pace in January and February, and indicates a pickup in March.
• Investment: Nonresidential structures decreased 21.7 percent, equipment and software increased 11.6 percent and real residential fixed investment decreased 4.1 percent.
• Government spending subtracted 1.09 percentage points in Q1 (unusual), and change in private inventories added 0.93 percentage points.
The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy. For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Fresh blow for global economy as US slows - Economists scaled back their expectations for the first quarter GDP figure as February and March drew on, but the first estimate published by the Commerce department yesterday was modestly weaker than even those lower forecasts. The consensus estimate had been 2 per cent. Many analysts noted temporary factors were keeping the figure low. Federal government spending dropped 7.9 per cent, with defence spending down 11.7 per cent, and commercial construction unexpectedly plunged 21.8 per cent. "Wild swings in government spending from quarter to quarter are notuncommon and are usually reversed quickly, and a severe series of winter storms held back construction in the first quarter. "For the year as a whole, constraints on government spending, in combination with moderate growth in consumer spending, will probably keep GDP growth below 3 per cent. It appears likely that GDP growth will fall short of the Fed's recent forecast of 3.1 per cent to 3.3 per cent on a fourth quarter-to-fourth quarter basis."

Economic growth slows sharply; new jobless claims rise - Two new snapshots of the economy — one showing a sharp slowdown in first-quarter economic output and the other a surge in weekly unemployment claims — underscored the fragility of the recovery, its vulnerability to global shocks and the long road still ahead for millions of American workers. Many analysts shrugged off the report that gross domestic product grew just 1.8% in the first part of the year — down from 3.1% in the fourth quarter last year. Economists said the slowdown was caused mostly by temporary factors such as the harsh winter weather and a surge in oil and food prices, which took a bite out of consumer spending and the nation's trade.Officials at the Federal Reserve as well as many private forecasters expect GDP growth to bounce back to 3% or higher in the rest of the year. The latest GDP figures were close to analysts' expectations, but the jobless claims report was an unwelcome surprise. With hiring picking up in the last two months, experts predicted a drop in new filings for jobless benefits.

US GDP growth slows to 1.8%, surprise jump in jobless rate - US economic growth braked sharply in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years.  Another report on Thursday showed a surprise rise in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter. Growth in gross domestic product, a measure of all goods and services produced within US borders, slowed to a 1.8% annual rate after a 3.1% fourth-quarter pace, the Commerce Department said. Economists had expected a 2 percent growth pace. Output was also restrained by harsh winter weather, rising imports as well as the weakest government spending in more than 27 years. "The biggest factor was weather. It hurt consumption and construction. Energy also hurt consumption as well. Higher gasoline prices took a bigger bite out of people's budget,"

2011:Q1 Real GDP Growth – One of the Three Smallest Gains in the Recovery - In the first quarter, consumer spending (+2.7%) and equipment & software spending (+11.6%), and exports (+4.9%) and inventories ($43.8 billion vs. $16.2 billion) made positive contributions to real GDP growth, while residential investment expenditures (-4.1%), non-residential structures (-21.8%), and government spending (-5.2%) partially offset these gains. It is noteworthy that real GDP in the first quarter crossed the peak reading in the fourth quarter of 2007 by a significant measure (see Chart 2) and the U.S. economy is most certainly on the path of expansion. Stronger growth is predicted for the second quarter of 2011 and a more moderate pace is likely in the second-half of the year, which puts the Q4-to-Q4 increase in 2011 around 2.9%. The FOMC’s projections show the central tendency for real GDP growth as 3.1%-3.3% in 2011.

Today’s GDP Report Perpetuates Myth That Imports “Subtract” from Growth - The U.S. Commerce Department just released its initial snapshot of first-quarter economic growth this morning. The new news is that economic growth slowed to 1.8 percent, a disappointing rate that will do nothing to shrink unemployment. The old news is that the report continues to label rising imports as a “subtraction” from gross domestic product (GDP)...In Table 2, the Commerce Department calculates that rising imports subtracted 0.72 percentage points from real GDP in the first quarter. This will be widely interpreted as meaning that GDP growth would have been 2.5 percent last quarter if those burdensome imports had not increased. This is all bunk, as I try to explain in a Cato study released earlier this month, titled, “The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a ‘Drag on Growth.’” One source of confusion is the fact that the government estimates GDP, not by measuring what we actually produce each quarter, but by measuring what we spend.

Economy still growing and still disappointing - The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 1.8% during the first quarter of 2011. Not exactly what the doctor ordered for a still very sick patient. If we were back to a tolerable unemployment rate, an annual GDP growth rate of 1.8% would be a little disappointing but not that unusual for an expansion. The problem is, growth this slow would often mean a rising unemployment rate, the last thing we need at the moment. Still, our Econbrowser Recession Indicator Index remains about where it was, with a reading of 5.2% for 2010:Q4, leaving no doubt that as of then, the economy had not yet entered a contraction phase of the business cycle. Note that we wait a quarter for data revisions and trend recognition before calculating the index, so it is always looking one quarter back from the most recent release.

Disappointing First Quarter GDP Growth - Good times just around the corner?: U.S. Economy Slows: Gross domestic product, the value of all the goods and services produced, rose at an seasonally adjusted annual rate of 1.8% in the first quarter, the Commerce Department said Thursday in its first estimate of the economy's benchmark indicator. The modest increase marked a significant slowdown from the economy's pace in the fourth quarter, when GDP rose by 3.1%. ...The data marked a setback for an economy still healing from a deep recession... And, continuing a recent trend, inititial claims for unemployment insurance also increased to a level that, historically, is associated with job loss. Brad DeLong also notes this passage from the FT: Gross domestic product growth was also slowed by a “sharp upturn” in imports, falling exports and a steeper decline in government spending. Federal government spending sank 7.9 per cent, much faster than the 0.3 per cent decline recorded in the fourth quarter and local and state government spending fell 3.3 per cent, compared with a 2.6 per cent drop in the last three months of 2010. The pullback in government spending, particularly at the state and local level, “reflects the ongoing budget problems that will continue to be a drag on the overall economy for some time yet”,

Slower growth, for now - AS EXPECTED, America's recovery slowed in the first quarter of 2011. At a seasonally adjusted annual rate, real GDP grew by 1.8% in the first three months of the year, down from the 3.1% growth performance in the fourth quarter of 2010, according to the advance estimate of output released this morning. This deceleration came as no surprise; indeed, some recent forecasts projected an even slower rate of growth. While it's hard not to be a little disappointed in the performance, Americans can take a little comfort in the fact that the slowdown was partially due to transitory factors. Bad weather early in the year dampened consumer activity and residential investment. Defence spending was much slower in the first quarter than anticipated, subtracting 0.69 percentage points from output. This defence shortfall is expected to be made up later in the year. Still, there some reasons to be concerned that growth, moving forward, may lag forecasts. Fed Chairman Ben Bernanke expressed some worry yesterday that low residential investment could continue into the second qarter.

Growth data cast doubt over US recovery - Doubts have been cast over the strength of the US economic recovery after output grew at an annualised rate of only 1.8 per cent in the first quarter. A surge in oil prices held back consumption growth, while public spending fell at every tier of the US government. Most analysts expect the weakness to be temporary but government support for the economy will start to fade later in the year, so the lack of any acceleration in growth points to years of further pain for the world’s largest economy. At this stage of a recovery, growth often rebounds by between 4 and 5 per cent. Expansion of less than 2 per cent will not create enough jobs to keep up with population growth and cut the US unemployment rate of 8.8 per cent. The dollar fell further on release of the growth numbers as investors judged that weak growth would cause US interest rates to stay lower for longer. Although overshadowed by the growth figures, there was another disturbing economic release on Thursday. Initial claims for unemployment insurance rose to 429,000 and the four-week average rose back to more than 400,000. Jobless claims had been on an improving trend and the reversal suggests that momentum in the labour market might have stalled.

After the Fall(s) - The gross domestic product number for the first quarter was disappointing, and came in well below what economists had forecast when the year began. Analysts say that things will probably pick up later in the year, but then, we have heard that before. Remember the White House’s initial projections about unemployment after the Recovery Act was passed? The prediction was that unemployment would never reach 8 percent. Instead, we haven’t seen unemployment below 8 percent in over two years. Then there was “Recovery Summer,” which actually saw growth slow substantially, followed by subsequent predictions of an imminent acceleration. Hindsight is 20/20, of course, but in retrospect the projections for an easy, and possibly even “V-shaped,” recovery seem almost comically optimistic. Especially when you look at the history of financial crises and the “lost decades” they can sow. In a paper by Carmen Reinhart and Kenneth Rogoff documented over a dozen financial crises in developed and developing countries going back to the Great Depression, for example, they found that the unemployment rate rose an average of 7 percentage points over 4.8 years.

Underwater Mortgages a Threat to Recovery; Expect No More Than 3% Growth Until Housing Recovers - In a Technical Note on GDP Bloomberg reports "First quarter Advance Real GDP Real GDP increased 1.8 percent (annual rate) in the first quarter of 2011, following an increase of 3.1 percent in the fourth quarter of 2010. The deceleration in real GDP in the first quarter reflected a sharp upturn in imports, a deceleration in consumer spending, a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by a sharp upturn in inventory investment." Given the renewed housing bust what might one expect going forward? A senior economist for Wells Fargo believes it is unreasonable to expect more than 3% growth going forward as long as housing remains deeply underwater.

More Than Half Still Say U.S. Is in Recession or Depression - More than half of Americans (55%) describe the U.S. economy as being in a recession or depression, even as the Federal Open Market Committee (FOMC) reports that "the economic recovery is proceeding at a moderate pace." Right now, do you think the economy is growing, slowing down, in a recession, or in an economic depression? Although economists announced that the recession ended in mid-2009, more than half of Americans still don't agree. These ratings are consistent with Gallup's mid-April findings that 47% of Americans rate the economy "poor" and 19.2% report being underemployed. In another possible disconnect with monetary policymakers, many Americans may not see the trade-off Bernanke suggests between promoting a stronger economy and experiencing higher inflation. Right now, prices are soaring, yet the latest Gallup Daily tracking data show that 67% of Americans say the economy is "getting worse."

Guest Post: Gallup Poll Shows that More Americans Believe the U.S. is in a Depression than is Growing … Are They Right? - Consumer confidence is, well … in somewhat of a depression. Reuters reports today:  The April 20-23 Gallup survey of 1,013 U.S. adults found that only 27 percent said the economy is growing. Twenty-nine percent said the economy is in a depression and 26 percent said it is in a recession, with another 16 percent saying it is “slowing down,” Gallup said. Tyler Durden notes: That means that more Americans think the country is in a Depression, let alone recession, than growing.  How can so many Americans believe that we’re in a depression, when the stock market and commodity prices have been booming? As I noted last week: Instead of directly helping the American people, the government threw trillions at the giant banks (including foreign banks; and see this) . The big banks have – in turn – used a lot of that money to speculate in commodities, including food and other items which are now driving up the price of consumer necessities [as well as stocks]. Instead of using the money to hire Americans, they’re hiring abroad (and getting tax refunds from the government). But don’t rising stock prices help create wealth? Not really. As I pointed out in January: A rising stock market doesn’t help the average American as much as you might assume

The Two-Track Recovery (or 'Depression'?) -Despite what the gross domestic product report released Thursday shows, nearly a third of Americans believe the country is in a depression, according to a new Gallup poll. The poll, conducted April 20-23, found that 29 percent of Americans thought the economy was in a depression, and an additional 26 percent thought it was in a recession. The recession technically ended nearly two years ago, according to the Business Cycle Dating Committee of the National Bureau of Economic Research.  But most laypeople who hear these terms probably think of the level of economic activity — that is, does the economy feel healthy or not. But even if we take the poll responses to mean “is the economy healthy” (or some variant of that concept), the responses still warrant further digging. It turns out the people most likely to say the economy is “growing,” and the least likely to say the economy is in a “depression,” are the wealthy. Poor Americans are twice as likely to think the economy is in a depression as the rich are:

Bernanke: Financial Crisis Hit Low-Income Americans Harder - The U.S. financial crisis hit already vulnerable Americans harder than others, Federal Reserve Chairman Ben Bernanke said Friday, signaling concerns about an uneven economic recovery. In prepared remarks, Bernanke also repeated his view that the recovery is set to continue at a moderate pace. While the jobs market is slowly improving, the unemployment rate is still “quite high, particularly among minorities, the young, and those with less education,” the Fed chief said. In Friday’s remarks, the Fed chairman underlined that while the scale of the problems caused by the economic crisis has been exceptional, many of the problems themselves aren’t new for lower-income families and communities that were already struggling.  “People who were vulnerable to begin with — those with low incomes, few assets, and less education — have had a more difficult time weathering the financial storm or recovering from setbacks,” Bernanke said.

Dollar falls to new low as markets await Fed's next move -- City experts believe that this will be a defining week for the dollar. Ben Bernanke, chairman of the Fed, will for the first time hold a press conference on Wednesday evening immediately after the Federal open market committee has voted. Traders expect no change to the Fed's current loose monetary position. "The market will, as usual, be hanging off every word from Bernanke," said Jane Foley, senior currency strategist at Rabobank. "There is a small risk that the Fed will toughen its stance on inflation, but in the absence of this, loose monetary policy in the US is likely to continue to weigh on the dollar at least for the remainder of the year."

J.P. Morgans Kasman: Dollar Isnt Weak Enough, Fed on Hold until 2013 - In this week’s Big Interview, J.P. Morgan Chief Economist Bruce Kasman told the WSJ’s Kelly Evans that the Federal Reserve “is still our friend” and that resistance of other central banks to run tighter monetary policy is interfering with the U.S. dollar’s ability to weaken. “We have an economy that has a lot of slack in it, has low underlying domestic price pressures, both in terms of pricing power for companies and in terms of labor, we have a housing market which is weak,” he said. “We’re healing, but we’re healing painfully slowly, and unfortunately I think that’s our future.” Still, the odds of a recession this year are small, he said; “somewhere between 10 and 20 percent.” He assigned similar odds to the prospect of another round of Fed purchases after the current, somewhat controversial quantitative easing program ends in June. Kasman acknowledged that the current program, known as QE2, has pushed up commodity prices but said “the real source of the problem is the way other central banks are behaving, not the U.S. Fed.” .

Bernanke and the Dollar -- From Ezra Klein Tom Gallagher, a fiscal and monetary policy specialist at the Scowcroft Group, e-mails to say that I’ve been too harsh on Ben Bernanke, and his rhetorical emphasis on inflation is a way of buying time and political space to ignore inflation . . . I am not sure about this. I want to take time to go through the testimony word-by-word and do some analysis but one thing I can tell you straight from memory is that Bernanke’s bit about the dollar was embarrassing for every economist listening. That could have had an effect. I don’t mean that as a “dis” of Bernanke’s knowledge. Its just that his actualy words were so vacuous as to border on deception. He passed the buck to Tim Geithner’s whose dollar policy, everyone knows, consists of repeating the phrase “The US has a strong dollar policy” while simultaneously trying to convince other central banks, to weaken the dollar.

Timmy Geithner Knows Diddly-Squat - Normally, I do not react to propaganda statements from the Secretary of the Treasury. But the lies and distortions asserted by Timothy Geitner yesterday deserve a rebuttal. Treasury Secretary Tim Geithner reiterated and defended the "strong-dollar" policy following a speech Tuesday at the Council on Foreign Relations in New York. "Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interest as a country," Geithner said in response to a question. "And we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners"... This is the Orwellian Lie, the Big Brother Lie, a Whopper. A "strong-dollar" policy? The very opposite is the truth. I wrote about the perils of the declining dollar only two days ago in The Dollar? We've Got That Sinking Feeling... And when I wrote that, I was late to the party. Many others have talked about the dollar's precipitous decline lately

Dollar’s Biggest Decline? 2001-08 - The hand-wringing about the US dollar is rather late to the party. Where were all you concerned dollar bulls earlier in the decade? It strikes me that like the late-to-discover inflation, you folks cannot spot a trend until it bites you in your collective asses. While the WSJ is upset that the dollar has been range bound between 72-87 the past 3 years, I strongly urge them to look at the 7 years before that. Consider the following charts: The one at right was in today’s WSJ, and shows the US currency off by less than 20% over the past few years. That’s not a dollar collapse; A fall from 121.02 in July 2001 to 70.69 in March 2008 — Now THATS a dollar collapse!

Who Debased the Dollar? - Paul Krugman - Barry Ritholtz makes an obvious but strangely unnoticed point: right now we have all these people hysterical about the debasement of the dollar, but where were they when the real devaluation was taking place? Funny how we didn’t hear all this hysteria between 2001 and 2007. For the record: while I had plenty of complaints about the Bush economy, the declining dollar was never among them.

China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings - All those who were hoping global stock markets would surge tomorrow based on a ridiculous rumor that China would revalue the CNY by 10% will have to wait. Instead, China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the 'buy US debt' Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so. And to think that this comes just as news that the Japanese pension fund will soon be dumping who knows what. So, once again, how about that 'end of QE' again?"

China PBOC Official: US Faces Rising Debt-Issuing Costs -Report - China must be vigilant against possible price fluctuations caused by rising costs that the U.S. faces to issuing debt, China's Caixin Media reported Sunday, citing People's Bank of China Research Bureau Director Zhang Jianhua.There is no need to worry the U.S. could default and the country "at most" faces rising costs to issuing debt, the report quoted Zhang as saying. China is far and away the largest holder of U.S. debt, with $1.154 trillion of Treasurys as of the end of February, even though it pared those holdings by $600 million earlier this year, according to U.S. government data. The U.S. Treasury Department has said the U.S. will soon reach its $14.3 trillion borrowing limit. Though the Treasury has said that it can use some maneuvers to keep meeting its debt obligations for a few more weeks, it will default on its debt by July 8 unless the borrowing limit is raised before then.

The Dollar? We've Got That Sinking Feeling...-  Just before the Easter weekend, the Wall Street Journal's Dollar's Decline Speeds Up, With Risks for U.S. spelled out the alarming decline of the dollar. The U.S. dollar's downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency. Just as Tim Geithner, Paul Krugman and other China bashers have wanted, the Chinese have allowed the Yuan to rise in value, in part to dampen their severe inflation problem. Washington has been pushing Beijing to let the yuan rise against the dollar and other currencies, in order, among other things, to help reduce the U.S. trade deficit. But a continued decline in the value of the dollar is a double-edged sword for the U.S. economy. It's a "double-edged sword" for our economy because the weakening dollar raises the price of imported goods for Americans, including the price of oil. That's the Bad News. The Good News, we've always been told by Krugman and the rest, is that a weaker dollar supports American exports.

Bogus Threats to US Reserve Currency Status: No Country Really Wants It! - Mish - In spite of all the hype regarding the Yuan as a reserve currency I have stated many times recently that discussion of the Yuan as a reserve currency is nothing but ridiculous hype. My reasons are:

  • The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
  • China is a command economy
  • In China, property rights and civil rights are questionable
  • Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble
Michael Pettis at China Financial Markets has a similar list of reasons, phrased slightly differently. However, Pettis does add one key item I overlooked: "Very deep and open domestic bond markets"

The Endgame Headwinds - Before we can get to how I think the Endgame of the debt supercycle plays out in the US, we need to quickly survey the current environment, and revisit (at least for long-time readers) a few basic economic themes that I will call the “headwinds” of economic growth. So many leaders in so many countries think that with the right policies they can grow (export) their way out of the problem. As I have written, not everyone can grow their way out of a crisis at the same time. Someone has to buy. And while the right policies will in fact help, growth is, in my opinion, going to be severely constrained in the multi-year period of the Endgame. But, jumping right to the bottom line here, one way or another we will get through this very difficult period. Really. And my personal view is that in the period following the Endgame cycle we’re going to see a very real economic boom, for reasons we will visit briefly in this series and at length over the coming year. I am quite optimistic longer-term, but the flight to get there may be very bumpy if you are not prepared for it.

Money Madness -- Krugman - I’ve been fond of quoting the late Charles Kindleberger, who used to say that anyone who spends too much time thinking about international money goes mad. But I’m thinking that we need to expand the proposition: it seems that almost everyone who weighs in on monetary matters of any kind goes crazy. The proper reaction to QE2 is, “Meh”. Just not a big deal. Similarly for the depreciation of the dollar from its crisis peak to more or less where it was in early 2008.  The whole tone of this discussion is reminiscent of the way people talked about the gold standard back when it was widely thought that any meddling with the sacred role of a metal with precisely 79 protons would mean the demise of civilization. But it has been 80 years since Britain went off gold, and last I noticed, William and Kate weren’t getting married in a desolate wasteland. We’ve had freely floating exchange rates for almost 40 years, right through the reigns of Saint Reagan and Dear Leader. Calm down, everyone.

Speaking of International Money (Wonkish) - Krugman - Aha — no sooner do I suggest that the craziness associated with discussions of international money has now shifted to money in general than I see Steve Pearlstein writing a column about global economics that I agree with halfway through, but that veers off into a misplaced focus on the international role of the dollar as the key concern. Now, Pearlstein isn’t crazy the way the goldbugs are — but he does seem to share the common tendency to exaggerate the importance of owning a global currency. By the way, this is home turf for me; I’ve been writing about these issues for a long time (pdf). And one of the odd things about international money is that the more you know about it, the less important you tend to think it is: lay observers think it’s huge, economists who don’t specialize in international macro think it’s pretty big, actual researchers on international monetary issues disagree about exactly how important it is, but by and large they don’t think it’s all that important.

Austrians and MMTers should be on the same side - Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt. As it turns out, these two groups are the most ardent critics of each other, thereby giving the mainstream enough bullets to shoot both of them both down with each other's bullets. MMTers are shot down with the branding that they don't care about inflation, while Austrians are shot down with being crazy gold bugs. As I see it, both have a good understanding of monetary transmission, except each follows this understanding to two of its logical outcomes. Austrians believe that having fiat money in the economy will lead to continuous malinvestments, endless bubbles, and will eventually destroy the credibility of the currency. MMTers embrace fiat, and believe that it is precisely the government's ability to spend fiat that enables it to offset the private sector's need to save, to take over when the private sector is deleveraging, restructuring, or just plain fearful of investment, so that the economy does not spiral into cascading deflation

Taxing China's Assets -  For much of the past decade, the United States has begged, pleaded, and threatened China to change its disruptive currency practices, which artificially make Chinese exports cheap and foreign goods sold in China expensive.  Minor trade measures, such as a few more antidumping or countervailing duty cases to levy penalty duties on U.S. imports of Chinese paper or steel, will not make an appreciable dent in the trade deficit or the unemployment rate. And major trade measures, such as a tariff or quota against all Chinese exports, would likely be ruled illegal by the World Trade Organization and would almost certainly provoke Chinese retaliation. A more productive course would be to tax Chinese currency manipulation rather than Chinese exports. In order to undervalue the renminbi against the dollar, China drives the dollar's value up by buying dollar-denominated financial assets, principally U.S. Treasury bills and bonds. To discourage China from doing so, the U.S. government should tax the income on Chinese holdings of U.S. financial assets. For example, the U.S. Treasury would withhold tax on interest paid on Treasury bonds held by China.

China must watch for rising U.S. Treasury yields: researcher (Reuters) - China needs to guard against volatility in U.S. Treasury prices should investors demand higher returns from U.S. government debt, a researcher at the Chinese central bank said on Monday. Zhang Jianhua, a head of research at the People's Bank of China, said worries that the heavily indebted U.S. government may not repay its debt could drive Treasury yields higher and cause U.S. debt prices to fluctuate. Investor concerns that U.S. Treasury yields may spike higher came to the fore last week when Standard & Poor's threatened to cut the United States' prized AAA credit rating unless it reduces its yawning budget deficit. As the biggest foreign buyer of U.S. Treasuries, China is especially sensitive to fluctuations in U.S. debt prices and has periodically sought assurances that its investments would be protected.

What a Crisis Looks Like - There's been some discussion over the last few days of what is going to happen if China starts reducing its position in US Treasuries.  Seeking Alpha has a good summation of the problem: In response, during a recent summit, the leaders of Brazil, Russia, India, China and South Africa (the BRICS) announced that they want to trade between themselves in their own currencies. This comes amid a growing chorus in China pushing for a limit of dollar reserves to $1.3 trillion. At present, China, whose economy the IMF says will outpace that of the US by 2016, has $3.04 trillion in dollar reserves. What's going to happen to the dollar when China sells off $1.74 trillion? And who, besides the Federal Reserve, is going to buy our bonds? If anything, I think this understates the problem.  The real issue starts, not when China starts selling our bonds, but when China stops buying our bonds. As soon as that happens, we're in big trouble.

Who'll buy the bonds? - Jim Jubak decides that here, as elsewhere in life, if you aren't good, try to find weak competition. The biggest thing the U.S. Treasury market has going for it is the disarray in financial markets that might otherwise provide reasonable alternatives in the volume that global investors need. The euro is still in crisis, and the euro bloc of nations looks further away from a solution to the problem than it did six months ago. Japan's budget is even further out of balance than that of the United States -- the yen may be a great currency to borrow if you want to invest somewhere else, but Japanese government bonds are even less attractive than U.S. Treasurys in the long run. The Chinese yuan may be an alternative to the U.S. dollar someday, but not until the Chinese government decides that its currency is fully and freely convertible.

Bill Gross Battles Bond Dealers on Outlook as Treasuries Gain - The world’s biggest bond dealers dispute Bill Gross’s assertion that the $9.13 trillion market for U.S. Treasuries offers little value.  While Gross, who runs Pacific Investment Management Co.’s $236 billion Total Return Fund, is betting against government debt, the 20 firms that trade with the Federal Reserve predict yields on the benchmark 10-year Treasury note will hold below 4 percent for a third straight year for the balance of 2011. “I could join the dealers and say the 10-year’s not going to go to 4 percent, so what am I left with?” Gross said. “I’m left with an under-yielding, less-than-inflation security. I have better choices. As a firm we’re not going to put up with it.”  So far, Goldman Sachs Group Inc., Credit Suisse Group AG and the rest of the primary dealers are proving right. U.S. bonds of all maturities are generating their best returns since August, gaining 0.49 percent this month. Optimism Congress will cut spending, slower growth and rising demand from banks meeting tighter risk standards governing the capital they must hold to cushion against losses are supporting bond prices.

Global systemic crisis: Autumn 2011 – Budget/T-Bonds/Dollar, the three US crises which will cause the Very Serious Breakdown of the global economic, financial and monetary system - At this stage, LEAP/E2020 can confirm that the next stage of the crisis will really be the 'Very Serious Breakdown of the world economic, financial and monetary system' and that this historic failure will occur in autumn 2011 (3). The monetary, financial, economic and geopolitical consequences of this 'Very Serious Breakdown' will be of historic proportions and will show the crisis of autumn 2008 for what it really was: a simple detonator. The crisis in Japan (4), the Chinese decisions and the debt crisis in Europe will certainly play a role in this historic breakdown. On the other hand we consider that the issue of government debt of countries on Euroland’s periphery is no longer the dominant European risk factor here, but it is the United Kingdom which will find itself in the position of the 'sick man of Europe' (5). The Eurozone has in fact established and keeps improving all the monitoring systems needed to address these problems (6). Management of the Greek, Portuguese and Irish problems will therefore take place in an organized fashion. That private investors must take a haircut (as anticipated by LEAP/E2020 before summer 2010) (7) does not belong to the category of systemic risks, displeasing the Financial Times, the Wall Street Journal and Wall Street and City experts, trying every three months to rerun the 'coup' of the early 2010 Eurozone crisis (8)."

Hemming the least smelly shirt - A GOOD friend of mine was born a subsistence farmer in a remote African village. He went to primary school in a one-room structure with no windows, electricity, running water or proper blackboard. I once asked him what he was taught about America (the country where he would one day make his home and achieve extraordinary success) as a child at this school. He remembers being told two things: America has a few, very large farms which produce food for everyone and it is the world’s largest debtor. America has a special economic position. It can add to its debt each year while its sovereigns remain the world’s “risk-free asset”. Or, as I once heard PIMCO’s Mohammed El-Erian call it, the “least dirty shirt”. America’s risk-free status means it can borrow cheaply no matter how untenable its fiscal position becomes, at least for now. In principle a country like America can run deficits each year forever, so long as its debt payments do not exceed GDP growth. Assuming the debt remains serviceable, it may even be desirable to run deficits some years. The problem occurs if and when the music stops and the market offers a better “risk-free” alternative.

A Time for Radical Centrists - It has been a bad decade for the gross federal debt, which has ballooned to 93.2 percent of gross domestic product in 2010 from 56.4 percent in 2001. Wars and recession have taken their toll, and last week Standard & Poor’s warned that the United States was in danger of losing its AAA rating. Is it any wonder that 70 percent of Americans think the country is on the wrong track? Our best hope is that the collision between the Tea Party and the Obama administration will explode into some serious centrism. Just as the strange cocktail of Bill Clinton and Newt Gingrich produced welfare reform in 1996 and a significant decline in the gross debt, to 57 percent of G.D.P. from 67 percent, the political conflict between President Obama and the Republican-controlled House seems to have created some fiscal seriousness from both parties. Political energy rarely comes from middle. It’s easy to understand why millions of Americans could get passionate about the more generous, more just country offered by progressives from Theodore Roosevelt onward. It’s also easy to understand the passionate desire for freedom that inspired the original Tea Party and its current incarnation.

With Economy as a Hostage, the GOP Presents Extreme Demands… The standoff du jour in Washington is about a vote to raise the federal debt ceiling. Democrats and the White House insist it must be done—as does Wall Street—while fiscal conservatives and Tea Party activists are demanding serious concessions, and in some cases, an unconditional “no” vote. As the conversation reaches a crescendo, it’s useful to take a quick look at what the debt ceiling actually is, and what forces are at play in the debate. Before 1917, Congress had to approve borrowing every time it happened, but World War I created a need for more flexibility and lawmakers gave the federal government unchecked borrowing powers, provided the total amount was less than a certain limit. Congress now needs to approve any borrowing past the $14.3 trillion debt ceiling, which the United States will reach “no later” than May 16, according to Treasury Secretary Timothy Geithner. If Congress doesn’t raise the debt ceiling, the government would have to stop spending—including stopping interest payments on those Treasury bonds, meaning that the United States would effectively default on its debt.

The Impending Debt Limit/Default Crisis Has Been Long in Coming - The recent financial crisis in Greece has led to a lot of discussion about whether the United States might one day have a public debt so large that default becomes a real possibility. While the sort of problem Greece is experiencing is impossible here, we have another problem that, to my knowledge, no other nation on Earth has: a legal limit on government debt that Congress must raise periodically. As the almost inevitable debt default is perhaps only weeks away, Wall Street types are finally becomeing nervous. They should have known that supporting a bunch of not-too-bright, ignorant Tea Party members to Congress was not going to work out well. I tried to warn them. Following is an article I published last year warning people just how crazy these people are and some references to the debt limit/default issue.

Bankers, Funds Tell Treasury Of ‘Urgent’ Need To Raise Debt - The Treasury Borrowing Advisory Committee, a key group of senior representatives from investment funds and banks, this week warned that any delay in interest or principal payment by the U.S. government could trigger a catastrophic financial crisis. “I am writing to express my concerns regarding the urgent need to increase the statutory debt limit,” J.P. Morgan Managing Director Matthew Zames said in a letter, dated April 25, to Treasury Secretary Timothy Geithner. Geithner earlier this month told lawmakers that the U.S. will reach its debt limit no later than May 16, and could default by July 8 if Congress doesn’t raise the $14.294 trillion ceiling. But many Republicans, and some Democrats, first want a commitment to cut the budget deficits and start lowering federal debt.

Geithner: Debt ceiling debate 'ridiculous' - Treasury Secretary Timothy Geithner on Tuesday slammed the debate over raising the debt ceiling as “ridiculous” and said it is “irresponsible” for policymakers to leave the impression that the U.S. might not pay its bills. Geithner also said he was confident that lawmakers would increase the debt limit, but stressed that he would like to see that happen sooner rather than later.  The Treasury secretary said the tussle over the borrowing limit "is a ridiculous debate to have."   "I mean, the idea that the United States would take the risk — people would start to believe we won't pay our bills — is a ridiculous proposition, irresponsible, completely unacceptable basic risk for us to take," Geithner said. Treasury currently estimates that the debt limit will be breached in the middle of next month, and said that it has certain tools that would delay default until roughly July 8.

Note to Rep. Bachmann: Hitting the Debt Limit Has Consequences - The other day, I blogged on the necessity of increasing the debt limit. And I got a remarkable response: The tea party and others on the right fringe of American politics appear to believe that hitting the debt ceiling is no biggie, since all Congress would have to do is reprogram tax dollars to pay creditors first and use what’s left for other priorities. The rest of government would, sniff, have to be abandoned. I can understand why this view is so attractive to the right. After all, it allows them to downplay the real significance of breaching the federal borrowing limit and at the same time kill lots of government programs.  The trouble is, they are completely misinterpreting the consequences of exceeding the debt limit. It is in fact, a public policy non-sequitur—something like responding to the question, “Do you want to go the ballgame” with, “I found a great fruitcake recipe.”Part of the problem, as my colleague Donald Marron notes, is that Treasury Secretary Tim Geithner has muddied the rhetorical waters by warning about the potential of government defaulting on its debt if the debt ceiling is breached. While it is true that this is a theoretical problem, it is not the immediate risk of exceeding the debt limit.

What Happens if the Debt Ceiling Isn't Raised - First, foreign investors, who hold nearly half of outstanding Treasury debt, could reduce their purchases of Treasuries on a permanent basis, and potentially even sell some of their existing holdings. A worrisome precedent is the sharp decline in foreign sponsorship of [government-sponsored enterprise, or G.S.E.] debt since Fannie Mae and Freddie Mac were placed under conservatorship. Despite assurances from Treasury officials regarding the U.S. commitment to these institutions, foreign sponsorship has yet to return to pre-conservatorship levels. Second, a default by the U.S. Treasury, or even an extended delay in raising the debt ceiling, could lead to a downgrade of the U.S. sovereign credit rating. Third, the financial crisis you warned of in your April 4th Letter to Congress could trigger a run on money market funds, as was the case in September 2008 after the Lehman failure. In the event of a Treasury default, I think it is likely that at least one fund would be forced to halt redemptions or conceivably “break the buck.” Fourth, a Treasury default could severely disrupt the $4 trillion Treasury financing market, which could sharply raise borrowing rates for some market participants and possibly lead to another acute deleveraging event. Fifth, the rise in borrowing costs and contraction of credit that would occur as a result of this deleveraging event would have damaging consequences for the still-fragile recovery of our economy. Finally, I would emphasize that because the long-term risks from a default are so large, a prolonged delay in raising the debt ceiling may negatively impact markets well before a default actually occurs. This is because investors will likely undertake risk-management actions in preparation for a potential default.

More Democrats threaten to vote against raising borrowing limit - A growing number of Democrats are threatening to defy the White House over the national debt, joining Republican calls for deficit cuts as a requirement for consenting to lift the country’s borrowing limit. The tension is the latest illustration of how the tea-party-infused GOP is driving the debate in Washington over federal spending. And it shows how the debt issue is testing the Obama administration’s clout as Democrats, particularly those from politically competitive states, resist White House arguments against setting conditions on legislation to raise the debt ceiling. The push-back has come in recent days from Sens. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, and Joe Manchin (D-W.Va.), a freshman who is running for reelection next year. Sen. Mark Pryor (D-Ark.) told constituents during the Easter recess that he would not vote to lift the debt limit without a “real and meaningful commitment to debt reduction.” Even Sen. Amy Klobuchar (D-Minn.), generally a stalwart White House ally, is undecided on the issue and is “hopeful” that a debt-ceiling bill can be attached to a measure to cut the federal deficit.

Democrats Are Caving Left And Right On The Debt Ceiling - The odds of a "clean" debt ceiling hike -- which is to say, one that's not attached to any spending cuts or deficit targets -- seem slim-to-none.  According to The Washington Post, more and more Democrats are joining the GOP and opposing Obama on this question. Despite the fact that it needs to be done to continue operating government, and the fact that the public would scream bloody murder if the full implications of it were realized, the debt ceiling vote is wildly unpopular, and you can be sure that any politician who votes for it will get hammered for it in the 2012 election. Of course, the real story on the debt ceiling fight is this: The GOP wants austerity now because it weakens the economy in the runup to the election. The question is how much blood they can draw, and how much spending Obama has to give up on.

Where are the Grownups? - When it comes to economic policy, the grownups among politicians in Washington DC have gone missing. (Brad Delong clearly needs to resume his occasional series, "Grownup Republican Watch".) And in today's world where uninformed, discredited, and illogical economic policies seem to be eagerly accepted as gospel by legislators, the grownups have gone quiet on both sides of the aisle: Debt ceiling: More Democrats threaten to vote against raising borrowing limit. A growing number of Democrats are threatening to defy the White House over the national debt, joining Republican calls for deficit cuts as a requirement for consenting to lift the country’s borrowing limit. The tension is the latest illustration of how the tea-party-infused GOP is driving the debate in Washington over federal spending.  So the dangerous game in which the possibility of US government default is a bargaining chip does not seem to be over, and in fact seems to be getting new players. And then there's the real and destructive impact of the growing threats against the Fed's independence.

What happens if Congress blows the debt ceiling? - Some Republican lawmakers are challenging Treasury Secretary Tim Geithner's warnings about the grave consequences of not raising the country's debt ceiling. Geithner has said the country would risk default if Congress doesn't raise the country's legal borrowing limit by July 81.  Just pay the interest on the debt to bondholders -- that'll prevent default, Geithner's critics say.  Indeed, the Treasury Department takes in about $177 billion a month on average. And interest on public debt2 only costs $19 billion.  That's good. He can pay the interest. But it's hardly the whole story. Average monthly spending -- minus interest -- is $276 billion. That means Geithner will be short $118 billion every month to pay all the bills the country has incurred. But just talking "averages" can be deceiving, because monthly spending and revenue are "bumpy month to month," said former Congressional Budget Office acting director Donald Marron. Translation: There may be times when Geithner comes up far shorter than $118 billion.

Treasury quietly plans for failure to raise debt ceiling - The White House is warning that catastrophe will strike if Congress fails to raise the limit on the national debt: With too little cash to pay creditors, the U.S. government would default. Interest rates would skyrocket. And the economic recovery would collapse. But behind the scenes, Treasury Secretary Timothy F. Geithner has already begun juggling the books to conserve cash, draining a special account at the Federal Reserve. And with the debt forecast to hit the legal limit of $14.3 trillion in just a few weeks, he has a range of tools at his disposal, including borrowing money from a pension fund for federal workers. Geithner also has authority to pay investors first for interest they’re owed on the debt, according to a decades-old legal opinion. A growing number of conservatives argue that by making interest payments first, the government could avoid default and the Obama administration’s predictions of economic Armageddon.

Why Do We Have a Debt Ceiling Anyhow? - On the face of it, a federal debt ceiling seems strange. Congress passes spending bills and tax bills, and those decisions lead to bigger or smaller deficits — or once upon a time surpluses — depending on what happens with the economy. The decision to borrow more or less is a consequence of those tax and spending decisions. With Congress once against arguing about raising the debt limit, one might wonder how this peculiar practice began.  Before 1917, Congress okayed specific loans — such as the one to build the Panama Canal — or specific types of lending. To give the U.S. Treasury more flexibility during World War I, Congress passed the Second Liberty Bond Act. It put aggregate limits on various types of Treasury borrowing and “that allowed the Treasury greater ability to respond to changing conditions and more flexibility in financial management,” according to an authoritative account by the Congressional Research Service. For the two subsequent decades, Congress set separate limits for different types and maturities of debt. But in 1939, it stopped doing that, and created the aggregate limit on Treasury borrowing.

S&P's negative outlook on US credit triggers unease from largest debt holder - Chinese experts expressed concern about the country's dollar assets after Standard & Poor's cut its outlook on U.S. debt, which maintains the top triple A rating, from "stable" to "negative". "U.S. debt is not as safe as it seems, with two looming risks: the inflation threat from U.S. debt and the climbing depreciation threat from U.S. dollars," said Zhang Ming, deputy director of the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS). Liu Yuhui, a researcher with the Financial Research Center of the CASS, said that the S&P's downgrading of the U.S. credit forecast would drive some investors away from the U.S. debt market. The S&P's last Monday lowered its outlook on U.S. credit to "negative" from "stable." It kept its highest AAA rating for U.S. government debt and said that there was a one-in-three chance it would lower the rating in two years. Equities quickly dropped, but the dollar did not weaken and U.S. Treasury interest rates did not rise. U.S. Treasury Bonds reflect the U.S. government's credit and have been a key investment item for the world.

The United States faces a crisis not seen since the Depression - Maybe it's because Boston is different, a semi-detached city in one of the US's most liberal states. But the news that the world's biggest economy had had its creditworthiness challenged for the first time by the upstart rating agency Standard & Poor's (S&P) hardly seemed to register with the locals. No one I met fulminated about loss of economic sovereignty or that S&P, whose purblind approval of junk mortgage debt as triple A was one of the causes of the financial crisis, had finally over-reached itself. Bostonians seemed unconcerned. Perhaps this was because it was just one more surreal moment in the pantomime that is American economic and political life. There was a momentary tremor in the Dow Jones.. But soon the markets were on the rise again as if nothing had happened. The Obama administration played it down.  If the hope was to provoke a change in the debate about the US's record budget deficit, S&P must have been disappointed.

America Appears To Be Sleepwalking Towards Disaster – Does No One Care? - There is now, according to S&P, "at least a one in three chance" that American debt will be downgraded from its top-notch status over the next two years – which would be a first in modern times.  A New York Times/CBS News opinion poll has also suggested the US public is now more economically pessimistic than at any time since President Barack Obama's first two months in office in early 2009 – when the country was still caught in the "Great Recession". These are the stark realities facing the world's largest economy. They are set, furthermore, against Europe's sovereign debt turmoil, Japan's nuclear crisis and ongoing violence in the Middle East.  Yet despite all this bad news, this veritable litany of woe, the Dow Jones Industrial Average ended last week at a three-year high. US equities are now at levels not seen since mid-2008 – before the credit crunch really took hold. On top of that, despite S&P's announcement, the price of Treasuries kept rising, as their yield – the cost the US government must pay to borrow – fell to its lowest level in a month. Has the world gone mad?

Allan Sloan: The Debt Is the Problem Even If We Don’t Default On It - In Wednesday’s Washington Post, Allan Sloan is amused by people who “freak out” over the federal debt getting “downgraded” or defaulted on–the same people who seem oblivious to the problems with the debt itself or even their own role in its growth over the past decade: You’ve got to love it. Republicans who never saw a George W. Bush national debt-increase request they didn’t support point with alarm at S&P now saying there’s a 1-in-3 chance it will downgrade the U.S. credit rating within two years. Democrats, who rightly fussed about the costs of Bush’s massive tax cuts, two unfunded wars and unfunded Medicare prescription drug benefit, insist that things are going to be okay under the current Democratic administration. Allan explains that worries about default are really overblown, although who knows, we might just act “stupid” enough for it to happen:  But even if U.S. Treasury debt is downgraded, there’s no chance of the government defaulting on its debt absent Washington doing something incredibly stupid, such as refusing to increase the national debt ceiling.

On the Budget Debate People Are Saying “All We Want Are the Facts” - John Taylor - This graph from my Friday Wall Street Journal article simply presented basic facts about the second Obama budget and compared it with the first Obama budget and with the House budget.  So why did it attract so much attention here and here and other places? I think it's a sign that people are tired of rhetoric and demagoguery. They want to understand each side’s factual position in the debate. "All we want are the facts, ma'am," as Joe Friday would say. My guess is that people would like it if President Obama or Members of Congress took one or two charts to the town hall meetings or to the Sunday morning talk shows. Sometimes you hear the excuse that charts are too technical, but that certainly doesn’t apply to the techies at the Facebook town hall last Wednesday.

John Taylor’s disingenuous op-ed: John Taylor bashes the White House budget proposals of February 14 and April 13 and lauds the House Republican budget proposal of April 5.Taylor’s simplifications go so far as to be misleading. Taylor [implies that when hi]s boss, George W. Bush, was president (Taylor was  Under Secretary of the Treasury for International Affairs during the Bush Administration), spending was under control.  This implication omits several inconvenient facts. The financial crisis itself was partially the result of the irresponsible fiscal policies (fighting two wars and cutting taxes at the same time) of that same Bush Administration. To simplify: reducing the federal budget deficit by an amount and increasing the aggregate of all state budget deficits by the same amount does not demonstrate fiscal rectitude. To claim, as Taylor does that, “…the House budget plan, with spending in the same range, approximately balances the budget with no increase in taxes…” is misleading.  John Taylor should know better.

John Taylor and the Zombies –Krugman - Via Brad DeLong, I see that John Taylor is peddling the zombie claim that there has been a huge expansion in the federal government under Obama. Sigh. One way to address this claim is to ask, where are the huge new federal programs? The Affordable Care Act has not yet kicked in; the stimulus, such as it was, is fading out; where is this big government surge? In answer, the peddlers of this myth point to the fact — which is true — that federal spending as a share of GDP has risen, from 19.6 percent in fiscal 2007 to 23.6 percent in fiscal 2010. (I use 2007 here as the last pre-Great Recession year). But what’s behind that rise? A large part of it is a slowdown in GDP rather than an accelerated rise in government spending. Nominal GDP rose at an annual rate of 5.1 percent from 2000 to 2007; it only rose at a 1.7 percent rate from 2007 to 2010. How much would the ratio of spending to GDP have gone up if spending had stayed the same, but there had not been a slowdown? Here’s the answer: OMB and author’s calculations  So about half of the rise in the ratio is due to a fall in the denominator rather than a rise in the numerator.

Paul Krugman Versus Budget Facts -John Taylor - Yesterday Paul Krugman, citing Brad DeLong's post earlier in the day, joined the commentary on my Wall Street Journal article of Friday which I further discussed in my blog of Sunday. Krugman takes issue with my statement that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent” and instead claims to see no “huge expansion of the federal government” once one takes account of the slowdown in nominal GDP growth due to the recession.  Krugman is wrong. The Administration's budget did propose spending levels which make the recently increased rate of government spending as a share of GDP permanent, regardless of the reason for the recent increase. If you want to see this in a way that takes account of changes in nominal GDP growth related to the recession, then you can compare actual spending before the effects of the recession began with proposed spending after the effects of the recession are over. For all of 2007, spending was 19.6 percent of GDP. For all of 2021—after the impacts of the recession and the final year of the budget window—the budget submitted in February proposed spending equal to 24.2 percent of GDP. These two budget facts are part of the data presented in my Wall Street Journal chart and are taken directly from CBO tables. The 4.6 percentage point increase represents $1 trillion more federal spending per year at 2021 levels of GDP.

Taylor Digs In Deeper - Paul Krugman - Oh, my. Rather than answering my question — where are these big new Obama programs? — he points to CBO projections showing that spending on mandatory programs is expected to remain high in 2021. He has to know — or has no business writing about budget issues if he doesn’t know — what that’s mainly about: it’s about the baby boomers hitting retirement age, plus the continuing rise in health care costs. Baby boom starts in 1946; 65 years after that is …? I mean, we’ve been hearing tons about the demographic deluge (exaggerated, but still a very real factor). And Taylor presents budget projections that are mainly driven by that demography as if they represented a massive Obama initiative? Back to my original point: the actual rise in the spending/GDP ratio under Obama represents (1) weak GDP (2) safety net programs. It’s not a huge expansion of government. No amount of dodging can change that fact.

2021 and All That - Krugman - OK, a calmer followup on Taylor. Originally he claimed that there had been a huge expansion in government under Obama; I pointed out that about half the rise in the ratio of spending to GDP reflected low GDP, not high spending, and that the other half was basically safety net programs: Rather than addressing these facts directly, Taylor now claims that Obama must have expanded government, because his budget projected spending of 24 percent of GDP in 2021, up from 19.6 percent in 2007, before the crisis struck. But the great bulk of this projected rise has nothing whatsoever to do with Obama’s policies. Let’s compare the CBO projections for 2021(pdf) with the historical data (pdf) for 2007. The projections shows spending rising from 19.6 percent of GDP to 24 percent; what’s behind that? The answer: Social Security is up. That has nothing to do with Obama, who hasn’t changed the program at all; it’s just demography, the baby boomers retiring. Medicare is also up. Obama actually cut funds from Medicare, a fact trumpeted by Republicans. Nonetheless, projected spending is up, both because of demography and because of rising health costs.

One More Point About 2021 - Krugman - Or maybe two points. Or .. amongst my points .. Anyway, some numbers to help pin this down. When somebody like John Taylor, or Bob Corker and Claire McCaskill, asks why federal spending shouldn’t stay at or near the share of GDP it was at in 2007, there are two compelling answers. First, federal spending is in large part about providing retirement support and health care to seniors. And the baby boomers have already started to arrive. In 2005, there were 20.6 Americans over 65 for every 100 Americans of working age; by 2020 there will be 27.5. Right there, you have roughly a one-third increase in the burden on Social Security, Medicare, and much of Medicaid. Second, because a large part of the social insurance programs is concerned with health care, health costs matter — and these have consistently grown faster than GDP. By 2021 we’ll have had 14 years of rising health costs added to the budget burden. Now, we can and should take steps to slow the rate at which such costs grow — and the ACA actually did just that, to screams of “death panels” from the right. But nobody can realistically expect a complete end to “excess cost growth” right away, so that adds further to the pressure for higher spending.

Spending Rise Has Much To Do With Policy -John Taylor - The running debate between Paul Krugman and me is bringing more facts to bear on important budget and policy issues. Since I wrote my reply yesterday to Krugman’s criticism of my Wall Street Journal article, he has responded three times, with Taylor Digs Deeper, 2021 and All That, and One More Point about 2021.  Krugman now admits that spending as a share of GDP would rise from 19.6 percent of GDP in 2007 to around 24 percent in 2021 under the budget proposed by the Administration on Feburary 14, which is what I showed in my original graph. And since spending averages around 24 percent of GDP in 2009-2011, this confirms my point that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent.” Krugman also reports some of the components of the rise in entitlement spending, showing that Social Security, Medicare, and Medicaid spending rise as a share of GDP under Obama’s proposal.  But Krugman now argues that that “the great bulk of this projected rise has nothing whatsoever to do with Obama’s policies.” This is wrong on two accounts.

A (Hopefully) Last Word on Taylor vs. Krugman –DeLong - According to the CBO baseline, mandatory spending in fiscal 2019 is now projected at $2.96 trillion; discretionary spending at $1.52 trillion; and net interest at $0.45 trillion.  In January 2009, before Barack Obama took office, projected mandatory spending in 2019 was $2.89 trillion; discretionary spending $1.39 trillion; and net interest $0.70 trillion. The rise in net interest is overwhelmingly the consequence of the burst of countercyclical deficits caused by the recession--and thus not Obama's responsibility.  The combination of changes in budgetary and economic assumptions and changes in legislation have thus raised fiscal 2019 spending by $0.20 trillion--rather less than 1% of GDP. Not all of those changes are the responsibility of Obama: I would say about 1/3 of them are, with the rest mostly being flaws in how CBO constructs it's current-law baseline estimates. But say they all are: then Obama has raised projected federal spending by something less than 1% in the ten-year medium run, and has lowered it in the long run relative to baseline as the ACA policies cumulate.

Where Has the Spending Gone, Joe DiMaggio? - Lately there's been a gnashing of the teeth about the deficit and the debt and what to do about it. Democrats point out that when GW took office, there was no deficit, and that a big part of the problem is that federal tax revenues have fallen from 20.6% of GDP in Fiscal Year 2000 to 14.9% in Fiscal Year 2010 (warning - Excel file), and are slated to fall to 14.4% this fiscal year. I found a nice graph here. Despite the nonsense that gets referred to as Hauser's Law, the big fall in tax revenues is is in large part due to the tax cuts, although the poor economy also plays its share. But for there to be a deficit, tax revenues (whether high or low) have to be less than spending. And spending has also gone up (again see OMB Table 1.2 referenced above) from 18.2% of GDP in 2000 to 23.8% of GDP in 2010, and is slated to go above 25% of GDP this fiscal year. (It is worth noting – federal spending as a percentage of GDP fell in every single year during the Clinton administration…) I thought it would be interesting to see where that spending is going, so I pulled the data from OMB Table 3.1 and graphed it below. (Dotted lines indicate future projected spending.)

Is Stockman right about deficits, after all? - Many Americans interested in economics will recall David Stockman as the controversial White House budget director who swam against a tide of increasing deficits during Ronald Reagan’s administration in the first half of the 1980s. Stockman has an op-ed article in yesterday’s New York Times blasting what he sees as weak efforts by the president and congressional Republicans to come up with long-term plans to cut deficits. We wish to respond to the fiscal disaster scenario that Stockman presents in today’s article. Levy Institute macroeconomists and other strong proponents of Keynes’s theories have argued in recent years that the United States should run deficits in the amounts necessary to ensure full or nearly-full employment, without fear of bankruptcy or other affordability issues connected with high deficits. We argue that unlike individual U.S. states and members of currency unions, the U.S. federal government can run deficits indefinitely without becoming “insolvent” in any sense or being forced to default.  The government has this ability because the United States uses paper money that is not convertible to a fixed amount of gold or foreign currency. Reading Stockman’s article, it appears that he might not completely disagree with these views

An Insurance Company With An Army - Krugman - A general reminder whenever budget issues are discussed: the U.S. government is — this isn’t original — best thought of as a giant insurance company with an army. When you talk about federal spending, you’re overwhelmingly talking about Social Security, Medicare, Medicaid, and defense. And the bulk of the insurance — all of Social Security and Medicare, about 2/3 of Medicaid — is for the elderly and disabled. This is important both for assessing projections about future spending — yes, spending is projected to rise, but how could it not given the aging of the population? — and for assessing claims about the need to shrink the government. Put it this way: Whenever someone talks about making government smaller, he should be asked which of these big four he proposes cutting, and how. If he responds with generalities, he’s faking it.

Radical Plan to Cut Military Spending and Help Balance the Budget - Mish - My long held belief is the US cannot afford to be the world's policeman. Moreover, I question whether it is wise to pursue such a policy even if we could pay for it. Regardless, it is beyond absurd to leave cuts in defense spending off the table when the budget deficit is $1.5 trillion. The US has troops in 140 countries. Admittedly many of those are small operations. However, why should the US be meddling in the affairs of those countries in the first place? The US has 150,000 troops in Europe and Asia. Why? The cold war is over, the odds Europe will be invaded by Russia close to zero, and even if the odds are higher, why should it be US troops and US expense protecting Europe? The question I have had is what would a massive pullback in troop levels save? Courtesy of Foreign Policy magazine, today I have an answer.Please consider A Radical Plan for Cutting the Defense Budget and Reconfiguring the U.S. Military by retired Col. Douglas Macgregor

What Is a Deficit Hawk…or Panda…or Peacock? - The Washington Post’s Greg Sargent questions the true “hawkishness” of some who label themselves “deficit hawks”: It sounds to me like Greg’s saying a lot of Tea Party types label themselves “deficit hawks”–and that’s probably true.  But I cringe when I hear that, because to be opposed to deficits does not mean one is opposed to big government.  It just means that if I am for big government but against deficits, I have to be for higher taxes.  And if I am for smaller government and lower taxes, but against deficits, I have to be for the tough benefit cuts that make that math work out.   I think Paul Ryan has pretty clearly spelled out that he is a deficit hawk of the latter type (even if the details of the proposed benefit cuts are not yet spelled out), that the Progressive Caucus in Congress has spelled out that they’re deficit hawks of the former type (closing the deficit with mostly tax increases–but also defense cuts), and that President Obama is trying to forge a deficit-hawkish path somewhere in the middle.

Deficit compromise - The Washington Post reported last week on a discouraging poll. Americans supposedly want to reduce the deficit, but not if it means changing Medicare, cutting programs like defense or Medicaid, or raising taxes on anybody but the very richest Americans. Democrats and Republicans seem farther than ever from finding agreement. It's times like this that I'm glad there are some optimists around who still see some basis for making progress with America's daunting fiscal challenge. Diane Lim Rogers sees the issue this way: Stories about [the Washington Post-ABC] poll have tended to emphasize the majority who are opposed to each item in a "pick one" menu of tough choices: 78 percent opposed to cutting Medicare, 69 percent opposed to cutting Medicaid, 56 percent opposed to cutting defense spending. The only "pick one" option that a majority (72 percent) supported: "raising taxes on incomes over $250,000."  Diane notes that only a slight majority opposed a more balanced approach which combines ("small") cuts in the major entitlement programs with "raising taxes on all Americans." This is a glass that is (almost) half full. We haven't even begun to make the full sales pitch on this "shared sacrifice" plan with more specifics about how Medicare and Social Security can be trimmed while actually strengthening the safety-net parts of those programs

Hiding Behind Words to Avoid Coming Together - I very much liked the suggested point-counterpoint opinion pieces on the front of the Outlook section in today’s Washington Post.  Actually it was not so much a debate with pro-one side vs. the other arguments, but rather a one-two-punch critique of the rhetoric used on both sides. First, University of Virginia history professor Sophia Rosenfeld warns that the GOP’s talk of “common sense” when it comes to fiscal responsibility really has little to do with striving for “common good” type strategies.  Her central thesis:The political appeal to common sense is thus best understood not as a call for clearheaded solutions but rather as a form of pandering — an effort by pundits and politicians to channel real popular anger and to lather voters with collective flattery. Calls for common sense like Beck’s or Palin’s start from the premise that the hard-working majority can instinctively tell right from wrong. That their enemies — self-serving Washington politicians, greedy Wall Street bankers, immoral Hollywood entertainers, out-of-touch scientists and “experts” — cannot be trusted. And to her right (on the Outlook front page), American Enterprise Institute’s Arthur Brooks argues that the Democrats’ emphasis on achieving “fairness” through higher taxes on the rich doesn’t exactly encourage the “shared sacrifice” (for the “common good”) needed for bipartisanship in deficit reduction.  It really perpetuates the hyperpartisan, “class warfare” type of talk that gives each side an excuse to keep disagreeing.

Nonstop chatter about deficit does nothing to reassure people about economy - Yes, I know you’re bored of hearing me and others point out that the nonstop chatter about the deficit is completely out of sync with voter angst about the economy and jobs. But here’s another interesting finding, buried in today’s Marist poll, showing this in a new way: Obama’s big deficit reduction speech didn’t budge Obama’s low approval numbers on the economy and didn’t budge the numbers showing high public economic anxiety. The Marist poll is getting lots of attention today for the toplines showing approval of Obama on the economy at an all time low. But this from the internals, I think, is more interesting: The poll found that before Obama’s speech, 40 percent approved of his performance on the economy, versus 58 percent who disapproved of it. After Obama’s speech, those numbers were 41-56 — statistically the same.

Don't Let Fiscal Policymakers Off the Hook - The recent focus on Ben Bernanke and the Fed, in particular what more could be done to help the economy and the unemployed, takes the pressure off of fiscal policymakers. But Congress also bears as much responsibility, or more in my view, for the slow recovery and the sorry state of the employment picture.Fiscal policy was far from aggressive enough -- at best it offset declines at the state and local level leaving the net effect near zero -- yet people express surprise it wasn't able to do more. It was also too small, way too late, and it was not persistent enough. Declines in stimulus spending as the program ends are holding back economic growth at a time when fiscal policy ought to be aiding, not stalling the recovery. This was always a battle that needed to be fought on multiple policy fronts, neither monetary nor fiscal policy alone, or perhaps even in combination, was going to be enough. We needed both monetary and fiscal policy to respond aggressively, and to continue to respond as long as needed, but both have fallen short and there is no sign of monetary and fiscal policymakers moving to make up lost ground.

Nothing Magical–or Even Sensible–About An 18-19 Percent of GDP Revenue Ceiling - Bob Williams of the Tax Policy Center feels the way I do about how meaningful–or not–the 40-year historical average level of revenues as a share of our economy is as a guide for where revenues ought to go in the future.  On the TPC’s “TaxVox” blog, he writes:[T]here’s nothing intrinsically right or wrong with any given level of taxation. As Americans get older, spending on Social Security and healthcare will necessarily rise. And, as we grow wealthier, we may choose to spend more for things we want—helping those in need, improving our roads and schools, or paying to build more and better infrastructure. Those are political decisions that lawmakers make all the time. But there’s nothing magical about 18 or 19 percent. Tell that to the Republicans in Congress who have signed a “no new taxes” (of any kind) pledge.  Oh yeah, we have been, and oh yeah, at least some politicians are catching on.  For example, there’s Republican Senator Tom Coburn–who I think truly qualifies as a “deficit hawk” by the way.  From Republican Sen. Tom Coburn of Oklahoma told the NBC program “Meet the Press” that if lowering tax rates and eliminating loopholes and deductions ended up bringing in more money to the U.S. government, “that would be fine with me.” Asked about a pledge he signed previously against any kind of tax increase, Coburn said his more important pledge was to do what’s best for the country.

The Mythical Obama Spending Binge -The notion that the Obama administration has presided over a massive spending binge has been repeated so often that the administration doesn't even bother denying it anymore. Spending has shot up as a percentage of GDP. But, as Paul Krugman explains, virtually the entire phenomenon is an automatic response to the recession rather than any policy change. First, about half the increase in the percentage of GDP going to government spending is simply reflects the economic crisis, which has shrunk the denominator: Now, this chart implies that the other half of the increase reflects actually higher spending. That increase consists almost entirely of automatic stabilizers -- programs that benefit the needy and increase their budgets automatically when the number of needy increase. Krugman breaks down the annual rate of growth by category, comparing it with the annual rate of growth under President Bush: So there you have it. The "Obama spending binge" was almost entirely mythical.

Oh Yeah: Crowding Out Has Been a Huge Problem - Right-wing economists love to claim that government spending "crowds out" private spending, especially investment spending on fixed assets. It's probably true at some level and in some situations. But if it was true for postwar America, you'd expect to see some evidence in the historical data, right? Not so much: The investment share of government, ex-defense, fell by 29% from the 60s to the 80s, while the share devoted to business increased 18% (28% from the 50s to the 80s) -- the very period when the blossoming New Deal programs and Johnson's Great Society were supposedly creating Leviathan, embodied. Those changes in share percentages don't really put across the magnitude of the change, though. Business investment started at a much higher level, so the absolute increase in business investment utterly dwarfs all the other changes. Curiously (given the right-wing narrative) the business share flattened out once we started feeling the manifestly salutary effects of the Reaganomics world view. It actually declined slightly under Dubya and six years of unfettered Republican control. Go figure

Writing a Better Balanced Budget Amendment - Back on 3 February 2011, a number of Republican party members in the U.S. Senate introduced Senate Joint Resolution 5, which proposes to amend the U.S. Constitution to require the U.S. Congress to balance the annual budget of the U.S. federal government. The resolution has since been signed on to by all the Republican members of the U.S. Senate.  It's a good sentiment, and it has some points to recommend it, however it's got some real world problems.  Here's the text of the proposed amendment, along with our comments: Section 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year. That really sounds good, doesn't it? In theory, that's all the U.S. Congress would ever need to do to balance the U.S. government's budget. But, "In theory, there is no difference between theory and practice. But, in practice, there is."

The Confidence Fairy Has Taken a Leave of Absence _ Krugman - Was it only last June when Alan Reynolds was holding Ireland up as a role model, not just for troubled European economies, but for the United States? Yes, it was: “The Irish approach to tackling the recent recession,”  “was vastly different than the strategies implemented by the U.S. and much of the rest of the developed world. Most governments cranked the printing presses into high gear and began injecting round after round of capital into the global economy. Ireland went the opposite direction, imposing draconian budget cuts and reeling in government spending.” The Irish approach worked in 1987-89 — and it’s working now. This is a lesson that Washington should learn sooner rather than later. Um:  Ireland: 10-year bond rates Meanwhile, Greek austerity is failing even to do much to reduce the deficit, because the economy is shrinking. The usually discreet Calculated Risk sums it up: More austerity coming – the beatings will continue until morale improves! Even Business Insider seems to be getting it. Contractionary policies, it turns out, are contractionary.

Vouchers Won’t Solve Our Health Care Cost Problem - As part of his plan to reduce the budget deficit, Republican Congressman Paul Ryan of Wisconsin proposes replacing Medicare as we know it with a voucher system. Under this system, seniors would receive a credit from the government that can be used to purchase health insurance from private sector providers.  The Ryan plan would reduce Medicare payments far below what is currently available, and this would leave many without the means to obtain the care they need. But even if the vouchers were adequate, I would still not be in favor of a voucher system for health insurance. I am not opposed to vouchers in general. They are offered as an alternative whenever government wants to broaden the availability of private sector services, e.g. vouchers for housing and education, and sometimes vouchers are the best available solution. But not always. So how can we tell if a voucher program is likely to work? And what does this tell us about the Ryan proposal?

What we're not being told about Paul Ryan's Medicare plan - Dean BakerThe nation is drowning in endless accounts of how the huge deficit will sink the economy and the country. These accounts invariably feature stories of a Congress addicted to spending and a nation that wants government benefits that it doesn't want to pay for.  This story has nothing to do with reality, as all budget analysts know. The explosion of the budget deficit in the last three years is a response to the plunge in private sector demand following the collapse of the housing bubble. If the budget deficit were smaller, we would simply have less demand and fewer jobs.  Paul Ryan did his best to lay out the long-term story as clearly as possible with his plan to privatise Medicare. The analysis by the non-partisan Congressional Budget Office (CBO) shows that Ryan's plan would hugely increase the cost of healthcare to seniors. Under the Ryan plan, a Medicare-equivalent policy is projected to cost almost half of a median 65-year-old retiree's income by 2030. It would soon exceed the income of most retirees, as healthcare costs outpace income growth.

Representative Ryan’s $30 Trillion Medicare Waste Tax - Representative Ryan’s proposal to replace the current Medicare system with a system of vouchers or premium supports has been widely described as shifting costs from the government to beneficiaries. However, the size of this shift is actually small relative to the projected increase in costs that would result from having Medicare provided by private insurers instead of the government-run Medicare system.  The Congressional Budget Office’s (CBO) projections  imply that the Ryan plan would add more than $30 trillion to the cost of providing Medicare equivalent policies over the program’s 75-year planning period. This increase in costs – from waste associated with using a less efficient health care delivery system – has not received the attention that it deserves in the public debate. Report - PDF

Does the Ryan Plan Curb Health Spending? - My post last week, on the budget plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, ended with the observation that the plan did not propose measures to control overall health spending in the United States, “nor does that appear to have been Mr. Ryan’s objective.” To which one reader responded: I do completely reject that there are no cost controls in the Ryan budget. If there is no federal, state, insurance or private money to pay for extremely expensive care such as in Post No. 7 above, such care will simply not be delivered or paid for. Let me, for all to see, acknowledge this well-taken point. If less money were available to be spent on health care, then overall health spending would be lower. But let me also reproduce a comment from that Post No. 7:  If cutting Medicare is so important, why not start now, rather than with today’s 55-year-olds? Start by not paying for life-support treatments for critically ill very old people, as Medicare did for my 92-year-old father’s PEG feeding tube three years ago, who died last month after running up another $300K or so in medical bills paid by Medicare and his health insurance as a retired teacher.

The Five Scariest Things in the GOP Budget, Part One: The End of Food Stamps As We Know Them -  The food stamp program isn't called food stamps anymore. It's called the Supplemental Nutrition Assistance Program, or SNAP. And the stamps no longer come in the form of colored paper coupons. Now they are virtual stamps, loaded onto electronic debit cards. But the program serves the same essential purpose it always did: Helping poor people to pay for food.  The Republican budget would make two changes to the program. First, it would transform SNAP from an entitlement to a block-grant. Instead of an open-ended federal commitment to the program, guaranteeing benefits for any Americans that meets the eligibility guidelines, the federal government would simply give the states an allotment of money, set by a pre-determined formula. It's the same change Republicans propose for Medicaid and, as with that program, the shift is no minor thing. Today, spending on SNAP automatically rises during economic downturns, as more people lose jobs or see incomes fall. Not only does that automatic expansion help alleviate hardship. It also boosts the economy. In fact, most experts consider government food assistance among the quickest, most effective forms of economic stimulus. As the Wall Street Journal noted in July, 2009, near the peak of the recession:

Would GOP Budget Actually Reduce the Deficit? - Discussion of the House Republican budget has focused mostly on the privatization of Medicare, the block-granting of Medicaid, and the repeal of the Affordable Care Act. And that’s appropriate, given the magnitude of the changes and widespread impact they would have. But those proposals are obscuring some other proposed shifts that, in any other context, would be plenty troubling for their own sake. This week I'll highlight five of them. So far, I've written about radical changes to the Supplemental Nutritional Assistance Program (SNAP), changes in the eligibility age for Medicare, a crucial weakening of financial reform, and a neglect of infrastructure. Today I conclude by assessing just how much the Republican budget would actually reduce the deficit.  One reason you hear so many people describing the House Republican budget as “brave” and “serious” is that it would dramatically reduce the deficit. And yet that's not as true as you might think, particularly in the first decade. When House Budget Chairman Paul Ryan unveiled his proposal, he announced that it would reduce government spending by $5.8 trillion and reduce deficit spending by $1.6 trillion in its first ten years. But Ryan included in his spending reductions the savings from ending the wars in Afghanistan and Iraq.

Flim Flammed - Krugman - Jon Cohn points out that the real question about the Ryan plan isn’t whether it reduces the deficit in the right way; it’s whether it reduces the deficit at all. And Cohn doesn’t even take on the giant magic asterisk on the tax part of the plan: Ryan claims that he will keep revenue at 19 percent of GDP despite large tax cuts, by closing loopholes — but has said nothing at all about which loopholes would be closed. The truth is that this is almost surely a deficit-increasing plan, not a deficit-reducing plan. Meanwhile, Jon Chait looks at Ryan being interviewed about his plan and sees “a stream of misleading and outright false claims”. Notably, his denial of the plain fact that his plan hurts the poor while benefiting the rich — and the evasive language used to obscure what it really going on — is exactly the kind of thing we got accustomed to during the Bush years. I don’t know when if ever the Beltway crowd will admit it, but they were, indeed, flim flammed; the man they decided was an upright, honest deficit hawk is in fact an evasive, dissembling guy who wants to use the deficit, not end it.

Ryan and Heritage - Krugman -  Jonathan Bernstein says something I’ve been meaning to say, about the relationship between the Ryan plan and the ludicrous Heritage economic projection. Strictly speaking, the Path to Prosperity document doesn’t actually use that projection in its estimates. Yet it does direct us to the projection, in effect giving it a seal of approval. And there is, as some of us have tried to point out, a huge magic asterisk in the revenue projections: Ryan calls for $3 trillion in tax cuts, but insists that his plan will be revenue-neutral, because they will do something unspecified to broaden the tax base. Ryan and his colleagues have stonewalled all inquiries about what that something might be. The best guess has to be that there is no there there — that if they ever get to the point of making this an actual plan, they’ll invoke the wonderful “dynamic” effects of lower taxes on rich people to fill that $3 trillion gap. So the Heritage nonsense ends up being a crucial part of the plan after all.

Tax Expenditures are not Loopholes - I am reminded of Orwell and his deep concern with the misuse of language for political ends when I see pols of both parties label tax expenditures as “loopholes” or “earmarks.” The House Budget resolution promises an individual tax reform that “simplifies the broken tax code, lowering rates and clearing out the burdensome tangle of loopholes that distort economic activity.” The Fact sheet describing President Obama’s new budget framework calls for “individual tax reform that closes loopholes and produces a system which is simpler, fairer, and not rigged in favor of those who can afford lawyers and accountants to game it.” The bipartisan National Commission on Fiscal Responsibility and Reform notes that the tax system is riddled with tax expenditures and adds, “These earmarks not only increase the deficit, but cause tax rates to be too high.”The Congressional Budget Act of 1974 defines “tax expenditures” as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability.” And they are very big: the annual revenue loss from these provisions now totals more than $1 trillion.

Obama's Orwellian Oratory - U.S. President Barack Obama displayed his talent for Newspeak oratory when announcing his second proposed budget for the United States federal government's 2012 fiscal year on 18 April 2011. "If, by 2014, our debt is not projected to fall as a share of the economy -- if we haven't hit our targets, if Congress has failed to act -- then my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code," he said. So, what exactly does President Obama mean when he calls for "spending reductions in the tax code"?  To get straight to the bottom line, what he proposes to do is to significantly increase the federal income taxes that productive Americans are required to pay without having to go to the trouble of increasing income tax rates.  Instead, the President is seeking to hike federal income taxes by reducing the amount of deductions and tax credits that honest Americans can claim on their tax returns. But because he doesn't want to appear to be raising federal income taxes, he's using some really deceptive language.

There They Go Again: The ‘People’s Budget’ and High Tax Rates - What’s the deal with the People’s Budget, the fiscal plan released this week by 80 congressional progressives? . After all, Paul Krugman called it, “the only major budget proposal out there offering a plausible path to balancing the budget.” Depends, I suppose, on what you mean by plausible. The Congressional Progressive Caucus’ budget is, at 30,000 feet, the mirror image of the House-passed fiscal plan developed by Budget Committee Chair Paul Ryan (R-WI). While the House GOP budget shows what happens when you try to slash the deficit with only spending cuts, the left’s budget shows what happens when you just raise taxes and cut defense spending.  Ryan would remake Medicare, cut projected Medicaid spending by $800 billion and other domestic programs by half over a decade—and  he’d still end up with a deficit of $400 billion in 2021. The progressives create impossibly high tax rates, and while they claim to balance the budget in 2021 (it is very hard to confirm their numbers), they almost certainly won’t after that.

First Time Since 1935, Handouts Exceeding Taxes - As you can see, government transfers of funds to households exceeded taxes paid by households as a percentage of personal income. For the first time since 1936. And the gap is growing. In raw numbers, in February of this year, households received $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans' benefits, education assistance and other cash transfers of government funds to individuals. The same month, households paid $2.2 trillion in income, payroll, and other taxes. The difference was nearly $100 billion, or around 1% of personal income. If you want a rough guide as to where we stand in the playing out of this recession (assuming you don't concur with the government's declaration that it's over), this chart probably serves the purpose as well as anything. Note that the red line was below the blue one for 1931-36. If a similar period is in store this time around, then we're only about two-fifths of the way into a five-year downturn.

Let’s Take a Hike, by Paul Krugman - When I listen to current discussions of the federal budget, the message I hear sounds like this: We’re in crisis! We must take drastic action immediately!  You have to wonder: If things are that serious, shouldn’t we be raising taxes, not cutting them? ... Consider the Ryan budget proposal, which begins by warning that “a major debt crisis is inevitable” unless we confront the deficit. It then calls for tax cuts, with taxes on the wealthy falling to their lowest level since 1931. And because of those large tax cuts, the only way the Ryan proposal can even claim to reduce the deficit is through savage cuts in spending, mainly falling on the poor and vulnerable. (A realistic assessment suggests that the proposal would actually increase the deficit.) President Obama’s proposal is a better. At least it calls for raising taxes on high incomes back to Clinton-era levels. But it preserves the rest of the Bush tax cuts. And, as a result, it still relies heavily on spending cuts, even as it falls short of actually balancing the budget.

Taxes and the deficit - This morning in his Monday column Paul Krugman discussed the need to raise taxes to deal with the long run structural federal deficit. Every time any one proposes higher taxes Larry Kudlow and the right wing noise machine shouts to the rooftops that it is a tax the rich scam and that there are not enough wealthy people to raise the necessary revenues. But as usual with these claims maybe we should actually look at the data before we accept this meme. Since 1980 the top 5% of family's share of national income has increased from 15% to 21% -- the percent is derived from the five year moving average centered on 1980 and 2007. The last year that this data is available is 2009.  If we taxed away half of this increased share of national income it would generate a sum roughly equal to 3% of GDP, or about the CBO estimate of the long run structural deficit. Moreover, it would still leave the top 5% of families with some 15% of national income, a larger share than was ever recorded before 1993.

What S&P had to say about taxes - BOTH Paul Krugman and Ezra Klein argue that America is lightly taxed, relative either to other countries or to history. But why take it from them? Here’s what Standard & Poor’s had to say the day they assigned a negative outlook to America’s AAA credit rating:  The U.S. public sector consistently uses a smaller share of national income than the public sectors of most 'AAA' rated countries, and smaller than those of its closest peers, implying greater revenue flexibility. Political considerations aside, from an economic perspective, the U.S. public sector's smaller share of national income suggests to us there could be room for the U.S. to raise taxes or increase other government revenue while remaining competitive. We believe that this flexibility also enhances the U.S.'s ability to pay. Of course, our ability to pay isn't the issue. S&P lowered its outlook because it questioned our willingness to pay.

Visualize Your Taxes - The creative thinkers over at Google recently ran a contest for programmers, economists, data geeks and any other interested parties to create a web tool to help taxpayers understand what they pay in federal income taxes and where the money goes.Using data sets provided by Google and their partner, entrants came up with a variety of different concepts, including a grocery store-style receipt (similar to the calculator on the White House website) , a clock, and an array of charts, graphs and figures. The video below gives an overview of the submissions. The contest grand prize winner of this data visualization challenge was Anil Kandangath’s "Where Did My Tax Dollars Go?". Google’s prize jury noted that his entry is rich in information but with an elegant design that allows users to interact with the visualization without losing the "big picture." Google blogger Jenny Ramaswamy wrote that "Anil's entry is a great example of how data visualization can take boring, complicated, but critically important information and make it accessible to everyone." (Use image below)

Only tax rises can fix America’s budget mess - Never particularly grounded in reality, budget talk in Washington has taken on an Alice in Wonderland quality. A paroxysm of deficit cutting is sweeping the US, with Republicans and Democrats hurling around dubious figures like confetti. But both are trying to win the battle to be the party of fiscal responsibility without broaching the one step every sensible analyst knows is necessary to solve America’s budget crisis: meaningful tax increases. Fiscal hawks can be heartened by the all-deficit-cutting, all-the-time mood; a consequence of the triumph of the Republicans and their Tea Party allies in the 2010 midterm elections. Indeed, a few diehard liberal elements apart, both sides have grasped deficit reduction in a smothering embrace. With conservatives determined to hold raising the US federal debt ceiling hostage to a deficit agreement, some progress toward reducing the current gap seems likely.But like so much about Washington, a closer inspection should temper any euphoria. Take the recent hard-fought agreement to reduce the funding gap in this fiscal year by $38bn. It looks impressive until you examine the fine print. It included, for example, measures to eliminate $6.2bn of “budget authority” for census-taking – even though the decennial census is complete and that money was never going to be spent. Nonetheless, scrubbing those funds garnered full credit.All told, according to calculations by the Congressional Budget Office, spending this year will be reduced by just $352m. Additional savings in later years will total more than $20bn, but this is still some way short of the headline figure. More important, however, is the way longer-term proposals from both sides stretch credulity.

I Agree: "Darn It, Let's Raise Taxes" - According to House Speaker John Boehner, "You can't raise taxes in the middle of a weak economy." Echoing that talking point, newly elected Tea Party Rep. Joe Walsh (R-Illinois), in an interview with ABC, claimed, "Every time we've cut taxes, revenues have gone up, the economy has grown." Sen. Orrin Hatch (R-Utah) attacked the president's April tax speech by suggesting that everyone knows, "Raising taxes ... will do little to reduce the deficits and debt that are, at their root, spending problems."  If I and many economists, including Paul Krugman (who wrote, "Darn It, Let's Raise Taxes"), are included, however,everyone doesn't agree with their assertions, and saying the words ad nauseam doesn't make them empirically or logically true - in fact, history often suggests otherwise. From 1951 to 1985, marginal tax rates (MTR) on the wealthiest Americans averaged 75 percent. Did the mega-rich job creators, as the Republicans argue, cease hiring, lay off workers, shut their doors and go home? Hardly.

Tax the Rich: The Battle Cry Paul Ryan Rejects - Perhaps the most remarkable feature of Rep. Paul Ryan’s widely discussed budget plan, which all but 4 House Republicans voted for on April 15, is that it cuts taxes for the rich and pays for it by raising taxes on the middle class. Whatever one thinks about the economics of this, politically it is a non-starter. Indeed, not only is there no public support for what Ryan is proposing, there is strong support for going in the other direction and raising taxes on the rich. The tax side of Ryan’s plan says only that the top tax rate on individuals and corporations would be reduced to 25 percent. It says nothing whatsoever about cutting taxes for anyone in the 25 percent bracket or lower. According to the Tax Policy Center, the Ryan proposal would reduce federal revenues by $2.9 trillion over the next decade.  Ryan says that he would also broaden the tax base sufficiently that federal revenues would rise from 15 percent of GDP to 19 percent of GDP. But he doesn’t mention a single one of these supposed base broadeners specifically. These include the exclusion for employer-provided health insurance, and the deductions for mortgage interest, state and local taxes, charitable contributions, and contributions to pension and retirement plans.

Why Should Taxes Be 18 Percent of GDP? - “The Path to Prosperity,” Congressman Paul Ryan’s (R-WI) solution to federal budget deficits, called for keeping “overall revenue as a share of the economy at historical averages between 18 and 19 percent.” The House budget resolution chose the higher value and set the revenue target at 19 percent of GDP through 2050.  What’s so special about those numbers? Nothing.  It is true, as Ryan’s plan noted, that that level of revenues matches the historical average for recent years. Over the past half century, the share of GDP claimed by federal taxes has ebbed and flowed, ranging from a high of 20.6 percent in 2000 to a low of 14.9 percent each of the last two years. The 50-year average was just a hair under 18 percent (see graph). But nothing says this should be the correct level of taxation going forward.

Tax cuts stimulate growth? No they don't. - George Bush the Elder (pictured) described the idea as Voo-Doo Economics, but like other too-good-to-be-true patent remedies, the idea that tax cuts for business stimulate investment and growth just won't die. Over the past 30 years economists have researched and debated the case for tax cuts and generally concluded that the empirical evidence doesn't support the argument. In fact the more we consider the evidence the more risible the case for supply-side tax cuts becomes; read this, for example. Sadly the lack of empirical evidence doesn't deter some fanatics from pushing the case for all its worth, especially since politicians love ideas that go across well in soundbites. The results of the latest research into the impact of corporate tax cuts on business investment have just been published by the Canadian Centre for Policy Alternatives.

Some GOPers Considering Tax Increases? - Linda Beale -The New York Times editorial "Rethinking Their Pledge" suggests that maybe some GOPers will recognize the hypocrisy of crying deficits, cutting entitlements without figuring out first how to cut costs (or pay for things we really want), and still cutting taxes for the wealthy.  You see, 95% of the Republicans in Congress have signed Grover Norquist's little "pledge" never to raise taxes.  What most people don't realize is that the pledge isn't just a no taxes forever pledge.  It's also a "keep up the tax expenditure goody stream for Big Business and its owners" pledge. The pledge is often thought of as an agreement never to vote for raising taxes for any reason, but it goes even further than that. Those who sign it also vow never to eliminate any tax deductions or credits (like the handout to ethanol makers), unless the resulting increase in revenues is offset, dollar for dollar, by further tax cuts.  As the editorial notes, Norquist wants to "shrink government" and "drown it in a bathtub."  Why, one should stop and ask, is this government that our Founding Fathers labored so to create deserving of such scorn?

The tax debate has never been about the evidence - Matt Yglesias sees the American right retreating from intellectual/empirical attacks on progressive taxation, and falling back on moral attacks:You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. Paul Krugman attributes this to the closing of the conservative intellectual worldview: [M]y take is that what we’re looking at is the closing of the conservative intellectual universe, the creation of an echo chamber in which rightists talk only to each other, and in which even the pretense of caring about ordinary people is disappearing. I mean, we’ve been living for some time in an environment in which...Chicago professors making several hundred thousand a year whine that they can’t afford any more taxes, and are surprised when that rubs some people the wrong way. Why wouldn’t such people find it completely natural to think that the hurt feelings of the rich are the main consideration in economic policy? While I think neither Yglesias nor Krugman is incorrect, I do think there are a couple of important factors that they don't mention in their posts.

How I Paid Only 1% of My Income in Federal Income Tax - In 2009, the median U.S. family had an income of just under $50,000, on which they would have paid roughly $2,761 (or about 5.5%) in federal income tax. I, by contrast, enjoyed an income of $207,415 in 2009, but paid only $2,173 (or 1.0%) in income tax. In a recent newspaper interview, I mentioned my absurdly low tax rate to illustrate the extent to which the tax system is biased in favor of the wealthy (my income varies widely from year to year, but is typically north of half a million dollars). My point was that with our country facing frightening budget deficits amid an ever-widening income gap between the rich and everybody else, I consider it both unwise and unfair that a former investment banker like myself pays less in taxes than working Americans with far lower incomes. I wasn't even trying to minimize my taxes (and, in fact, could have paid zero tax if I was).

Left, Right Can Love Tax Plan - Taxing what you buy is no different from taxing what you have to spend. In other words, taxing consumption is effectively equivalent to taxing current wealth and current and future wages.  We propose a tax reform -- and Lord knows we need one -- that recognizes this equivalence. Our plan taxes all retail sales at a 17.5 percent rate. But if you don’t want to pay the retail sales tax, you can pay, up front, a 15 percent tax on your wages and wealth. Every dollar of tax you pay up front gives you an electronic sales-tax credit, for use when shopping, which exempts $1 of consumption from the 17.5 percent retail sales tax. Unused credits grow with interest, so you aren’t penalized by waiting to spend.  Lefties can elect to pay taxes on their wages and wealth, and righties can elect to pay taxes at the store. Lefties will perceive a progressive tax system because they see it taxing wealth as well as wages. Righties will perceive a regressive tax system. They will both be happy, though they will both be wrong.

Obama says it’s only ‘fair’ to raise taxes on the rich; he's wrong.… We are not a perfect opportunity society in the United States. But if we want to approach that ideal, we must define fairness as meritocracy, embrace a system that rewards merit, and work tirelessly for true equal opportunity. The system that makes this possible, of course, is free enterprise. When I work harder or longer hours in the free-enterprise system, I am generally paid more than if I work less in the same job. Investments in my education translate into market rewards. Clever ideas usually garner more rewards than bad ones, as judged not by a politburo, but by citizens in the marketplace. There is certainly a role for government in this system. Private markets can fail due to monopolies (which eliminate competition), externalities (such as pollution), the need for public goods (such as education, which is indispensable in an opportunity society), corruption and crime. Furthermore, most economists agree that some social safety net is appropriate in a civilized society. When the government focuses on these things, it assists the free-enterprise system. But when a government that has overspent for years turns to tax increases instead of spending cuts simply for the sake of “fairness,” it weakens free enterprise, lowers opportunity and impoverishes us in many ways.

Increasing Taxes on the Wealthy is Unfair??? -The immorality is based upon the idea that the wealthy earned every penny they received and it would be immoral to take it away and give it to those who didn't toil as hard, as effectively, or at all (you know, the people whose wages have not kept up with their productivity). The arguments against the idea that pay at the top reflects merit alone are well known -- the contention hardly passes the laugh test -- and I won't repeat them here. But anyone who thinks the reward for crashing the financial sector ought to be unimaginable wealth should rethink their ideas. Let me focus instead on the opening paragraph: The Ryan plan is based on three premises. First, our economy is headed for a predictable disaster because of the ruinous levels of government spending. (Standard & Poors’ decision this week to downgrade its outlook for U.S. debt only confirms this worry.) Second, we already have one of the highest corporate tax rates in the world, and we can’t load more income taxes onto entrepreneurs without expecting collateral harm to jobs and economic growth. Third, therefore, we must cut spending and reform entitlements, and this would necessarily affect the nearly 70 percent of Americans who take more from the government than they pay in taxes.

Pity For The Rich: You can tell something’s happening in the economic policy debate when you start reading more things like AEI’s Arthur Brooks explaining that it would simply be unfair to raise taxes on the rich. Harvard economics professor and former Council of Economics Advisor chairman Greg Mankiw has said the same thing. And of course Representative Paul Ryan is both a fan of Brooks and a fan of the works of Ayn Rand. Which is just to say that we used to have a debate in which the left said redistributive taxation might be a good idea and then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes. Now that idea seems to be so unsupportable that the talking point is switched. It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare. If that sounds remotely plausible to you, you might have a lucrative career ahead of you working as an apologist for said Galtian Overlords. If not, then congratulations for possessing a modicum of common sense.

On Pity for the Rich - Matt Yglesias has a good question, but I don’t think that I agree with his answer. He points out that we used to have a debate in which the left said redistributive taxation might be a good idea nd then the right replied that it might sound good, but actually the consequences would be bad. Lower taxes on the rich would lead to more growth and faster increase in incomes. but that now the right seems fixated on the point that taxing the rich is unfair — they made it, they should keep it. And he suggests that the right is, implicitly, conceding that trickle-down economics doesn’t work. But my take is that what we’re looking at is the closing of the conservative intellectual universe, the creation of an echo chamber in which rightists talk only to each other, and in which even the pretense of caring about ordinary people is disappearing. Why wouldn’t such people find it completely natural to think that the hurt feelings of the rich are the main consideration in economic policy?

Who Benefits From Bubbles? - Krugman - One of the more interesting documents published by the IRS — I know, I know, not the hardest criterion in the world — is its report on the income and taxes of the top 400 taxpayers (pdf). A lot of attention gets focused, rightly, on the remarkably low average tax rate these people pay — less than 17 percent in 2007, the lowest on record.  But I was struck by something else: in several years during the last decade the top 400 accounted for more than 10 percent of all capital gains income in America. Just 400 people! Conservatives often try to sell the notion that reducing the capital gains tax is about helping small business people. But you really want to think of the fact that a significant chunk of that tax break is going to just 400 people. And when you think about financial regulation, you similarly want to bear in mind that when asset prices rise, a tiny handful of people get a large chunk of the gains; I don’t know this for sure, but I’d bet that they somehow end up bearing a much smaller share of the losses when the bubble bursts.

Which is worse--theft of pizza or hiding almost $5 million from the IRS? - Linda Beale - In California, I seem to recall, some unlucky (and probably bullying) soul went to jail under the three strikes law for stealing a slice of pizza. Now, a member of the elite class can file a false tax return to defraud the government (and all honest taxpayers) by hiding $4.9 million in assets in a Swiss bank and not filing tax returns and information reports as required and what does he get? Possible maximum sentence under the sentencing guidelines was 20 years. He got: 24 months probation. the taxes due. a $940 thousand civil penalty. (The penalty charge is only 50% of the assets he had hidden in one year--2004, even though it ostensibly could be charged for more years.) And a $10,000 fine. This guy was clearly engaging in intentional tax evasion. When the UBS case came to light, he moved a million of his stash to Lichtenstein, hoping to stay ahead of the law. (Lichtenstein was even better at banking secrecy than the Swiss.) Then he made regular trips back to his Swiss bank to take out bunches of travelers' checks, trying to empty out his account.

Undocumented Immigrants Paid $11.2 Billion In Taxes While GE Paid Nothing - This past month, there was much outrage over the fact that General Electric, despite making $14.2 billion in profits, paid zero U.S. taxes in 2010. General Electric actually received tax credits of $3.2 billion from American taxpayers. At the same time that General Electric was not paying taxes, many undocumented immigrants, who are typically accused of taking advantage of the system while not contributing to it by many on the right, paid $11.2 billion in taxes. A new study by the Institute for Taxation and Economic Policy shows that undocumented immigrants paid $8.4 billion in sales taxes, $1.6 billion in property taxes, and $1.2 billion in personal income taxes last year. The study also estimates that nearly half of all undocumented immigrants pay income taxes.

We’re not Broke. We’ve been Robbed! - We’re not broke. We’ve been robbed by the super-rich and big corporations who are raking in the cash and running up the deficit. Our economy is still more than twice as large as any other country in the world. With 4% of the world’s population, we generate 24% of its wealth. We spend more on our military than almost all other nations combined and more than twice as much per person on health care as other developed countries. But over the past three decades, the rich have gotten richer while their tax rates have plummeted. While the income of the richest 400 Americans quadrupled — they now have more wealth than the 155 million Americans on the other end — their effective tax rates were cut almost in half.

Is the Corporate Tax Going Away? - Individuals who just filed their taxes this year might be wondering why they face high tax rates when big corporations apparently manage to escape the tax net. In the New York Times, David Kocieniewski reported that the nation’s largest corporation, General Electric, earned a profit of $14.2 billion in 2010, while claiming a tax benefit of $3.2 billion. He went on to note that the strategies GE and other corporations have followed to reduce their taxes, combined with tax law changes that have encouraged more businesses to file as individual taxpayers, have pushed down the corporate share of the nation’s tax receipts from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.  Mr. Kocieniewksi was careful to attribute GE’s low reported taxes to aggressive tax minimization strategies and successful lobbying, not to any illegal tax evasion. And there are many reasons that taxes reported on financial statements may not provide a very accurate picture of a company’s effective tax burdens. But what struck me more in the article was the apparent sharp decline in corporate receipts. Is the corporate tax really going away or was this just a cleverly constructed example?

Love Bailouts? Then You’ll Love the GOP Budget - For the most part, we can measure the impact of the House Republican budget by thinking about the dollars not spent--i.e., the hundreds of billions of dollars that Paul Ryan and his allies would take away from Medicare, food stamps, and other vital programs. But some of the budget’s provisions have less to do with spending levels and more to do with regulatory authority. The most obvious and important of these is a proposal to eliminate a key feature of the Dodd-Frank financial reform bill and, in the process, weaken the government’s ability to prevent another financial crisis.  The Dodd-Frank law gives the government authority to subject certain large, complex financial institutions to additional regulation, on the theory that their collapse could have such profound effects on the rest of the econmy. In addition, the Dodd-Frank law puts in place a legal process that would allow the Federal Deposit Insurance Corporation, or FDIC, to place failing financial firms into receivership and put them through an orderly break-up when normal bankruptcy procedures won’t work. It’s the same sort of authority FDIC has long held for taking over and then dissolving failing banks.

Greenspan Says We Live In A Bleak Dystopia Where Financial Regulation Is Impossible - Alan Greenspan recently argued in the FT that the Dodd Frank Act fails to meet the test of our times. In defense of this view, Greenspan paints a disturbing view of the modern world as a financial dystopia in which humans are at the mercy of a financial machine they have built but can no longer hope to manage. Greenspan argues: The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems. Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates. I can swallow the metaphorical hand that is invisible yet opaque, but I draw the line at “notably rare” instability. Notably rare? This modern financial world has not been operating for more than 30 years. (By many metrics, the period of rapid financial innovation was kicked off by the inflation and oil shocks of the 1970s and got underway in earnest with the rise of computing power and worldwide regulatory reform starting around 1980.) Suppose we set aside the S&L crisis, the lost decade(s) in Japan, the Asian financial crises of the late 1990s, etc. Let’s focus on the latest crisis, which many of us would not confine to a neat little box in 2008. If we attribute three years of misery to the crisis, “notably rare” is up to ten percent of the time.

Reject Greenspan’s Bleak Vision, by Jon Faust: Alan Greenspan recently argued in the FT that the Dodd Frank Act fails to meet the test of our times. In defense of this view, Greenspan paints a disturbing view of the modern world as a financial dystopia in which humans are at the mercy of a financial machine they have built but can no longer hope to manage. Greenspan argues,The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems. ... With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates. ... Greenspan’s bleak vision, like Orwell’s before him, may prove correct. My view is that the financial crisis was not a sad by-product of modernity but rather a new episode in a very old story: systems that allow risk taking and innovation are inherently subject to periodic crises. We can surely avoid another crisis by outlawing all risk taking. The alternative is to strive provide a stable backdrop in which productive risk taking can flourish.

Thoma: “Critical vulnerabilities remain” - Get ready for the next financial crisis, cautions University of Oregon economist Mark Thoma in his April 23 blog Economist’s View. That’s because we have not taken, and are not likely to take, the needed steps to prevent runs on the shadow banking system, he writes.Separating retail and investment banking, setting higher equity requirements, and forcing firms to devise resolution plans so the FDIC can dismantle them when they fail, will not prevent runs on financial markets like those that caused the financial crisis in 2007-2008, writes Thoma. Those runs, mainly on the repurchase market, occurred in the shadow banking system. They can be prevented only by regulating the shadow bankers and insuring the shadow lenders, similar to the way the FDIC regulates traditional bankers and insures their depositors, Thoma writes. But the government is not going to insure shadow bankers, so the best we can do is require the institutions to have lots of equity, says Thoma. But that’s probably not going to happen either, he writes.

Dodd-Frank for Dorks - I found this WSJ article on the “new Dodd-Frank lexicon” amusing, since I actually am one of “the small army of lawyers, lobbyists and regulators who speak fluent Dodd-Frank.” That of course means that I have a fancy hard-copy of Dodd-Frank in my office, and an even fancier electronic (PDF) copy. Since I know a lot of lawyers in the financial services area read this blog, as well as non-lawyers who are interested in financial reform, I’ve uploaded my fancy electronic copy of Dodd-Frank here (and embedded below). By “fancy,” I mean a PDF of Dodd-Frank that has bookmarks to every title, subtitle, and section (and even some subsections) in the law; is fully tagged, so you can copy-and-paste from it without any screwy line breaks; and perhaps most importantly, scales-up the Government Printing Office’s text size (since the tiny text size and unreasonably large page margins make the GPO’s official version practically unreadable). That may all seem trivial, but when you need to be able to quickly locate a specific section in an 848-page bill, having bookmarks to every single section makes a huge difference. So there, now everyone can benefit from all that expensive software my firm uses for PDFs (which mainly consists of various Evermap products, I believe), as well as the incredible PDF skills of my indispensable assistant.

Arrogance and Authority - Simon Johnson - It is increasingly common to hear prominent American and European central bankers proclaim, with respect to the crisis of 2008-2010, the following verdict: “We did well.” Their view is that the various government actions to support the financial system helped to stabilize the situation. Indeed, what could be wrong when the United States Federal Reserve’s asset purchases may have actually made money (which is then turned over to the US Treasury)?But to frame the issue in this way is, at best, to engage in delusion. At worst, however, it creates an image of arrogance that can only undermine the credibility on which central banks’ authority rests.The real cost of the crisis is not measured by the profit and loss statement of any central bank – or by whether or not the Troubled Asset Relief Program (TARP), run by the Treasury Department, made or lost money on its various activities. The cost is eight million jobs in the US alone, with employment falling 6% from its peak and – in a major departure from other post-1945 recessions – remaining 5% below that peak today, 31 months after the crisis broke in earnest. The cost is also the increase in net federal government debt held by the private sector – the most accurate measure of true government indebtedness. Comparing the US Congressional Budget Office’s medium-term forecasts before and after the crisis, this debt increase is a staggering 40% of GDP.

$3 Billion Banks - Jon Macey is no friend of regulation. In 1994, he wrote a paper titled “Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty” arguing, in no uncertain terms, that the SEC was obsolete: “the market forces and exogenous technological changes catalogued in this Article* have obviated any public interest justification for the SEC that may have existed”  So what does Jon Macey think of big banks? In a new Feature** in the Yale Law Journal, Macey, along with James P. Holdcroft, Jr., argues that banks should be broken up into pieces no bigger than $3 billion. According to Macey and Holdcroft, the basic problem is that the government cannot credibly commit not to bail out too-big-to-fail banks in a crisis. Or, more precisely, the only way it can commit not to bail out TBTF banks is to break those banks up before the crisis hits. Their proposed limit is 5 percent of the FDIC Deposit Insurance Fund, which itself is 1.15 percent of total insured deposits, so the limit would work out to $3 billion as of 2010.

What is the optimal leverage for a bank? - At the height of the financial crisis, many highly leveraged banks found that their sources of funding disappeared – withdrawn due to fears over the scale of losses. In the fallout from this banking crisis, the economic damage has been enormous. The global crisis has called into question how banks are run and how they should be regulated. Highly leveraged banks went under, threatening to drag down the entire financial system with them. Here, David Miles of the Bank of England’s Monetary Policy Committee, shares his personal views on the optimal leverage for banks. He concludes that it is much lower than is currently the norm.

The FDIC’s Resolution Problem by Simon Johnson - Under the Dodd-Frank financial regulation legislation (in Title II of that act), the Federal Deposit Insurance Corporation is granted expanded powers to intervene and manage the closure of any failing bank or other financial institution. There are two strongly held views of this legal authority: that it substantially solves the problem of how to handle failing megabanks and therefore serves as an effective constraint on their future behavior, and that it is largely irrelevant. Both views are expressed by well-informed people at the top of regulatory structures on both sides of the Atlantic, at least in private conversations. Which view is right?  In terms of legal process, the resolution authority could make a difference. But as a matter of practical politics and actual business practices, it means very little for our biggest financial institutions. On the face of it, the case that this power to deal with failing banks — known as resolution authority — would help seems strong. Timothy F. Geithner, the Treasury secretary, has repeatedly argued that these new powers would have made a difference in the case of Lehman Brothers.

FDIC Doubles Down on the Safe Harbors - In a little noticed footnote in the FDIC's recent report on a hypothetical liquidtion of Lehman under Dodd-Frank resolution authority, the FDIC states The exemption from the automatic stay under the Bankruptcy Code in the case of qualified financial contracts generally works well in most cases. However, for systemically important financial institutions, in which the sudden termination and netting of a derivatives portfolio could have an adverse impact on U.S. financial stability, the nullification of the ipso facto clause is needed. By removing a right of termination based solely upon the failure of the counterparty, the bridge financial company structure provides the flexibility to incentivize quali- fied financial contract counterparties to either maintain their positions in such contracts, or exit their positions in a manner which does not jeopardize U.S. financial stability.   Nice. In short, don't even think about trying to get special treatment when we're in charge, but have at it in front of the bankruptcy judges.

Skin in the Game-True Sale Implications - There's a proposed joint federal rulemaking on the Dodd-Frank Act asset securitization risk retention requirements that would mandate some form of "skin-in-the-game" in most asset securitizations.  The proposed rule making provides a number of options for acceptable risk retention, and some exemptions from the requirement, but I think it raises a more fundamental problem for asset securitization, namely whether it will be possible to get clean true sale opinions with federally mandated risk retention. The economics of many securitization deals hinge on the transfer of assets to the securitization vehicle being a "true sale," meaning that they are property of the securitization vehicle and not the assets' originator (or aggregator) and thus bankruptcy remote in the sense that they cannot be claimed as part of the originator or aggregator's bankruptcy estate.    Investors like securitized assets precisely because the assets are (in theory) impervious to the fate of the originator or aggregator.

The Costs of Regulating Derivatives - So the outgoing chair of ISDA complains that banks will have to pass on the costs of Dodd-Frank to end users of derivatives. Undoubtedly the usual crowd -- primarily the WSJ op-ed page -- will run with this evidence of yet another hit to American competativenes coming out of Dodd-Frank. But maybe we could stop and consider if this simply means that users of derivatives will now incur the true costs of their trades, and will no longer be subsidized by the Treasury.

Step away from the CCP - The Streetwise Professor has a lovely post about how regulators are starting to edge away from the new clearing rules, as they realise how flawed they are. First he quotes a WSJ article which begins: One by one, financial regulators who supported the Dodd-Frank law in 2010 are beginning to deny paternity, especially for the bouncing bundle of new derivatives rules. …and continues… you have a disturbing number of financial eminences suddenly rushing to get clearinghouse warnings into the public record. Do they know something that the taxpayer doesn’t? It’s hard to tell, because even as the Beltway crowd scrambles to draft clearinghouse warning memos for posterity—and for their posteriors—regulators are also promoting “independent director” rules that will discourage people with knowledge and experience from overseeing these institutions. This is the last thing regulators should be doing if they now understand the risks.

Did “Say on Pay” Dampen CEO Compensation? - Yves Smith - While the report in the Financial Times, that Dodd Frank “say on pay” rules appear to be producing a reduction in 2010 pay versus 2009 levels, this change may well fall into the “one robin does not make a spring” category. The FT notes: According to pay consultancy ClearBridge, which has examined the first 100 Fortune 500 companies to file details of so-called proxy statements – resolutions to be voted on at annual meetings – there is clear evidence of a shift in pay practices….Nearly 40 companies, including AT&T, Walt Disney and OfficeMax, have eliminated tax breaks that have seen them take on executive tax bills under some circumstances.There was one statement in the article that I question: “Executive compensation tends to go up or stay flat, so any time it goes down is the beginning of a noteworthy trend,” said Russell Miller, partner at ClearBridge. It’s premature to call this change a trend. In fact, it is far more likely that this is a one-time adjustment to eliminate the pay elements that are hardest to justify. Merely adjusting other forms of remuneration to recoup these reductions would be likely to attract bad PR. I’d expect top level pay to keep growing at a hard-to-justify rate from this new, slightly reduced base.

Warren tells the controversial truth — Certain members of Congress keep trying to kill the Consumer Financial Protection Bureau before it is born, but so far they’re losing to a former Sunday school teacher.  “I am not going down on this agency without a fight,” Elizabeth Warren said earlier this month at a Society of American Business Writers and Editors meeting in Dallas. “It is a fight worth having.” Warren, who draws inspiration from Methodist Church co-founder John Wesley, has been preparing the way for the new agency to open July 21. From the beginning, she’s fended off calls that she go away and battled legislation designed to kill, defund or otherwise neuter her baby.  Reminds me of when our fearless leaders gutted the Securities and Exchange Commission and so many other regulatory agencies and then asked why there were so many Ponzi schemes.

Will Better Consumer Protection Lead to a Credit Crunch for Women? - Considering women themselves were once property, we’ve come a long way: most women can now walk into a bank and open an account, sign up for a credit card, or take out a loan. As recently as the 1970s, credit cards were issued only with a husband’s signature; it took the Equal Credit Opportunity Act of 1974 to force companies to make cards available to women. Women quickly embraced credit, and less than thirty years later they carry roughly the same amount of consumer debt as men and even have more cards in their wallets than men do—by a 5-to-4 margin. But as the market opened up to female borrowers, lenders began lobbying to relax usury laws and developing predatory practices. Women who obtained credit found themselves bearing a disproportionate share of lender abuses. As a group, women are financially less stable than men are; that made them a prime target for companies looking to profit from late fees and interest on unpaid balances.

Bank overdraft fees pile up despite Fed regulation - Consumers continue to spend billions on overdraft fees, despite a Federal Reserve1 regulation that requires banks to obtain customers' permission before signing them up for overdraft-protection programs, consumer advocates say. Consumers will spend an estimated $38.5 billion in overdraft penalty fees in 2011, up from $18.6 billion in 2000, according to a study out today by the Pew Health Group, the consumer-product safety arm of the Pew Charitable Trusts2. Part of the problem is that most banks fail to adequately disclose the cost of different overdraft options, Pew said. For example, the median overdraft-protection fee is $35, vs. $10 to transfer funds from a customer's savings account to cover the overdraft, the study said. Under a Federal Reserve rule adopted last year, banks are required to obtain customers' permission before charging them fees to cover debit card or ATM overdrafts. Since then, though, banks have used high-pressure and misleading sales tactics to persuade consumers to sign up for their overdraft-protection programs, the Center for Responsible Lending said Tuesday.

Supreme Court Ruling in A.T. & T. v. Concepcion Approves Class Action Bans in Consumer Contracts -  I heard a humorous radio program this morning in which Europeans were complaining about how you never know the real price of anything in America. Things seem cheap, but once you consider the taxes, the tipping, the hidden ad-ons, the price is so much more.  There is no transparency.  Boy, they don’t know the half of it. At times it seems everywhere you turn, you find a scam or an unauthorized fee. Thank goodness for the legal system, right?  The way we can all fight back?Ahem...not so fast. Most Americans can’t access attorneys. A Huff Post article reports on a world-wide survey, that ranks the U. S. lowest among 11 developed in providing access to justice to its citizens, and lower than some third-world nations.   Wednesday’s U.S. Supreme Court decision, A T & T v. Concepcion, appears to hold that companies can stick No Class Action clauses into their adhesion contracts, essentially cutting off access to attorneys in any action in which the amount at stake is too small to interest an attorney. Tell me I am reading this wrong….pretty please?

Guest Post: Senators Franken and Blumenthal and Representative Johnson Announce Legislation Giving Consumers More Power In Courts vs. Corporations - Congressman Johnson’s office sent me the following announcement in response to the Supreme Court’s ruling that limits the ability of consumers to bring class action suits in many situations, where consumer service contracts provide binding arbitration provisions. Sens. Franken, Blumenthal, Rep. Hank Johnson announce legislation giving consumers more power in courts vs. corporations . — After consumers were dealt a blow today when the Supreme Court ruled that companies can ban class action suits in contracts, U.S. Sens. Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.) and Rep. Hank Johnson (D-Ga.) said today they plan to introduce legislation next week that would restore consumers’ rights to seek justice in the courts.Their bill, called the Arbitration Fairness Act, would eliminate forced arbitration clauses in employment, consumer, and civil rights cases, and would allow consumers and workers to choose arbitration after a dispute occurred.

HuffPo Expose on the Biggest, Ugliest Fight in DC: Debit Card Fees -- Yves Smith - If you want to understand inside the Beltway politics, proceed immediately to a superb article by Zach Carter at Huffington Post, ” ” It is a meticulously reported piece over the number one fight in the nation’s capital, which contrary to headlines, is not the budget battle but proposed regulations over debit card fees, otherwise known as “interchange” fees. As Felix Salmon, Katie Porter, and Adam Levitin have written, the reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers, or as one Senator broke it down further: The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards. Debit card charges are as close as you get to pure profit in banking once you get the system in place. The service runs over existing charge card equipment and infrastructure on the merchant end, and is integrated into existing bank balance reporting on the consumer end. For retailers, which are often low margin businesses, the various bank payment service charges are a very large cost. And the only serious study done on the impact of card charges (both credit and debit) on consumers concluded that the average household pays $230 a year. This is a significant hidden tax on lower-income households. The Carter story is full of juicy vignettes: Bernanke lying badly on behalf of banks; WalMart fabricating alarmist Fed statistics; various Congressmen handwringing as to which group they should sell themselves to align with; the repeated flip flops of the mercenary NAACP.

The Politics of Swipe Fees - The HuffPo has a major piece on the debit card swipe fee legislative fight, which seems to be a stand-alone K-Street Full Employment Act. It's well worth the read. I'd add a few points to the HuffPo piece, however: the Booger Rule of Antitrust, the Small Banks and Small Businesses (with help from Wrestlemania III), and Consumer Advocates.  First, it never really explains what's the problem with swipe fees other than that merchants think they're too high.  Merchants think lots of costs (fuel, electricity, etc.) are too high. But what galls merchants about swipe fees is that they have no ability to negotiate over them as they do with other costs of business. For example, Home Depot can't get lower MasterCard swipe fees by making it the "top shelf," preferred payment method. And merchants can't pass along swipe fees to card-using consumers. Payment card network rules say that they have to pass it along to all consumers. These rules are the problem.

The Booger Rule of Antitrust in the Debit Card Fight - 04/29/2011 - Yves Smith  -Although we were big fans of the HuffPo piece yesterday on the DC war over debit card regulation, Adam Levitin was a bit less happy since the article focused on the politics and was thin on why the card fees were burdensome to merchants. Although a few readers tried arguing the bank position and did not get a terribly enthusiastic reception, Levitin explains the real problem: the actions of the Visa/MasterCard duopoly are pretty clear antitrust violations, but as he pointed out via e-mail, the US pretty much does not do antitrust any more. The Chicago school of economics indoctrination of judges via an orchestrated “law and economics” movement (see ECONNED for an overview) has resulted in judges not seeing competitive problems anywhere. The Department of Justice has lost a slew of recent antitrust cases at the Supreme Court, so they’ve lost the appetite to pursue them. But (to give an indication of how bad the behavior of the card networks is), the normally supine DoJ has been active in payment cards. It sued Visa and MasterCard over their their “dual exclusivity rule” (allowing merchants to use either one, but barring Amex and Discover) and won. Last year the, DoJ sued and immediately settled with the two big networks on credit card swipe fees.

Your Humble Blogger Asked Larry Summers a Question He Did Not Like -  Yves Smith - A funny thing happened at the INET conference. First, I got to ask Larry Summers a question because Martin Wolf, who was moderating the session, is a good sport. Normally, at this sort of event, only At Least Semi Big Names get to interact with Big Names. Yours truly is a minimum of a rank or two below At Least Semi Big Names. You will find our question at 55:35.  Second, my recollection of his long answer (which ducked my question, as various people remarked to me that evening and the next day) seems to not all be on the tape, which led me to think I was losing my mind. I distinctly recall two parts, the first being a bit of a detour that led to a diss of the question. In that, I recall him citing someone (I didn’t recognize the name, but I may also not have heard it clearly since I was at a table in the back) and then mentioning “socialist” and “communist” or “socialism” and “communism”. I was gobsmacked by that. In the second part, he posed his own question, which had very little do do with what I had asked, and answered that. But when I went to look at the tape, lo and behold, no mention of either dirty word that I thought I heard...

Lenders Who Lobbied Hardest for Deregulation Took Most Risks - Three International Monetary Fund researchers said the mortgage lenders who lobbied most aggressively in Washington for less regulation took more risks and exposed themselves to worse outcomes during the financial crisis than more conservative firms that didn’t lobby. The researchers said these same lenders were more likely to receive money under the federal government’s bank bailout, possibly because these firms were hit harder during the crisis and had relationships with key lawmakers. (Read the full paper) The researchers noted that Citigroup Inc., for instance, which nearly collapsed during the crisis and which required $45 billion in government support to stay alive, lobbied intensely against a 2001 bill that aimed to put tighter restrictions on lenders. A Citigroup spokesman declined to comment. The researchers noted that, from 1999 through 2006, 93% of bills introduced in Congress that promoted tighter regulation were never signed into law. But two key pieces of legislation that paved the way for lax mortgage markets were enacted, one in 2000 and another in 2003.

Banks Play Shell Game with Taxpayer Dollars - Bernie Sanders - A study requested by Sen. Bernie Sanders (I-Vt.) found numerous instances during the financial crisis of 2008 and 2009 when banks took near zero-interest funds from the Federal Reserve and then loaned money back to the federal government on sweetheart terms for the banks. The banks pocketed interest on government securities that paid rates up to 12 times greater than the Fed's rock bottom interest charges, according to a Congressional Research Service analysis conducted for Sanders. "This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks," Sanders said. "Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities." The Federal Reserve claimed at the time that the emergency loans were needed so banks could provide credit to small- and medium-sized businesses that desperately needed money to create jobs or to prevent layoffs.  "Instead of using this money to reinvest in the productive economy, however, it appears that JPMorgan Chase, Citigroup, and Bank of America used a large portion of these near-zero-interest loans to buy U.S. government securities and earn a higher interest rate at the same time, providing free money to some of the largest financial institutions in this country," Sanders said.

Largest Banks Likely Profited By Borrowing From Federal Reserve, Lending To Federal Government - A newly-released study from the Congressional Research Service bolsters claims that the nation's largest banks profited off the Federal Reserve's financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.  The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended. The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed's money and flipped easy profits simply by lending it back to another arm of the government. The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to "direct corporate welfare to big banks," in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt "instead of using the Fed loans to reinvest in the economy," Sanders added.

Bank Arbitrage (JPM, C) At yesterday’s presser, Fed chief Ben Bernanke indicated an easy policy stance for the foreseeable future. While the basis of this is the ostensibly high unemployment, I believe it is really to buy time to rehabilitate the bank’s balance sheets. They remain poorly capitalized. Rather than put insolvent institutions into reorg, we have allowed the hang on slowly getting better through a massive back door bailout: Borrowing from the Fed at near 0%, and lending it right back to Treasury at 2-3%. This is more politically acceptable than just writing them checks for $100s of billions of dollars. Similar arbitrage has existed for the top 20 banks since the Fed took rates down to zero.The bailout has always been about rescuing the banks, their management, shareholders, and most especially, their creditors and bond holders

The New FDIC Paper on the Resolution of Lehman Brothers  - On April 18th, the FDIC released a paper, The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act, which explains how it could have used the resolution authority in Title II of Dodd-Frank to taken down Lehman Brothers with no losses to taxpayers and without collapsing the financial system. It’s always good to remind ourselves what we want our law to do in terms of failure. Failure is a legal concept, and our laws reflect our values on how we want failure to proceed. We want those who benefit the most from risks to take the largest losses.  We want to preserve the ongoing value of the firm if there is any. We want to coordinate the behavior of creditors – so value is based on legal rights, not the speed of action – and ameliorate the hardships caused to debtors and provide a fresh start to the entity.

So How Exactly Does Buffett Get Information Like This? -  Yves Smith - Reader Hubert highlighted this section of FCIC testimony from Warren Buffett: I think that if Lehman had been less leveraged there would have been less problems in the way of problems. And part of that leverage arose from the use of derivatives. And part of the dislocation that took place afterwards arose from that. And there’s some interesting material if you look at, I don’t exactly what Lehman material I was looking at, but they had a netting arrangement with the Bank of America as I remember and, you know, the day before they went broke and these are very, very, very rough figures from memory, but as I remember the day before they went broke Bank of America was in a minus position of $600 million or something like that they had deposited which I think J.P. Morgan in relation to Lehman and I think that the day they went broke it reversed to a billion and a half in the other direction and those are big numbers. Now perhaps Buffett read of the Lehman-Bank of America issue in the Valukas report, but I missed it in my admittedly selective reading, and I have not seen any one comment on it. I pinged a contact who is pretty deeply involved in the Lehman bankruptcy. His observation: Very interesting. I don’t know where he would have got any of this information. The people who would have this data are: Lehman, BA, Alvarez & Marsal [the Lehman bankruptcy overseers] or their lawyers. Regulators may also have this data and some other dealers may also have some knowledge. Now if any of the first set of people shared this information with Buffett, that would seem to be mighty inappropriate.

The visible hand - The recent banking crisis represented a missed opportunity for the U.S. government to put financial markets on a firmer foundation and prevent future meltdowns, former New York governor Eliot Spitzer asserted in a talk at MIT on Tuesday. “At the moment of the economic cataclysm,” Spitzer said — referring to the financial sector freeze-up that began in fall 2008 — “I thought, ‘We will finally have that epiphany that will bring us back, we will embrace rational policy once again.’ And here we are two years later, and I’m thinking: ‘What happened? How can this possibly be? Didn’t people learn a lesson?’ … I’m afraid to say the answer is no, they didn’t.” Speaking in a full Wong Auditorium, Spitzer suggested that Congress’ efforts at financial reform have not brought about substantive changes to the financial industry. That inertia has left the economy “on the precipice” and at risk of similar downturns in the future, Spitzer said, while maintaining a dangerous level of income inequality in the United States.

Don't Let Goldman off the Hook - The damning new Senate report proves Wall Street still can't be trusted to police itself. With crises mounting daily—wars, deficits, debt limits, natural disasters—it's tempting to forget the cataclysms of the past. In particular, America seems to have amnesia about the Wall Street-induced catastrophe that destroyed so much of our economy. We still haven't learned its lessons, and if we don't pay attention, we're soon going to pay again for its perpetrators' callous disregard for the public interest. The report last week issued by Sens. Carl Levin and Tom Coburn was a bipartisan indictment of Wall Street and its lead architect, Goldman Sachs. Putting the Levin-Coburn report together with the FCIC report, we now have a pretty extensive set of documents with which to understand the inner workings of a still compromised Wall Street, riddled with conflicts of interest and favoring half-truths at best when dealing with government.  I want to focus on the two most critical conclusions that jump out from these documents. The first has been remarked upon but bears repeating. The second, I do not believe has been discussed at all and is perhaps the more important.

For A Few Dollars More -- Over the last few weeks there seems to be consensus among many financial bloggers, whose credibility is far more trustworthy than the corporate mainstream media, that the country is teetering on the verge of economic collapse due to the complete capture of the government, financial, regulatory, and media by a small group of oligarchs. They have also been described as the super rich, plutarchs, ruling elite, and scum sucking leeches. The bloggers that I have the utmost respect for, including Jesse, Charles Hugh Smith, Mike Shedlock, Yves Smith and Gonzalo Lira have all come to the logical conclusion the horrific economic situation of the country is a direct result of the greed, corruption, fraud, and plundering by a powerful connected group of rich financiers operating without fear of being brought to justice by the authorities.

Why Does Reputation Count for So Little on Wall Street? -  Yves Smith -The biggest culprit far and away was the end of private partnerships. The NYSE rule requiring that members be partnerships was revoked in 1970, but the first firms to go public were low life retail brokers known as “wire houses”; the white shoe investment banks stayed private. The first nail in the Wall Street reputational coffin was the explosive growth of the bond trading business, fueled by newly volatile interest rates in the stagflationary 1970s. Traditional investment banks (the sort that did M&A and lead managed underwritings) didn’t need much capital, but bond traders did. Partnerships are conservative for two reasons. One is widely discussed: they have unlimited liability. A partner can lose everything. That tends to focus the mind and leads partnerships to be very careful and deliberate as to who they admit into their inner circle and how they monitor non-partner risk-takers. But second is that partnership capital is illiquid. The most likely exit is to extract equity gradually via sale to younger members of the firm. But they aren’t rich; in most cases, they earn their way in via their share of firm profits. Thus the partners are forced to take a very long term view of the value of their franchise. They don’t merely have to get to retirement; they have to do what they can to make sure that the next generation of partnership will be good enough stewards to be able to cash them out.

2008 Crash Deja Vu: We’ll Relive It, And Soon - Yes, another crash is coming, unavoidable, just like 2008. Not because our totally dysfunctional government is collapsing into anarchy, thanks to the 261,000 Super-Rich Lobbyists. Not just because our monetary system is run by the Bernanke Printing Press Company. And not just because a soulless conspiracy of Wall Street CEOs cares nothing for democracy and the public interest, only for their stockholders and their year-end bonuses. Another crash is coming soon because we’re back playing the same speculative games as we did for years prior to the 2008 crash. When we collapse, it will be because America’s leaders never learn the lessons of history. Never. “It’s as if 2008 never happened. Once again the worlds investors are pumping up bubbles that will probably explode in their faces. After the popping of a real estate bubble led to the first global recession since the 1930s, world markets are frothing like shaken Champagne. Pundits claim to have spotted price increases that are unsupported by economic fundamentals in assets ranging from U.S. farmland to Israeli biotech to Australian housing to Chinese cemetery sites. Commodities have soared. Global junk-bond issuance hit a record in the first three months of the year … this is the granddaddy of them all, an almost-encompassing bubble right at the heart of monetary systems.”

Unofficial Problem Bank list increases to 984 Institutions -Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Apr 29, 2011. Changes and comments from surferdude808: The FDIC got back to closing banks this and released its enforcement actions for March 2011, which contributed to many changes to the Unofficial Problem Bank List. In total, there were six removals and 14 additions this week. After these changes, the list includes 984 institutions with assets of $422.1 billion, compared to 976 institutions with assets of $422.2 billion last week.

Treasury can still spend $60 bln on TARP: report - There is still $60 billion in taxpayer-funded, bank bailout funds available to be spent on housing and other programs, a top watchdog for the government’s Troubled Asset Relief Program said Thursday.  “TARP’s financial outlook is improving, with more institutions repaying TARP and cost estimates continuing to decline,” reported the Office of the Special Inspector General for the Troubled Asset Relief Program in its quarterly report to Congress. “Nevertheless, it bears repeating that Treasury’s ultimate return on its TARP investments depends on many variables that are largely unknowable at this time.”  It pointed out also that as of March 31, about $146.8 billion in TARP funds were still outstanding.  The report noted that costs will vary depending on the Treasury’s ability to sell certain securities in troubled insurer, American International Group.

Time Banking - As the full destructive and tyrannical import of commodification sets in, individuals, communities, and peoples are looking for ways to break this tyranny. One aspect of domination is our servitude to the bank-controlled cash supply. So one key part of fighting back is the imperative to Take Back Our Money. One key part of relocalization is the development of alternatives to the system cash economy. There are many such alternatives – barter, alternative currencies, Local Exchange Trading Schemes (LETS), people’s banks, and others. One alternative which is vigorously spreading is Time Banking. A Time Bank is a program for giving and receiving services among members of a community. It’s a way of organizing the informal economy of a community along the lines of reciprocal gifting of work. Members of a Time Bank offer and request every imaginable kind of service – professional expertise, skilled labor, manual labor, domestic chores, any kind of assistance, giving lessons, the use of resources and facilities. Every hour you give is credited to your Time Bank account, an hour you receive is an our you’ve committed yourself to reciprocate. Some banks tally the accounts in hours, others call them time dollars (T$) or something similar. But the measure is always time.

The big sell-out - THE U.S. GOVERNMENT still owns 92 percent of AIG, the troubled insurance giant whose dangerous derivatives business blew up in 2008, necessitating a federal bailout. The government also retains about one-quarter of the common stock of General Motors, which it took as part of the $50 billion bankruptcy-cum-bailout that salvaged that automaker in 2009.  Alas, both firms’ share prices have been tumbling lately, which means that taxpayers stand to recover billions of dollars less than they would make otherwise.  No one can be happy that a 25 percent drop in AIG’s stock price since the start of 2011 has reduced the Treasury Department’s paper profit on the bailout from $24 billion to about $6 billion. Nor is it cause for celebration that reborn GM’s stock has fallen from about $33 at the time of its initial public offering in November to about $30 today — which translates into an $11 billion net loss for the government on the GM bailout if Uncle Sam were to sell out today. Does that mean that the Obama administration should shelve its plans to divest these stakes possibly as early as May?

AIG Sues ICP And Moore Capital, Says It Was The Victim Of Fraud - American International Group Inc, sued two money management firms on Thursday in a fight to recoup billions of dollars the bailed-out insurer said it lost due to fraud. The insurer, 92 percent owned by the U.S. government, sued ICP Asset Management and Moore Capital in New York State Supreme Court, contending it suffered huge losses by insuring mortgage securities that one of the financial firms created. ICP could not be immediately reached for comment. A Moore spokesman said in a statement: "We haven't seen the complaint, and therefore can't comment on it." AIG, which received $182 billion in bailout money, said the suit represents the start of a campaign to recover some of the losses it suffered as a result of others' misconduct. The campaign will likely take aim at Bank of America Corp, Goldman Sachs Group Inc and other Wall Street banks, according to a person familiar with AIG's strategy. The banks sold AIG mortgage bonds with top-notch ratings that have since plummeted in value.

Life Insurers Skimp on Payouts: States - States are investigating whether some of America's largest life insurers are failing to ensure that they pay out on policies of deceased customers, in a battle that could shift hundreds of millions of dollars to consumers and state coffers. The showdown has its roots in the ambitions of a little-known auditing firm that three years ago pitched cash-strapped states on identifying unclaimed life policies that those states could seize as abandoned property.

Freddie Mac mortgage purchases plummet 31% - The amount of monthly mortgages purchased for securitization by Freddie Mac fell nearly 31% in March to $26.9 billion. The government-sponsored enterprise reported its total mortgage portfolio decreased at an annualized rate of 4.7% during the month to $2.14 trillion. Monthly purchases and issuances have been steadily decreasing since December and are now down 46% from then, which represented the peak of 2010. Year-to-date, Freddie Mac has purchased and issued $104.7 billion in mortgage guarantees. The drop comes amid heated debate on how and when to reduce Fannie Mae and Freddie Mac's presence in the mortgage marketplace. Under Dodd-Frank, the GSEs need to reduce market share, but there is no consensus on how to accomplish the task. The single-family refinance-loan purchase and guarantee volume at Freddie Mac hit $19.4 billion in March, accounting for 72% of its mortgage purchases and issuances. Meanwhile, the aggregate unpaid principal balance of the GSE's mortgage-related investment portfolio fell by about $4.1 billion. Freddie's mortgage-related securities and other guarantee commitments also declined in March dropping 5.3% from a year earlier.

Thrivent sues lenders for ‘massive frauds’ - Thrivent Financial for Lutherans has sued Countrywide Financial Corp. and GMAC Mortgage over what it describes as "massive frauds" in which it says it was duped into buying hundreds of millions of dollars in mortgage-backed securities. Thrivent says it wanted conservative, low-risk investments and believed it was buying only those mortgages that carried the highest, AAA investment-grade ratings. But because Countrywide and GMAC failed to follow their underwriting guidelines, Thrivent says, it ended up holding higher-risk mortgages and has suffered huge losses amid the housing market collapse. Between 2005 and 2007, the suit says, Minneapolis-based Thrivent and its affiliates paid hundreds of millions of dollars for 20 mortgage-backed securities offerings from Countrywide and for seven offerings from GMAC. The suit says that two firms either knew or recklessly disregarded the fact that the securities failed to meet the criteria for the AAA ratings they carried.

OCC Makes Patently False Claim That Slap-on-the-Wrist Servicing Penalties Could Hurt Banks - Yves Smith - As we’ve written in some of our posts on the foreclosuregate settlement negotiations, the OCC has engaged in what even those of us at a remove can tell is bureaucratic warfare against the FDIC and the yet to be operational Consumer Financial Protection Bureau. For the OCC to undermine the CFPB is a twofer. First, it helps to beat back meaningful mortgage reform. Second, the CFPB has the potential to hamper the OCC’s real mission, which is to make sure that the banks come first and everyone else pounds sand. It recognizes the need to make the occasional concession to keep the pitchfork crowd at bay, but otherwise it really has no interest in making the banks toe the line. Note that the Treasury and the Fed have pretty much the same worldview, but the OCC is more shameless and bloodyminded about pursuing it.  For instance, it is pretty clear that someone in the officialdom, probably the OCC, painted a target on Elizabeth Warren’s back. As much as we’e been critical of what appear to be some of the steps she has taken, the flip side is that she does not buy the Team Obama modus operandi of coddling the banks and persuading the chump public to go along via a heavy dose of propaganda and Potemkin reforms.

IRS Likely to Expand Mortgage Industry Coverup by Whitewashing REMIC Violations - Yves Smith - As established readers know, we’ve been writing since mid 2010 about the widespread, possibly pervasive, failure of mortgage securitization originators to convey the notes (the borrower IOU) to securitization trusts as stipulated in the deal documents, well before the robo signing scandal broke. This abuse matters because the transaction procedures were designed carefully to satisfy certain legal requirements, among them rules contained in the 1986 Tax Reform Act regarding REMICs, or real estate mortgage investment conduits, which required that the securitization trust receive all its assets by 90 days after closing and that all assets conveyed to the trust have to be “performing”, as in not in default. Failure to comply with the rules is a prohibited act and subject to taxation at a rate of 100%, and additional penalties may apply. Now, with the Federal government under enormous budget pressure, shouldn’t the authorities be keen to go after tax cheats? The headline of a Reuters article, “IRS weighs tax penalties on mortgage securities,” would suggest so. But don’t get your hopes up. The lesson is don’t jump to conclusions when big finance is involved.

Bank of America Corp. (BAC) was accused by a top official at the Iowa attorney general’s office of engaging in a divide-and-conquer strategy by undermining support for the settlement of a nationwide probe into foreclosure practices, a person familiar with the matter said. The bank tried to get attorneys general to break away from those supporting the proposed accord, Iowa Assistant Attorney General Patrick Madigan said during a recent conference call, according to the person. A second person familiar with the settlement talks said the bank sought to sow dissent among the states, eight of which have publicly criticized the proposal’s terms. Both people asked not to be identified because the talks are private. Madigan declined to comment.  “We have held face to face negotiating sessions and our negotiations continue,” Iowa Attorney General Tom Miller, a Democrat who leads the 50-state effort, said in a statement. “We believe all the banks are negotiating in good faith.”

A Foreclosure Problem Congress Couldn’t Ignore - Last week, the mortgage servicing arm of JPMorgan Chase reached an unusual settlement in a class action lawsuit, acknowledging it had charged illegally high interest rates and wrongfully foreclosed on 6,000 homeowners across the country. JPMorgan agreed to give $12 million to the individuals and $15 million to a fund for additional damages, on top of $6 million already promised for these particular violations.  So had one of the major corporate forces behind the foreclosure crisis finally come to terms with its criminal activities and done right by the customers it defrauded? Hardly. Last week's settlement, and similar ones by other banks, relate only to a very specific type of foreclosure fraud: violations of the Servicemembers Civil Relief Act. Banks are hoping that by compensating members of the military for improper foreclosures, they can boost their public image and avoid responsibility for the broader foreclosure crisis and the truckload of violations committed against civilian borrowers.

For the Servicers: Is It Better to Rob Peter or Paul? - The U.S. mortgage servicing industry is in deep doo-doo. To foreclose on a mortgage, you must own the note and the mortgage.  Because of lost, sloppy, and perhaps nonexistent paperwork, banks who purport to have the right to foreclose often cannot prove they own the note and mortgage. Things are starting to hit the fan -- we can't say exactly what is hitting the fan because this is a family blog (except for here, here, and especially here). In defending itself, the mortgage industry is taking yet another reflexive, knee-jerk position that seems to me to be against their long-term interest. A typical fact pattern might play out like this. Bank forecloses on Peter. At the foreclosure sale, Paul buys the property. Bank cannot prove it owned the mortgage and note at the time of the foreclosure sale, meaning it had as much right to foreclose as any other stranger to the property. That is to say, it had no right to foreclose. At this point, Bank either owes Peter or Paul. It owes Peter for fraudulently obtaining a judgment of foreclosure against him and dispossessing him of his home. Or, if we overturn the foreclosure sale, it owes Paul for conveying an invalid title (more accurately, it would owe the sheriff who should have to return Paul's money).

Arizona Representative Drops Chain of Title Notification Provision After Apparent Bribe by Servicer - Yves Smith - The object lesson was Arizona Senate bill 1259, which passed 28-2 and created heart palpitations in bank offices all over the US (see the text here). It would have required that banks disclose chain of title and required that the foreclosing party reimburse legal fees when the plaintiff failed to prove ownership. Ouch! A full bore effort was mounted to kill it. As the bill’s Senate sponsor, Senator Reagan, wrote: I was told the bill was DOA in the House before it even got out of the Senate. It was “double-assigned” meaning it had to pass two committees instead of just one. In addition, the Chair of the Banking and Insurance committee in the House did not like the bill and was not going to give it a hearing, meaning the bill was dead.  But it gets better. A realtor who also audits trustee sales, one Darrell Blomberg, was keen to revive the bill and enlisted Representative Carl Seel. But weirdly, Seel was late to the legislative session. When Rep. Seel was asked what had happened to prevent him from showing up on time to propose the amendment, he explained that he had decided not to propose it because he was told there was no chance of it being adopted… One thing though… from what Darrell explained to me, Carl Seel must have been in a very good mood the day of his unexpected tardiness, because even though he had been previously turned down twice for his own loan modification, two days before he showed up too late to propose the amendment, Ocwen granted him a PRINCIPAL REDUCTION that reduced his mortgage to $88,000 from roughly $190,000… that’s a reduction of approximately 56% give or take a few points one way or the other.

How Failure to Manage Foreclosed Homes Kills - Yves Smith - There’s a sad little story in the “NY/Region” section of the New York Times, which illustrates a not often enough discussed sort of wreckage resulting from the housing mess: that of deaths resulting from foreclosures. Think I’m exaggerating? There have been cases of suicides, or murder/suicides of people losing their homes. But that can’t necessarily be attributed to foreclosure per se, but of personal financial disaster, with the foreclosure being the literally fatal blow. So while one can attribute their deaths to the financial crisis and therefore to the reckless behavior of major financial firms, it’s hard to pin it on foreclosures per se. But there are some deaths that can, indisputably, be blamed on foreclosures or more specifically, the negligent management of foreclosed properties. No one should ever die because a bank failed to take proper care of a home it seized. This, just like banks seizing houses that have no mortgages on them, should simply never happen. But it is in fact taking place. As anyone who lives in a part of the country hard-hit by foreclosures, the banks (more accurately, the servicers) are often derelict in their duties as property managers. When the servicer, acting on behalf of the securitization, takes possession of a home, it becomes responsible for it. It must pay property taxes and comply with local rules. In theory, the servicer should manage the home so as to maximize its value on behalf of the investor

McDaniel Details Effect of Foreclosure Info Bill - Attorney General Dustin McDaniel said Tuesday a new law that helps better inform Arkansas homeowners before having their houses undergo foreclosure "will help people during a difficult time." The bill, sponsored by Rep. Tiffany Rogers, D-Stuttgart, was signed into law by Gov. Mike Beebe March 31. Act 885 requires mortgage companies to give homeowners more information if the company is pursuing foreclosure. "Every year, the Consumer Protection Division in my office deals with numerous calls, often several a day, from people who find out their homes are being foreclosed on," McDaniel said. "They have little time to react and many times don't know where to get the information they must have before they can act." The measure requires mortgage holders to inform homeowners about the foreclosure procedures and will let homeowners attempt to make good on delinquent payments or otherwise develop a plan to continue making payments.

Housing Wire Again Runs PR Masquerading as News on Behalf of Its Big Client, Lender Processing Services -  - Yves Smith -The very fact that this item “LPS fires back with motion seeking sanctions against Alabama attorney,” was treated as a news story by Housing Wire is further proof that Housing Wire is above all committed to promoting client and mortgage industry interests and only incidentally engages in random acts of journalism. LPS is desperate to create a shred of positive-looking noise in the face of pending fines under a Federal consent decree, mounting private litigation, and loss of client business under the continued barrage of bad press.  If you know anything about litigation, particularly when small fry square off against large companies, it’s standard for the well funded party to engage in a war of attrition against the underdog. One overused device is to threaten or file for sanctions. Even when they are weak or groundless, they still waste opposing counsel’s time and energy. Housing Wire, who has LPS as one of its top advertisers, is clearly more than willing to treat a virtual non-event as newsworthy to help an important meal ticket.

Wealthy Leaving Las Vegas Mansions as Foreclosures Spreading - A growing number of high-end homes are selling at a loss or facing repossession by lenders in Las Vegas, which already has the highest rate of foreclosure filings among large U.S. cities. The wave of defaults that began with subprime borrowers and the unemployed has spread to upscale homeowners who see no point of staying even if they can afford to.  In the 15 months through March, at least 25 houses in the Las Vegas area changed hands for more than $3 million, with at least seven doing so through foreclosure or by selling at a loss, according to the Greater Las Vegas Association of Realtors and Clark County property records. In 2009, 14 homes sold for more than that amount, with one trading at a loss. In the first quarter, 30 Clark County homes with loans exceeding $1 million were repossessed by banks or bought by third-parties in foreclosure sales, up from 20 homes a year earlier, according to, a Discovery Bay, California-based company that tracks defaults. Short sales, in which the bank agrees to accept less than the loan balance, and bank-owned properties accounted for about three-quarters of all home sales, according to the Las Vegas Realtors.

Misc: More "Hate" for Housing, Record number of homes in foreclosure process - From the Associated Estates Realty Corp (AEC) conference call, an apartment REIT in IN, OH, MI and PA: Looking at certain performance metrics throughout our portfolio, we continue to see residents staying longer - on average, 18 months. Also, it has been well publicized, households have a greater propensity to rent versus own as renting allow for increased financial flexibility and physical mobility. To this point our annual resident turnover is down 10 basis points year-over-year and buying home as a reason for moveout is just over 14%, down from better than 25% just a few years ago. These trends are contributing to increased occupancy, increased rents, and improved same community NOI as a result of the lower turnover costs.Other apartment owners have also told me that the number of renters "moving out to buy a home" is way down. Although LPS has not released their mortgage metrics for March yet, I've heard that the "foreclosure in process" category is at a record high (no surprise) while the overall delinquencies declined sharply (a seasonal decline is normal for March). Also Freddie Mac released the monthly volume report for March, and they showed 90+ day delinquencies down to 3.63% - a high level, but the lowest since September 2009.

LPS: Mortgage Delinquency Rates declined in March, Foreclosure pipeline "Bloated" - LPS Applied Analytics released their March Mortgage Performance data. From LPS:
• Delinquencies ended the quarter 12% lower than the end of last year, over 500,000 loans have left the delinquent pool over the last three months.
• New problem loan rates are at a three year low as fewer loans are going bad. At the same time, seasonal trends have helped support a large increase in monthly cure rates.
• March typically sees large seasonal declines in new delinquency rates, though this year was the second largest on record.
• Modification activity also contributes to the improved landscape with almost a quarter of 90+ delinquencies from last year now current on their payments.
• The foreclosure pipeline is still bloated with overhang at every level:

– There are almost twice as many loans deteriorating greater than 90+ days delinquent vs. starting foreclosure.
– There are almost three times the number foreclosure starts vs. foreclosure sales.
– 90+ and foreclosure inventory levels are almost 45 times monthly foreclosure sales.
• Origination activity has dropped off in early 2011 and due to much stricter underwriting, recent vintages have been performing exceptionally well.

This graph provided by LPS Applied Analytics shows the percent delinquent and percent in foreclosure. The percent in the foreclosure process has been trending up because of the foreclosure issues.  According to LPS, 7.78% of mortgages are delinquent (down from 8.80% in February), and a record 4.21% are in the foreclosure process (up from 4.15% in February) for a total of 11.93%. It breaks down as:

• 2.12 million loans less than 90 days delinquent.
• 1.99 million loans 90+ days delinquent.
• 2.22 million loans in foreclosure process.

For a total of 6.33 million loans delinquent or in foreclosure.

The second graph shows the break down of foreclosures by days delinquent. "31% of loans in foreclosure have not made a payment in over 2 years." So about one third of the 2.22 million loans in the foreclosure process haven't made a payment in over 2 years.

The decline in the delinquency rate is partially seasonal, but the sharp decline is a positive. A key problem is all those homes in the foreclosure process. As LPS notes: "Delinquencies have dropped to about 1.8 times the 1995-2005 average, foreclosure inventories are 8 times historical “norms”." There were only 94,780 foreclosure sales in March and 270,681 foreclosure starts - so the foreclosure inventory just keeps growing.

A Frightening Satellite Tour Of America’s Foreclosure Wastelands (20 cities)

Fannie Mae and Freddie Mac Delinquency Rates decline - Fannie Mae reported that the serious delinquency rate decreased to 4.44% in February from 4.45% in January. This is down from the all time high 5.59% in February 2010.  Freddie Mac reported that the serious delinquency rate decreased to 3.63% in March from 3.82% in February. (Note: Fannie reports a month behind Freddie). This is down from 4.13% in March 2010. These are loans that are "three monthly payments or more past due or in foreclosure". Some of the rapid increase in 2009 was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent. As modifications have become permanent, they are no longer counted as delinquent.  Although delinquencies typically decline in March, the decline for Freddie Mac delinquencies is larger than usual - and other data suggest the overall delinquency rate declined further in Q1. The MBA will release the Q1 National Delinquency Survey in May.

Strategic-defaults-it-could-get-very-ugly - When home prices were rising rapidly during the bubble years of 2003-2006, it was almost inconceivable that a homeowner would voluntarily stop making payments on the mortgage and lapse into default while having the financial means to remain current on the loan. Then something happened which changed everything. Prices in most bubble metros leveled off in early 2006 before starting to decline. With certain exceptions, home prices have been falling quite steadily since then around the country. In recent memory, this was something totally new and it has radically altered how most homeowners view their house. In those major metros where prices soared the most during the housing bubble, homeowners who have strategically defaulted share three essential assumptions:

  • The value of their home would not recover to their original purchase price for quite a few years.
  • They could rent a house similar to theirs for considerably less than what they were paying on the mortgage.
  • They could sock away tens of thousands of dollars by stopping mortgage payments before the lender finally got around to foreclosing

Case Shiller: Home Prices near post-bubble lows in February - S&P/Case-Shiller released the monthly Home Price Indices for February (actually a 3 month average of December, January and February). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities). From S&P:Home Prices Edge Closer to 2009 Lows Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices ... show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices. The Composite 10 index is off 31.7% from the peak, and down 0.2% in February (SA). The Composite 10 is still 1.8% above the May 2009 post-bubble bottom. The Composite 20 index is also off 31.4% from the peak, and down 0.2% in February (SA). The Composite 20 is only 0.4% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low soon. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 2.6% compared to February 2010. The Composite 20 SA is down 3.3% compared to February 2010.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Bad housing news still isn't that bad - THE latest Case-Shiller home price data, for the month of February, are now out, and headlines are sure to be gloomy. Year-on-year, the 20-city index dropped 3.3% in February, down slightly more than in the previous month. Most of the markets tracked by the index fell for the month. Eight of the tracked markets hit new post-boom lows. Still, it would be a mistake to be too pessimistic. First, one must remember the peculiarities of the Case-Shiller data. The reported indexes are a three-month moving average, so the latest figures include data that became available in December, January, and February. The contracts for those sales may have closed a month or two before, so the figures capture a snapshot of the housing market that includes last fall. Conditions have likely improved since then. Second, there are some encouraging trends in the data. Fewer cities hit new lows in February than in January. Perhaps more importantly, the monthly rate of decline continues to slow.

Case Shiller Double Dip Almost Here - Last year, we took a Closer Look at the Second Leg Down in Housing. Today, the Case Shiller NSA 20 checked in at 139.27; the previous post-bubble low is 139.26. Case Shiller: “Data through February 2011, released today by S&P Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10-City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels. Washington D.C. was the only market to post a year-over-year gain with an annual growth rate of +2.7%. Ten of the 11 cities that made new lows in January 2011 saw new lows again in February 2011. With an index level of 139.27, the 20-City Composite is virtually back to its April 2009 trough value (139.26); the 10-City Composite is 1.5% above its low.”

A Look at Case-Shiller, by Metro Area (April Update) The S&P/Case-Shiller Composite 20-city home price index posted a 1.1% drop in February from a month earlier and fell 3.3% from a year earlier, as the housing market faced a new round of trouble. Nineteen of 20 cities in the index posted month-to-month declines in February — just Detroit notched an increase. On a seasonally adjusted basis, which aims to take into account the slower winter selling season, five cities — Atlanta, Cleveland, Dallas, Detroit and Washington, D.C. — posted monthly increases. Phoenix prices were flat on a seasonally adjusted basis. Only one area of the U.S. — Washington — posted a year-over-year gain. Ten markets — Atlanta, Charlotte, Chicago, Las Vegas, Miami, New York, Phoenix, Portland, Seattle and Tampa — hit their lowest points since home values started dropping more than four years ago.See a sortable table of home prices in the 20 cities in the Case-Shiller index. Read the full story. Read the full S&P/Case-Shiller release.

Home Prices Still Searching For A Bottom - Home prices are falling in most major U.S. cities, and at least 10 major markets are at their lowest point since the housing bubble burst. The Standard & Poor's/Case-Shiller 20-city index showed home prices declined in 19 metro areas from January to February and 11 markets experienced faster price declines compared with the previous month. The index, which was released Tuesday, fell for the seventh straight month. It is slightly above the level hit in April 2009, the lowest point since the bubble burst. Analysts expect the March index will fall past the low point. High unemployment, stricter lending rules and fears that prices will fall further are among the reasons why few people are buying and selling homes. A record number of foreclosures are forcing down home prices in most metro areas, and prices are expected to keep falling through this year. "There is evidence that potential sellers are holding their properties off the market, waiting for housing prices to stop falling,"

Whither the Housing Bottom? - Today’s Case-Shiller index report showed that housing prices fell for the seventh consecutive month in February. Some analysts now say that a bottom may finally be approaching — for the second time. It was, after all, two years ago that the index’s long slide appeared to be over, only to bounce up and then fall again: As of February, the 20-city index was down 32.6 percent from its peak, and 10 metro areas posted new index lows for the third consecutive month. These areas were Atlanta, Charlotte, Chicago, Las Vegas, Miami, New York, Phoenix, Portland in Oregon, Seattle and Tampa. Detroit was the only metro area where prices rose in February, but prices hit a new bottom there just the month before. Detroit — like Atlanta, Cleveland and Las Vegas — has home prices below 2000 levels. Depending on when you think the housing bubble really started, this could mean that in some markets homes could be undervalued. But that doesn’t mean prices will soon shoot up. “The enormous supply overhang of existing homes (particularly factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,”

US Home Prices May Fall 11% This Year, Morgan Stanley Says - U.S. home prices will fall 6 percent to 11 percent this year, more than previously forecast, as mortgages become harder to obtain and distressed sales drive down values, according to Morgan Stanley.  Prices will have lost as much as 39 percent from their 2006 peak through the first half of 2012, according to measures such as the S&P/Case-Shiller index. Morgan Stanley previously estimated values would drop 35 percent from the peak.  “We revised our outlook lower for two key reasons,” . “First, home prices have fallen more than we expected since our last published forecast in early December 2010, and second, sales activity has remained weak, especially for mortgage-dependent transactions, which are needed to support the non-distressed market.” Home values are dropping as foreclosures, which sell at a discount, undermine real estate prices. Distressed properties, including foreclosures and short sales, made up 40 percent of existing home purchases in March, the National Association of Realtors said April 20. Short sales occur when a lender agrees to sell for less than the mortgage balance.

Housing Values: The Perfect Storm - With all the news of still-declining home prices, most buyers are keeping their feet firmly planted on the sidelines unless they’re sure they’re getting a bargain.  At the same time agents and banks are battling (mis)perceptions in their local markets, where property values may not be on such a slippery slope. Add to the equation a distressed property, and finding an agreeable short sale price while still covering enough of the outstanding mortgage debt to be acceptable to the lender can be a challenge. It’s a nasty tug-of-war, with neither buyers or sellers feeling like they’re gaining any ground.  As Patrick Newport, U.S. economist for the research firm IHS Global Insight, put it, “[T]he vicious cycle in which falling prices lead to more foreclosures which lead to even lower housing prices, continues to play a role in keeping housing on the mat.”Newport suspects that we’re in for more of this circling sequence. “Are we nearing the end of falling house prices? Probably not,” he said. His firm is forecasting home prices to drop at least another 5 to 10 percent before turning around in the second half of 2011.

A Reversal for Real Estate After Some Mild Gains -- PRICES for both homes and commercial real estate are falling again. Meaningful improvement may have to wait until there are many fewer distressed properties for sale.  Indexes of the two markets showed this week that the latest declines had almost wiped out the mild gains the two markets had shown after prices appeared to have hit bottom.  In both cases, sales volumes are far below what they were when the markets were booming, and a large proportion of the properties that are being sold were in trouble before the sale. The National Association of Realtors3 estimates that about 40 percent of existing homes that changed hands in March were either in foreclosure or were so-called short sales in which the house was sold for less than was owed on the existing mortgage.  The commercial property index, which is based on data collected by Real Capital Analytics, shows that 29 percent of transactions in February involved distressed properties — including those already in foreclosure or default, as well as those whose owners had filed for bankruptcy.

Whatever Happened To The Housing Recovery? - In today’s New York Times, Floyd Norris points out that the real estate market remains as distressed as it was when the Great Recession started, and shows no signs of turning around any time soon:PRICES for both homes and commercial real estate are falling again. Meaningful improvement may have to wait until there are many fewer distressed properties for sale.Indexes of the two markets showed this week that the latest declines had almost wiped out the mild gains the two markets had shown after prices appeared to have hit bottom.The Standard & Poor’s/Case-Shiller index of home prices ended February 3.3 percent below where it was a year earlier, and just 0.5 percent above the low reached in May 2009. The Moody’s/REAL Commercial Property Price Index was reported to be down 4.9 percent over the last 12 months, but still 0.8 percent above its low, reached last August.

Wells Fargo Forecast for New Home Sales - From Alan Zibel at the WSJ: Home Builders' Outlook Stays Fragile Wells Fargo Securities projects only modest increases over the next two years, with 330,000 new-home sales likely this year, followed by 440,000 in 2012. It is likely to take another three years before new-home sales return to healthy annual sales of around 770,000, said Wells Fargo economist Anika Khan. That is a little more optimistic than my outlook. The key will be how long it takes to absorb all the excess vacant housing units. The pickup in residential investment this year will be mostly from apartments and home improvement, but eventually we will see an increase in new home sales.

New Home Sales in March at 300 Thousand SAAR, Record low for March - The Census Bureau reports New Home Sales in March were at a seasonally adjusted annual rate (SAAR) of 300 thousand. This was up from a revised 270 thousand in February. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in March 2011 were at a seasonally adjusted annual rate of 300,000 ... This is 11.1 percent (±21.7%)* above the revised February rate of 270,000, but is 21.9 percent (±10.3%) below the March 2010 estimate of 384,000. And a long term graph for New Home Months of Supply: Months of supply decreased to 7.3 in March from 8.2 months in February. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal). The seasonally adjusted estimate of new houses for sale at the end of March was 183,000. This represents a supply of 7.3 months at the current sales rate.

New Home Sales: Slightly Better Than Horrible - It is interesting what registers as good news these days in the housing market. People are making a big deal out of today's new homes sales number as perhaps finally the sign that the housing sector is rebounding. On Monday, the Census reported that new housing sales rose 11% in March. This was greeted as generally good news. Nationwide, 29,000 new homes were sold and it puts the market on pace to clear 300,000 homes in 2011. It's the first month that new home sales have jumped, and they were up in the double digits. So this is good news, no? Not really. The March numbers were up from February. But February's sales pace of 270,000 was the lowest on record since the Census began tracking the number in 1961. So beating that number is a little clearing the first round in whatever is the opposite of limbo. What's more, on a year over year basis, March sales were actually down 22% from a year ago.

New home sales up, inventory at 43-1/2 year low -  (Reuters) – New U.S. single-family home sales increased more than expected in March and the supply of new houses on the market hit their lowest level since August 1967, but prices fell from a year ago.The Commerce Department said on Monday sales rose 11.1 percent to a seasonally adjusted 300,000 unit annual rate, after an upwardly revised 270,000 unit pace in February. Economists polled by Reuters had forecast new home sales climbing to a 280,000-unit pace last month from a previously reported record low 250,000 unit rate. Compared to March last year sales were down 21.9 percent. The market for new homes is being squeezed by competition from previously owned homes and a deluge of foreclosed properties, even though inventories of new houses are at a 43-1/2 year low.

U.S. Home Ownership Falls Back to 1998 Levels - The nation’s homeowner vacancy rate fell in the first quarter but remains well above its long term average before the housing boom and bust, according to this Census Bureau release today. The homeowner vacancy rate was at 2.6% in the first quarter, from 2.7% in the last three months of 2010. That’s down from the recession trough of 2.8%-2.9% range than held throughout 2008 but “still well above the 1.6% average of 1985-2005,” The highest vacancy rate, at 2.8%, continues to be in the south, where states like Florida have been hard hit by the housing bust. The Midwest — whose recession toll was more a function of the loss in manufacturing jobs — was at 2.7%. The release also showed that the housing bust has undone all of the gains in ownership rates that were much ballyhooed in the early and mid-2000s. The nation’s home ownership rate, at 66.4% in the first quarter, was down from 66.5% in the last three months of 2010 — the lowest level since 1998.

Home Sales: Distressing Gap - Another update ... this graph shows existing home sales (left axis) and new home sales (right axis) through March. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales). The gap is due mostly to the flood of distressed sales. This has kept existing home sales elevated, and depressed new home sales since builders can't compete with the low prices of all the foreclosed properties.
1) It is important to note that existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.
2) The National Association of Realtors (NAR) is working on a benchmark revision for existing home sales numbers. As I noted in January, this benchmarking is expected to result in significant downward revisions to sales estimates for the last few years - perhaps as much as 10% to 15% for 2009 and 2010. Even with these revisions, most of the "distressing gap" will remain.

March Survey: Almost half of housing market is now distressed properties - From Campbell/Inside Mortgage Finance HousingPulse: HousingPulse Distressed Property Index Rises for Month; Homebuyer Traffic Flattens The HousingPulse Distressed Property Index (DPI), a key indicator of the health of the U.S. housing market, rose to 48.6 percent in March – the second highest level seen in the past 12 months. The HousingPulse DTI indicated that nearly half of the housing market is now distressed properties. This trend is likely to continue as a backlog of foreclosures and mortgage defaults make their way through the housing pipeline. ... [S]hort sales boomed in the month of March and the proportion of damaged REO fell. Short sales rose from 17.0% in February to a record-high 19.6% in March. Damaged REO fell from 14.9% in February to 12.0% in March. This fits with other data showing a high level of distressed properties, and this suggests further declines in the repeat transaction house price indexes.

Timing: New Home Sales and Home Builder Reports - NY Times quoted Jennifer Lee, senior economist at BMO Capital Markets today regarding the new home sales report: "Sales remain very low by historical standards and, considering that a number of home builders reported large drops in orders recently, there is likely more weakness ahead." I agree with Lee that there is more weakness ahead, however the recent "large drop in orders" for homebuiders was for Q1, and the Census Bureau report today was for March - so this report tells us about last quarter, not the future for homebuilders (just a few homebuilders have reported - many more will report this week).  According to the Census Bureau, this was the weakest Q1 on record with only 71,000 homes sold, so it is no surprise the homebuilders are reporting a weak first quarter. (Note: record keeping started in 1963). The previous record low was 84,000 in Q1 2009 (also there were 87,000 home sold in Q1 2010).

Real House Prices and Price-to-Rent - The first graph shows the quarterly Case-Shiller National Index (through Q4 2010), and the monthly Case-Shiller Composite 20 and CoreLogic House Price Indexes (both through February release) in nominal terms (as reported). In nominal terms, the National index is back to Q1 2003 levels, the Composite 20 index is 0.4% above the May 2009 low, and the CoreLogic index is back to January 2003 levels.  Once the Case-Shiller Composite 20 falls below the May 2009 low, the index will be back to early 2003 levels.  Nominal prices will probably fall some more, and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes.  The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Composite 20 index is just above the May 2009 levels, and the CoreLogic index is back to January 2000.

Residential Investment and Non-Residential investment in Structures at Record Lows as Percent of GDP - Residential Investment (RI) decreased in Q1, and as a percent of GDP, RI is at a post-war record low at 2.21%. Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

Q1 2011 Details: Investment in Office, Mall, and Lodging, Residential Components - The BEA released the underlying detail data today for the Q1 Advance GDP report. Here is a look at office, mall and lodging investment: This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP. Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by 70% (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP).  The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by 80% already.  The second graph is for Residential investment (RI) components. 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). This graph shows the various components of RI as a percent of GDP for the last 50 years. Usually the most important components are investment in single family structures followed by home improvement. Investment in single family structures was just above the record low set in Q2 2009.

Housing Crisis Continues to Batter Nation's Homeownership Rate -- With the housing crisis still taking its toll, the nation’s homeownership rate slipped further during the first three months of this year. The U.S. Census Bureau reported Wednesday that the homeownership rate dropped to 66.4 percent at the end of the first quarter. It’s fallen back to a level not seen since 1998. Analysis of the numbers shows that the housing bust has more than reversed the increase in homeownership gained during the boom.Economists at the research firm Capital Economics say the further decline in the homeownership rate in the first quarter “provides yet more evidence that Americans are now less able and less willing to buy a home.” Paul Dales, the firm’s senior U.S. economist, said, “Part of this fall is due to foreclosures and the combination of high unemployment and tighter credit conditions preventing households from getting on the property ladder.”

Do These Charts Look Like "Recovery"? - House prices in desirable areas are declining, contradicting the "recovery" story. Without speculating on where housing valuations "should" be, what's your takeaway from these charts of individual home prices? Does this look like a "recovery" to you? Since everyone knows "real estate is local," I selected three homes in very desirable but not overly exclusive neighborhoods with excellent school districts and a history of strong price appreciation: two in Northern California and one in the Greater Boston region. For context, here is the most recent Case-Shiller Index, which shows national home prices declining to 2003 levels. This chart traces a classic "bubble" with the top around the first quarter of 2007, followed by a sharp decline and a period of stabilization as the Federal Reserve and the Federal government intervened to support the housing market in an unprecedented fashion--buying $1.1 trillion in mortgages, issuing tax credits to buyers, etc. etc. Recently, the index turned down again, the dreaded "double dip."

Q1 2011: Homeownership Rate at 1998 Levels - The Census Bureau reported the homeownership and vacancy rates for Q1 2011 this morning. The homeownership rate declined to 66.4%, down from 66.5% in Q4 2010. This is the same as in 1998. The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. Some of the increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to around 66%, and probably not all the way back to 64%.  The homeowner vacancy rate decreased to 2.6% in Q1 2011, down from 2.7% in Q4 2010. This has been bouncing around in the 2.5% to 2.7% range for two years, and is slightly below the peak of 2.9% in 2008. A normal rate for recent years appears to be about 1.7%. This leaves the homeowner vacancy rate about 0.9 percentage points above normal. The rental vacancy rate increased to 9.7% in Q1 2011 from 9.4% in Q4 2010. It's hard to define a "normal" rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 42 million rental units in the U.S. If the rental vacancy rate declined from 9.7% to 8%, then 1.7% X 42 million units or about 700 thousand excess units would have to be absorbed.  This suggests there are still close to 1.4 million excess housing units.

Affordable rental housing scarce in U.S., study finds - The share of renters who spend more than half their income on housing is at its highest level in half a century and it’s no longer just low-income tenants who are feeling the pain, according to a Harvard University study scheduled for release Tuesday. About 26 percent of renters — or 10.1 million people — spent more than half their pre-tax household income on rent and utilities in 2009. That’s because incomes slipped dramatically from their peak at the start of the decade even as rents kept rising. The study offers the latest in a series of grim statistics about the scarcity of rental housing, especially for the working poor. The supply has not kept up with demand in part because of a shortage of apartments, a key source of new rentals. Developers cut back on such projects when the economy deteriorated in 2009, which drove down vacancies and boosted rents.

Study: 26 percent of renters spend over half their income on housing - From the WaPo: Affordable rental housing scarce in U.S., study finds The share of renters who spend more than half their income on housing is at its highest level in half a century and it’s no longer just low-income tenants who are feeling the pain, according to a Harvard University study scheduled for release Tuesday. About 26 percent of renters — or 10.1 million people — spent more than half their pre-tax household income on rent and utilities in 2009. In many areas, the demand is driven by families who lost their homes to foreclosure ... [and] as the job market recovers, more newly employed young adults appear to be seeking their own apartments instead of living with their parents, putting even more upward pressure on rental rates ... This is a very high percentage of their income for housing. Add in higher gasoline prices, and there can't be much left. Recent reports have shown the apartment vacancy rate is falling rapidly - and rents are rising - so this situation is probably even worse now than in 2009.

Collateral damage: Tenants of foreclosed properties - Water has not run in Joseph’s derelict apartment since his landlord abandoned the four-unit building to foreclosure, and skipped town in November. The landlord’s absence led to a water shutoff, and for the past four months, Joseph has not been able to turn it back on because of a long-standing rule at the Miami-Dade Water & Sewer Department. That rule — which restricts renters from re-opening a closed account — has come under increased scrutiny as more landlords have fallen prey to the foreclosure crisis, some leaving tenants without basic utilities. “The tenants have become the hidden victims of the foreclosure crisis,” said Purvi Shah, a Florida Legal Services attorney who defends tenants of foreclosed properties. “There are hundreds of tenants in Miami-Dade County living in really serious conditions.”

Phoenix Underwater Mortgages Show Housing's Threat to Recovery -  One year ago, there were signs that housing was healing; new home sales were up and prices rising. Now, new home sales are below levels hit at the depth of the recession two years ago, and 23 percent of all borrowers -- more than 11 million homeowners -- owe lenders more than their homes are worth. The renewed weakness is keeping a lid on consumer confidence, consumption and growth. “It keeps the recovery from being all that strong,” says Mark Vitner, senior economist for Wells Fargo Securities in Charlotte, North Carolina. “We don’t see how the economy can get above 3 percent growth, except for a short period of time, with housing being so deeply underwater,” he said.  In the 18 months after the recession ended in June of 2009, the economy grew at an average annual rate of 3 percent a quarter. A survey of economists by Bloomberg News produced a median forecast that growth slowed to a 2 percent rate in the first quarter of this year, not enough to ease the nation’s unemployment crisis.

P&G raising some prices for retailers - Shoppers could soon see higher prices for Pampers diapers, Charmin toilet paper and Bounty paper towels. Procter & Gamble Co. said Monday it raised U.S. list prices for those products because of rising costs for pulp, oil and gas. The Cincinnati-based consumer products maker informed retailers of increases last week. Retailers will decide how much of those price increases to pass along to shoppers. P&G said list prices for Pampers are up 7 percent on average, Pampers wipes up 3 percent, and Charmin and Bounty products up 5 percent. P&G said Luvs, its lower-priced diaper brand, remains unchanged.

Kimberly-Clark to raise prices to offset costs The maker of Kleenex tissues and Huggies diapers reported net income of $372 million, or 86 cents per diluted share, compared with $411 million, or 92 cents per diluted share, for the first quarter of 2010. Excluding nonrecurring items, the company said it earned $1.09 per share. Net sales for the quarter were $5.03 billion, a 4 percent increase from $4.84 billion in the first quarter of the previous year. The cost of making the products the company sells, however, increased 12 percent to $3.6 billion.

Meat prices seen going even higher   — A trip to the meat counter just keeps getting more expensive.  In a revised forecast Monday, the U.S. Agricultural Department indicated that consumers will see higher price tags on a package of ground beef or steak at the supermarket. Retail prices have been surging the last nine months as animal supplies shrink, exports grow and feed-grain costs soar.  Overall, the USDA said meat prices will climb 6% to 7% this year over 2010, up from its March 25 forecast for a 4.5% to 5.5% increase.  Beef prices are projected to jump 7% to 8%, up sharply from the government’s March estimate of a 4.5% to 5.5% rise. Beef prices are already running 12% higher than they were a year ago. Pork prices, which gained more than other meats last year, will be a half-percentage point higher, rising 6.5% to 7.5% over 2010.  The USDA left unchanged its food-at-home inflation forecast that calls for grocery-store prices to run 3.5% to 4.5% more than they did a year ago.

Rising costs may mean an end to the era of cheap goods from China - The era of super-cheap Made-in-China goods may be over, as rising costs push the country's export prices to new highs.  Prices in February soared 11 percent from a year ago, surpassing the peak during the boom days before the global financial crisis, latest data showed.  Chinese goods are expected to get even more expensive this year, with some companies reportedly forecasting at least a 10 percent hike. All this has even set some Chinese officials warning that the country's days as the world's lowest-cost factory are drawing to an end.  Rising production costs have become an “irreversible trend” for small businesses, said Quan Zhezhu, party secretary of the All-China Federation of Industry and Commerce. He told a forum held by Peking University that the time of low labor and raw materials prices enjoyed by China's 10 million-odd small and medium enterprises (SMEs) is over.  From 2005 to last year, the average wage per month for migrant workers jumped 14 percent to 1,690 yuan (US$259).

Is the Wal-Mart Way the American Way? | "We need to uphold the law, we need to apply the law and we need to allow this project to move forward. I believe that not to do so would be un-American." So stated Rohnert Park (Sonoma County) City Councilwoman Amy Breeze last summer when the council voted to approve a controversial Wal-Mart supercenter--despite a year long campaign against the project by a broad coalition of labor, environmental, and community organizations. The Living Wage Coalition of Sonoma County challenges Ms. Breeze's definition of Americanism. Though we respect her point of view, we think she is dead wrong. Wal-Mart, we believe, has betrayed fundamental American values. As the largest retailer and private employer in America, no other company has such a profound impact upon our economy and labor markets. It is time for Wal-Mart to change, or face a growing opposition to its plan to build at least one supercenter in every county of California.

How Gasoline Price Hikes Affect Buying Choices - Economists got data on purchases of gasoline from a large grocery chain covering January 2006 through March 2009. As gasoline prices rose sharply in late 2007 through the summer of 2008, fewer and fewer people opted to buy higher octane midgrade and premium gasoline for their cars, and bought less expensive regular instead. (When prices fell in late 2008, the trend reversed, in spite of the worsening economic climate.) But what about other purchases? Because some customers held retailer loyalty cards with the grocery store, Hastings and Shapiro were able to track them, too. Specifically, they looked at purchases of half-gallon cartons of orange juice. The grocery chain carried five brands – four national ones and its own private label. They found that while rising gasoline prices led more people to buy regular, they didn’t prompt people to buy less expensive orange juice brands in an attempt to make back the money they were losing at the pump. “If anything, the direction of our estimates suggests that higher gasoline prices tend to increase the demand for higher-quality orange juice brands,” they write.

Prices Widening Confidence Gap Among Higher, Lower Income Groups - Income inequality is nothing new within the U.S. consumer sector, but the recession created a new split between those who managed to keep their jobs and those who didn’t. The gap is widening now that staples like energy and food are much more expensive. Consumer confidence edged up in April, but not everyone was happier. The gain in confidence was concentrated among those households earning $35,000 or more. The indexes fell among consumers with yearly incomes less than $25,000.One reason for the gap is that higher-income families have benefited more from the soaring stock market. Equity gains are helping to offset the accelerating drop in home values. Standard & Poor’s reported home prices in 20 major U.S. cities fell 3.3% during the year ended in February. Another explanation is the unequal sting from rising gasoline and food prices. Higher costs for these consumer basics are eroding overall household buying power, but higher-income families are better able to absorb the increases.

Our shoppers are 'running out of money' -- Wal-Mart's core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday. "We're seeing core consumers under a lot of pressure," Duke said at an event in New York. "There's no doubt that rising fuel prices are having an impact."  Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in. Lately, they're "running out of money" at a faster clip, he said. "Purchases are really dropping off by the end of the month even more than last year," Duke said. "This end-of-month [purchases] cycle is growing to be a concern. Wal-Mart, which averages 140 million shoppers weekly to its stores in the United States, is considered a barometer of the health of the consumer and the economy. To that end, Duke said he's not seeing signs of a recovery yet.

Thieves target truck tailgates for the steel - The rising cost of metal has some thieves targeting a heavy piece of steel. They're snagging tailgates off pickups in just seconds. Josh Griffin sells pickups to online buyers and then ships them across the country. Four of the trucks on his lot have been hit. It's a problem being reported around the country. Investigators believe the crooks sell the stolen tailgates online or at scrap yards.

Americans' Economic Confidence Declines Further - Gallup's Economic Confidence Index dropped to -39 in the week ending April 24 -- a new weekly low for 2011. This continues a downward trend that began in mid-February. The current deterioration of confidence contrasts sharply with the improving trend found at this time a year ago. Slightly more than one in four Americans said the economy is "getting better" last week. This measure has been declining since mid-February, and is now at its 2011 low. Far fewer Americans currently feel the economy is improving than held that expectation a year ago, when 41% said things were getting better. Just 12 months ago, economic confidence was improving and there was talk of "frugality fatigue." The U.S. saw a sharp spike in spending -- particularly among those with higher incomes -- during May 2010. Things were looking up for the nation's retailers and the economy as a whole until the debt crisis in Europe surfaced. This year, economic confidence is going in the opposite direction. There is an increasing danger of stagflation as prices surge and the economy slows. As a result, retailers and the economy could find it difficult to match last May's sales performance in 2011.

Personal Income and Outlays Report for March - The BEA released the Personal Income and Outlays report for March:  Personal income increased $67.0 billion, or 0.5 percent ... Personal consumption expenditures (PCE) increased $60.7 billion, or 0.6 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in March, compared with an increase of 0.5 percent in February. Real PCE was revised up significantly for both January and February. The following graph shows real Personal Consumption Expenditures (PCE) through March. PCE increased 0.5% in March, but real PCE only increased 0.2% as the price index for PCE increased 0.4 percent in March.  Note: Core PCE - PCE excluding food and energy - increased 0.1% in March. The second graph shows real personal income less transfer payments as a percent of the previous peak. This has been slow to recover - and real personal income less transfer payments declined slightly in March. This remains 3.1% below the previous peak.This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the March Personal Income report.

ATA Truck Tonnage Index Rose 1.7 Percent in March - The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.7 percent in March after falling a revised 2.7 percent in February 2011. The latest gain put the SA index at 115.4 (2000=100) in March, which was the highest level since January of this year (116.6).  In February, the index equaled 113.5. The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 123.3 in March, up 20.7 percent from the previous month.   Compared with March 2010, SA tonnage climbed 6.3 percent, which was higher than February’s 4.4 percent year-over-year gain, but below the 7.6 percent jump in January.  For the first quarter of 2011, tonnage increased 3.8 percent from the previous quarter and 6.1 percent from the first quarter 2010.

America's transport infrastructure: Life in the slow lane…America, despite its wealth and strength, often seems to be falling apart. American cities have suffered a rash of recent infrastructure calamities, from the failure of the New Orleans levees to the collapse of a highway bridge in Minneapolis, to a fatal crash on Washington, DC’s (generally impressive) metro system. But just as striking are the common shortcomings. America’s civil engineers routinely give its transport structures poor marks, rating roads, rails and bridges as deficient or functionally obsolete. And according to a World Economic Forum study America’s infrastructure has got worse, by comparison with other countries, over the past decade. In the WEF 2010 league table America now ranks 23rd for overall infrastructure quality, between Spain and Chile. Its roads, railways, ports and air-transport infrastructure are all judged mediocre against networks in northern Europe.

Fresh Reminders That The Economic Recovery Continues To Struggle - Is the labor market headed for a fresh round of trouble? Today’s weekly jobless claims report provides some new motivation for going over to the dark side on this question. The usual caveat applies, of course: divining the future from any one number in this volatile series can be misleading. Unfortunately, the jump in new filings for unemployment benefits is no longer an isolated data point. “It’s clearly disappointing,”. “It may be that the pace of improvement is slowing.”  "The trend over the past few weeks is clearly disappointing as signs were pointing to a more sustainable pick up in the labor market.” A chart of recent history tells the story. New filings jumped to a seasonally adjusted 429,000 last week—the highest since January. More worrisome is the recent rise in the four-week moving average for weekly claims, a trend that increased to more than 408,000 last week. Save for one week earlier this month, the four-week average has risen continually since this measure bottomed out in early March at just under 389,000. And while we’re reviewing distressing signals in this corner, let's note too that the four-week average is now above the 400,000 mark for the first time since February.

The word most politicians ignore: Jobs - What is it about the word “jobs” that our nation’s leaders fail to understand? How has the most painful economic crisis in decades somehow escaped their notice? Why do they ignore the issues that Americans care most desperately about? Listening to the debate in Washington, you’d think the nation was absorbed by the compelling saga of deficit reduction. You’d get the impression that in households across America, parents put their children to bed and then stay up half the night sifting through piles of think-tank reports on the kitchen table, trying to calculate whether there will be enough in the Social Security trust fund to pay benefits beyond 2037. And you’d be wrong. Those parents are looking at a pile of bills on the kitchen table, trying to decide which ones have to be paid now and which can slide. The question isn’t how to manage health care or retirement costs two decades from now. It’s how the family can make it to the end of the month.

The Wageless Recovery - Robert Reich - Much of Wall Street thinks inflation is now the biggest threat to the US economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession. The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones. The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking.Add to this the continuing decline in the value of the biggest asset most people own – their homes – and what do you get? Consumers who won’t and can’t buy enough to keep the economy going. That spells recession. Why doesn’t Wall Street get it?

One Million Exhausted Jobless Benefits in Past Year - Roughly one million people were unable to find work after exhausting their unemployment benefits over the past year, new data released Thursday by the Labor Department suggests. The back-of-the-envelope datapoint is yet another sign that the labor market remains weak, economists said. About 8.2 million idled workers were receiving unemployment benefits as of the week ended April 9, the Labor Department said in its weekly jobless claims report. That compares to about 10.5 million individuals at the same time last year, a decline of roughly 2.3 million people. Since the federal government estimates that the economy created 1.3 million jobs during the 12 months ended in March, economists said that slightly less people probably fell through the cracks and couldn’t find employment. “That leaves, roughly speaking, about one million people who have exhausted their unemployment benefits and have very likely not yet found a job,”

As One Million Exhaust Jobless Benefits, A Look At What Recent Deteriorating Layoff Trends Means - In addition to today's broad economic disappointment that once again nobody could have foreseen (save for a few comments from us back in January predicting just this most recent contraction), another incrementally negative development which will force the spin doctor to earn their overtime is the observation that over the past year at least 1 million unemployed have now officially fallen off the 99-week gravy train, and exhausted their entire jobless benefits. Luckily, for 10% of the US population there is the magically levitating S&P. For everyone else, there are foodstamps (for now).. and of course the worthless dollar. And in other news, Peter Tchir looks at the recent deplorable jobless claims numbers (wonder why you aren't hearing much about today's initial claims on CNBC? that's why) and comes to the following logical conclusion: 'Currently expectations for next Friday's NFP is 183k. I think the number will be 160k, but in this world it makes no difference since that will encourage belief in QE3 which will trigger dollar weakness which will cause stocks to go up. Since its hard to go long stocks with this logic, it leaves me looking at precious metals.' Tchir is not the only one doing so.

Number of the Week: Millions Set to Lose Unemployment Benefits - 5.5 million:

Americans unemployed and not receiving benefits The job market may be on the mend, but that’s not much consolation to millions of Americans facing a frightening deadline: the end of their unemployment benefits.The country’s unemployment rolls are shrinking fast, after expanding sharply last year as the government extended benefits to ease the pain of a deep economic slump. As of mid-March, about 8.5 million people were receiving some kind of unemployment payments, down from 11.5 million a year earlier, according to the Labor Department. Some people are leaving the unemployment rolls because they’re finding jobs. Many Americans, though, are simply running out of time. As of March, about 14 million people were unemployed and looking for work, according to the household survey. At the time the survey was done, about 8.5 million were receiving some kind of unemployment payments, according to the Labor Department’s Employment and Training Administration. That leaves about 5.5 million people unemployed without benefits, up 1.4 million from a year earlier.

Can't Get No Satisfaction? - Krugman - Today David Brooks argues that there is a disconnect between the improving economy and the increasingly despairing public, pointing to a deeper malaise. But is the economy really improving in a way that matters to voters? To be sure, there have been times when there was a clear disconnect between the economy and voter perceptions of the country’s direction. This was particularly true during the Bush years:  But I don’t think we need to look for deep reasons for our current malaise; it’s still a lousy economy, which has not created enough jobs to do more than keep up with population growth:  Yes, the unemployment rate has declined, but that is entirely the result of fewer people looking for work (you’re not counted as unemployed unless you’re actively searching.) And the plight of the unemployed has worsened, as prospects for finding a new job get ever more remote:

Chicago Fed Ties Jobless-Rate Drop to Lower Job Losses - The recent decline in the unemployment rate is being driven by a labor market where fewer people are losing jobs, as opposed to those finding new work, according to fresh research from the Federal Reserve Bank of Chicago. The paper, published Monday, seeks to understand why the unemployment rate has fallen so quickly in recent months. It has declined from 9.8% in November to 8.8% in March. That rapid drop has caught forecasters and many central bankers off guard, and it appears at odds with other data showing the still tepid level of job creation. The fast decline in the unemployment rate has left many economists unsure. There is no collective understanding of why this measure has appeared to improve so rapidly. Some have tied the drop to weak labor force participation and said the unemployment rate has fallen simply because the job market is so bad people are just giving up on finding work. But others reckon the monthly payroll data may be undercounting new hires, and argue the unemployment rate is telling an accurate tale of the economy’s improving prospects.

Good News: U.S. Labor Force Growth through 2020 Could Be Faster Than Widely Expected  - Macroeconomic Adviser’s modeling strongly suggests a more optimistic long-term trend in labor force growth than is widely expected.

  • We expect the labor force participation rate to rise from a little over 64% in early 2011 to 66% by the end of the decade.[1] Given projections of the adult population, MA’s forecasts could imply roughly 5 million more potential workers in 2020 than anticipated in recent projections from the Congressional Budget Office (CBO).
  • Faster labor force growth implies faster growth of potential GDP.
  • Faster growth of potential GDP and greater employment imply higher federal revenues and lower deficit-to-GDP ratios than a more pessimistic path.

McDonald’s Hires 62,000 in National Event, 24% More Than Planned -- McDonald’s, the world’s biggest restaurant chain, said it hired 24 percent more people than planned during an employment event this month.  McDonald’s and its franchisees hired 62,000 people in the U.S. after receiving more than one million applications, the Oak Brook, Illinois-based company said today in an e-mailed statement. Previously, it said it planned to hire 50,000.  The April 19 national hiring day was the company’s first, said Danya Proud, a McDonald’s spokeswoman. She declined to disclose how many of the jobs were full- versus part-time. McDonald’s employed 400,000 workers worldwide at company-owned stores at the end of 2010, according to a company filing. The number of applications for unemployment benefits in the U.S. rose last week, a sign that progress in the labor market may be fading. Jobless claims increased by 25,000 to 429,000 in the week ended April 23, the most in three months, according to data from the Labor Department in Washington today.

McDonalds Hires 62,000, Turns Away Over 938,000 Applicants For Minimum Wage, Part-Time Jobs - This is what the US economy has been reduced to: McDonalds reports that as part of its employment event to hire 50,000 minimum wage, part-time (mostly) workers, subsequently raised to 62,000 it received a whopping 1 million applications, or a Tim Geithner jealousy inducing 6.2% hit rate.  Alas, the US economy is now so pathetic that the bulk of the population will settle for anything. Literally anything. And the saddest part: over 938,000 applicants were turned away. Here's hoping to Burger King needs a few million janitors in the immediate future too. And yes, aside from reality, things in America are really recovering quite nicely.

75,000 Applied for 2,000 Local McJobs - A McJob looked mighty appealing to tens of thousands of people in the Chicago area. More than 75,000 job-seekers applied for 2,000 area positions with McDonald's during the fast food king's first-ever "National Hiring Day" on April 19.  Applicants packed franchises in Illinois, Southern Wisconsin and Northwest Indiana. McDonald's filled all 2,000 jobs, including more than 1,000 posts in the Chicago area alone, a McDonald's spokesperson said.  Oak Brook-based McDonald Corp. offered 50,000 positions nationwide as part of the April 19 job fair. The openings were for full- and part-time restaurant crew and management positions, which translate to about three or four new hires per store. Applicants were asked to apply at franchises or online.

Panasonic to axe thousands of jobs, close dozens of plants… (Reuters) - Japanese consumer electronics giant Panasonic Corp said it would cut another 17,000 jobs and close up to 70 factories around the world over the next two years in a bid to pare costs and keep up with Asian rivals. The maker of Viera TVs and Lumix cameras said it was aiming to trim its workforce of 367,000 at the end of last month to 350,000 by March 2013. The cull comes on top of nearly 18,000 job cuts made in the past business year, for a total of around 35,000 over three years."The figure is huge, but so is the company, and for an old-fashioned one like Panasonic, this is a big move," said Toru Hashizume, chief investment officer at Stats Investment Management in Tokyo.

Worse Than Inflation, Part I There are worse things than inflation, and we have them ~Jim Tobin From USA Today With three college degrees including an MBA and a resume boasting volunteer work and a 25-year stint at one company, Linda Keller is devastated by what employers see in her. "She’s lazy. She’s not doing anything. Her skills are out of date. She’s out of touch with reality," Keller rattles off. "That’s what hiring people think." That’s because Keller, 53, has one strike against her that’s hard to overcome in today’s ultracompetitive job market. She’s unemployed — and has been for 19 months. She’s among 4.4 million people nationwide who have been out of work for a year or more. The group makes up more than 40% of the total unemployed, the highest percentage since World War II.

Worse Than Inflation, Ctd - There are worse things than inflation and we have them ~James Tobin. From the NYT. Using more comprehensive data to nail down economic trends, the new study found a clear correlation between suicide rates and the business cycle among young and middle-age adults. That correlation vanished when researchers looked only at children and the elderly.

Everyone Is 'Middle Class,' Right? -  I’ve been complaining lately about how how surprisingly little Americans know about income distribution and their own place within it. Americans all seem to think they’re “middle class,” even those in the top 5 percent of all earners. As a result they frequently misunderstand what political mantras like “let’s tax the rich” really mean. But it turns out such income ignorance is not confined to Americans. A new working paper by Guillermo Cruces, Ricardo Pérez Truglia and Martín Tetaz finds that Argentinians also all believe themselves to be middle class, whatever their actual standing relative to their countrymen. The study is based on a March 2009 survey of 1,100 households representative of greater Buenos Aires. Researchers gathered data on respondents’ actual household income, and compared those numbers to respondents’ perceptions of their own rankings within the income distribution for all of Argentina. They found that everyone thought they were basically middle class.  Poor people consistently overestimated their rank, and rich people consistently underestimated their rank:

Rich Man, Poor Man -  Everyone thinks they're middle class. This isn't a big surprise: the word "rich" has specific connotations (servants, mansions on the Gold Coast, 200-foot yachts, etc.) and even someone making $200-300 thousand a year probably doesn't have any of that stuff. What's more, most people in that income range were likely raised middle class, so culturally they still think of themselves that way even if their incomes give them a pretty comfortable lifestyle. But Catherine Rampell notes something more interesting today. Researchers surveyed 1,100 households in Buenos Aires and asked them a purely objective question: what decile do you think your income puts you in? The bottom decile means you're part of the poorest 10%, the fifth decile means you're right in the middle, and the tenth decile means you're part of the richest 10%. Here's how things shook out:  Fascinating! The very poorest thought they were actually in the fourth decile — just barely below average. The very richest thought they were in the sixth decile — just barely above average.

In Equality We Trust? - Trust in other people greases the wheels of economic development. The management maven Steven Covey argues that high-trust companies are more successful than others. Higher incomes, in turn, seem to carry trust to higher levels. But as a recent Economix post by Catherine Rampell reports, cross-country surveys show that income inequality is negatively related to trust. Largely as a result, the average level of trust is significantly lower in the United States than in more egalitarian countries, particularly those of Scandinavia. And we seem to feel less trusting every day. A survey released at a recent World Economic Forum indicated that trust in both business and government had declined more steeply in the United States than in other countries as a result of the recent financial crisis. Have sharp increases in inequality in the United States since the 1960s made us more cynical and suspicious?

Inequalities and the ascendant right -The playing field seems to keep tilting further against ordinary people in this country -- poor people, hourly workers, low-paid service workers, middle-class people with family incomes in the $60-80K range, uninsured people, ....  75% of American households have household incomes below $80,000; the national median was $44,389 in 2005.  Meanwhile the top one percent of Americans receive 17% of total after-tax income.  And the rationale offered by the right to justify these increasing inequalities keeps shifting over time: free enterprise ideology, trickle-down economics, divisive racial politics, and irrelevant social issues, for example. Here is the trajectory of US income by quintile since 1965 (link); essentially no change in the bottom three quintiles over that 40-year period. Plainly the benefits of growth and productivity change in the national economy have benefited the top 40% of the population, and disproportionately have flowed to the top 5%.

Madness: Right-Wingers Are Serious About Trying to Undermine Child Labor Laws - The fact that we're debating the social benefits of child labor laws in the second decade of the 21st century casts the madness that's gripped our right-wing in sharp relief. It took a hard-fought, century-long battle to get compliant kids working for slave-wages out of American workplaces, and that battle was supposedly won 73 years ago during the New Deal. But according to Ian Milhiser, Supreme Court Justice Clarence Thomas has “called for a return to a discredited theory of the Constitution that early twentieth century justices used to declare federal child labor laws unconstitutional” in three separate decisions. In January, Senator Mike Lee, R-Utah, said that children's employment was a states' rights issue, and their regulation by the federal government is unconstitutional. Milhiser noted that “many GOP elected officials have embraced rhetoric suggesting” that they agree, but have stopped short of coming out and saying as much. The National Employment Law Project (NELP) announced this week that it is diverting attention from its primary task of advocating for the 14 million Americans without jobs to run ads in Maine against two measures that would significantly undermine the state's limits on child labor. 

Foster children would be allowed to get clothing only from second hand stores - Under a new budget proposal from State Sen. Bruce Casswell, children in the state’s foster care system would be allowed to purchase clothing only in used clothing stores. Casswell, a Republican representing Branch, Hillsdale, Lenawee and St. Joseph counties, made the proposal this week, reports Michigan Public Radio. His explanation? “I never had anything new,” Caswell says. “I got all the hand-me-downs. And my dad, he did a lot of shopping at the Salvation Army, and his comment was — and quite frankly it’s true — once you’re out of the store and you walk down the street, nobody knows where you bought your clothes.” Under his plan, foster children would receive gift cards that could only be used at places like the Salvation Army, Goodwill and other second hand clothing stores."

Black Unemployment At Depression Level Highs In Some Cities - More than two years later, Nolan is still looking for a job and feeling increasingly anxious about a future that once felt assured. Her life has devolved from a model of middle class African American upward mobility into an example of a disturbing trend: She is among the 15.5 percent of African Americans out of work and still looking for a job. For economists, that number may sound awful, but it’s not surprising. The nation’s overall unemployment rate sits at 8.8 percent and the rate among white Americans is at 7.9 percent. For a variety of reasons -- ranging from levels of education and continuing discrimination to the relatively young age of black workers -- black unemployment tends to run twice the rate for whites. Yet since the Great Recession, joblessness has remained so critically elevated among African Americans that it is challenging longstanding ideas about what it takes to find work in the modern-day economy.

More Black Men Now in Prison System than Enslaved in 1850 - “More African American men are in prison or jail, on probation or parole than were enslaved in 1850, before the Civil War began,” Michelle Alexander told a standing room only house at the Pasadena Main Library this past Wednesday, the first of many jarring points she made in a riveting presentation.  Alexander, currently a law professor at Ohio State, had been brought in to discuss her year-old bestseller, The New Jim Crow: Mass Incarceration in the Age of Colorblindness More Black Men Now in Prison System than Enslaved in 1850. Interest ran so high beforehand that the organizers had to move the event to a location that could accommodate the eager attendees. That evening, more than 200 people braved the pouring rain and inevitable traffic jams to crowd into the library’s main room, with dozens more shuffled into an overflow room, and even more latecomers turned away altogether.  Growing crime rates over the past 30 years don’t explain the skyrocketing numbers of black — and increasingly brown — men caught in America’s prison system, according to Alexander. “In fact, crime rates have fluctuated over the years and are now at historical lows.”

The rhetoric of closed borders: Why illegal immigration thrives - Illegal immigration is widespread. In 2008, approximately 12 million immigrants lived unlawfully in the US alone. This column argues that illegal immigration is largely a tale of political failure. It shows that governments find it best to “talk tough but do nothing”. By imposing quotas but not effectively enforcing them they can mislead the public that want a limit on migration while appeasing those who want more migrants.

Monday Map: State Income Tax Rates - Today's Monday Map shows the top statutory marginal income tax rate in each state, for tax year 2011.

Governor: $4.2 billion deficit, mandates provide little "wiggle room'' - Gov. Tom Corbett offered a visual image to show what the state is up against with a $4.2 billion deficit heading into the 2011-12 budget year. The governor said that someone could place $1,000 bills end to end from the Ohio line east across the Pennsylvania Turnpike and into New Jersey, near Atlantic City, before the bills totaling $4.2 billion would run out. And Corbett said Thursday, there isn't a lot of "wiggle room'' in the proposed state budget, with mandated programs forcing tough choices in other areas. Some of those tough choices are falling on subsidies for basic education and on state aid for higher education. But when asked about the proposed 50 percent cut in state funding for higher education, Corbett said the budget process is still playing itself out.

No sign of breakthrough as Minn. faces $5B deficit - With just four weeks left in the Minnesota legislative session, there's no sign that majority Republicans and Democratic Gov. Mark Dayton have come any closer to solving a $5 billion budget shortfall. The two sides remain divided on issues including taxes, spending levels and the process they will use to secure a deal. Newly muscular Republican caucuses are under pressure from tea party activists and conservatives who want them to stick to their plan to cut spending without raising state taxes, while Dayton's proposal for a new top income tax bracket has found little support in the Legislature -- even as Democrats say the budget can't be balanced without new revenue. On Monday, the day before lawmakers were due back at the Capitol after a weeklong holiday break, GOP leaders flew from St. Paul to seven other cities to build support for their plan and criticize Dayton's approach. While they were flying, Dayton was live on Minnesota Public Radio pointing out what he views as flaws in GOP spending proposals and underlining his campaign theme of taxing the wealthy.

Illinois faces $8 bln backlog of bills-comptroller (Reuters) - Illinois is on track to end fiscal 2011 with $8 billion in unpaid bills and other obligations, the state comptroller said on Wednesday. "After years of hand-wringing about the state's finances and deficit spending, here we are looking to end yet another fiscal year in the red," . The $8 billion owed to school districts, hospitals, and social service agencies, as well as for state employee health insurance and to cover $850 million in corporate tax refunds, would match the amount of unpaid obligations the state had at the end of fiscal 2010, according to the comptroller. Deferring payment of bills incurred in fiscal 2011 into fiscal 2012, which begins on July 1, would help perpetuate Illinois' structural budget gap despite a big income tax rate increase enacted earlier this year. Illinois' widening structural deficit, huge unfunded pension liability, inability to pay bills on time, cascading bond ratings, and its propensity to borrow its way out of financial problems have made the state a top concern in the $2.9 trillion U.S. municipal bond market.

Muni Mutual Funds See $583 Million Outflow In Latest Week -Lipper - Investors pulled $583 million out of municipal bond funds in the week ended Wednesday, Thomson Reuters unit Lipper FMI said Thursday.  The outflow comes on the heels of a $1.2 billion pullout in the week ended April 20. It marks the 24th straight week of outflows which in total amount to around $33.3 billion.  The four-week moving average--a more meaningful number because of the longer time span it measures--was an outflow of $959 million versus an outflow of $914 million in the previous four-week period.  The recent string of outflows has been a weakening factor in the $2.9 trillion municipal bond market, but it has been more than offset lately by relatively light new bond sale supply.  Generally speaking, the amount of money coming out of funds has been lessening since hitting a record $4 billion in the week ended Jan. 19. The outflows began in mid-November.

Moody's cuts New Jersey rating a notch on finances - The rating agency, which cut New Jersey by one notch to Aa3 from Aa2, also cited the Garden State's $31 billion public pension shortfall -- a $37 billion issue that forced downgrades across the country in recent months. Issuers prize high credit ratings because they allow them to borrow money more cheaply. "To voters, it means the fiscal house is not in order, and the question will be who to blame,"  Later on Wednesday, Fitch Ratings revised New Jersey's credit outlook to negative from stable, citing "mounting budgetary pressure" and a significant unfunded pension liability. Fitch currently rates New Jersey GOs AA."

S&P affirms rating and negative outlook for California - Standard & Poor's Ratings Services on Monday affirmed California's A-minus general obligation rating with a negative outlook, but warned any ratings downgrade would likely be related to liquidity problems. "The outlook on California's rating remains negative, mostly because of our view of the risk to the state's cash position in the coming months if state lawmakers are unable to reach the level of political consensus necessary to resolve the remaining projected budget deficit," the credit rating agency said in a statement. California lawmakers have so far agreed to spending cuts and other measures to tackle $11.2 billion of the state's $27 billion budget gap and S&P said that marked "good progress." But it added that a protracted stalemate in dealing with the remainder of the gap "could expose the state's liquidity to significant risk of being insufficient to fund all of the state's operations," possibly leading to aggressive cash management measures by the state controller.

Lessons from California: The perils of extreme democracy… CALIFORNIA is once again nearing the end of its fiscal year with a huge budget hole and no hope of a deal to plug it, as its constitution requires. Other American states also have problems, thanks to the struggling economy. But California cannot pass timely budgets even in good years, which is one reason why its credit rating has, in one generation, fallen from one of the best to the absolute worst among the 50 states. How can a place which has so much going for it—from its diversity and natural beauty to its unsurpassed talent clusters in Silicon Valley and Hollywood—be so poorly governed?  It is tempting to accuse those doing the governing. The legislators, hyperpartisan and usually deadlocked, are a pretty rum bunch.  But as our special report this week argues, the main culprit has been direct democracy: recalls, in which Californians fire elected officials in mid-term; referendums, in which they can reject acts of their legislature; and especially initiatives, in which the voters write their own rules. Since 1978, when Proposition 13 lowered property-tax rates, hundreds of initiatives have been approved on subjects from education to the regulation of chicken coops.

Brown May Take $11 Billion California Tax Extension to Voters - California Governor Jerry Brown said he’s willing to gather signatures for a voter initiative to extend $11 billion in expiring tax increases, blocked by Republican lawmakers, in order to balance the state’s budget. “We are going to put it before the people one way or another,” the 73-year-old Democrat said in an interview. The governor worked with lawmakers to reduce the $26.6 billion budget shortfall to about $15 billion through cuts to health care, education and other programs. The linchpin of his plan would fill $11 billion of the remaining gap by getting voter approval of a five-year extension of tax and fee increases due to expire by July 1. The proposal fell short when Republican lawmakers withheld support. Brown has since been traveling up and down California, the most populous state, trying to persuade at least two Republicans each in the Senate and Assembly to change positions, which would be enough to allow a vote.

Massachusetts Dems Pass Bill to ‘Eliminate Collective Bargaining as We Know It’ - Last night, the Massachusetts House of Representatives overwhelmingly passed a bill (111-42) to strip public-sector workers of their ability to bargain collectively for healthcare. The rhetoric surrounding the bill, proposed by Democratic State House Speaker Robert A. DeLeo, is in many ways similar to what Wisconsinites recently heard as Gov. Walker pushed his infamous unionbusting bill. But how could a state in which Democrats control both the State House and the Governor’s mansion be pushing a bill that attacks workers’ rights to collectively bargain? The State of Massachusetts currently faces a budget deficit of $1.9 billion. House Democrats say that by limiting the collective bargaining rights of public employees over healthcare they can save the state $100 million a year. And many Democrats, who have been supported by labor unions in the state, passed it.

Union busting in Massachusetts?!? - Do not attempt to adjust your computer're reading the headline correctly... House lawmakers voted overwhelmingly last night to strip police officers, teachers, and other municipal employees of most of their rights to bargain over health care, saying the change would save millions of dollars for financially strapped cities and towns.  The 111-to-42 vote followed tougher measures to broadly eliminate collective bargaining rights for public employees in Ohio, Wisconsin, and other states. But unlike those efforts, the push in Massachusetts was led by Democrats who have traditionally stood with labor to oppose any reduction in workers' rights.  "It's pretty stunning,'' said Robert J. Haynes, president of the Massachusetts AFL-CIO. "These are the same Democrats that all these labor unions elected. The same Democrats who we contributed to in their campaigns. The same Democrats who tell us over and over again that they're with us, that they believe in collective bargaining, that they believe in unions... . It's a done deal for our relationship with the people inside that chamber.''  "We are going to fight this thing to the bitter end,'' he added. "Massachusetts is not the place that takes collective bargaining away from public employees.''

The Right-Wing Network Behind the War on Unions - From New Hampshire to Alaska, Republican lawmakers are waging war on organized labor. They're pushing bills to curb, if not eliminate, collective bargaining for public workers; make it harder for unions to collect member dues; and, in some states, allow workers to opt out of joining unions entirely but still enjoy union-won benefits. All told, it's one of the largest assaults on American unions in recent history. Behind the onslaught is a well-funded network of conservative think tanks that you've probably never heard of. Conceived by the same conservative ideologues who helped found the Heritage Foundation, the State Policy Network (SPN) is a little-known umbrella group with deep ties to the national conservative movement. Its mission is simple: to back a constellation of state-level think tanks loosely modeled after Heritage that promote free-market principles and rail against unions, regulation, and tax increases. By blasting out policy recommendations and shaping lawmakers' positions through briefings and private meetings, these think tanks cultivate cozy relationships with GOP politicians. And there's a long tradition of revolving door relationships between SPN staffers and state governments. While they bill themselves as independent think tanks, SPN's members frequently gather to swap ideas. "We're all comrades in arms," the network's board chairman told the National Review in 2007.

Wanna Buy a Turnpike? - Right now you’re probably asking yourself: How are all the angry new governors doing? Great! Fear and loathing may abound, but it’s business-friendly fear and loathing. In Ohio and Wisconsin, angry new governors John Kasich and Scott Walker are taking economic development out of the hands of state bureaucrats and giving the job to new quasi-private entities that will be much more effective and efficient.  In Florida, where the Legislature did all that in the 1990s, the angry new governor Rick Scott has a bold plan to improve economic development by creating a State Department of Commerce that will be much more effective and efficient.   “We don’t want to leave any money on the table,” said Kasich, who is planning to sell five prisons, the lottery and maybe do something with the turnpike. I’m from Ohio, and while I never did like the turnpike, I’ve always been a fan of history. I wonder if I could get a good deal on the Warren Harding homestead.

How to Destroy a Society - Republicans and their hyper-rich supporters are engaged in an all-out effort to destroy government and the institutions that support it. Rick Snyder in Michigan destroys local governments. John Kasich in Ohio and Scott Walker in Wisconsin wreck unions in order to cut the pay of teachers, police and firefighters. The House, run by the Tea-GOP, wants to cut every social program, every federal initiative that improves the lives of humans, and most regulations. The unifying theme is the simplification of the structure of society, leaving individuals to struggle against one another for resources, instead of cooperating to improve the lives of average citizens. I’ve been wondering whether the people behind this movement, people like the Koch brothers, the Scaifes, the Mellons, the Waltons and other rich people who inherited the money they spend freely in the cause, are even slightly worried about the fact that most Americans are armed. There is some evidence that they are. For example, one of Jamie Dimon’s perks is a home security system that cost the shareholders of JPMorgan Chase $17,052 last year (page 25 of 2011 proxy ). Gerard Arpey, the CEO of the money-losing American Airlines, got $56,440 from shareholders to pay for “security for his family.”

Deborah Popper on "Subtracted Cities" - She writes about how shrinking cities can take control of their destinies, while being realistic about what those destinies imply: Detroit stands as the ultimate expression of industrial depopulation. The Motor City offers traffic-free streets, burned-out skyscrapers, open-prairie neighborhoods, nesting pheasants, an ornate-trashed former railroad station, vast closed factories, and signs urging "Fists, Not Guns." A third of its 139 square miles lie vacant. In the 2010 census it lost a national-record-setting quarter of the people it had at the millennium: a huge dip not just to its people, but to anxious potential private- and public-sector investors. Is Detroit an epic outlier, a spectacular aberration or is it a fractured finger pointing at a horrific future for other large shrinking cities? Cleveland lost 17 percent of its population in the census, Birmingham 13 percent, Buffalo 11 percent, and the special case of post-Katrina New Orleans 29 percent. The losses in such places and smaller ones like Braddock, Penn.; Cairo, Ill.; or Flint, Mich., go well beyond population. In every recent decade, houses, businesses, jobs, schools, entire neighborhoods -- and hope -- keep getting removed.

Mayor: Cleveland must cut up to 400 jobs by end of May due to reduced state aid - Cleveland Mayor Frank Jackson says the city must cut its work force by 350 to 400 employees by the end of May as a result of planned cutbacks in state aid.  The mayor announced the cuts in an email sent this afternoon to news media outlets. He said in the email that under the two-year state budget proposed by Gov. John Kasich, the city will lose $35.7 million in state aid by the end of 2012. Mayor Jackson on April 6 warned of the potential for layoffs due to reduced state support.  To balance the city's $512 million budget for the rest of 2011 and to prepare for 2012, Mayor Jackson said, the city must make up to 400 job cuts. His email statement did not specify the types of jobs that will be cut, but it indicated the reductions will include full-time, part-time and seasonal employees.

LA Mayor Villaraigosa orders more furloughs after workers reject deal - Los Angeles Mayor Antonio Villaraigosa on Wednesday ordered more than seven weeks of unpaid furlough days for thousands of city workers after they rejected a labor union deal. The mayor imposed the furloughs for workers who refused to defer pay raises and increase contributions to their retirement healthcare plans. “I am not some tough guy behind a podium. I don’t relish doing this," Villaraigosa said. "I have no choice.”  The mayor said the city must furlough these workers to help address a $460 million deficit. Clerical workers, assistant city attorneys and 911 operators among others face 42 unpaid furlough days. City officials said they're still figuring out how many workers would face furloughs, but the number would be in the thousands.The mayor said the furloughs would mean "diminished city services."

Budget will be all pain, no gain: Mike - After weeks of issuing dire warnings that large-scale layoffs are coming, Mayor Bloomberg declared yesterday that when the numbers are finally released next week they'll be "very painful."  He offered no specifics, but indicated there's not much hope of a reprieve once his $65.6 billion executive budget for fiscal 2012 is made public May 5.  The mayor laid the blame on Albany and Washington, which he asserted had left the city with about $3 billion less in aid than it needs and was counting on.  He suggested that demonstrators planning a massive rally on Wall Street May 12 to protest his budgets cuts would be better suited directing their anger at the state and federal governments.  "New York City has to balance its budget by law," he said. "We will go ahead and do that, you can rest assured. And it will be very painful because we have a lot less money, which means a lot fewer people."

Tornado Slams Jefferson County Contemplating Bankruptcy - Jefferson County, Alabama, already on the brink of bankruptcy, faces another emergency after a tornado ripped through the state’s most populous county, destroying 1,000 homes and killing at least 30 people.  The county of 660,000 people, which may run out of cash in July, was devastated yesterday when a tornado with winds of more than 100 miles an hour (161 kilometers an hour) tore through the west side and then slammed into Birmingham’s northern neighborhoods. More than 100 people were injured.  Police, firefighters and public-works crews from the county’s more than 40 municipalities have started search-and- rescue operations, and the death toll and injuries will probably climb, said Mark Kelly, a spokesman for Jefferson County’s Emergency Management Agency. At least 1,000 homes in Jefferson County were “flattened and unliveable,” said Allen Kniphfer, the agency’s executive director.

Sacramento budget proposes deep cuts for police, fire departments - This is the budget Sacramento City Hall has been dreading. Roughly 80 police officers stand to lose their jobs under a budget plan to be released today, part of a proposal from the interim city manager that would cut $32 million in spending across city departments. The cutbacks proposed for the Police Department, which currently employs 700 uniformed officers, would spare little beyond patrol officers. The proposal calls for eliminating the gang, narcotics, auto-theft and Problem Oriented Policing (POP) units; police presence in city schools would be cut by 25 percent.  Under the proposal, six Fire Department rigs would be out of service at any given time on rotating brownouts, up from two currently. And of the city's 15 community centers, all but three – South Natomas, Coloma and Pannell – would close.

Christie v. Court: Is threat for real? - Just how powerful is he? Gov. Christie said last week that he had mulled defying a possible order from New Jersey's Supreme Court to restore funding to schools. The statement, on a call-in radio show, left legal scholars wondering whether this was the Republican governor just spouting threats and bluster - or foreshadowing an unprecedented break with tradition.If Christie ignores the ruling, scholars said, he could be ruled in contempt of court and personally fined, he could be impeached for violating his oath of office, or he could trigger a constitutional crisis and the statewide closing of schools. Or maybe nothing would result, and voters would be left to decide whether to reelect a governor who overruled the highest court in his state in the name of fiscal prudence.

Philadelphia Schools To See 16% Layoffs - Facing an "unprecedented" fiscal crisis, the Philadelphia School District could shed 3,820 employees - 16 percent of its workforce - and is planning for more painful cuts, including losing full-day kindergarten, officials said Wednesday. At a hearing on the district's $2.7 billion budget, Chief Financial Officer Michael Masch told the School Reform Commission (SRC) that to close a $629 million gap, the district must also make painful trims in areas ranging from gifted and alternative education to transportation and counselors. Class sizes will go up; individual school budgets will go down. A still-soft economy, flat city revenues, and sharp cuts in state aid combined with the loss of federal stimulus money have hit the district of 155,000 students hard, Masch said.

Philly schools may cut nearly 1300 teachers - The Philadelphia public schools will have to cut 3,800 jobs -- including almost 1,300 teachers -- if the governor's planned budget cuts are approved. District Chief Financial Officer Michael Masch said Wednesday that the schools face a $292 million loss in state aid, creating a $629 million deficit overall. Masch says the district will have to lay off 16 percent of its work force. That includes 12 percent of its teachers plus hundreds of aides, custodians and central office staff. The district serves about 154,000 students, not including those in charter schools. Republican Gov. Tom Corbett has proposed $1.1 billion in education cuts statewide to help close a budget gap. Lawmakers have indicated the reductions are too steep, but they have not yet agreed on a counterproposal.

$69 million deficit projected for Elk Grove Unified in 2013 - The Elk Grove Unified School District (EGUSD)’s financial future looks bleaker. An accumulated deficit of $69.7 million is projected for the 2013-14 school year. The district may go deep in the red as soon as next summer if state education cuts persist.  That’s the worst-case scenario that district staff presented to the school board during their April 26 meeting. Several trustees expressed their frustration at state legislators and Trustee Pam Irey pointed at the city of Sacramento’s fight to stop the Sacramento Kings from moving to Anaheim. “Nothing irks me more than to watch a city fight over the Kings and try to raise that money for a sports team,” she said. “Why is it in that (school) district as well are they not fighting for their education?”

PS.D. schools plan for doomsday budget - San Diego schools chief Bill Kowba is preparing for a “doomsday budget.” The San Diego Unified School District is already poised to take a $114 million hit in cuts and layoffs next year to cope with the state’s relentless fiscal crisis. Tuesday, Kowba will discuss what he calls a doomsday budget, a spending plan that includes up to $50 million in additional cuts to next year's $1.04 billion budget. Kowba will hold a news conference to discuss a worst-case scenario in which the state directs the district to eliminate an additional $35 million to $50 million from next year’s budget. Potential cost-cutting measures include shortening the school year and layoffs. Meanwhile, the school board is set to pass a resolution on Tuesday that calls on legislators representing San Diego Unified to reject any state budget that calls for any further cuts to education spending.

Another Educational Milestone for Women: They Now Hold More Graduate Degrees Than Men - The Census Bureau released its annual report today on educational attainment in the United States for 2010 (here's the press release, here are the tables). In another educational milestone for women, they now hold more advanced degrees (Master's, Professional [medical, law and dental] and Doctoral) than men for the first time in history (see chart above).   A decade ago, 55.4% of all advanced degrees were held by men and 45.6% by women, meaning that there were 124 men with advanced degrees for every 100 women.  But over the last ten years, the number of advanced degrees earned by women increased by 58%, or more than twice the 26% increase for men.  That disproportionately large increase in women earning graduate degrees since 2000 brought the total number of female advanced degree holders in 2010 to 10,685, surpassing the number of men holding graduate degrees (10,562) for the first time ever.

Census Bureau Report: More Than 6 in 10 Advanced Degree Holders Between Ages 25-29 Are Women - From yesterday's Census report on educational attainment, the chart above shows the college degree gap in favor of women for all levels of higher education for age group between 25-29.  More than 60% of advanced degrees are now held by women for that age group, up by more than three percentage points from the 58.2% reported by Census for 2009.  For African-Americans ages 25-29,  there are 239 women holding advanced degrees for every 100 men with graduate degrees (70.5% female vs. 29.5% male).  

n+1: Bad Education - The Project On Student Debt estimates that the average college senior in 2009 graduated with $24,000 in outstanding loans. Last August, student loans surpassed credit cards as the nation’s largest single largest source of debt, edging ever closer to $1 trillion. Yet for all the moralizing about American consumer debt by both parties, no one dares call higher education a bad investment. The nearly axiomatic good of a university degree in American society has allowed a higher education bubble to expand to the point of bursting. Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation. To put that in number in perspective, housing prices, the bubble that nearly burst the US economy,  then the global one, increased only fifty points above the Consumer Price Index during those years. But while college applicants’ faith in the value of higher education has only increased, employers’ has declined. What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?

Higher Education Fact Of The Day -- Malcom Harris in N+1: If current trends continue, the Department of Education estimates that by 2014 there will be more administrators than instructors at American four-year nonprofit colleges. I don’t agree with the entirety of the analysis, which I think makes too much out of the details of student loan financing and does too much bending over backwards to avoid offending the sensibilities of college professors and wannabe professors, but this is dead on: These expensive projects are all part of another cycle: corporate universities must be competitive in recruiting students who may become rich alumni, so they have to spend on attractive extras, which means they need more revenue, so they need more students paying higher tuition. For-profits aren’t the only ones consumed with selling product. Something to note is that to a large extent this is something that we have the ability to change as a society. A lot of the dysfunction is driven by donor dynamics, and donor dynamics are driven by the fact that donating money to a highly ranked college is considered a praiseworthy thing to do. That sets off the destructive rankings-driven quality-indifferent cycle of competition that we’re stuck with.

Student loan shark industry - College sticker shock is probably stunning many parents as college aged students now sign their intent to register at thousands of schools across the country.  You can almost feel the panic when Johnny or Suzie tells mommy and daddy she is going to University of Break the Bank while they watch their home equity plummet.  What should be a proud time is now becoming a scary prospect for many parents looking at backbreaking student loan debt.  If not the parent, many teenagers are looking at going into debt similar to taking on a mortgage without even owning a brick and mortar house.  Many private schools now charge $50,000 or more per year in tuition and fees.  Given that the average annual income for an American worker is $25,000 this one year cost is daunting.  In the past if you picked the wrong major or school you ended up with a nice looking piece of paper and a likely opportunity to work in the blue collar world as a backup earning a relatively decent income.  Today, pick the wrong career and school and not only do you have that same piece of paper but you also have limited prospects in finding even a basic job to service your college debt, forget about paying the rent or filling up your car with $4 a gallon gas.  To expect teenagers to pick the right college and have their lives figured out early on is a bit much to ask.  Students in the past did not have this same albatross hanging over their head.  The big problem now is the massive cost of college.

Dramatic rise in WI teacher retirements linked to collective bargaining changes | The Raw Story: "Hundreds of Wisconsin teachers have announced their intention to retire in June of this year, in much higher numbers than in normal years. Many of them cite Governor Scott Walker's proposed changes to public employees' collective bargaining rights as the reason. Madison school superintendent Dan Nerad says that his district is losing teachers because they fear that Walker's plan will cut deeply into post-retirement benefits for public employees. The district will fill the positions as quickly as it can, but Nerad believes that students and novice teachers will feel the effects of losing so many seasoned educators. 'Our intention is to replace them with knowledgeable people,' he said, 'but as a rule they will be less experienced.' School districts across the state are reporting higher than usual numbers of teacher retirements. Middleton-Cross Plains superintendent Don Johnson said, 'Although there is no current evidence that the state system would change in the near term, staff is still concerned.' Teachers are not the only profession seeing higher than average numbers of retirees. Overall, public employee retirement rates have jumped more than 80% since last year.

Public Pensions, Once Off Limits, Face Budget Cuts - When an arbitrator ruled1 this month that Detroit could reduce the pensions being earned by its police sergeants and lieutenants, it put the struggling city at the forefront of a growing national debate over whether the pensions of current public workers can or should be reduced.  Conventional wisdom and the laws and constitutions2 of many states have long held that the pensions being earned by current government workers are untouchable. But as the fiscal crisis has lingered, officials in strapped states from California3 to Illinois4 have begun to take a second look, to see whether there might be loopholes allowing them to cut the pension benefits of current employees. The mayors of some hard-hit cities have said that the high costs of pensions have forced them to lay off workers: Oakland, Calif., laid off one-tenth of its police force last year after failing to win concessions on pension costs.  Elsewhere there is pension envy: some private sector workers, who have learned the hard way that their companies can freeze or reduce their pensions, resent that the pensions of public workers enjoy stronger legal protections. But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game.

US States Pension Fund Deficits Widen by 26%, Pew Center Study Says - U.S. states’ deficits in their employee retirement systems widened by 26 percent in fiscal 2009 as governments were stung by investment losses and failed to pay enough into their pension funds, a study found.  The deficits, or the difference between the retirement and health-care benefits states have promised their employees and the assets set aside to fund them, grew to $1.26 trillion by the end of the 2009 budget year from $1 trillion a year earlier, the Pew Center on the States said in a report released today. The fiscal year ends in June for all but four states.  The gaps are straining governments that have yet to fully recover from the recession and are stoking political fights in states such as New Jersey, Ohio and Wisconsin over the workers’ benefits. They have also drawn scrutiny in Congress, where Republicans have held hearings into the risks posed by underfunded pensions and backed legislation that would bar the federal government from bailing out any ailing funds.  “The states dug themselves a big hole before the recession ever hit,”

State retiree benefits gap grows to $1.26 trillion - States are $1.26 trillion in the hole when it comes to their pension and retiree health obligations, according to a report released Tuesday.  And taxpayers are ultimately on the hook for this shortfall, which soared 26% in one year.2 The Great Recession has wreaked havoc on states' pension and retiree health systems, the Pew Center on the States found. The report covers fiscal year 2009, which began July 1, 2008 in most states. States are largely responsible for this predicament. As tax revenues plummeted, many skipped part or all of their annual retiree benefits contributions as they struggled to pay for education, Medicaid and other services.  "Far too many states have not responsibly managed the cost of retirement benefits, effectively running up the price for taxpayers," said Susan Urahn, the Pew Center's managing director. States only contributed a total of 64% of the nearly $115 billion their actuaries recommended they put in their pension funds for that year, the center said. They now face a $660 billion gap in these accounts.

Nest egg is missing for N.J. public worker retirees - New Jersey’s price tag for public-worker retirement health benefits is higher than any state in the nation, according to a study to be released today by the Pew Center on the States. New Jersey has promised $66.7 billion in medical benefits to future and current retirees, but has not set aside a single penny to pay for it, according to the study, which looked at 2009 financial data from all states. New Jersey’s unfunded liability — the gap between what is owed and what’s been saved — is higher than the nation’s most populated states of California ($66.5 billion), New York ($56.2 billion) and Texas ($53.8 billion). In fact, New Jersey’s unfunded liability accounts for 11 percent of the combined $604 billion accrued by all 50 states, the study shows.

In U.S., 53% Worry About Having Enough Money in Retirement - A majority of nonretired Americans do not think they will have enough money to live comfortably in retirement, up sharply from about a third who felt this way in 2002. Nonretired Americans now project that they will retire at age 66, up from age 60 in 1995. Younger Americans are the most optimistic about having enough money to live comfortably when they retire. They are also the least likely to say they will rely on Social Security as a source of income when they retire. This suggests that young Americans are looking optimistically toward other sources of income in retirement. Nonretired Americans now project a higher retirement age than in previous years. When Gallup first asked nonretired adults in 1995 when they expected to retire, 12% said they would retire after age 65. That percentage is now up to 37%. The percentage saying they will retire before age 65 is down from 47% in 1995 to 28% today.

Americans raiding retirement funds early - Nearly one-fifth of full-time employed Americans have raided retirement accounts in the past year to cover emergencies, according to a national Bankrate survey. Despite increasing signs of a stabilizing U.S. economy, 19 percent of Americans -- including 17 percent of full-time workers -- have been compelled to take money from their retirement1 savings in the last year to cover urgent financial needs, the Financial Security Index found.Though 80 percent of full-time workers didn't dip into retirement funds, far too many consumers are ill-prepared for emergencies, says Kim McGrigg, manager of community and media relations at Money Management International, a credit counseling agency."Perhaps the most alarming thing about these numbers is that they suggest a lack of other options," she says. "Consumers generally consider using retirement funds only as a last resort."

The New Ideal Retirement Age - A decade ago many people strived to retire young. Now most people are nudging back their retirement date and wondering if they will be able to retire at all. The age workers expect to retire has increased from an average of 60 in 1995 to 66 today, according to a new Gallup poll of 1,077 adults. Most Americans now expect to retire at age 65 or later. Over a third (37 percent) of workers plan to retire after age 65, up from just 15 percent in 1995. Retirement at exactly age 65 also remains a popular choice. A quarter of employees plan to retire at age 65, down only slightly from 29 percent in 1995. Early retirement is no longer a goal for most workers. The proportion of employees aiming to retire before age 65 has steadily declined from half of workers in 1995 to about a quarter (28 percent) in 2011. Just 5 percent of workers are striving to retire before age 55, down from 15 percent in 1995.

Today’s Social Security Fact: It Doesn’t Contribute to the Deficit… When deficit reduction is brought up, you can bet Social Security will be mentioned in the next breath. You might think that this means the program is one of the biggest contributors. But the reality is that it doesn’t contribute one cent. The program has low overhead cost for a retirement plan, is closely monitored to address potential deficits in the future, and is “purchased with funds deducted from the pay of workers and backed by the full faith and credit of the United States,” as Nancy Altman writes. To get the full scoop on why lowering Social Security benefits is a deficit red herring, read her full post: “To Deficit Hawks: We the People Know Best on Social Security.” It’s part of our series “Social Security’s Fiscal Fitness.”

Telling the Real Story on Social Security - In political debates and media reports, the dialog on Social Security has recently focused on budget numbers. The program is often mistakenly tied to the deficit despite the fact that by law it cannot borrow money to pay for benefits and thus cannot contribute to the deficit. But the bigger story is being missed: the fact that Social Security directly affects the lives of many Americans including seniors, the disabled, and widows and children who are eligible for survivor benefits.   Fundamentally, once a person becomes eligible as a permanently disabled worker, retiree, or spouse or widow of a retiree, benefits last as long as one lives and are adjusted for inflation each year. While the benefits of Social Security are especially important to women because of their lower lifetime earnings and longer lives, men are becoming increasingly reliant due to shifts in retirement saving patterns and the recent severe recession. Many children, whose parents have died or become disabled, rely on Social Security insurance benefits, as do disabled children, including the adult disabled children, of working parents or grandparents who worked.

Social Security goes paperless, saves money - The Social Security Administration is saying goodbye to the paper check. Beginning Sunday, anyone who signs up for Social Security benefits will have to choose an option for receiving their payments electronically.   The two major choices for electronic payments are direct deposit, in which the government directly transfers your payment into your bank account, and a Direct Express card. That’s a debit card that automatically will be loaded up with your payment each month and doesn’t require a bank account. The Direct Express card won’t carry a monthly fee, although you may be charged fees for certain transactions. You can find details on potential charges here.

House Republicans face backlash at home over budget plan - Congress is on its first recess since Republican leaders unveiled a plan to end the federal deficit by dramatically changing Medicare, cutting other government programs and reducing taxes. With members of the House returning home to meet with constituents, politicians have been anxiously looking for signs of trouble. On both sides, strategists remember that nearly two years ago, town hall meetings revealed the first stirrings of a conservative rebellion against President Obama's healthcare plan. That uprising eventually helped sweep a GOP majority into control of the House. The signs over the last week have been mixed. Republicans heard their core supporters urging them to take strong stands and hold fast on the next big budget fight — the debate over raising the federal debt limit.

Republicans Just Voted To End Medicare — So Where’s The Outrage? - Members of Congress are back in their districts, attending town hall events, explaining to their constituents why, exactly, they want to make such major changes to the health care system.  If that sounds familiar, you might be wondering if we're in for August 2009 redux. That was when conservatives and tea party activists caused mayhem at Democratic town hall events and sowed doubt in the minds of members and the media about whether the push for health care reform was really viable. Now, Republicans have their sites set on Medicare and Medicaid, and just voted, almost to a person, to basically zap both programs.  So are we in for a repeat? Don't bet on it. So far this week, we've seen a handful of video clips showing Republicans being interrogated by constituents -- experiencing mild discomfort, but nothing like the genuinely frightening scenes two years ago, when large groups of coordinated, angry activists forced members to call off and cancel events.

GOP Reps Ryan, Webster face screaming anger at town halls - In the words of MSNBC host Rachel Madddow, House Republicans are in the midst of a “collective freakout” over the public’s reaction to Rep. Paul Ryan’s (R-WI) budget plan, which cleared the House right before Congress went on vacation.  Among other items, Ryan’s budget would significantly cut Medicare spending, eventually phasing it out in exchange for a coupon program that would only cover a small percentage of seniors’ medical bills.  Four Republicans voted against it, and not a single Democrat voted for it.  Now, Republicans are starting to catch the anger that Democrats caught in 2009 in the midst of their push for President Obama’s health care reforms. In two of the most recent examples, Reps. Ryan and Webster (R-FL) were confronted by angry crowds demanding to know why they had voted to cut Medicare.

Town Hall Meetings on the Ryan Budget Raise Concerns - Linda Beale - Various congressional representatives held town hall meetings recently, and the news channels and print media were abuzz with the lively give-and-take, including shouting matches. See, e.g. Republicans facing tough questions over Medicare overhaul in Budget Plan, Washington Post. The issue--the House's adoption of the Ryan budget proposal and its clear agenda of overturning New Deal safety nets embodied in the current understanding of Medicaid, Social Security and Medicare. Those at or near retirement are worried that the Ryan proposal will hurt everybody. The Ryan proposal comes with frequent disclaimers about protecting the already older population and needing to act now to protect our grandchildren, a clear effort to massage the message to appeal to current grandparents. See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011 (noting Webster's statement that "not one senior citizen is harmed by this budget" while implying that it is necessary to prevent grandchildren from "looking at a bankrupt country"); Congressional Republicans go home to mixed reveiws,, Apr. 26, 2011 (noting North Carolina GOP Rep. Renee Ellmers'claim that "If you're 55 and older, your Medicare and Social Security will not change").

Raising the Medicare Age - Krugman - Jonathan Cohn rightly slams a little-noticed feature of the Republican plan — a rise in the Medicare eligibility age.  In general, the fervor with which Washington types call for raising eligibility ages is a “tell”: it shows how disconnected they are from the way the other half lives (and dies). For in our increasingly polarized society, life expectancy is more and more a class-related issue. As the Social Security Administration has shown, the gap between life expectancy in the top and bottom halves of the wage distribution has risen sharply:   And by the way, Social Security eligibility has already gone up one year, and is scheduled to rise by another. Add to this what I believe to be true, which is that rising life expectancy has not gone hand in hand with a rising age before costly conditions become common; Cohn shows that adding 65 and 66-year olds to the private insurance pool would cause a devastating rise in costs.

What if Medicare required a living will? - Andrew Sullivan has a proposal to lower health-care costs that actually makes some sense. “If everyone aged 40 or over simply made sure we appointed someone to be our power-of-attorney and instructed that person not to prolong our lives by extraordinary measures if we lost consciousness in a long, fatal illness or simply old age,” he writes, “then we’d immediately make a dent in some way on future healthcare costs. A remarkable proportion of healthcare costs go to the very last days or hours of our lives.”  His idea is voluntary. But I’d make a different suggestion. What if, to be eligible for Medicare, you had to give someone power of attorney and sign a living will? You could tell your attorney, and write in your will, that you want every possible measure employed to keep you alive. You could say cost is no object, and neither is pain or quality of life. You could make whatever choice, and offer whatever instructions, you want. You just have to do it. You have to make the decision.

Americans depend more on federal aid than ever Americans1 depended more on government assistance in 2010 than at any other time in the nation's history, a USA TODAY analysis of federal data finds. The trend shows few signs of easing, even though the economic recovery is nearly 2 years old. A record 18.3% of the nation's total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs in 2010. Wages accounted for the lowest share of income — 51.0% — since the government began keeping track in 1929.The income data show how fragile and government-dependent the recovery is after a recession that officially ended in June 2009.The wage decline has continued this year. Wages slipped to another historic low of 50.5% of personal income in February. Another government effort — the Social Security payroll tax cut — has lifted income in 2011. The temporary tax cut puts more money in workers' pockets and counts as an income boost, even when wages stay the same.

Obama Denies Vermont Healthcare - "Vermont is one step-closer to becoming the first state to set up a truly universal, single-payer health care system. The Vermont Senate passed the new healthcare bill yesterday - following in the footsteps of the state House that passed the bill last month. Now - it just needs to be signed into law by Governor Peter Shumlin who's already expressed his support for the measure. There IS one last step though - Vermont would need to secure a waiver to opt out of Obamacare in order to build its own healthcare system. "A handful of lawmakers have introduced legislation to allow states - in particular Vermont - to drop out of Obamacare if they prove they can cover just as many people with insurance as the law would have without adding to the deficit. But surprise, surprise, Republicans don't like the idea. That's right - after bashing Obamacare for 2 years - they don't want to let states drop out of it. What happened to their whole "state's rights" platform - does that only apply to stuff like abortion and gay marriage - and not to giving people free healthcare? The truth is - Republicans are trembling at thought of Vermont having a single-payer healthcare system to serve as a model for other states. Canada's single-payer healthcare system started in just one province - Saskatchewan - and then spread across the country because people in other provinces demanded it. "Republicans fear that the same thing is likely to happen in the United States and they'll do anything they can to stop it in Vermont. They don't care about sick people - they care about profits for their buddies - the millionaire private health insurance executives."

Meaningfully Shopping for Insurance is Next to Impossible - Krugman - That’s the title of a blog post by Nathalie Martin at Credit Slips. It describes just how hard it is for even sophisticated buyers to figure out which company is offering the best deal on such things as home insurance. She doesn’t point this out, but this observation has a strong bearing on the health reform debate. When people call for “consumer choice” in health care, what this mainly comes down to isn’t comparison shopping on actual care — help, I’m dying, who’s got a good deal on stents? — but rather comparison shopping on insurance policies. And that’s basically impossible even for home insurance, which is a lot simpler than medical insurance. Very strong regulation that forced insurance companies to offer clear, simple choices might help — but the consumer-driven-medicine people are also opposed to strong regulation. This stuff is all fantasy — fantasy that’s very bad for our health.

The Road to Romneycare - Krugman - Yglesias looks at calls for a return to something like the McCain health plan — subsidies for individuals to buy insurance on the open market — and gets it exactly right: once you think seriously about how this would work, you end up with something that looks very much like the health reform we have. Suppose we give people help buying insurance. This doesn’t help people with pre-existing conditions, who won’t be able to get insurance anyway. So we add community rating: insurers can’t discriminate based on medical history.  But this leads to a problem with adverse selection: healthy young people will drop coverage, leaving behind a bad risk pool and high costs. So we add a mandate, requiring that everyone get coverage. But some people can’t afford to do this. So we add means-tested subsidies to help lower-income citizens. And you’ve just described the Massachusetts health reform, aka Romneycare, which in turn is basically the same as Obamacare.

Buying On The Installment Plan - Another reminder that the Congressional drafters of what’s come to be called ObamaCare shaved fiscal corners came early this month in a notice published in the Federal Register. The news: after May 5, 2011, no more applications will be received for the Early Retiree Reinsurance Program. Why? The applications already received plus those expected to be received by May 5 will blow through the money available. This small program—less than one percent of all the spending in ObamaCare’s first decade—was, like subsidies for state high risk pools, one of the “early implementation” provisions of the law. It would show somebody getting something during the period when most of the action would be bureaucratic rumbling getting ready for the “Big Bang” on January 1, 2014. All sorts of new subsidies take effect on that date. It would have been more than one percent if Congress funded the whole thing. Instead, the Congressional drafters opted for an installment plan. They would put up a defined amount of money for the whole program, and then close enrollment once enough companies had signed up.

How Health Reform Punishes Work - WSJ - Supporters of ObamaCare acknowledge it will have some unintended consequences. Yet surprisingly little attention has been focused on the law's most problematic provision: government subsidies to help individuals and families purchase health insurance. This new entitlement—which the chief actuary of the Centers for Medicare and Medicaid Services estimates will cost more than $100 billion per year once it is fully implemented—will damage the country's long-term fiscal outlook. It also will introduce far-reaching negative effects on rewards to work and bizarre new inequities into American life. The health law establishes insurance exchanges—regulated marketplaces in which individuals and small businesses can shop for coverage—and minimum standards for the insurance policies that can be offered. Because the policies will be so costly, there's a subsidy for buyers that phases out as family income rises. This sounds reasonable—but the subsidies required to make a "qualifying" insurance policy affordable are so large that their phaseout creates chaos.

Will the Protectionists Wipe Out Solo Practitioners in Medicine? - Dean Baker -That is the implication of an NYT article on the decline in the number of physicians in independent family practices. The article argues that long hours and uncertain pay make it unattractive for physicians in the United States. This may be true given the extent to which the doctors' lobbies have been able to limit the number of people licensed to practice medicine in the United States. However, there is a huge supply of people in the developing world who would be willing and able to train to U.S. standards and work under the conditions described in the article. If the Obama administration and Congress were not so completely dominated by protectionists, they would be working to eliminate the barriers that are making it more expensive for people in the United States to get health care.

Insurers Getting Rich By Not Paying for Care - I'm betting that just about every executive of a for-profit health insurance company, whose total compensation ultimately depends on the value of their stock options, woke up on Good Friday considerably wealthier than they were 24 hours earlier. Why? Because of the spectacular profits that one of those companies reported Thursday morning. Among those suddenly wealthier executives, by the way, are the corporate medical directors who decide whether or not patients will get coverage for treatments their doctors believe might save their lives. UnitedHealth Group, the biggest health insurer in terms of revenue and market value, earned so much more during the first three months of this year than Wall Street expected that investors rushed to buy shares of every one of the seven health insurers that comprise the managed care sector. In my view, it would be more accurate to call it the managed care cartel.

The US Health Care System IS the Most Efficient in the World - As you can see the United States spends more resources per capita on health care than any country in the world. If you were worried about possible government distortion compare the light blue and dark blue bars. The light blue are private expenditures on Health Care, the dark blue are public expenditures. As you can see private US spending easily outstrips every other country in the world. That in-and-of itself establishes the US as the most efficient system. One does not need to look at outcomes to determine Why?  Well, we know that patients want to spend money on health care. We can see that as they are provided more insurance they spend more money. We can see that as they become wealthier they spend more money. We can see that as they are exposed to the market mechanisms they spend more money. Spending more money on health care seems to be inline with satisfying consumer preferences. Yet, couldn’t this all be a waste. Don’t outcomes matter for efficiency? No, they don’t. They don’t because patients themselves do not look at outcomes and satisfying consumer preferences is the gold standard of efficiency.

The three most important health-care graphs in the world - The Kaiser Family Foundation has an excellent series of charts making the point that not only does the American health-care system spend much more than anyone else, but that spending has been growing much faster than everyone else’s, and is now so high that our government spends more on health care than the governments of countries with single-payer systems — and that’s true even though most of our health-care spending is private! But let’s start at the beginning. Here’s what we spend vs. what everyone else spends: And here’s the growth in that spending over time. Note that in the 1970s, we were approximately equal to the rest of the world. It’s really in the ’80s and ’90s that the gap between us and everyone else opened up: It’s interesting that Switzerland, which relies more heavily on private, or at least semi-private, insurers and cost sharing than any of the other European systems, also stands out for poor cost control, though not nearly as poor as ours.  But perhaps the piece de resistance is this chart, showing the percentage of gross domestic product that countries spend on private and public health-care expenditures. The United States spends more through the government than — deep breath — Japan, Australia, Norway, the United Kingdom, Spain, Italy, Canada or Switzerland:

Health literacy - Recent posts here and elsewhere about physician-patient information asymmetry made me realize that I was not aware of empirical work on the subject. Joshua Gans helped me out a little on this. And, again by email, Brad Flansbaum helped me out a lot. Among the pile of documents he pointed me to (many of which I’ve not yet read), was a Partnership for Clear Health Communications paper on low health literacy,* by John Vernon, Antonio Trujillo, Sara Rosenbaum, and Barbara DeBuono.The authors use the 2003 National Assessment of Adult Literacy (NAAL) — a US survey of over 19,000 adults — to assess health literacy. Based on the NAAL, here are the distributions of health literacy assessments by type of health insurance:

Decoding Human Genes Is Goal of New Open-Source Encyclopedia - A massive database cataloging the human genome's functional elements -- including genes, RNA transcripts, and other products -- is being made available as an open resource to the scientific community, classrooms, science writers, and the public, thanks to an international team of researchers. In a paper that will be published in the journal PLoS Biology on 19 April 2011, the project -- called ENCODE (Encyclopedia Of DNA Elements) -- provides an overview of the team's ongoing efforts to interpret the human genome sequence, as well as a guide for using the vast amounts of data and resources produced so far by the project. Ross Hardison, the T. Ming Chu Professor of Biochemistry and Molecular Biology at Penn State University and one of the principal investigators of the ENCODE Project team, explained that the philosophy behind the project is one of scientific openness, transparency, and collaboration across sub-disciplines. ENCODE comes on the heels of the now-complete Human Genome Project -- a 13-year effort aimed at identifying all the approximately 20,000 to 25,000 genes in human DNA -- which also was based on the belief in open-source data sharing to further scientific discovery and public understanding of science.

Cut the subsidies first - Says Professor Munger: But the real "subsidies to the affluent" are cutting subsidies to sugar, corporate farms, oil companies, and big fat defense firms. The problem is not a misallocation by ability to pay, but rather straight up subsidies to war pigs, farm pigs, and the prison-industrial complex fattening the purses of anti-drug warriors. Those payments dwarf the tax cuts.  Taxes take money from people who have earned it. Subsidies are gifts of money from those taxpayers to people who have NOT earned it. Get rid of the subsidies, first. I'm with him on cutting subsidies to sugar producers, big farms--even little farms--and oil companies.

Too Much Moisture Keeping Crops From Fields - It's been too wet to gain much ground on the 2011 crop season, according to the U.S. Department of Agriculture's weekly crop report. About a quarter of the state reports surplus soil moisture, with an average of more than one inch of rain in the past week. "One year ago, we had that wonderful planting season of April, and we were at 29 percent completed on corn planted," says Mark Schleusener, deputy director of the USDA National Agricultural Statistics Service Illinois field office. "Well, we're not there." The nine percent corn figure is in line with the five year average. The Illinois oat crop is 63 percent planted, ten points ahead of the average.

Corn, Soybeans Rally as Wet Midwest Weather May Delay Planting -  Corn and soybeans rose on speculation that wet, cold weather across the U.S. Midwest will limit planting and reduce yields.  Fields from central Arkansas to Detroit may get as much as 8 inches (20 centimeters) of rain the next 10 days, keeping soils saturated, said Tim Bowden, a senior meteorologist for Planalytics Inc. in Berwyn, Pennsylvania. Farms from Nebraska to northern Indiana will receive as much as 4 inches of rain, and the cool weather will slow evaporation, Bowden said.  “The markets are focused on the extended planting delays developing in the Midwest,” said Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis. “Farmers are already looking at shorter-season varieties,” which will yield less than normal, he said.

Corn Gains as Rain Delays Seeding; Wheat Jumps to 2-Month High‎-- Corn gained on speculation that wet, cold weather across the U.S. Midwest will further delay planting, reducing yields. Wheat advanced to a two-month high. July-delivery corn increased as much as 2.6 percent to $7.64 per bushel in Chicago before trading at $7.6025 at 3:02 p.m. in Singapore. The grain fell 0.7 percent last week. "Given more rains in the U.S. Midwest over the weekend, we may see another delay in planting of the corn crop amid forecasts for tighter global supply this year," said Han Sung Min, a broker at Korea Exchange Bank Futures Co. in Seoul. The U.S. is the biggest producer and exporter of corn. The U.S. Department of Agriculture, or USDA, will release its weekly planting progress report later today after the close of trade in Chicago. About 7 percent of the corn crop was planted as of April 17, down from 16 percent a year earlier, and up from 3 percent the previous week, the USDA said April 18. The average for the previous five years is 8 percent.

Wet weather expected to delay Midwest corn planting‎ - Less-than-ideal planting conditions could get worse over the next 10 days for the southern part of the Corn Belt as heavy rain conditions are forecast by  Agricultural Meteorologist Dale Mohler states that repeating storms will continue from Nebraska to Indiana, a zone where farmers are typically busy planting corn at this point in the season. A significant part of this area has received from 150 to 200 percent of normal rainfall this month, which has many fields ranging from wet to saturated. Multiple drenching storm systems, with extensive cloud cover and below-average temperatures, will affect the area through the end of the month. There is potential for an additional 3 to 6 inches of rain, and locally more, to fall on the southern part of the Corn Belt over the next week or so. The bulk of the upcoming rain may fall on the Mississippi and Ohio Valley portions of the Corn Belt.

Wet April delays area corn planting -  With nearly 10 inches of rain so far this month, and more promised for today and Thursday, farmers say it will take a week of nice weather for the soil to dry enough to plant. "Last year we finished planting corn in April," Howell said. "I don't think we'll even get started in April this year." Only 2 percent of Indiana's corn crop is planted, a number down from more than 50 percent planted at this point in 2010 and 15 percent for the five-year average, according to Monday's USDA crop progress report. Ohio farmers have planted only 1 percent. Forecasters aren't offering much hope the persistent rains will end anytime soon. The soggy season could last into the summer, Indiana associate state climatologist Ken Scheeringa said.

Notes: Rains Hamper Corn Planting - - Heavy rains in Indiana and throughout the Midwest are delaying corn planting. Only 2 percent of Indiana’s corn crop is planted, a number down from more than 50 percent planted at this point in 2010 and 15 percent for the five-year average, according to Monday’s USDA crop progress report. Ohio farmers have planted only 1 percent. Nationwide, only 9 percent of the corn acreage was planted as of Monday, compared to 46 percent at this time last year and 23 percent for the five-year average. Forecasters aren’t offering much hope the persistent rains will end anytime soon. The soggy season could last into the summer, Indiana associate state climatologist Ken Scheeringa said.Speaking of rain, parts of central and southern Indiana are getting flooded out and communities like New Albany are bracing for more storms.

Rain delays Hoosier farmers - Federal officials say the latest slew of spring rainstorms has kept Indiana farmers from planting enough corn to maximize their yield. The U.S. Department of Agriculture reports only 2 percent of Indiana's corn crop had been planted by last week, compared with a five-year average of 15 percent. Purdue Extension corn specialist Bob Nielsen says corn grain yield potential declines with delayed planting after May 1. A Purdue University news release Tuesday said the optimal time period to plant corn for a maximum yield is April 20 through May 10. Nielson said it's not wise for farmers to begin planting in soggy soils to beat the cutoff point. He added that most growers have machinery capacity to catch up quickly once the soil conditions become more favorable.

Farmers look for break in rainy weather - Howard Siegrist, director of the Licking County branch of the Ohio State University Extension, said the rainy April has prevented any planting of corn or soybeans so far this spring. Corn planted by May 8 should produce a normal yield, but after that date the chances of a good crop begin to diminish, Siegrist said. "We're definitely way behind normal," Siegrist said. "This may go down as one of the wettest seasons. We're cautiously optimistic next week will be better."So far, only five days in April have been suitable for farmers to work in their fields, compared to the average of 11 days, Siegrist said. So, instead of having 20 percent to 25 percent of the corn planted, local farmers are stuck at the starting gate.

Wet weather delaying county's planting season - Tracy Jones said with the way conditions are now, 2011 will be the latest in the season that he’s started planting corn in his 30 years of farming. Cold, wet weather conditions have delayed spring planting in DeKalb County, and farmers don’t expect the soggy weather to break anytime soon.  The majority of DeKalb  County crops were already in the ground by this time last year, said Greg Millburg, manager of the DeKalb County Farm Bureau. As of this week, Millburg said less than 5 percent of crops have been planted because of the weather. Millburg said ideal planting conditions would include 2-3 weeks of dry weather and soil temperatures above 50 degrees. He said the longer it takes to get seeds planted, the more it affects crop maturity and yield. “I think (farmers) are starting to get a little nervous, especially with the forecast for more (rain) on the way,” he said. According to the Illinois Department of Agriculture, 67 percent of corn fields in the state had been planted by the week of April 24 in 2010. This year, 10 percent of Illinois corn fields have been planted by the week of April 24.

Wet weather stalls Illinois corn planting - -- Corn planting has stalled in Illinois and much of the Midwest because of a week of wet weather. And rain remains a constant in regional forecasts for much of this week. The U.S. Department of Agriculture said today that Illinois farmers have planted 10 percent of what is expected to be a 12.8 million-acre crop. That's just 1 percent more than a week ago and well behind the 27 percent that's typically planted by now. The USDA says farmers in Iowa, Indiana and other key corn states are in similar shape. Nine percent of the country's corn crop has been planted. Usually just under a quarter is in the ground by late April. With prices high, farmers are expected plant a huge 92.2 million acres of corn this year

Iowa Corn Planting Is Slowest In 10 Years - Farmers in Iowa didn't plant corn last week because of the continued wet, chilly conditions. Only 3% of the state's 2011 corn acreage had been planted through Sunday April 24, according to USDA's weekly weather and crop report. Normally at this time of year, farmers have about 28% of Iowa's corn in the ground.  "This year's planting progress is the slowest in a decade," says Bill Northey, Iowa Secretary of Agriculture. "Usually, we have around 28% of the corn planted as of April 24. That's the 5-year average. Last year at this time we were well ahead of the 5-year average. With warm and dry weather last spring, farmers had 61% of Iowa's corn crop planted at this time." Iowa's wet, chilly weather is expected to continue through most of this week. Soil temperatures are still below 50-degrees F at planting depth. Soil temperatures need to be 50 degrees or warmer so corn seed can germinate. "What we need is sunlight," says Dale Roewe, who farms near Laurens in Pocahontas County in northwest Iowa. He doesn't expect to be back in his fields until this weekend.

Economist: Rain Delay Effects to Start Trickling into Commodity - --Rain-delayed planting has started to have a ripple effect in the commodity markets. "Corn is the commodity that is the most weather-sensitive at the moment," Scott Stiles, extension economist-risk management, for the University of Arkansas Division of Agriculture, said Thursday. "Ending stocks are very tight for corn. 2011 needs to be a great year, and it's not starting off well." While last Monday's crop report showed Arkansas' corn planting progress to be in line with the five-year average, "the futures market is concerned with the slow planting progress in key corn states." Illinois, Iowa, Indiana, Nebraska and Ohio were all well behind their five-year average pace. For example, Iowa's five-year pace at this time is 28 percent planted. This week it was only 3 percent. "Given an adequate break in the weather, a lot of acreage can be planted in a week," Stiles said.

Heavy April rains delay ag planting (04-29-2011) --  April’s heavy rains have been devastating Mississippi’s agriculture, as they delay planting, postpone management and flood fields. Heavy rains that accompanied the late-April storms added to already soggy soils and are pushing some planting dates dangerously late. “In Quitman County, there are hundreds of acres of farmland under water,” said Don Respess, Coahoma County director with the Mississippi State University Extension Service. “There is nowhere for the water to go. If the fields have been planted, the crops will be destroyed. If they’re not planted yet, they won’t be for a while.” Although some corn will have to be replanted, many corn fields in the north part of the Delta have been planted. Some soybeans are planted, but very little cotton. “Farmers are anxious to get in the field to plant cotton,” Respess said. “We got excessive rains Wednesday, and that water will delay planting longer.”

Soggy fields put U.S. farmers on a tight deadline - "Historically, we would like the work to be done by the first of May, and research shows the optimal planting time is the last week of April," said Winger, who plants half of his 2,500 acres with corn, and the other half with soybeans. Similar scenes of waterlogged fields stretch from Minnesota to Indiana to Nebraska, the heart of the U.S. Corn Belt. Unusually wet conditions are keeping farmers out of their fields during the crucial spring planting season. Delays in seeding pushed new-crop December corn futures at the Chicago Board of Trade about 7 percent higher in the past month, with prices climbing on fears that planting delays will reduce this year's crop at a time when corn stocks are at their tightest in 80 years. Just 9 percent of the U.S. corn crop, the world's largest, was planted as of Sunday, compared with the five-year average of 23 percent and last year's record pace of 46 percent.

Planting Continues to Be Delayed by Weather - Seemingly continuous rain and some late season snow have left much of the Corn Belt wet and unplanted.  Last year at this time nearly half, or 46%, of the corn crop was planted.  Twenty-three percent is the five year average. Still, with all the wet weather USDA reports that 9% of the expected corn crop has been planted. Some believe that next week's report will show the corn planting pace will be among the slowest on record.  The driest area where some corn planting could take place this week is in Nebraska and Kansas, and a few fields in parts of southern South Dakota and western Iowa could see farmers get in the fields. For the eastern part of the corn planting area, much rain has fallen from Missouri and on east.  In the Ohio Valley, the Ohio River is receiving water from its flooding tributaries. Cool temperatures have not helped either. With forecasts calling for more rain, especially in the eastern half of the Corn Belt, corn planting pace will not pick up or even begin until the sun comes out more often, temperatures warm a bit, and the land dries out. Meteorologists say the stormy Midwest spring is being fueled by the same La Nina weather phenomenon that is behind the drought gripping Southern Plains states such as Texas and Oklahoma, where the wheat crop planted last fall is shriveling from thirst even as Minnesota fields are too muddy and cold to plant with seed. According to the USDA, 72% of the Texas wheat crop is in very poor to poor condition.

Soaring food prices to raise Asian poverty: report - World food prices that surged 30 per cent in the first two months of the year threaten to push millions of Asians into extreme poverty and cut economic growth, the Asian Development Bank said Tuesday. The surging prices translated into domestic food inflation of 10 per cent on average in many Asian economies, which could drive 64 million people into poverty, the bank said in a report, adding that it will also erode the living standards of families already living in poverty. Food prices have been driven higher by surging oil prices, production shortfalls due to bad weather and export restrictions by several food producing countries. If higher food and oil prices persist for the rest of the year, they could shave as much as 1.5 percentage points from economic growth in developing Asian countries, the report said.

Food Costs Seen Reaching Record by Year-End as World Inflation Accelerates - Global food prices may rise 4.4 percent to a record by the end of the year, driven by demand for meat, oilseeds and grains used to make ethanol, adding to costs that mean inflation is accelerating from the U.S. to China. The United Nations’ Food Price Index may climb to 240 points from 229.84 last month. Global corn stockpiles are shrinking the most in seven years, inventories of nine edible oils will drop to the lowest since 1974 and U.S. beef stocks will be the smallest since 1999, the U.S. Department of Agriculture estimates. “The stockpiles are being severely depleted,” said Adams, who correctly forecast gains in heating oil and gasoline prices last year. “Eventually it gets to the consumer. The U.S. government isn’t subsidizing pork chops like it is ethanol.”  The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March. Chinese consumer prices rose last month by the most since 2008. The People’s Bank of China raised borrowing costs four times since October and the European Central Bank increased rates on April 7 for the first time since 2008. World Bank President Robert Zoellick said April 16 that the world is “one shock away” from a crisis in food supply and prices.

High crop prices are good for farmers - It is wise to draw some distinctions within the broad category of U.S. farmers, because the boom times could be reaching some farmers more than others.  Table 1 shows USDA's 2009 estimates for two groups of farmers that sometimes get muddled together under the heading "family farmers."  This is the same most recent year and data source that Wise's report uses.  In this table, following USDA conventions, the small family farms have sales of $100,000 to $250,000.  The large family farms have sales of $250,000 to $500,000.  The table excludes very large family farms and non-family-owned corporate farms on the one hand, and small hobby farms or "rural residence" farms on the other hand.Table 1 shows that the small family farms had somewhat lower average household income than the U.S. average in 2009, and they would not be able to get by on farm income alone. Many farm families include at least one person working in the paid labor market. The large farms, by contrast, had much higher average household income than U.S. average household income.

The Great Stagnation, in agriculture -- Overall, it is neglected knowledge just how much the “Green Revolution” has slowed down since the 1990s.  In Africa, measured heights have stagnated or declined in recent times.  Robert Paarlberg’s Starved for Science: How Biotechnology is Being Kept Out of Africa is an excellent book on its title topic and more generally on falling TFP in global agriculture. On other commodities, there are further charts and graphs (on both sides of the debate) here.  The article is overwrought but worth the read, as it shows how far we are currently from the world of Julian Simon.

Agriculture and the Oil Supply - There is nothing more important than our fossil fuel supply when it comes to modern agricultural production. That is unfortunate, as current policies seem to promote maximum production of just a few crops over the goal of our own national food security with built-in resiliency. Today's far fewer farmers with far larger equipment, while efficient during periods of time offering abundant and low-priced oil and natural gas inputs, would need more and more government support were prices to go permanently higher. Or, if supplies become truly tight, rationing of oil and price subsidization dedicated for agriculture would become necessary. As energy input costs go up, farmers in the poorer nations are already opting out and growing alternative lower-input crops, or none at all. Could that happen here? As ever more expensive equipment and seasonal inputs weigh upon farm profits and the resulting higher priced food commodities encourage demand destruction, there becomes a diminishing return which might threaten this high energy devouring agricultural system itself. Luckily, a great deal of slack in today's entire U.S. food system model would afford us an opportunity to zero in on essential production practices provided our governing leaders are up to the task and providing we have enough time to do so.

USDA moves to let Monsanto perform its own environmental impact studies on GMOs - Last August, Federal Judge Jeffrey White issued a stinging rebuke to the USDA for its process on approving new genetically modified seeds. He ruled that the agency's practice of 'deregulating' novel seed varieties without first performing an environmental impact study violated the National Environmental Policy Act. The target of Judge White's ire was the USDA's 2005 approval of Monsanto's Roundup Ready sugar beets, engineered to withstand doses of the company's own herbicide. White's ruling effectively revoked the approval of Monsanto's novel beet seeds pending an environmental impact study, and cast doubt upon the USDA's notoriously industry-friendly way of regulating GM seeds. How has the Obama USDA responded to Judge White's rebuke? By repeatedly defying it, most recently in February, when the agency moved to allow farmers to plant the engineered seeds even though the impact study has yet to be completed. Its rationale for violating the court order will raise an eyebrow of anyone who read Gary Taubes' recent New York Times Magazine piece teasing out the health hazards of the American sweet tooth: the USDA feared that the GMO sugar beet ban would cause sweetener prices to rise. Thus the USDA places the food industry's right to cheap sweetener for its junk food over the dictates of a federal court.

Why Is Damning New Evidence About Monsanto’s Most Widely Used Herbicide Being Silenced? -  Dr. Don Huber did not seek fame when he quietly penned a confidential letter to Secretary of Agriculture Tom Vilsack in January of this year, warning Vilsack of preliminary evidence of a microscopic organism that appears in high concentrations in genetically modified Roundup Ready corn and soybeans and "appears to significantly impact the health of plants, animals and probably human beings." Huber, a retired Purdue University professor of plant pathology and U.S. Army colonel, requested the USDA's help in researching the matter and suggested Vilsack wait until the research was concluded before deregulating Roundup Ready alfalfa. But about a month after it was sent, the letter was leaked, soon becoming an internet phenomenon. Huber was unavailable to respond to media inquiries in the weeks following the leak, and thus unable to defend himself when several colleagues from Purdue publicly claiming to refute his accusations about Monsanto's widely used herbicide Roundup (glyphosate) and Roundup Ready crops. When his letter was finally acknowledged by the mainstream media, it was with titles like "Scientists Question Claims in Biotech Letter," noting that the letter's popularity on the internet "has raised concern among scientists that the public will believe his unsupported claim is true." Now, Huber has finally spoken out, both in a second letter, sent to "a wide number of individuals worldwide" to explain and back up his claims from his first letter, and in interviews.

Who Covereth the Heaven With Clouds, Who Prepareth Rain For the Earth, Who Hasn'teth A Clue (video) Fear not the extreme weather threatening us all, the tornados in the South, the drought and fire ravaging Texas. GOP Gov. Rick Perry - he who has called climate change “one contrived phony mess' and whose state is the biggest carbon polluter in the country - will save us with prayer. Also some help from the feds, though he wants to secede. Also a prayerful Facebook page and song. It only has eight words; I guess they ran out. But hear ye: Fear not climate change. Hallelulah.

Report: Climate change worsens Western water woes - Climate change is likely to diminish already scarce water supplies in the Western United States, exacerbating problems for millions of water users in the West, according to a new government report. A report released Monday by the Interior Department said annual flows in three prominent river basins — the Colorado, Rio Grande and San Joaquin — could decline by as much 8 percent to 14 percent over the next four decades. The three rivers provide water to eight states, from Wyoming to Texas and California, as well as to parts of Mexico. The declining water supply comes as the West and Southwest, already among the fastest-growing parts of the country, continue to gain population. Interior Secretary Ken Salazar called water the region’s “lifeblood” and said small changes in snowpack and rainfall levels could have a major effect on tens of millions of people.

A 21st-Century Water Forecast - The broad-brush conclusion of a new federal report on the future impact of climate change on water in the West is a bit familiar. Throughout the West, there will be less snow, and what snow there is will melt faster. The dry Southwest is going to get drier, and the wet Northwest wetter, as a diagram in the report (above) shows. The 122-page report includes original research — “including state-of-the-art climate modeling,” as Interior Secretary Ken Salazar said during a conference call on Monday — but also harks back to peer-reviewed scientific literature on seven river basins: the Columbia, the Klamath, the Sacramento-San Joaquin, the Colorado, the Missouri, the Truckee and the Rio Grande.

Food Insecurity Looms in Parched Horn of Africa - A drought in the Horn of Africa, triggered by the same La Niña episode that caused massive flooding in Australia last year, is plunging millions of pastoralists closer to food insecurity. Parts of Kenya, Ethiopia, Somalia and eastern Uganda are most affected. The U.N. World Food Programme (WFP) estimates that 8.4 million people are in need of food aid in the region, according to spokesman David Orr. Thousands of livestock have already died in Kenya and Ethiopia from animal diseases associated with the drought. The severity this year will depend on the rainy season between March and May. “It is too early to say yet, although the general view is [the rains] look like being quite poor in certain parts of Somalia and Ethiopia,” said Orr. “Combined with conflict and rising food prices in Somalia, this could be particularly serious in that country.”

More Than 1 Billion People Are Hungry in the World - For many in the West, poverty is almost synonymous with hunger. Indeed, the announcement by the United Nations Food and Agriculture Organization in 2009 that more than 1 billion people are suffering from hunger grabbed headlines in a way that any number of World Bank estimates of how many poor people live on less than a dollar a day never did.  But is it really true? Are there really more than a billion people going to bed hungry each night? Our research on this question has taken us to rural villages and teeming urban slums around the world, collecting data and speaking with poor people about what they eat and what else they buy, from Morocco to Kenya, Indonesia to India. We've also tapped into a wealth of insights from our academic colleagues. What we've found is that the story of hunger, and of poverty more broadly, is far more complex than any one statistic or grand theory; it is a world where those without enough to eat may save up to buy a TV instead, where more money doesn't necessarily translate into more food, and where making rice cheaper can sometimes even lead people to buy less rice.

Good News from the Regulatory Front - The new Tea Party Republicans in the House of Representatives decry the “fact” that the U.S. Environmental Protection Agency (EPA) continues to promulgate “job-killing regulations” for made-up non-problems.  And Democrats in the Congress – not to mention the Administration – are eager to talk about “win-win” policies that will produce “clean energy jobs” and protect Americans from the evils of imported oil and gas. Neither side seems willing to admit that environmental regulations bring both good news – a cleaner environment – and bad news – costs of compliance that affect not only businesses but consumers as well.  Sometimes the cost-side of proposed regulations dominates.  Those regulatory moves are – from an economic perspective – fundamentally unwise, since they make society worse off.  In other cases, the benefits of a proposed regulation more than justify the costs that will be incurred.  Such regulations are – to use a word now favored by President Obama –  a wise investment.  They make society better off.  Failure to take action on such opportunities is imprudent, if not irresponsible.  Just such an opportunity now presents itself with EPA’s Clean Air Transport Rule.

Coburn, Norquist Dispute Ethanol Tax Credit Repeal - Senator Tom Coburn (R-OK) and Grover Norquist, the President of Americans for Tax Reform (ATR), have engaged in a public dispute in recent weeks over whether repeal of a tax credit without accompanying it with a tax reduction elsewhere is good policy. The issue in particular is Coburn's proposal to eliminate $5 billion in federal tax credits provided to ethanol producers. Coburn has taken Norquist's Taxpayer Protection Pledge, which his organization is highly successful at getting Republican (and some Democratic) officeholders to take. The pledge asks candidates for public office to (1) oppose tax rate increases and (2) oppose the elimination of deductions and credits unless offset by other revenue reductions. Aside from his support for eliminating the ethanol tax credit, Coburn has also supported efforts to eliminate other tax deductions and credits designed to distort individual decisions, such as the employer-based health insurance deduction. Coburn was also a member of the President's Deficit Commission, which produced a plan that broadened the tax base and lowered rates, but increased revenues.

Business Roundtable Urges EPA to Stop Greenhouse Gas Rules - The Business Roundtable, a group of chief executives officers from companies such as General Electric Co. (GE) and Exxon Mobil Corp. (XOM), urged the Obama administration to abandon efforts to regulate greenhouse gases from industrial polluters. The Washington-based association wants President Barack Obama’s Environmental Protection Agency to scrap the rules for power plants and oil refineries, giving Congress time to craft legislation, according to an e-mailed statement today. The EPA rules are “an example of damaging regulatory overreach that threatens to stifle U.S. economic growth and job creation,” Thomas Fanning, CEO of Atlanta-based Southern Co. (SO), a Roundtable member and the biggest U.S. utility owner by market value, said in the group’s statement.

Major polluters say 2011 climate deal “not doable” - The world’s biggest greenhouse gas emitters do not expect a legally-binding deal to tackle climate change at talks in South Africa in December, two leading climate envoys said on Wednesday. U.S. climate negotiator Todd Stern and European climate commissioner Connie Hedegaard played down the chance of a breakthrough after a meeting of the Major Economies Forum (MEF), an informal group of 17 countries including the world’s top polluters, China and the United States. “From what I’ve heard in these last two days, the conclusion must be that it is highly unlikely that the world will see a legally binding deal done in Durban,” Hedegaard told reporters.

Exclusive: Plants and animals join forces with climate change deniers - A recent investigation reveals that the world's plants and animals have adopted a bold but risky strategy to save themselves from the ravages of global climate change. They have joined forces with the world's climate change deniers. This reversal has curious origins and follows decades of diplomatic signals from the plant and animal kingdoms to the world's scientific community that climate change must be halted or there will be "serious consequences." The reversal of strategy began when domestic cats and dogs watched the Life After People series on The History Channel along with their putative owners. The cats and dogs then described scenes from the show to their wild counterparts. From there word swept through the animal kingdom and was overheard by many plants as well. Life After People seemed like a utopian fantasy until some enterprising house plants realized that they might be able to set in motion events which would end the dangers that humans pose. The plants would make humans unwitting accomplices in their own extinction. It was a dangerous plan and one that would require considerable sacrifice among those in both the plant and animal kingdoms. When word of the plan spread far and wide, both kingdoms embraced it as the only path to survival for at least some species. Many realized they were doomed already; but if they could halt or even just reduce the extent of the Sixth Great Extinction, their actions would not be in vain

Ozone hole linked to southern rain increases - The hole in the ozone layer over Antarctica is a significant driver of climate change and rain increases in the southern hemisphere over the past 50 years, US scientists said Thursday. The findings by a team at Columbia University’s School of Engineering and Applied Science are the first to link ozone depletion in the polar region to climate change all the way to the equator. Researchers said the analysis should lead policy-makers to consider the ozone layer along with other environmental factors such as Arctic ice melt and greenhouse gas emissions when considering how to tackle climate change. “It’s really amazing that the ozone hole, located so high up in the atmosphere over Antarctica, can have an impact all the way to the tropics and affect rainfall there,”

Warmer oceans release CO2 faster than thought - As the world's oceans warm, their massive stores of dissolved carbon dioxide may be quick to bubble back out into the atmosphere and amplify the greenhouse effect, according to a new study. The oceans capture around 30 per cent of human carbon dioxide emissions and hide it in their depths. This slows the march of global warming somewhat. But climate records from the end of the last ice age show that as temperatures climb, the trend reverses and the oceans emit CO2, which exacerbates warming. Previous studies have suggested that it takes between 400 and 1300 years for this to happen. But now the most precise analysis to date has whittled that figure down. "We now think the delay is more like 200 years, possibly even less," The new results come from Siple and Byrd ice cores in western Antarctica. Van Ommen and colleagues dated CO2 bubbles trapped in the ice, and then compared their measurements with records of atmospheric temperatures from the same time period.

The methane hydrate feedback revisited - Methane release from the not-so-perma-frost is the most dangerous amplifying feedback in the entire carbon cycle (see “NSIDC bombshell: Thawing permafrost feedback will turn Arctic from carbon sink to source in the 2020s, releasing 100 billion tons of carbon by 2100“). Methane (CH4) deserves attention it is such a highly potent greenhouse gas — 25-33 times more powerful than carbon dioxide (CO2) over a 100-year time-horizon, but as much as 100 time more potent over 20 years, according to the latest research! Last year I reported on a major study in Science that found the vast East Siberian Arctic Shelf methane stores appeared to be destabilizing and venting.  The normally staid National Science Foundation issued a press release warning “Release of even a fraction of the methane stored in the shelf could trigger abrupt climate warming.” Now there is a new Geophysical Research Letters study on a paleoclimate analog that may be relevant to humanity today, “Methane and environmental change during the Paleocene‐Eocene thermal maximum (PETM): Modeling the PETM onset as a two‐stage event.”

Siberian seabed methane: first numbers - The latest estimate of methane release from the shallow seas off the north coast of Russia — the East Siberian Arctic Shelf (ESAS) — suggests that around 8 teragrams per year (1Tg = 1 million tonnes) of the gas are reaching the atmosphere. This is equivalent to previous estimates of total methane release from all oceans. The study, led by Natalia Shakhova and Igor Semiletov and published in this week’s Science ("Extensive Methane Venting to the Atmosphere from Sediments of the East Siberian Arctic Shelf," Science (5 March 2010), Vol. 327, No. 5970, pp. 1246–1250; DOI: 10.1126/science.1182221), is based on fieldwork over 2003–2008. Over 80% of the bottom water over the ESAS was found to be supersaturated with dissolved methane, and 50% of the surface water. More than 100 “hotspots’ were discovered, where large quantities of methane are escaping from the sea-floor. Here’s Shakhova discussing the paper’s findings in a University of Alaska Fairbanks video (press release):

Sam Carana: Runaway Global Warming - The East Siberian Arctic Shelf (ESAS) is a 2,000,000 km2 region that, due to polar amplification of global warming, can now be 10 °C (18 °F) warmer than average temperatures were 1951-1980 (NASA image below). Shakhova and Semiletov (2010) conclude that this ESAS region should be considered the most potential in terms of possible climate change caused by abrupt release of methane. They estimate that ESAS already releases some 3.5Gt of methane annually, adding that this is enough to trigger abrupt climate change. How does this methane release compare to carbon dioxide? Concentrations of atmospheric carbon dioxide rose from 288 ppmv in 1850 to 369.5 ppmv in 2000, for an increase of 81.5 ppmv, or 174 PgC over 150 years. By March 2011, the level of carbon dioxide was 392.4 ppmv. So, 104.4 ppmv of carbon dioxide was added by people since the start of the industrial revolution. If this was a one-time release, this 3.5 Gt (or Pg) of methane could have a greenhouse effect more than twice as strong as all the carbon dioxide that was added between 1850 and 2000, due to methane's high global warming potential (§1). However, methane is now released in such quantities annually in the ESAS region, while local concentration of methane (§2) and hydroxyl depletion (§3) make things even worse.

4/27/11 - Tuscaloosa Tornado

Storms knock out TVA nuclear units, power lines (Reuters) - Severe storms and tornadoes moving through the Southeast dealt a severe blow to the Tennessee Valley Authority on Wednesday, causing three nuclear reactors in Alabama to shut and knocking out 11 high-voltage power lines, the utility and regulators said. All three units at TVA's 3,274-megawatt Browns Ferry nuclear plant in Alabama tripped about 5:30 EDT (2230 GMT) after losing outside power to the plant, a spokesman for the U.S. Nuclear Regulatory Agency said. A TVA spokeswoman said the plant's output had reduced power earlier due to transmission line damage from a line of severe storms that spawned a number of tornadoes as it moved through Mississippi, Alabama, Kentucky and Tennessee. The NRC spokesman said early information indicated the units shut normally and the plant's diesel generators started up to supply power for the plant's safety system.

Tennessee Valley Authority: “We have never experienced such a major weather event in our history”; Mal-adapation: Missouri levee failure at Poplar Bluffs highlights need to increase infrastructure investments and prepare for climate change -- TVA COO:  Wednesday’s series of storms caused major damage to the TVA power system. We have never experienced such a major weather event in our history….  Hundreds of thousands of consumers are without power because of damage to power lines and other equipment….  The three units at the Browns Ferry Nuclear Plant in northern Alabama automatically shutdown [safely] as a result of transmission line damage from the storm. One thing is clear from all of the extreme weather slamming the United States: The warming and the deluges are connected (see Masters: Midwest deluge enhanced by near-record Gulf of Mexico sea surface temperatures).  Capitol Climate has just aggregated the data from NOAA’s National Climatic Data Center on “Monthly total number of daily high temperature, low temperature, and high minimum temperature records set in the U.S.” for the last few months. 

EarthObservatoryNASA: Flooding along the Mississippi River - On April 28 in the afternoon, 62 river gauges reported major flooding, 109 gauges had moderate flooding, 233 gauges showed minor flooding, and 298 showed conditions near flood stage, according to the Advanced Hydrological Prediction Service (AHPS). Flooding was concentrated in the U.S. Midwest and South, with some in the Northeast.

NOAA's National Weather Service: U.S. Tornadoes -- Daily Counts and Annual Running Trends*  - NOAA: U.S. Tornadoes -- Daily Counts and Annual Running Trends* Daily Counts and Annual Running Trend (Updated Frequently)* 10 year charts

Are La Nina and global warming behind the extreme tornado activity? - Tornadoes have been descending from angry skies with a frequency that may become unmatched in official records of April twisters. Cities, small towns, rural hamlets -- even international airports -- have suffered severe damage. The atmosphere has been behaving like an unruly teenager, with 275 tornadoes recorded so far this month.In order for tornadoes to form, several factors have to combine in just the right way. These ingredients include: a warm and humid atmosphere, strong jet stream winds, and atmospheric wind shear (winds that vary with speed and/or direction with height), as well as a mechanism to ignite this volatile mixture of ingredients - such as a cold front. As Jason discussed Friday, an unusually powerful jet stream has steered a cascade of frontal systems across the midsection of the country. “There’s been a ton of systems coming through, that’s I think one of the biggest single things” leading to the recent severe weather outbreaks, says Harold Brooks, a research meteorologist at the National Severe Storms Laboratory in Norman, Oklahoma. But what is causing all of these systems to be so intense? Is it La Nina, a natural climate cycle featuring cooler than average water temperatures in the tropical Pacific Ocean? Is global warming playing some role?

‘Hidden CO2 emissions’ revealed - The extent of carbon dioxide (CO2) emissions "hidden" in imported goods is growing, according to two studies. Official statistics do not include emissions created by making imported goods but researchers say they should. It comes as the Proceedings of the National Academy of Sciences reports 26% of global emissions come from producing goods for trade. The Carbon Trust found such "embedded" CO2 could negate domestic carbon cuts planned in the UK up to 2025.   Researchers want all nations to publish their data on embedded emissions. Glen Peters of research group Cicero, lead authors of the PNAS report, told BBC News: "There is a degree of delusion about emissions cuts in developed nations. They are not really cuts at all if countries are simply buying in products they used to manufacture.

Greenhouse gases: The cost of trade | The Economist - Rich countries are outsourcing carbon-dioxide emissions. WHEN a country reports its carbon emissions to the United Nations, it is the carbon dioxide that goes out of chimneys, exhaust pipes and forest fires of the country’s own territory that gets counted. But what about the carbon emitted elsewhere by people making goods that the country imports? A paper just published in PNAS by Glen Peters and colleagues looks at how the world’s carbon emissions get reapportioned when the carbon used to make traded goods and services is charged against the account of the ultimate consumer, not the initial producer. So while Europe may pride itself on emitting less carbon from its own territory than it did in 1990, from a consumption point of view the carbon embodied in imports from China alone all but cancels out the gain. In general the study finds that net embodied carbon imports into developed countries grew from 400m tonnes in 1990 to 1.6 billion tonnes in 2008—a growth rate faster than that of the world economy or global carbon emissions.

Natural Gas - The graph is from Peter Tertzakian who notes: To put this in perspective, 1,000 Tcf of natural gas contains the equivalent energy to 166 billion barrels of oil – a staggering amount considering that the discovery of 10 billion barrels of conventional oil these days is a rare occurrence, worthy of many headlines… Estimates of recoverable shale gas have doubled in just the past year and shale gas is only part of the supply with the total being 2,552 trillion cubic feet (Tcf) of potential natural gas resources in the U.S. alone. Per unit of electricity, burning natural gas results in significantly fewer carbon dioxide emissions than coal. It is possible, however, that fracking may leak more methane to the atmosphere so the net climate benefit is unclear, at least given current methods of development.

Fracking's Environmental Footprint to Transform Pennsylvania - Executives in the energy exploration and drilling industry practically salivate when talk turns to possibilities in Pennsylvania. Perhaps fittingly, their nickname for the Keystone State is "the Saudi Arabia of natural gas." Being heralded as twin energy founts, however, is about where the similarities between the natural gas-rich Middle Atlantic state and the oil-laden Middle Eastern nation end. Their geographies are studies in extreme contrast and size-wise, two Pennsylvanias could be shoehorned into just one Saudi Arabia. Right now, the hydraulic fracturing fever sweeping their state has many Pennsylvanians in turmoil. In addition to concerns about impacts on their water and air, state residents are worried about the indelible footprint fracking infrastructure is in the midst of stamping on the forests, open spaces, rural hamlets, agricultural fields and public lands they call home.

The high cost of fracking – and the movement against it - Asking Chesapeake Energy if it was worthwhile to drill in an area where they had a direct financial interest seems a bit like asking Tobacco Institute scientists if smoking is linked to lung cancer, no? An increase of over 700% ought to be looked into, not blandly passed along. But either way, there’s a lot of natural gas under them thar hills and it is, as the USGS helpfully notes in its summary, “an abundant, domestic energy resource that burns cleanly, and emits the lowest amount of carbon dioxide per calorie of any fossil fuel.”No matter how clean it is when you actually consume it, the process of getting to it is unbelievably dirty. Even the USGS acknowledges as much: “While the technology of drilling directional boreholes, and the use of sophisticated hydraulic fracturing processes to extract gas resources from tight rock have improved over the past few decades, the knowledge of how this extraction might affect water resources has not kept pace.”  Drilling technology sprinting past environmental protection - sound familiar?

TVA agrees to retire 2,700 megawatts of coal - Tennessee Valley Authority plans for a clean energy future - America of the future will burn less coal, use electricity more efficiently, and run our power system more safely. In this future we will have lower, more stable power prices; avoid the most catastrophic effects of climate change; and the energy industry will be a source of good jobs for millions of Americans. This future will not just appear out of thin air, though, and it will not happen next year, or even the year after that. America’s clean energy future will arrive over the next several decades. More importantly, the clean energy future will be the result of serious planning and investment, which must begin today. The Tennessee Valley Authority, or TVA, is one of our country’s best examples of public investment in the needs of the future. TVA is responsible for powering much of rural America and today provides power throughout the Southeast. It has already embarked on the process of planning for the future and their decisions shed light on what other utilities will have to do.

Displacing People For Profit: Obama Administration Supports Controversial Coal Project in Bangladesh -  While President Obama tours the country raising money for his reelection campaign, we are likely to hear well-crafted speeches that are supportive of clean energy and critical of big polluters. In West Virginia and Wyoming, he will no doubt talk glowingly of so-called "clean-coal" technology. In California, he might speak to solar's great potential, and in the Midwest, perhaps the whirling future of wind power. There will probably be little mention, however, of Obama's rubber-stamping of coal mine leases on public lands, or his continued support for a nuclear power renaissance. He'll also be unlikely to address how his administration is covertly pushing for an internationally opposed open-pit coal mine operation in Bangladesh. The massive mine, which was originally proposed in the mid-1990s, has been met with a number of roadblocks along the way, mostly in the form of grassroots outrage. Located in the Phulbari area of northwest Bangladesh, the mine would involuntarily displace anywhere between 40,000 and 200,000 villagers -- with 40,000 being the conservative estimate of the company pursuing the mine. The project would also displace indigenous populations who trace their ancestry in the region back 5,000 years.

"Energy Shift Parade" held to protest against nuclear policy in Japan - Protestors hold a banner and placards as they protest against Japan's nuclear policy during a parade for the Earth Day in Tokyo on April 24, 2011. Hundreds of people joined the march "Energy Shift Parade," demanding the use of sustainable energy instead of nuclear power. (Xinhua/AFP Photos)

Hi-res photographic proof reactor core exploded at unit 3 -  The residents of Japan have good cause to mistrust the media, TEPCO officials, and members of their government when it comes to assurances about radiation levels, plutonium dispersal, and the related health risks. Americans also have good cause to mistrust these same sort of assurances issued to American residents. The following is a letter I just sent to the Union of Concerned Scientists detailing evidence that the Fukushima unit 3 Reactor was the source of the massive hydrogen explosion a few weeks ago.... and the further implications of this easily verifiable fact. Follow the links and examine the aerial photos and the diagram of the reactor building. If you agree with my conclusions after looking at the evidence with your own eyes (and I'm sure that most anyone will), please contact the UCS and any media sources of your choice to encourage them to look into this.

New TEPCO data unequivocally shows ongoing criticalities at Unit 2 - Data released on April 28, 2011 by TEPCO is now unequivocal in showing ongoing criticalities at Unit 2, with a peak on April 13. TEPCO graphs of radioactivity-versus-time in water under each of the six reactors show an ongoing nuclear chain reaction creating high levels of “fresh” I-131 in Unit 2 [...]When a nuclear reactor goes “critical” it means that the fissioning of U-235 or Pu-239 becomes a self-sustaining process, called a chain reaction [...] But instead of seeing that expected decrease in I-131 levels relative to Cs-134 and Cs-137 in the regular TEPCO press releases, I-131 was seen to be increasing, instead of decreasing as the physics said it should. [...] “Outlier” Unit 2 has I-131 levels roughly 20 times its levels of Cs-134/137. The only possible source of I-131 would be “pockets” of molten core in the Unit 2 RPV settled in such a way that the boron in the injected water is insufficient to stop the localized criticalities.

Guest Post: Radiation Expert Says “Sr-90 and Uranium and Particulates Will Be Building Up in the USA and Europe … For Now I Think It Prudent To Stop Drinking Milk” -I wrote to radiation expert Dr. Chris Busby to ask him if he thought people living outside of Japan should take any actions to try to reduce their radiation exposure:  Epidemiologist Dr. Wing thinks people outside of Japan shouldn’t do anything to attempt to reduce radiation exposure: Leading Epidemiologist: Instead of Trying to Avoid Japanese Radiation, Put Your Energy Into Demanding a Saner Energy Policy But the French anti-nuclear NGO CRIIAD says that pregnant women and infants should take steps to reduce exposure: French Nuclear Group Warns that Children and Pregnant Mothers Should Protect Themselves from Radiation. I’ve also researched the scientific literature, and found that antioxidants can help a little: Can Vitamins or Herbs Help Protect Us from Radiation?  What’s your advice for people outside of Japan? Professor Busby replied: I attach my “don’t panic” paper. However, since then I have re-thought this advice as the thing is still fissioning and releasing 10 to the fourteen becquerels a day. This will mean that Sr-90 [strontium 90] and Uranium and particulates will be building up in the USA and Europe. I will assess this later but for now I think it prudent to stop drinking milk

Radiation Readings in Fukushima Reactor Rise to Highest Since Crisis Began -  Radiation readings at Japan’s Fukushima Dai-Ichi station rose to the highest since an earthquake and tsunami knocked out cooling systems, impeding efforts to contain the worst nuclear crisis since Chernobyl.  Two robots sent into the reactor No. 1 building at the plant yesterday took readings as high as 1,120 millisierverts of radiation per hour, Junichi Matsumoto, a general manager at Tokyo Electric Power Co., said today. That’s more than four times the annual dose permitted to nuclear workers at the stricken plant.  Radiation from the station, where four of six reactors have been damaged by explosions, has forced the evacuation of tens of thousands of people and contaminated farmland and drinking water. A plan to flood the containment vessel of reactor No. 1 with more water to speed up emergency cooling efforts announced yesterday by the utility known as Tepco may not be possible now. “Tepco must figure out the source of high radiation,” . “If it’s from contaminated water leaking from inside the reactor, Tepco’s so-called water tomb may be jeopardized because flooding the containment vessel will result in more radiation in the building.”

Japanese government considers underground wall to contain Fukushima radiation - -- The Japanese government is considering building an underground barrier near the Fukushima No. 1 nuclear power plant to prevent radioactive material from spreading far from the plant via soil and groundwater, a senior government official said. Sumio Mabuchi, a special adviser to the prime minister, revealed the plan Friday at the Japan National Press Club building in Tokyo. The plan is the first attempt to address the risk of contaminated water spreading far from the plant through soil. According to Mabuchi, the barrier would extend so far underground that it would reach a layer that does not absorb water. The wall would entirely surround the land on which reactors No. 1, 2, 3 and 4 stand. Mabuchi is a member of the unified command headquarters set up by the government and Tokyo Electric Power Co. to deal with the nuclear crisis. He serves as the head of government representatives on a team dealing with medium- and long-term issues, including how to contain the spread of radioactive materials from the plant.

Japan's irradiated waters: How worried should we be? -- Twenty-five years ago, I was a Ph.D. student here in Woods Hole, Massachusetts, studying the fate of fallout in the North Atlantic from nuclear weapons testing, when an explosion and fire at the Chernobyl nuclear plant released large quantities of radioactive materials into the surrounding environment. My colleagues and I immediately joined other scientists tracking these radioactive contaminants, which in my case focused on the Black Sea, the closest ocean to the accident site. A quarter-century later, I can still measure fallout from Chernobyl in the Black Sea, though fortunately at levels that are safe for swimming, consuming seafood and, if you could remove the salt, even drinking. I never thought I'd see another release anywhere near the magnitude of Chernobyl. Data released by Japanese scientists show cesium-137 concentrations in the waters immediately adjacent to the reactors at levels more than 1 million times higher than previously existed and 10 to 100 times higher in the waters off Japan than values measured in the Black Sea after Chernobyl. For the oceans, this is the largest accidental release of radiation we have ever seen.

German Nuclear Exit May Boost Power Prices 30%, BDI Group Says - Germany’s plan to accelerate its exit from nuclear power generation may raise electricity prices by as much as 30 percent, the BDI German industry lobby said.  The permanent halt of eight reactors and the closure of the remaining plants by 2018 could boost wholesale power prices to 70 euros ($102) a megawatt-hour that year, according to a study commissioned by the BDI and published April 24 on its website.  Germany, Europe’s biggest economy and largest energy user, plans to exit nuclear power after explosions at Japanese reactors stoked safety concerns. Higher prices could threaten chemical- and metal producers while utilities lose plants that can be more profitable than fossil-fuel-fired units, RWE AG (RWE), the country’s second-largest energy supplier, said last week.  The exit would generate additional costs of 33 billion euros by 2020, of which industrial and commercial energy users will pay 24 billion euros, as utilities employ more expensive power generation and demand for carbon-dioxide emission permits rises, the BDI said. The figure would rise to 51 billion euros if subsidies for developing renewable energy and the German power grid are included, the lobby group said on its website.

Indian Point Had A Small Leak In The Past -The Hudson Valley has already suffered from the spent nuclear fuel at Indian Point. Indian Point has two huge pools of spent nuclear fuel rods stored at its working reactors, each housing tons of uranium and plutonium no longer strong enough to turn steam into electricity, but still strong enough to be lethal. "The issue is to keep water in the pool," said Steve Kraft, senior director of special projects for the Nuclear Energy Institute, an industry policy organization. "It's all solved by having water in the pool." Nuclear fuel rods in the pools can start to heat up and even spew radiation — as in Fukushima — when the water that usually surrounds them leaks out or boils away as steam.While Indian Point has never had a serious incident that threatened the water coolant in its spent fuel tanks, it did experience a tiny, potentially dangerous leak. In 2005, Entergy Nuclear workers discovered the leak in Indian Point 2's spent fuel pool while digging on the property.Radioactive water was seeping through a crack in the wall of the pool building, soaking into the ground — and then finding its way into the nearby Hudson River.

Should We Re-Evaluate Carbon Taxes? - I've long been an advocate of some form of carbon taxation--gas tax, source fuels tax, even cap-and-trade if nothing else is available.  The tax seems like a three-fer: raise revenue, discourage use, and encourage innovation.   However, Jim Manzi has been making a pretty compelling argument that such a tax will do much less than people like me have been anticipating.  Even the long-term response to price increases is simply too low: Broadly, this means that even in the rich countries, a 1% increase in price leads to less than a 0.1% decrease in consumption over the long term.  And that's the best-case; in the short term, and in poorer countries, it's even less.  Meanwhile, income elasticity (how demand changes with rising or falling incomes) is positive, and a much larger effect.  As long as income growth continues, demand will also grow unless the price changes are very, very large. Ryan Avent argues that a gas/carbon tax is still a good idea, even if it won't deter usage.  But Manzi demurs:

Of carbon taxes and price elasticities - Kevin Drum recently set off a round of debate in the blogosphere lately with a post about the price elasticity of oil and carbon taxes. He cited an IMF study that showed a long-run price elasticity of oil demand of -0.035. What this means is if oil prices go up 10%, then the long-run demand for oil goes down 0.35%. The implication he draws is that any reasonably priced carbon tax isn’t going to have much of an impact on demand, and so it’s not going to be an effective policy for reducing carbon emissions. There’s obviously some problems with this, some of which has already been covered by Ryan Avent, Megan McArdle, and Kevin Drum himself, with Jim Manzi and Kevin Drum, again, on the other side. Importantly, as Alex Tabarrok pointed out, this is but one estimate of the price elasticity of demand for oil, and it’s smaller than what you find in the literature. The following table from a James Hamilton paper, also linked to by Alex, reports the results of several literature reviews of oil and gasoline price elasticities:

The Price Elasticity of the Demand for Oil -- Kevin Drum, Megan McArdle, Jim Manzi and Stuart Staniford are all worried by an IMF report that has very low price elasticities of oil such that “a 10 percent permanent increase in oil prices reduces oil demand by about 0.7 percent after 20 years.” Three quick notes. First, do note that the IMF estimates are below others in the literature which estimate an elasticity of 0.2 to 0.3, meaning that a 10% increase in price would reduce demand by 2 to 3 percent, still small but three times the IMF estimates. Moreover, the US estimates tend to be higher still in the range of 0.4-0.5. All of the estimates are certainly low so we are not going to solve the climate change problem overnight with a tax on oil.  Oil is necessary for civilization–given today’s technology–so people aren’t going to give it up easily. Second, as Ryan Avent notes, a smaller elasticity makes a better case for taxing oil and reducing labor taxes. Moreover why the focus on oil?  What matters for climate change is total carbon and there are likely to be many carbon users with high elasticities relative to oil, which has special properties. Third, this all depends on substitute technologies. In the past, there were few good substitutes for oil. If there are more good substitutes in the future then the elasticities will get larger.

Rethinking Rethinking the Gas Tax -- Adam Ozimek argues that we shouldn't jump to conclusions about the ineffectiveness of a gas tax, saying that the elasticities I blogged about yesterday were from IMF estimates that are substantially lower than other estimates.  You should read the whole thing, but I think there are two points worth highlighting. The first is that elasticities of demand for oil seem to be falling; they were much higher in the seventies than they are now, especially here.  This makes perfect sense: when prices spike, people invest in making their lives more efficient, and when prices fall, they don't suddenly rip out the insulation and sell the Prius. When you're very inefficient, small changes in efficiency mean big reductions in fuel usage--and spending.  But as your products become more efficient, the potential gains get smaller and smaller: This graph is really important, and I think underappreciated by those who write about things like CAFE standards.  What it tells you is that for both consumers, and consumption, the difference between 10 mpg and 20 mpg is larger than the difference between 20 mpg and 40 mpg.

Jim Manzi makes the case for higher petrol taxes - JIM MANZI does not think that it's a good idea to use Pigovian taxes to reduce emissions or, it seems, to cut oil consumption. I've always found his arguments interesting but wholly unpersuasive. Here's a small dose, in reaction to a Kevin Drum on the relatively small estimated elasticities of demand for oil produced in a recent IMF study: For example, it’s simple to observe that even really large, sustained price swings haven’t prevented amazingly steady growth in U.S. gasoline usage for more than half a century. Yes, people react to prices, but it’s hard to imagine that we could today impose a price high enough to get out of the structural problems of global warming (to the extent that you accept that) or our dependence on unstable regimes for oil.And on the other hand, price elasticity in the future cannot be divined by such models. As the available trade-offs change, the price elasticity of oil will change. Specifically, to the extent that we continue to progress in making non-fossil-fuels technology cheaper and more effective for an ever wider array of applications, we can accelerate the ongoing de-carbonization of our economy.

More on the Gas Tax - My father sends a critique of my views on the gas tax: In your discussions of the gas tax I didn't see any acknowledgment of the user fee aspect of the gas tax. It is actually a user fee,as gas usage is proportionate to vehicle weight and distance, with a slight progressive bias due to the fact that higher income folks tend to buy heavier vehicles.You may recall that there was a Commission that reported to the Congress that we should actually be investing about three times as much money as we are at present in the surface transportation system and we should raise the user fees appropriately to pay for these needed investments.  One of the reasons that there is much less elasticity today,as compared to 1973, is that we have jettisoned almost all of the non-transportation industrial uses of petroleum products. Very few,if any,power plants have base loads dependent on oil. Most peaking plants have been shifted to natural gas. The uses of diesel generators for standby and isolated power is probably the largest non-transportation usage,but even there new solar installations are reducing those loads.

IMF Short Term Elasticities Are Not Crazy - I gasped out loud last week at the low values for short term elasticity in the IMF World Economic Outlook: This was picked up by Kevin Drum, and that set off a small blogospheric storm in a teacup with posts by Ryan AventMegan McArdle, Kevin Drum again, Jim Manzi, Kevin Drum a third time, Marginal Revolution, Modeled Behavior, and probably others I missed.  Much of this discussion was about the implications for carbon taxes, which are not my concern here.  But a secondary theme was skepticism that the IMF's estimates are correct.  In particular, it was widely noted that there are much higher estimates in the economic literature.  I was familiar with this (which was why I titled the original post "Wow..."), and I was also aware of the trend to lower elasticity estimates over time but had never seen an estimate as low as the IMF's latest one. In this post, I wanted to present an admittedly crude exercise, partly for my own education, but which I think illustrates that the IMF's short term estimates for elasticity are not crazy on their own terms (ie as describing behavior between 1990 and 2009).  What I did was take annual data for oil prices (the inflation adjusted ones from the BP spreadsheet), world GDP from the IMF, and total oil production also from BP.  The year-over-prior-year changes look as follows:

Gross World Product Will Not Grow at 4%+ for Five Years - On Friday, we looked quickly at some estimates in the International Monetary Fund's World Economic Outlook for oil elasticities, as well as their projections for economic growth.  In this post, let's go through some of the implications of these numbers for oil supply and/or oil prices. First, from the detailed statistics in the WEO database, here are the IMF's projections for world growth over the next five years: This is annual percentage growth in total gross world product, corrected for inflation, and expressed at Purchasing Power Parity (PPP: ie, in which goods and services from non US countries are corrected to US prices assuming equivalent goods and services should be priced the same, rather than using market exchange rates). To give some idea of the context, here is the history of world growth since 1980, together with the growth projections:You can see that the IMF is basically forecasting five years of pretty good growth - near the top of the historical range, but certainly not above it.  They are not projecting any serious global slowdowns, still less an outright global recession, To turn this into a forecast for global oil supply, we can use the elasticities from their table 3.1:

BP gets billion-dollar tax credit for Gulf Spill - In general, I think comparisons of sprawling multi-trillion dollar budgets spent in complicated, legally mandated ways to overly simplistic personal situations is a bogus form of argument. But I can't help but wonder if I screwed up royally and killed 11 people and destroyed the livelihoods of thousands more if I'd be able to write it off my taxes as a business expense. I feel pretty sure the outcome would be me in jail, bankrupt by legal costs — particularly if it were my gross negligence that caused foreseeably catastrophic results. But BP is getting a tax credit to the tune of $13 billion by calling Gulf clean-up efforts business expenses.  That's right, the government played tough and forced BP to pay to clean up its own mess. But then BP stuck Uncle Sam with the tab after all.  U.S. corporate law allows companies to take credits for up to 35 percent of their losses. As a result, U.S. taxpayers are indirectly subsidizing the cost of the cleanup and the $20 billion fund BP created to compensate Gulf residents and businesses for its whoopsie-daisy last April. Heads, you're screwed; tails, you're screwed, too!

Blowout could spill 58 million gallons in Arctic - The federal agency overseeing offshore drilling in Alaska says the worst-case scenario for a blowout in the Chukchi Sea lease could result in a spill of more than 58 million gallons of oil into Arctic waters. That’s about a quarter of the Deepwater Horizon spill, which put 206 million gallons of oil into the Gulf of Mexico. But it’s far more than Shell Oil — the major leaseholder in waters off Alaska’s northwest coast — says it could handle under its current response plan. When applying for exploratory permits, Shell was required to prepare for a maximum spill of 231,000 gallons per day. The company says its fleet of on-site responders — including boats, barges, skimmers, and a tanker that can hold 21 million gallons of recovered liquids — can handle a spill of 504,000 gallons per day. But according to the memo prepared by the Alaska office of the Bureau of Ocean Energy Management, Regulation and Enforcement, a worst-case scenario blowout could initially discharge about 2.6 million gallons per day.

U.S. Airline Surcharges Set Record at $420 as Oil Prices Climb --- United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and rival U.S. carriers added a record $420 in fuel surcharges to round-trip European fares as soaring oil prices propelled first-quarter losses.  Across the industry, surcharges are as much as 50 percent greater than those put in place when fuel prices reached a record three years ago, according to air-travel website  Jet fuel has become airlines’ biggest operating expense, surpassing labor and climbing to an average $2.96 a gallon from January through March, up 41 percent from a year earlier. U.S. carriers raised surcharges and fares and trimmed expansion plans to try to preserve the full-year profitability achieved in 2010, when demand rebounded after the financial crisis.

High Gas Prices Mean Record Profits for Big Oil - While many Americans are seething at gas prices, which have hit $5 per gallon in parts of the country, big oil companies are expected to report significant first quarter profits later this week.  Analysts say they expect the world's largest non-government controlled oil company, Exxon, to report a staggering $10 billion profit -- a 60 percent increase.  Shell is expected to post a healthy 22.2 percent gain, translating to $5.9 billion for the company, which is right on par with competitor Chevron's profits.  It's enough to make people grappling with how to survive the pain at the pump furious.  "We're the ones getting shafted," But experts say you shouldn't cast blame on big oil -- they're not responsible for setting the price.

The Banana Peel of Destiny -That was a cute move by President Obama last week, calling out the "oil speculators" with a memo to his Attorney General, Eric Holder.  The President proved a few weeks ago, in his energy speech to the nation, that he doesn't understand how these resources are produced and traded. Consequently, the people he addressed remain clueless, but ticked off nonetheless. And the logic of politics now compels Mr. Obama to call out the dogs on... people who make money trading paper claims on oil?   Funny, he didn't show any interest the past two-plus years in people who make money swindling taxpayers via booby-trapped Collateralized Debt Obligations and Credit Default Swaps. Maybe those things sound too abstruse to get excited about - but believe me, it was a heckuva lot more money. In fact, a case could be mounted by God's attorney general - if he has one - that Mr. Obama abetted a gigantic conspiracy in fraudulent financial paper which makes the oil speculators look like shoplifters in a Kentucky WalMart.  For those of you interested in the reality side of things, here's the scoop:  The price of oil is going to go way up, and way down, and way up again, and way down again until everyone is too broke to ask for any, and companies are too ruined to go get it for them, and governments are too broken to interfere in the process.  The oil speculators are normal characters in a stressed market doing what needs to be done on the margins of "price discovery."

Putting Oil and Gas Tax Treatment in Perspective - Oil and gas companies are probably used to not being the most popular entities in public life, but it would seem they become easy targets when high gas prices are high - even more so when those prices begin to have political ramifications. President Obama has repeatedly called for tax provisions targeted at the oil industry to be repealed, including during his State of the Union address in February. Since then the White House has continued to single out oil and gas companies, sending a letter to members of the leadership in Congress this week, urging them to “eliminate unwarranted tax breaks for the oil and gas industry” and instead increase subsidies for other forms of energy. All of this begs the question, how much money are we talking about? According to Fiscal Fact No. 260, “Who Benefits from Corporate ‘Loopholes?’”, there were about $2.2 billion in tax expenditures that were specific to the oil and gas industry in 2010 It is true that the oil industry benefits from special tax provisions, but so do many other industries. Many tax benefits are poor policy and should be eliminated. There are also many tax benefits that are not limited to a specific industry, and these too could be scrubbed from the tax code.

Boehner Opens Door to Review of Oil Industry Tax Breaks - House Speaker John Boehner said Monday he’s prepared to consider curbing long-standing tax breaks used by oil and gas companies as part of the effort to cut the federal budget deficit, signaling a softening of the Republican position on the issue. “It’s certainly something we should be looking at,” Mr. Boehner said in an interview with ABC World News. “We’re in a time when the federal government’s short on revenues. They ought to be paying their fair share.”The Ohio Republican stopped short of endorsing a rollback of all oil industry tax breaks, and said he wants to consider the effect a change in the tax treatment of oil industry investments would have on job creation. “I don’t think the big oil companies need to have the oil depletion allowances,” he said. “But for small, independent oil and gas producers, if they didn’t have this there’d be even less exploration in America than there is today.”

Obama's Targets GOP Divisions On Oil Subsidies - President Obama knows all too well what it's like to feel the wrath of rankling his base by embracing compromise with Republicans on one of their ideological positions. That's why he didn't hesitate when House Speaker John Boehner (R-OH) appeared to open the door -- just a crack -- to the idea of ending payments to oil companies in an interview with ABC News released Monday afternoon.  Boehner's office spent all day dialing back the bosses' comments.  "We have pointed out for years that raising costs for energy producers will raise costs for consumers," Boehner spokesman Michael Steel told TPM. "And we want to 'take a look' at anything that lowers gas prices - but the President's proposal won't do that." But the damage was already done and the rest of the GOP leadership team was forced to quickly putty over any cracks appearing on the surface -- real or perceived -- while Obama did his best to exploit any divisions.

Boehner Jabs Obama on Economy, Offshore Drilling - As the political fight over rising gasoline prices heats up, House Speaker John Boehner cited Wednesday’s sluggish economic figures in prodding the White House to embrace Republican proposals to expand offshore oil and gas drilling. "While any positive growth is welcome, we are still not seeing the type of economic growth and private-sector job creation needed to help Americans who are struggling across the country,” the Ohio Republican said in a statement. “Skyrocketing gas prices continue to batter families and small businesses, and the Obama administration is making the problem worse by blocking more American energy production.” The Commerce Department reported Wednesday that gross domestic product grew at a 1.8% annual rate in the first three months of 2011. That number, coupled with rising gasoline prices and 8.8% unemployment, has both parties scrambling to look like they’re dealing with the problem.

Rising gas prices: Can Obama do anything about them? - If people have to keep paying more and more to fill their cars up, the president could lose re-election—even to one of the current batch of Republicans. There's evidence, circumstantial but graphically compelling, that the president's current poll numbers are a function of the price of gas. So: What can the president do about it? The standard answer is, "Not much." The political answer is, "Glom on to a policy that my party and/or industry wants him to support." The actual answer is somewhere between these two. There is no shortage of ideas. The issue will be which party or politician is skillful enough at using the politics of the moment—and oil companies will report their new, sure-to-be-massive profits over the coming days—to put any of these ideas into practice. Here's the bad news. In times of great panic over gas prices, Republicans and Democrats—and, more subtly, paid-for experts—resurrect some of their favorite energy plans. Democrats want to end tax subsidies for oil companies, and they've gotten a lift from Boehner's ad hoc agreement with them in that ABC News interview. Republicans—again, led by Boehner—say that Obama isn't taking "all of the above" energy plans seriously. ("All of the above" is a way to mention unpopular energy policies without actually mentioning them.)

Harry Reid wants Senate vote on oil incentives - Senate Majority Leader Harry Reid wants the full Senate to consider repealing oil and gas industry tax incentives next month. Reid is backing President Barack Obama’s effort to repeal roughly $4 billion in annual tax incentives for the industry — and potentially move that money toward renewable and clean energy projects. He will bring up such a plan “as soon as I can do it procedurally in the Senate here,” he told reporters in a conference call Wednesday. Obama — in a letter to congressional leaders Tuesday — said one way to address gas prices is eliminating those industry incentives and “invest that revenue into clean energy to reduce our dependence on foreign oil.”

Boehner rejects oil-subsidy vote As the country’s largest oil companies report near-record profits, the office of House Speaker John Boehner (R-Ohio) rejected on Thursday Democratic calls to consider legislation eliminating billions of dollars in tax breaks for the same corporations. “The Speaker wants to increase the supply of American energy to lower gas prices and create millions of American jobs,” Boehner spokesman Michael Steel said in an email. “Raising taxes will not do that.” Boehner said on Monday that oil companies should pay their fair share of taxes and that the industry did not need at least one of the subsidies Democrats want to terminate. But he started walking those comments back in the same interview, and his spokesman’s statement continued the rearguard action.

Oil Tax Breaks: Will Obama's Plan Cause A Price Spike? - Gas prices are up. Oil company profits are up. Should the taxes Exxon Mobil, Shell and others be going up as well? An increasing number of politicians seem to be saying yes. President Obama has proposed eliminating $4 billion in tax subsidies oil companies receive a year. Congress may vote on the plan next week. Yesterday, Republican Paul Ryan said he was for ending corporate welfare, including breaks for oil companies. Earlier in the week, Speaker of the House John Boehner indicated that he would be for cutting tax breaks to the oil companies given the price of gas. But now he seems to be backing off that stance. Boehner's spokesman, Michael Steel, told TIME that “the Speaker is willing to look at any proposal that would actually lower gas prices. Unfortunately, what the White House has proposed at this point would actually increase gas prices.” Indeed, the recent rise of gas prices seems to be slowing the economy. So raising taxes on oil companies does seem to be a bad move if it will  result in higher gas prices. But is that what would really happen? Probably not.

Sigh - "Congress returns next week to a flaring brawl over oil industry profits and tax breaks, with both parties hoping to capitalize on growing public ire at high gasoline prices. President Obama touched off the latest flurry with a letter to Congressional leaders last week calling for the repeal of $4 billion a year in tax incentives for domestic oil and gas production, saying the industry was doing very well, thank you, and needed no help from the government. Republicans responded that the president’s proposal would only raise the cost of production and the price of gasoline, which now tops $4 a gallon in many parts of the country. Both parties are planning legislative maneuvers this week to try to caricature their opponents as either in the pockets of the oil companies or hostile to domestic energy production." An entire article in the paper of record on the politics of high gas prices.   And no mention of "Libya", "Saudi Arabia", "Iraq", "fuel economy", "China", or any other factor that actually matters to the price of oil.  The disconnect between our political elite and reality couldn't be much wider, could it?

EPA Rules Force Shell to Abandon Oil Drilling Plans - Shell Oil Company has announced it must scrap efforts to drill for oil this summer in the Arctic Ocean off the northern coast of Alaska. The decision comes following a ruling by the EPA’s Environmental Appeals Board to withhold critical air permits. The move has angered some in Congress and triggered a flurry of legislation aimed at stripping the EPA of its oil drilling oversight. Shell has spent five years and nearly $4 billion dollars on plans to explore for oil in the Beaufort and Chukchi Seas. The leases alone cost $2.2 billion. Shell Vice President Pete Slaiby says obtaining similar air permits for a drilling operation in the Gulf of Mexico would take about 45 days. He’s especially frustrated over the appeal board’s suggestion that the Arctic drill would somehow be hazardous for the people who live in the area. “We think the issues were really not major,” Slaiby said, “and clearly not impactful for the communities we work in.” The closest village to where Shell proposed to drill is Kaktovik, Alaska. It is one of the most remote places in the United States. According to the latest census, the population is 245 and nearly all of the residents are Alaska natives. The village, which is 1 square mile, sits right along the shores of the Beaufort Sea, 70 miles away from the proposed off-shore drill site.

There Goes the Data: Major Cuts at EIA Washington -- One of my greatest concerns coming out of the financial crisis of 2008 was that, eventually, free services like government data would be reduced or lost altogether. This afternoon I learned from EIA Washington that one of the cornerstones of my own work, and also the work of others globally, is about to be suspended: the gathering of International Energy Statistics. For me professionally, this is among the most important gateways to monthly data on global oil production. As I said, after 2008 I came to recognize my own professional dependency on this free data. But, I never actually expected to lose my access. Well, that’s always the way, isn’t it? Below is a portion of today’s EIA Press Release: While I’ve not had time to look through the entire list of cuts, I did place a phone call to EIA Washington before publishing this post. I confirmed with an EIA spokesperson, Paul, that the cuts are immediate. While I may post again on this issue, the loss of such a large array of data is going to make work difficult for professionals across the energy, energy policy, environmental policy, and industrial and financial sectors. While we will still have IEA Paris data on a monthly basis—and BP Statistical Review data that comes once a year—EIA Washington produced alot of unique data of their own. This is big news. And, it’s bad news.

Oil above $124 as weak dollar supports (Reuters) - Oil rose on Wednesday after Federal Reserve Chief Ben Bernanke gave no signs that the central bank was about to tighten monetary policy. After getting an early boost from U.S. inventory data showing tightening gasoline stockpiles, oil markets extended gains after the Federal Reserve signaled it is in no rush to scale back its support for the U.S. recovery as it cut its forecast for 2011 economic growth. Lower interest rates tend to fuel commodity prices, driving investors into riskier assets and pushing up prices. While the central bank noted energy and commodity prices were rising, it said their effects would be "transitory." U.S. crude prices have risen more than 20 percent so far this year and consumers in the world's largest economy are starting to show signs of being hurt by higher fuel costs. U.S. crude oil for May delivery settled at $112.76 a barrel, gaining 55 cents, after climbing to a session high of $113.40, just below the year's high of $113.48 hit on Monday.

Oil roulette - The oil shock of 2008 helped drive the U.S. economy into the Great Recession. Oil at that time cost a record $147 per barrel, and gasoline prices surged to $4.11 per gallon in July 2008—the highest price ever. This squeezed families’ budgets because it is very difficult for most people to significantly reduce driving in the short run when prices rise. And the U.S. Commodity Futures Trading Commission, or CFTC, found that the 2008 oil record was partly driven by speculators driving up prices to make a quick killing. This year “it’s like déjà vu all over again.” Oil prices are rising to heights not seen since 2008. Oil rose from $85 per barrel to $112 per barrel in a little more than two months—a whopping one-third leap. Gasoline prices have followed along, rising by 70 cents per gallon—or 23 percent—during this same time. As our economy struggles to recover from the Great Recession, Americans are again forced to pinch pennies to afford their commute to work, school, and worship. Meanwhile, oil companies prepare to reap record profits in the first quarter of 2011.

Oil near 31-month peak on weak dollar, unrest (Reuters) - Oil prices pushed higher on Friday, on pace to post its eighth consecutive monthly rise, lifted by the weak dollar and turmoil in North Africa and the Middle East that offset concerns about slowing U.S. economic growth and the threat to demand from high prices. On the last trading day of April, both Brent and U.S. crude were heading for an eighth consecutive month of gains. The U.S. string would be the longest run of monthly increases since 1983 when the light sweet crude contract was introduced on the New York Mercantile Exchange, according to Reuters data. Traders also eyed U.S. front-month May gasoline and heating oil futures that expire at the end of Friday's session. Both U.S. and Brent crude bounced from early dips after euro zone data showed the inflation rate rose further above the European Central Bank's target in April, helping push the dollar index against a basket of major currencies. Brent crude for June rose 61 cents to $125.63 a barrel by 12:24 p.m. Brent's 2011 peak of $127.02 was reached on April 11. U.S. crude for June rose 54 cents to $113.40.

Columbus gas prices now at record levels - Gasoline prices in Columbus are at an all-time high today. The average price of a gallon of regular gasoline hit $4.08 today for the city, according to auto club AAA. That's a jump of 17 cents from yesterday and beat the old record set in July 2008 by 3 cents. The state average today of $4.05 matched the record set three years ago. Surging wholesale gasoline prices have been behind this week's big jump at the retail level, said Tom Kloza, chief oil analyst of the Oil Price Information Services. Those prices have risen 10 to 18 cents in many parts of the country this week. He expects prices to continue to climb next week.

Gas prices rising again— Springfield area motorists got another shock to their wallets Thursday as regular grade gas prices jumped to $4.15 per gallon the same day oil producers ExxonMobil and Royal Dutch Shell reported billions of dollars in first-quarter profits. Exxon reported that higher oil prices boosted profits to nearly $10 billion, up 69 percent from a year ago, according to media reports. Shell reported a profit of $8.78 billion, up 60 percent from the previous year. Meanwhile in the Springfield area, numerous filling stations hiked prices Thursday morning for a variety of reasons, said Miami Valley AAA President and CEO Ray Keaton. Unrest in the Middle East and Northern Africa, a draw-down in domestic crude oil stocks over the last several weeks and, in the northern United States, a changeover from winter to summer grade gasoline are promoting the increase in prices, he said.

Chicago: City of the big gas prices - Drivers in Chicago pay more for gas than they do in any other major metropolis in the continental United States. Analysts say that's due largely to a perfect storm of federal, state and local taxes. The average price for a gallon of gas in Chicago was $4.32 a gallon on Tuesday, according to data from price tracker That's more than what drivers pay in sprawling Los Angeles, where gas averaged $4.22 a gallon, and crowded New York City, where it's $4.20 a gallon. Indeed, the only major U.S. city with higher prices is Honolulu, where gas must be imported from the mainland or from refiners on other Hawaiian islands. The average price in America's 57th largest city was $4.44 a gallon. Gas prices have soared this year, driven higher across America1 as global oil prices spike2 on worries about political instability in the Middle East and lost supply from war-torn Libya.

The Peak Oil Crisis: Dimming of the Globe Late last month a newly enhanced web site,, dedicated to collecting articles concerning energy shortages around the world reappeared on the web after an absence of some months. The stories deal with coal, electricity and natural gas shortages as well as oil. In the course of the past month the web site has located and linked to nearly 200 stories that deal with some aspect of the developing global energy shortage. Most of these stories come from local paper and taken together paint a distressing picture of looming societal breakdown in many parts of the world that is not as yet generally appreciated by the public.  Most of the problems reported on deal with electricity shortages - which in several countries have deteriorated to the point where economies are threatened with collapse. In South Asia - Pakistan, Bangladesh, Nepal, and later in India - a combination of too many people, hydro-power reducing droughts, depleting fossil fuel reserves and inadequate investment in infrastructure raises the possibility that many urban areas may soon be uninhabitable.

Dumbest Guy in the Room: Donald Trump’s Energy Policy - As the rumor mill surrounding next year’s presidential election picks up steam, Donald Trump’s potential candidacy has received the nod from a few Republican Party stalwarts.  For his part, Trump appears to be courting party leaders by rolling out big-picture policy statements.  For example, in March, Trump proposed an extraordinarily straightforward energy policy for solving the short and long term energy woes of the United States. The plan has two principal parts. First, the U.S. military re-invade the Middle East and commandeer control of Iraq’s oil fields. As Trump sees it, the U.S. earned the right to annex Iraq’s abundant reserves of crude oil by investing about $1.5 trillion in ousting Saddam Hussein. Trump explained his thinking in an interview with George Stephanopoulos: Trump: George, let me explain something to you. We go into Iraq. We have spent thus far, $1.5 trillion. We could have rebuilt half of the United States. $1.5 trillion. And we’re going to then leave. So, in the old days, you know when you had a war, to the victor belong the spoils. You go in. You win the war and you take it.

U.S. Permits Oil Deals With Libya Opposition (Reuters) - The United States voiced confidence in Libya's main opposition council on Tuesday as the U.S. Treasury moved to permit oil deals with the group -- a potential financial lifeline for the anti-Gaddafi uprising. U.S. Ambassador to Libya Gene Cretz said deepening contacts with the Benghazi-based Transitional National Council (TNC) showed it was "a political body which is worthy of our support" although not yet full diplomatic recognition. "They continue to say the right things. They are reaching out to the international community. They're trying to be as inclusive as possible," Cretz, who is working in Washington to coordinate policy on the Libyan conflict, told reporters. The United States this week took steps to boost aid to the opposition council and to approve oil exports made under its auspices, creating a loophole in U.S. sanctions that could mean millions of dollars in revenue for rebel coffers. The order by the Treasury Department's Office of Foreign Assets Control covers oil transactions handled through Qatar Petroleum, which has agreed to help market oil for the council, or the Vitol group of companies.

Saudi oil production and the Libyan conflict - One of the key questions in assessing the effect of the Libyan conflict on world oil prices was the extent to which an increase in Saudi production would offset some of the lost output from Libya. Now we know the answer, and it's not reassuring. Back on Feb 25, Reuters reported what sounded like some favorable indications: Saudi Arabia has raised oil output above 9 million barrels per day (bpd) to make up for a near halt in Libyan exports,  Only it later turned out that this production increase was not in response to events in Libya, but in fact had been implemented some months earlier. And this week Saudi Oil Minister Ali Al-Naimi tried to get us to believe that the Saudis have now gone back to lower production levels because there's way too much oil being supplied already. I kid you not. Here's the quote from Bloomberg: "Our production in February was 9,125,100 barrels a day," al-Naimi said, as he arrived in Kuwait for a conference. "In March, it was 8,292,100 barrels. The reason I mention these numbers is to show you the market is oversupplied." Well, if the supply of low-sulfur oil from Libya has decreased, and the supply of high-sulfur oil from Saudi Arabia has increased, equilibrium would require an increase in the price spread between sweet and sour crudes.The only legitimate meaning one can attach to Al-Naimi's statement is that if the Saudis had wanted to sell 9 mb/d, they would have had to settle for less than a $25/barrel increase in the price of their lower grades.

Small Saudi Arabia Caveat - A week or so back, there were reports that Saudi Arabian officials had sharply cut oil production in March: Saudi Oil Minister Ali Al-Naimi said Sunday that oil production from the kingdom was 8.292 million barrels per day in March, down about 800,000 barrels a day from 9.125 million barrels per day in February. Most estimates, including the monthly report of OPEC—which relies on external databases—had seen a rising or stable production at about nine million barrels a day in March.At the time, the OPEC Monthly Oil Market Report ("based on secondary sources") showed 8.961mbd in March, versus 8.904 in February.  Today, I checked the IEA, which have now released the detailed tables for March, and they also show flat production of 8.62mbd in March, exactly the same as the 8.62mbd in February. So, for whatever reason, the international agencies do not seem to be accepting the idea that Saudi Arabian production dropped sharply in March.  It will be very interesting when the JODI number comes out.  That is based on Saudi Arabian self reports, and it will be intriguing to see if official Saudi reports of their production bear any relationship to what the oil minister says to the press.

Bush’s chief economist schools Bush and GOP: Domestic drilling won’t lower gas prices  - President George W. Bush stepped away from the ranch yesterday to “opine on the issues of the day” with ABC’s George Stephanopoulos. First up, a lesson on Texas tea. Bush suggested Americans try to “understand how supply and demand works” and realize that offshore drilling is key solution to rising gas prices. “If you restrict supplies of crude, the price of oil is going to go up and it affects gasoline,” he said. But, in what is becoming an unfortunate pattern for the ex-president, his own former administration official disagrees. Doug Holtz-Eakin, the White House’s Chief Economist under Bush, joined MSNBC’s Chris Matthews Tuesday to discuss the problem of rising gas prices. When asked whether the conservative “dig, drill” mantra would actually lead to lower gas prices, Holtz-Eakin — who was also the cheif economic adviser for Sen. John McCain’s (R-AZ) 2008 presidential campaign — offered a simple answer: “no“:

US traders use river transport to profit from oil glut - Barges laden with crude are set to make their way to the oil-rich Gulf of Mexico in the latest sign of how price anomalies have reconfigured energy markets.  Petro Source Terminals, a storage tank operator, plans to start filling vessels with crude oil at the river port of Catoosa, Oklahoma, to sell to refiners in Louisiana, hundreds of miles downstream. The company is hiring barges because the price of West Texas Intermediate crude, the US oil benchmark, has been weighed down by record 40m-barrel stocks at its delivery point in Cushing, Oklahoma.  On Wednesday, the price of Louisiana sweet crude was $127 per barrel, while Nymex June WTI futures were $111.90, having dropped 31 cents.  Profit awaits traders who can sell WTI-linked oil in more expensive markets, but moving it out of landlocked Cushing is difficult. This week two companies, Enterprise Products Partners and Energy Transfer Partners, said they would build a pipeline to move 400,000 barrels per day from Cushing to Houston to provide an outlet for the “stranded” barrels. The project would not begin service until late 2012

End of "Fossil Fuel Age" will drive oil-prices up  Varnholt is a big believer in the Peak Oil thesis - the theory whereby we are extracting the maximum amount of oil, so as we decline from this peak, the price of oil will inevitably rise - and he backs up this confidence.  "Look at what the Saudis have invested in their operational infrastructure in the last decade, and they're not producing more oil, they're actually producing less than they did in 2000. This tells you one of two things; there's less oil available, or it's harder to get to it - or possibly a combination of both - but the latter is the most likely." All of this means of course that oil exploration and production is costlier than ever. There hasn't been a single oil-field discovered in the last thirty years, so the chances of discovering one at this stage are almost negligible.

IEA's Birol: Oil Prices Putting Global Economy 'In The Danger Zone' —High oil prices are threatening to disrupt a still-fragile global economic recovery, the chief economist of the International Energy Agency said Friday.  "We are in the danger zone now with prices and how the economy is responding," said Fatih Birol, head economist at the Paris-based group that represents major oil consumers.  Mr. Birol called on the Organization of Petroleum Exporting Countries to raise production at its planned June 8 meeting, warning that "we may see higher prices than we see now" otherwise. His remarks are the latest salvo in a dialogue between OPEC and their biggest customers. OPEC members have resisted calls for more oil to reduce pressure on economies still in recovery from recession, but public posturing by both sides is increasing ahead of the group's meeting. Mr. Birol said oil use is set to increase by as much as three million barrels a day over the next few months, and prices could march higher unless major producers pump out more crude. Refineries, now leaving a period of seasonal repairs, will soon process more oil to boost production of gasoline and other fuels before summer demand hits.

IEA: The age of cheap energy is over - The Executive Director of the International Energy Agency (IEA) has warned that curbing rising fossil fuel prices will require significant investments and further development and deployment of renewable energy technologies, energy efficiency, and advanced vehicles. Nobuo Tanaka noted that the renewed debate on nuclear energy could have an impact, not only on climate change but also energy security. “The age of cheap energy is over,” Mr Tanaka said, speaking at the Bridge Forum Dialogue in Luxembourg on 13 April 2011. “The only question now is, will the extra rent from dearer energy go to an ever smaller circle of producers, or will it be directed back into the domestic economies of the consumers, with the added benefits of increased environmental sustainability?”

Part 6 Predicting regional and global peak oil and total recoverable oil. -  What is not guaranteed is that there will ever be a replacement which has the energy density and transportability of petroleum. This news story is yet another example of what we have being starting to see with increased frequency: military and government study groups and companies all talk openly about the problems that lay directly ahead, while the public and politicians remain largely asleep—or at least silent. Part 2 and part 3 of this series presented a regional analysis of global petroleum production and consumption trends for the Middle East (ME), Former Soviet Union (FS), Africa (AF), South America (SA), Asia-Pacific (AP), Europe (EU) and North America (NA). Part 4 used this data to predict how the global petroleum export pool will likely decline to zero in about 2030-2035. Part 5 used the data to predict what petroleum consumption will look like for each of these regions as global net-export pool declines to zero. Here in part 6, I analyze the same data to predict peak oil and total recoverable petroleum (Q; sometimes referred to as URR, ultimate recoverable reserves) for these seven regions, and for the world. I also briefly compare my predictions to predictions made by others, and, present a fantasy consumption scenario for North America .

The peaking of oil prices and the coming Depression. Resource Wars to follow - On the Financial Sense Newshour this week, Jim Puplava is pleased to welcome back Nicole Foss. Nicole M. Foss is co-editor of The Automatic Earth, where she writes under the name Stoneleigh. Prior to the establishment of TAE, she was previously editor of The Oil Drum Canada, where she wrote on peak oil and finance. Foss runs the Agri-Energy Producers' Association of Ontario, where she has focused on farm-based biogas projects and grid connections for renewable energy. While living in the UK she was a Research Fellow at the Oxford Institute for Energy Studies, where she specialized in nuclear safety in Eastern Europe and the Former Soviet Union, and conducted research into electricity policy at the EU level. Her academic qualifications include a BSc in biology from Carleton University in Canada (where she focused primarily on neuroscience and psychology), a post-graduate diploma in air and water pollution control, the common professional examination in law and an LLM in international law in development from the University of Warwick in the UK. This week in her discussions with Jim Puplava, Nicole believes we will see the peaking of oil prices, the next bout of deflation and a looming depression. She sees resource wars as inevitable, given this deflationary scenario.

Gasoline crisis looms in Russia as international prices rise - Many Russian regions are running short of gasoline and diesel fuel, with the situation threatening to deteriorate soon into a complete drought in some areas as oil companies cash in on higher fuel prices abroad, the Russian Fuel Union warned on Tuesday. "If the situation persists, many regions may be left without fuel altogether in the next few days," said RFU President Evgeny Arkusha, whose organization represents fuel retailers. The situation is at its worst in the St Petersburg, Voronezh, Novosibirsk and Altai regions as well as the Sakhalin island, he said. Prices for oil and oil products have risen sharply on foreign markets recently against the background of events in the Middle East, but the Russian government has held local prices back making export more attractive, Sergei Vakhrameyev, a senior analyst with Metropol brokerage, explained

Russia boosts gasoline export duty to keep fuel at home - Russia, the world's largest oil producer, will hike its gasoline export duty 44 percent from May 1 instead of an expected 34 percent to fight local fuel shortages, the government said in a regulation on Friday. The tariff, tied to international prices for gasoline, will stand at $408.3 per ton instead of the previously planned $304 per ton, it said. "Gasoline exports will now make sense only for companies with refineries near the border," said Vadim Mitroshin, an analyst at Otkritie bank.International oil and oil product prices have been boosted by unrest in the energy-rich Middle East and local companies prefer to sell gasoline on the world market after the Russian government capped retail prices. The price regulations led to a deficit of gasoline in many Siberian regions and in the north of the country.

Russia to halt gasoline exports in May - Exports of gasoline from Russia will stop in May to address rampant shortages in parts of the country, a deputy energy official said. Moscow is keeping fuel prices suppressed ahead of parliamentary elections in December and the presidential contest next March. Some gasoline stations in Russia that aren't owned by major oil companies are running out of gas and many cities, including St. Petersburg, reported dwindling supplies, Russia's state-run news agency RIA Novosti reports. Russian Deputy Energy Minister Sergei Kudryashov said Russia might have to stop exporting fuel products to address domestic demand. "I think we must satisfy the need at the expense of cutting exports," he was quoted as saying. "We have agreed now that oil companies will supply all their oil products to the domestic market."

Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever (19pp pdf) The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever - Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources. The quicker we do this, the lower the cost will be. Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels. A lower population would help. Just to start you off, I offer Exhibit 1: the world’s population growth. X marks the spot where Malthus wrote his defining work. Y marks my entry into the world. What a surge in population has occurred since then! Such compound growth cannot continue with finite resources. Along the way, you are certain to have a paradigm shift. And, increasingly, it looks like this is it!

Won’t innovation, substitution, and efficiency keep us growing? - Conclusions - The near-religious belief that economic growth depends not on energy and resources, but solely on increasing innovation, efficiency, trade, and division of labor, can sometimes lead economists to say silly things. Some of the silliest and most extreme statements along these lines are to be found in the writings of the late Julian Simon, a longtime business professor at the University of Illinois at Urbana-Champaign and Senior Fellow at the Cato Institute. In his 1981 book The Ultimate Resource, Simon declared that natural resources are effectively infinite and that the process of resource substitution can go on forever. There can never be overpopulation, he declared, because having more people just means having more problem-solvers. How can resources be infinite on a small planet such as ours? Easy, said Simon. Just as there are infinitely many points on a one-inch line segment, so too there are infinitely many lines of division separating copper from non-copper, or oil from non-oil, or coal from non-coal in the Earth. Therefore, we cannot reliably quantify how much copper, oil, coal, or neodymium or gold there really is in the world. If we can’t measure how much we have of these materials, that means the amounts are not finite—thus they are infinite.[1]It’s a logical fallacy so blindingly obvious that you’d think not a single vaguely intelligent reader would have let him get away with it.

Strong Australian dollar to help build cheap LNG export terminals, says Origin Energy CEO - THE Australian dollar's charge to a 29-year high is a boon for the country's gas industry, making giant export terminals cheaper to build, says the chief executive of Origin Energy, Australia's biggest utility. More than $100 billion of investment is planned by international energy companies in Australia over the next decade to capitalise on rising demand in Asia for clean-burning fuels. That could catapult Australia ahead of Qatar as the world's largest exporter of liquefied natural gas, or LNG. Australia's resources industry is boosting demand for labour, fuelling potential growth in wages, and soaking up spare capacity in the economy. As a result, rising wage-inflation is stoking bets that the central bank will have to increase interest rates again, helping keep the Australian dollar at post-float highs.

Julia Gillard Calls For Closer Defence Ties With Beijing - Julia Gillard has wound up her first visit to Beijing as Prime Minister by calling for Australia and China to gradually increase their co-operation on defence as a means to promote good relations and maintain regional peace and prosperity.  Ms Gillard has also said China's naval vessels are welcome in Australia and that she wants to promote step-by-step collaboration and links between Australian and Chinese military officials. Her comments, made in the context of US concerns about a lack of transparency from the Chinese, came as Chinese President Hu Jintao told Ms Gillard he appreciated her work in promoting friendship with his country. "Since becoming Prime Minister you have repeatedly expressed your commitment to developing a pragmatic, friendly, mutually beneficial and comprehensive relationship with China," Mr Hu told Ms Gillard

Of Mines And Men - For a long time, several decades in fact, Nigeria was the undisputed king of the continent. It had the best oil and more of it than anyone else. Jim worked there for years, risked kidnappings, armed attacks on heavily guarded offshore rigs, the mighty chaos of Lagos. Like other oilmen he lived in a compound with grocery stores, restaurants and bars, and rarely ventured outside, and then only when it was absolutely necessary. But in 2007, times are changing, he says, ordering another bottle of Nova Cuca, a local beer, from a passing waitress. Angola is becoming the new king. Angola has everything an expat could want. There’s only one thing: the Chinese are taking over here, where there is more oil than anywhere else in Africa.

TheEconomist: Africans are asking whether China is making their lunch or eating it - On his first trip three years ago Mr Zhu filled a whole notebook with orders and was surprised that Africans not only wanted to trade with him but also enjoyed his company. “I have been to many continents and nowhere was the welcome as warm,” he says. Strangers congratulated him on his homeland’s high-octane engagement with developing countries. China is Africa’s biggest trading partner and buys more than one-third of its oil from the continent. Its money has paid for countless new schools and hospitals. Locals proudly told Mr Zhu that China had done more to end poverty than any other country. He still finds business is good, perhaps even better than last time. But African attitudes have changed. His partners say he is ripping them off. Chinese goods are held up as examples of shoddy work. Politics has crept into encounters. The word “colonial” is bandied about. Children jeer and their parents whisper about street dogs disappearing into cooking pots.

IMF bombshell: Age of America nears end - The International Monetary Fund has just dropped a bombshell, and nobody noticed.  For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.  And it’s a lot closer than you may think. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.  Put that in your calendar.  It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.

The 'Age of America' is ending- The "Age of America" is ending in just five years. That's according to forecasts from the International Monetary Fund, which has set 2016 as the year when China's economy officially surpasses that of America as the world's largest. To put this into perspective, only 10 years ago the U.S. economy was three times the size of China's, according to Brett Arends at MarketWatch. We knew this was coming, but this is the first time the IMF has put an actual date on it. "Most people aren’t prepared for this," Arends writes. "They aren’t even aware it’s that close." Even at its peak, Japan only had half of America's economic output, the Mail adds, and the USSR produced only a third. If you look solely at the gross domestic output of the U.S. and China using current exchange rates, you wouldn't see this coming, Arends writes. That's because China works hard to undervalue its currency. The IMF analyzed something different: "Purchasing power parity." Or, the amount people earn and spend in their economies. Using this yardstick, China's economy is set to zoom from $11.2 trillion this year to $19 trillion in 2016, Arends writes. The U.S. economy will rise as well in that period, but only from $15.2 trillion to $18.8 trillion.

China to Become World’s Largest Economy by 2016 – So? - Brett Arends seems alarmed: Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising. Just 10 years ago, the U.S. economy was three times the size of China’s. He could have mentioned that China’s population is over 1.3 billion while ours is approximately 0.3 billion. The CIA World Factbook noted that in 2010 China’s per capita income was only $7400 per year (ranking #126) whereas ours was $47,000 per year (ranking #10). One would hope that China’s growth would be such that its per capita income would surely converge to that of richer nations.

China unveils new wanted, not-wanted industry list - (Reuters) - China's economic planning agency on Monday published a new list of industries that it would encourage, restrict or ban, a blueprint that could have a far-reaching impact on investment activity China over the coming years. The list will serve as a guideline for Chinese regulators in making policies on tax, bank credit, land and trade, and will also be a reference for Beijing to decide which foreign investors are welcomed. In a statement summarizing the new guidelines, the National Development and Reform Commission (NDRC), said the list makes changes to the previous version, published in December 2005, to reflect technological change and industrial development. "Some steel, non-ferrous and construction material products have seen serious over-capacity, for which we will no longer encourage ordinary capacity in these areas," the NDRC said. For projects in sectors listed as "to be encouraged", investors often find it easy to obtain approval from the government, in addition to cheap bank loans and land as well as preferential tax treatment. But for industries labeled as "restricted" or "to-be-eliminated", investors will find it hard to get governmental approval for new projects and to maintain operation. For example, such projects would be the first to be cut off at times when electricity is restricted because of power shortages.

BusinessInsider: China Orders Bank Stress Tests That Factor In A Massive, 50% Collapse In Housing Prices -  There are stress tests, and there are stress tests. And it sounds as though China is conducting the latter.  According to FT, the country's banks have been ordered to assess their viability if real estate fell 50%. Does this portend some kind of pricking of the much-hyped real estate bubble? Some might read it as that, but it can also be read simply as prudent banking regulation that's getting ahead of any potential problems. It's not as though Beijing has been sanguine about the country's wild real estate ride.

Yuan Breaks Through 6.5 Per Dollar for First Time Since 1993 - China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.  The currency’s seventh weekly gain, its longest winning streak since July 2008, may damp U.S. criticism of China’s exchange-rate policy before Vice Premier Wang Qishan heads to Washington next month for talks with Treasury Secretary Tim Geithner. Consumer prices in Asia’s biggest economy rose 5.4 percent from a year earlier in March, exceeding the government’s 4 percent goal for this year.  “Inflation is still higher than what the government would like to see,” . “The central bank is tolerating faster currency appreciation to contain import costs.”  The yuan strengthened 0.16 percent to close at 6.4910 per dollar in Shanghai, earlier touching a 17-year high of 6.4892, according to the China Foreign Exchange Trade System. It rose 0.9 percent this month, the best performance of 2011.

Singapore Gets on the RMB Trading Bandwagon - In case you missed it, here is more news of the internationalization of the yuan. Singapore and Hong Kong usually duke it out for bragging rights as the financial centre of East Asia. For some time now, the Hong Kong Monetary Authority has experimented with facilitating trade settlement with the Chinese yuan--a first step in making it a more widely used vehicle currency in the region. In the longer time frame which China looks at things unlike shortsighted Americans, first the region then the world. It's a different perspective when you're on the way up instead of the way down. Being ever so hip to the times, the Singaporeans have gotten on the RMB bandwagon as well. While Hong Kong will still retain advantages dealing in renminbi--it is an erstwhile part of China, after all--it is wary of being left behind. That said, Singapore like Hong Kong possesses the requisite financial know-how, market liquidity, and trading outpost status to make it worthwhile for the (mainland) Chinese to extend RMB trading to.

London Wants to Get on the RMB Trading Bandwagon - To accompany today's other blog feature, may I just point out that it's not only the Asian crowd that wants to get on the RMB bandwagon. It may be confusing to my international readers, but to repeat, the Lord Mayor of London (Michael Bear) is different from the Mayor of London (Boris Johnson). The former represents merely the City of London where the financial services industry is concentrated, while the latter represents the much larger Greater London Authority. Moreover, the latter post was only created in the year 2000--the first directly elected mayor in the UK. Unsurprisingly, one of the Lord Mayor of London's tasks is to represent the interests of the financial services industry. And what better cause is there than to make trading in the currency of the future available right here in old Europe? There's already a City of London Advisory Council for China to help promote this effort. From Dow Jones: Mayor of the City of London Alderman Michael Bear said the city wants to be an offshore yuan center to take advantage of the internationalization of the currency, state-run Xinhua News Agency reported Wednesday. 'The yuan will become a meaningful component of international trade and even become an important reserve currency,' Bear said.

Are China’s high-speed trains heading off the rails?China’s expanding network of ultramodern high-speed trains has come under growing scrutiny here over costs and because of concerns that builders ignored safety standards in the quest to build faster trains in record time. The trains, a symbol of the country’s rapid development, have drawn praise from President Obama. But what began in February with the firing and detention of the country’s top railway official has spiraled into a corruption investigation that has raised questions about the project’s future. Last week, the new leadership at the Railways Ministry announced that to enhance safety, the top speed of all trains was being decreased from about 218 mph to 186. Without elaborating, the ministry called the safety situation “severe” and said it was launching safety checks along the entire network of tracks. The ministry also announced it would reduce ticket prices to boost lagging ridership and would slow construction of high-speed lines to avoid outpacing public demand.

S&P cuts Japan outlook as rebuilding may hit US$600b - Ratings agency Standard & Poor's on Wednesday cut its outlook on Japan's sovereign debt following last month's quake-tsunami disaster and warned that reconstruction costs could pass US$600 billion. It said, however, that the March 11 disaster, which obliterated whole towns on the northeast coast, left 26,000 people dead or missing and triggered a nuclear crisis, would not hurt Japan's medium-term growth potential. The credit ratings agency said the cost of rebuilding could range from 20 trillion yen to 50 trillion yen (US$245 billion to US$612 billion). It said 30 trillion yen was its central forecast, if there are no measures to boost revenue, such as tax increases. The figure is somewhat higher than government estimates of as much as 25 trillion yen, not including the nuclear accident.

Japan’s Retail Sales Slump Most in 13 Years - Japan’s retail sales tumbled the most in 13 years last month as the nation’s record earthquake shut stores and discouraged households from spending money.  Sales slumped 8.5 percent in March from a year earlier, the biggest decline since March 1998, according to a statement by trade ministry in Tokyo today. Toyota Motor Corp. led a record drop in auto sales in March and domestic output plunged 63 percent after disruptions in its supply chains and factory closures. Production will return to normal by December, the automaker said. Prime Minister Naoto Kan unveiled a 4-trillion yen ($49 billion) extra budget last week to rebuild the northeast area that was devastated by the earthquake and tsunami. The spending aims to provide more than 100,000 temporary homes and clean up debris from the disaster

Japan's Autos Face $36 Billion Sales Hit - Japanese automakers may continue to lose around $36 billion in revenue between April and June. According to Japan's Nikkei financial daily, the 57 percent fall in total production for March, translates into a combined revenue loss of $12 billion for the eight automakers. And with many analysts predicting roughly the same shortfall for the current June quarter, this means continuing industry-wide revenue losses of $12 billion each month. Toyota saw a crushing 63 percent fall in its March volumes. And with the top carmaker saying it expects cuts to persist till the end of the year, Toyota is expected to lose its crown to General Motors and fall behind Volkswagen to number 3.

Toyota car production in Japan plummets 62.7 percent due to parts supply crunch after tsunami - Toyota’s car production in Japan plummeted a staggering 62.7 percent in March due to a parts supply crunch following the earthquake and tsunami. Toyota Motor Corp., the world’s top-selling automaker last year, said Monday its domestic production in March was 129,491 vehicles — the lowest since 1976 when Toyota began maintaining production figures. The magnitude-9.0 earthquake and tsunami on March 11 destroyed many factories in northeastern Japan, causing severe parts shortages for Toyota and other automakers. Given Toyota’s production woes after the tsunami, General Motors Co. is likely to reclaim the title of world’s largest automaker that it lost in 2008. Toyota sold 8.42 million vehicles last year, just keeping its lead over a resurgent General Motors Co., which sold 8.39 million, thanks to booming sales in China.

Japan Quake Still Reverberating Through Auto Industry - The earthquake in Japan is taking a heavy toll on the auto industry. With Japanese automakers and parts suppliers still struggling to recover from the disaster, car prices are rising and U.S. rivals are looking at boosting production to take away market share. And many in the industry believe it may be early next year before the market sorts itself out. Ford said it was considering ways to ramp up production to fill the gap caused by fewer Japanese vehicles coming to the U.S. market. Ford is studying whether it can get the components needed to make more cars, said Alan Mulally, the automaker's chief executive.  "There will be some opportunity for us to serve even more consumers going forward," Mulally said. "Clearly with this much disruption, demand is going to outpace supply." Mullally's remarks came as Ford's Japanese competitor Toyota said it was still having problems obtaining about 150 different types of crucial parts because of the March 11 earthquake and tsunami. The world's largest automaker is operating at just a little better than 40% worldwide — and at about 30% in North America. Toyota doesn't expect to resume pre-quake manufacturing levels until November or December.

A Japanese Plant Struggles to Produce a Critical Auto Part— A modern car is a computer on wheels. The window openers, the dashboard navigation maps, the fuel injectors — these and many other operations are controlled by some of the 100 or so electronic systems in a typical car.  No wonder the magnitude 9.0 earthquake that knocked out one of the world’s leading automotive computer-chip factories struck such a severe and lasting blow to the global auto industry. Renesas supplies 40 percent of the world market with a crucial car computer chip.  Since the March 11 earthquake, the lack of chips from this plant is a big reason automobile production has slowed to half its normal rate in Japan, and is at a crawl in some factories in the United States and elsewhere.  And plant officials here on Wednesday acknowledged that this critical link in the supply chain would be restored only gradually, despite the round-the-clock efforts of an army of workers to repair the cracked walls, collapsed ceilings and out-of-kilter equipment caused by the quake.

Japan's earthquake and tsunami: Global supply chain impacts - The consequences of the tragic disaster in Japan are many. This column examines the trade effects. It suggests that Japanese exports will fall by 0.5–1.6% and its imports will rise by 0.4–1.3%. Despite the devastation in Japan, the effects on global trade will be relatively small.

Tokyo Disney Resort Under Pressure To Cut Down On Power Consumption -- The operator of Tokyo Disney Resort is under pressure to reduce electric power consumption in anticipation of a power shortage this summer. The night operation of Tokyo Disneyland in Urayasu, Chiba Prefecture, resumes on April 23 and its spectacular Electrical Parade event will also be revived. However, Tokyo Disneyland and Tokyo DisneySea, which together reportedly consume 10 times more power than the Tokyo Dome baseball stadium, are struggling under pressure to reduce their power consumption and generate power on their own.

Japan’s ‘stunning’ stats: Yosano’s new nightmare - As variously predicted, the “3/11 effect” on Japan’s economy is starting to kick in. And true to warnings that the impact could be far worse than feared, the latest batch of data is reasonably horrible. Only a day after S&P signalled fresh concerns about Japan’s economy, official data on Thursday showed a far sharper plunge in March industrial production than the consensus 10.6 per cent – a whopping 15.3 per cent fall from February – while March household spending slid an annual 8.5 per cent. Kaoru Yosano, Japan’s economy minister who famously spoke in January of his “dreadful dream” about the national debt burden, was “stunned” by the industrial production figures, according to the Nikkei newspaper. No wonder. Yosano had told the FT just days after the March 11 magnitude 9 earthquake, that the disaster would have little impact on Japan’s economy.

IMF: Capital Flows to Asia Still Below Peaks - Is there really an unprecedented tidal wave of cheap capital flowing into emerging Asia? Not yet. But it could still be on its way, spelling even more appreciation for local currencies and risks to the region’s financial markets. The International Monetary Fund, which examined the volume of capital that’s flowed into Asia’s economies the past couple of years and compared it with previous cycles, found that the flow has been significant, but compared with the size of local economies, still not as large as previous cycles. Asia has experienced three major episodes of capital inflows over the past few decades. The early 1990s, the early 2000s, and today. In the last quarter of 2010, flows were at about 4.25% of GDP, compared with 6.75% in the second quarter of 1996 and the first quarter of 2004.

The G-20’s Empty Gestures - The world’s 20 most important finance ministers and 20 most important central bankers traveled to Washington this month from every part of the globe to accomplish, predictably, exactly nothing. The subject of the G-20’s recent meeting was “global imbalances.” According to the communiqué issued by the group, the meeting focused on developing a procedure for identifying which G-20 countries have “persistently large imbalances” and why they have them. This delicate analytical task was assigned to the International Monetary Fund, which is to complete its work before the ministers’ next meeting in October. It hardly takes a team of IMF economists to answer these questions. Anyone who has taken a first-year undergraduate course in economics would have no difficulty in identifying the countries with the largest trade surpluses and deficits. The United States wins first prize with a trade deficit of more than $650 billion in the most recent 12 months. No other country comes close enough to be awarded second prize.

The one-trillion-dollar chicken game and the G20 - At the end of this week the world will know whether, after ten years of negotiations, the Doha Round is still stuck in a “game of chicken”. This column argues that the agreement in goods still offers a good basis for a deal as it provides the most precious virtue, i.e. certainty and insurance. Moreover the likely alternative to Doha – rampant regionalism – will not help the US and China achieve more than they could with Doha because their trade partners find FTAs with these two particularly difficult.

The Doha Round doomed once again: Blame it on the G20 - What is needed for the Doha Round of trade negotiations to reach a satisfactory end? This essay argues that the talks need nothing less than the involvement of heads of government. Deepening economic integration requires improved global governance and completing the Doha Round must be part of this. Failure would put globalisation, and the enormous benefits it has brought about, at serious risk.

The Doha Round: No more delays - At this point, there is virtually no chance that governments will act to prevent another breakdown or suspension of the Doha Round at the 29 April 2011 meeting of the WTO’s Trade Negotiating Committee. So I see little profit in reviewing the intricate details of why this is the case for each of the major areas – goods, services, agriculture, rules, etc. Or even why, as some have noted, there would be real benefits in salvaging less controversial pieces of the negotiating agenda. This essay argues that such a failure is now more dangerous than ever. For domestic political reasons unrelated to trade, the US will be in no position to lead on international trade issues for some years. As the US is still the “indispensable nation” for WTO talks, this means 2011 is the last good opportunity for many years.

Why the Doha Round matters to Asia and the Pacific - The idea that it would be harmless to allow Doha to languish for years is deeply dangerous, at best. Failure to conclude the Round this year would put a dagger in the heart of a multilateral system. The multilateral trading system is the economic sinew that constrains the exercise of international political muscle in ways that damage global wellbeing and inflicts national self-harm. With the rise of China, turmoil in the Middle East, and a damaged and imbalanced economy, the world needs such sinews now more than ever. Relatively minor and politically manageable accommodation by key players could achieve a substantial outcome that would be a good deal for everyone including developing nations.

The US is painting itself into a corner on 21st century trade policy - America’s best chance at getting better access to the world’s fastest growing economies is on the table – it is called the Doha Round. The US should push hard for a conclusion as the alternatives are much worse. The US faces great domestic and foreign problems in pursuing the regionalism alterative. In particular, US faith in the Trans-Pacific Partnership seems to be based on unclear thinking about political constraints at home and political reactions abroad.

The Doha Round’s Premature Obituary - The Doha Round, the first multilateral trade negotiation conducted under the auspices of the World Trade Organization, is at a critical stage. Now in their 10th year, with much negotiated, the talks need a final political nudge, lest Doha – and hence the WTO – disappear from the world’s radar screen. The threat of irrelevance is understood by leading statesmen, who have committed themselves to putting their shoulders to the wheel. British Prime Minister David Cameron, German Chancellor Angela Merkel, and Indonesian President Susilo Bambang Yudhoyono have unequivocally endorsed the recommendation of the High-level Expert Group on Trade, which Peter Sutherland and I co-chair, that we ought to abandon the Doha Round if it is not concluded by the end of this year. But even as these efforts are gathering momentum, The Financial Times, which used to be a staunch supporter of multilateral free trade, dropped a cluster bomb on Doha, even congratulating itself that, in 2008 (when a ministerial meeting failed to reach closure), it “argued that leaders should admit the negotiations were dead.”

China, Japan, South Korea Urge Further Efforts For Trilateral Investment Framework (Xinhua) -- Trade ministers from China, Japan and South Korea agreed on Sunday to make further efforts to reach a substantive agreement in the Trilateral Investment Agreement negotiation at an early date, according to joint statement. The document of the 8th Economic and Trade Ministers' Meeting among the three countries in Tokyo also called for accelerating a joint study, which involved government officials, business and academic participants, for a free trade agreement among the three countries. The meeting was attended by Chinese commerce minister Chen Deming, South Korean Trade Minister Kim Jong-hoon, and Japanese Economy, Trade and Industry Minister Banri Kaieda.Top trade officials of the three countries agreed that the maintenance and development of a free and open trade system will not only support the recovery of the disaster-hit region of Japan but also secure vigorous and sustainable growth of all three countries. The Chinese commerce minister said at the gathering that China would continue to strengthen its cooperation and exchange with its two neighbors on economy and trade.

How Asia Copes with America’s Zombie Consumers - Asia needs a new consumer. A post-crisis generation of “zombie consumers” in the United States is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers.Of course, this is not the first time that Asia has had to cope with the walking economic dead. But the most prominent zombie may well be a broad cross-section of American consumers who are still suffering from the ravages of the Great Recession. Afflicted by historically high unemployment, massive under-employment, and relatively stagnant real wages, while burdened with underwater mortgages, excessive debt, and subpar saving, US consumers are stretched as never before.Yet the US government has tried virtually everything to prevent consumers from adjusting. Going well beyond the requisite extension of unemployment-insurance benefits, the safety net has been expanded to include home-foreclosure containment programs, other forms of debt forgiveness, and extraordinary monetary and fiscal stimulus.

Maintaining Employment Through the Crisis - Latin America has accumulated experience in several areas of active labor policies. Argentina was an early starter during its own crisis in 2001 with incentives to keep people busy. The economic meltdown had left skyrocketing unemployment, widespread social scars but also some lessons. Thus the Global Recession found Argentina with muscles flexed, as Pablo Trucco and I show in a recent paper.The REPRO Program (as known under the Spanish acronym for Programa de Recuperacion Productiva) was created in 2002 to put a stop on snowballing layoffs. REPRO received a swift new lease on life as soon as the Global Recession hit Argentine employment indicators in 2008. Given the long tradition of informality, the retention of workers in formal employment was a paramount concern. Everyone dreaded a setback, so REPRO was speedily unearthed. This is a very simple and circumscribed program

Long term unemployment in industrial countries - In a timely report, the OECD last week released Persistence of High Unemployment: What Risks? What Policies?. From the report: Nearly two years after production began to recover from the worst recession to have hit OECD countries since the 1930s, the labour market situation remains a major preoccupation. At the end of 2010, the average OECD unemployment rate was still close to the historical peak reached during the crisis. In 12 OECD countries it remained two percentage points or more above the pre-crisis level, and even where the rise in joblessness was less severe, the recovery has been generally too weak so far to allow for a significant fall in unemployment.

Who has the lowest labor costs? - Floyd Norris has an interesting column in this morning’s New York Times. Earlier this week, I was getting ready with some observations similar to his, though I am sure I could not have done as good a job as he has in getting across the gist of the problem and presenting some evidence. Essentially, Norris shows that since the introduction of the euro in 2000, products from the countries now in fiscal crisis have lost competitiveness relative to German products in international markets. Norris presents data on competitiveness. His data is similar to the series depicted in the chart at the top of this post, but the data above are real exchange-rate indexes. The lines in the chart compare the competitiveness of various economies’ exports, taking into account not only differences in unit labor costs but also the values of their currencies relative to those of their trading partners. Norris’s point is that Germany is an big exporter partly because it has reduced labor costs relative to its competitors. Meanwhile, according to Norris’s theory, the peripheral countries of Europe, such as Greece, Ireland, and Portugal, have become less competitive, as their labor costs have risen relative to those in Germany and other “core” European nations. And because of the common currency, these higher-cost countries cannot use a devaluation to regain competitiveness.

European and US Employment - Paul Krugman - Bob Gordon has an interesting paper on US-Europe differences (pdf) that actually comes down on the side of those claiming that Europe is hurt a lot by high taxes; I don’t fully agree, but will have to come back to that some other time. But there’s a very useful figure that I wanted to post: Lots of people have an image of Europe as an economic pit of doom, with millions of prime-age workers sitting idle thanks to the welfare state. And there was some truth to that image 15 years ago. But things got better over there even as they got worse here: Even before the Great Recession struck, people in the prime of life were equally likely to be employed on either side of the Atlantic, and at this point Europe has a better prime-age employment situation than we do. It’s different for the young and the old. Young Europeans don’t work in part because they don’t have to: thanks to more generous student aid, they’re less likely to have to work while in school. But there’s also a lack of job opportunities. And the elderly retire earlier, largely thanks to generous benefits. Oh, and small businesses actually flourish more in Europe than here (pdf): health benefits, you know.

Promises, Promises. Better Measuring the Effect of Pension Reform - IMFdirect - Good fiscal policy means thinking about how policy decisions—especially ones that involve long-term promises, such as pensions—affect government finances both today and in the future. The first problem is that good fiscal policy hasn’t always ruled the day, to put it mildly. Today, pension reform is a priority for the advanced economies as current trends are unsustainable—see Commandment V—and for many emerging and low-income economies that need “to improve coverage of health and pension systems in a fiscally sound manner.”The second problem is that traditional deficit and debt indicators focus on the health of public finances today, but fail to capture the future impact of pension promises. This means that pension reforms, which often strengthen the fiscal position down the road, might not necessarily improve—and sometimes worsen—traditional fiscal indicators today. The risk is that assessments of pension reforms based on traditional deficit and debt indicators could create incentives to delay or even reverse reforms

At Least One Country With Big Banks is Not Afraid of Them - Yves Smith - This development, which was cited in last week’s Eurointelligence, has not gotten the attention it warrants: The Swiss government wants to impose capital requirements on their two internationally active big banks UBS and Credit Suisse that by far exceed what European or American regulators intend to ask their banks to do, Frankfurter Allgemeine Zeitung reports. According to a draft law those two institutions should be required to keep 19% of their capital as a cushion of which 10% has to be core tier one capital. Part of those 19% is a surcharge on big banks of 6% which can be covered by contingent capital (cocos). That measure alone will cost both banks €18bn respectively, the paper claims. The government justified its proposal by saying that nowhere else banks had a comparable weight in the economy as in Switzerland where the balance sheets of UBS and Credit Suisse are equivalent to about five times the national GDP. Funny how a country that is arguably very dependent on finance also correctly sees itself at risk. Switzerland, which had to undertake a very costly bailout of UBS, required the bank to bring in independent advisors and prepare a report of what it had done to get in trouble. Most of that report was released to the public. Had every bank in the world that was rescued been required to write similar reports, we’d all be further down the curve and various investigators would have been far more focused and effective.

Time to restructure Irish debt burden, say bosses - TOP Irish business leaders have suggested that the Government should move to restructure the country's vast debt mountain. Sean O'Driscoll, chief executive of Glen Dimplex -- Ireland's most successful industrial group -- told the Sunday Independent: "We should restructure the debt, because like any other business, you can't run anything well if you're relying on short-term funding." He added: "We need to look at a 20-year loan of some kind.  O'Driscoll's views that the unsustainable national debt needs to be restructured were shared by other business big beasts including Resources entrepreneur John Teeling, 11890's Nicola Byrne and Greencore's Patrick Coveney.  "We're going to have to restructure the national balance sheet and that is going to require some reduction in the overall level of indebtedness," Coveney said.  Hopes that Ireland may be able to restructure or spread out the repayments of its debt were boosted as Goldman Sachs suggested that the major European banks were in a better position to absorb losses on Greek, Irish or Portuguese bonds than they were last year.

Portugal lifts revised budget deficit to 9.1% of national income - Portugal, in bailout talks with the European Union and International Monetary Fund, has admitted its debt burden is even greater than its initial estimates after revising up its deficit for 2010 to 9.1% of gross domestic product. The country's National Statistics Institute sent the revision to the EU's statistics office, Eurostat, this weekend, blaming the decision to include three public-private partnerships onto the nation's books for causing the rise in the debt. The previous figure provided to Eurostat by Portugal was 8.6%, well above the 7.3% that was targeted by the government for 2010. A caretaker government is in talks with the EU and IMF about aid package for Portugal after the minority Socialist government resigned in March over its stalled austerity budget. The election will take place in June.

Portuguese Budget Deficit Revised Up Second Time to 9.1% - Courtesy of Google Translate, please consider Portugal again revised upwards the deficit in 2010 Portugal's public deficit stood at year-end 2010 to 9.1 percent of Gross Domestic Product (GDP), five tenths above the 8.6 percent reported three weeks ago. Early estimates on the Portuguese executive deficit in 2010, which received clearance from Brussels, they set a decline in the deficit to 7.3 percent, which Portugal is ranked as one of the countries of the European Union ( EU) with a greater reduction. But last March 31, the caretaker government rose to 8.6 percent deficit for the loss of large public transport and a nationalized bank, which had not been included in the accounts submitted to Brussels. The new upward revision is that the harsh adjustment measures implemented in the country Luso during the past year to reduce the public deficit-increasing tax burden, reducing public spending, cuts in salaries of civil servants, etc .- are having a more limited effect than expected

IMF wants easier sackings -While the trio representing the International Monetary Fund, the European Commission and the European Central Bank continue to remain tight-lipped on the progress of bailout negotiations with the Government, it has once again emerged this week that economists representing these international bodies have repeated calls to facilitate the sacking of workers and reduce dole payments. Reports this week in the Portuguese financial press are pointing towards increased tension between Lisbon and the ‘Troika’ of international experts over introducing new liberal labour laws.  While the government has shown an openness to debate certain stipulations of Portugal’s strict labour legislation, it is reportedly not ready to accept demands by the IMF, EC and ECB to streamline the labour market any further.

Draghi it is - Nicolas Sarkozy has finally, and unsurprisingly, announced his support for Mario Draghi as head of the ECB. Sarkozy made his announcement at a press conference in Rome with Silvio Berlusconi in Rome. The FT reports that Angela Merkel will soon also announce her support, which would mean that this is now a done deal. (There was never a serious alternative candidate.  Axel Weber could have had the job if he had wanted it, and after his withdrawal, the race was essentially over.)  The Europhobic Holger Stelzner from Frankfurter Allgemeine produced an uncharacteristically tame comment, in which he said that Draghi was sufficiently qualified for the job, but criticised him for failing to speak up when the ECB announced its securities market programme. The newspaper’s news coverage showed its sense of alienation with the entire process. The headline reads: “France strengthens Italy’s candidate.”  Reinhard Hönighaus and Wolfgang Proissl write in FT Deutschland that Merkel should link her acceptance of Draghi to a strengthening of Jürgen Stark in the governing council (we are not sure how this can be done. He cannot be promoted to vice president, and his role as head of the monetary policy section is already prominent), or a strengthening of the euro-plus pact.

Why does it take Merkel so long to come out in support of Draghi? - This is such a typical example of Angel Merkel leadership style during the euro crisis. Her staff is briefing journalists – Bild being the latest - that she is ready to back Mario Draghi for the ECB presidency, while her official spokesman goes on the record to deny the story. The purpose of this communication policy is, of course, to test the waters, and to pull back if she were to encounter any opposition. Fortunately for Mr Draghi, there has not been any. Even Bild has apparently swallowed the line that Draghi is the most Germanic central banker out there, picturing him with a Prussian police helmet. The paper reported that Merkel had given up the search for an alternative candidate.  Reuters reports that her own parliamentary party, a source of much opposition, also supports Draghi. So this latest exercise in leading-from-behind will soon draw to a close, with nothing gained except the obvious public impression that Nicolas Sarkozy has played the leading role in forging a consensus behind Draghi. Sarkozy’s announcement of support for Draghi was followed by endorsement from other countries. Spain said it supports Draghi. Jean-Claude Juncker did so yesterday, and so has the finance minister of Slovakia. Juncker’s support is important, given the Yves Mersch, the head of Luxembourg’s central bank, has also been mentioned as a candidate.

EU poised for Greece crisis talks - Senior officials from the European Union, the European Central Bank and the International Monetary Fund are expected to make a "lightning visit" for two days to ensure Greece can meet plans to cut its deficit by €24bn (£21bn). The trip is being planned for May 9, although insiders said this could be brought forward to May 5.  George Papandreou, the Greek prime minister, and other Greek officials have this weekend strongly denied rumours that Greece may be forced to restructure its debt imminently – possibly as early as this weekend. A year after Greece was forced to accept €110bn (£97bn) of financial aid from the EU and IMF, Greek government spokesman George Petalotis denied "the persisting international reports about a restructuring of the debt". George Papaconstantinou, the Greek finance minister, said that a restructuring or an extension of any of the €340bn national debt, which is set to hit 160pc of GDP by next year, was out of the question.

Greece will not be 'allowed' to restructure until policy shores up the Irish bond market - Rebecca Wilder - Just look at Tracy Alloway's imagery at FT Alphaville, and you'll know what's expected: an imminent Greek default. I still argue no, although European policy tactics are quite enigmatic and their next move is really anyone's guess. Alas, here's mine. Assuming that Greece does not secede from the Euro area, I give you three reasons why Greece will not be allowed to default soon (at least the next 12 months, given current market conditions). I say 'allowed' because true to the IMF legacy, EU/Euro area officials very likely see restructuring as a 'gift' for good fiscal behavior.
(1) Moral hazard is an important issue in Europe, and Greece has only begun its austerity program. We'll need confirmation that they are not on track in order to assess the timing of default, in my view.
(2) The banking system's not ready. Unless the Germans want to instantly recapitalize the Landesbanks this year, I'd argue that the Euro banking system remains overly exposed to mark-to-market accounting for all of the crappy debt that it holds on balance.
(3) This one's critical: policy makers must shore up Ireland and Portugal in order to avoid a quick contagion across the European banking system. They haven't done that yet. In fact, the Finnish election results exposed the tenuous negotiation process overall.

Citi Expects A 76% Haircut On Greek Debt (And 95% If Country Waits 4 Years) For Debt/GDP Ratio Back Down To 60% - Yesterday we learned that in borrowing a page right out of 2010, when the Greek government was mounting a full frontal assault against CDS traders everywhere (only for Eurostat to tell us that CDS traders had absolutely no impact on Greek solvency), Greece is once again scapegoating unrelated third parties for its problems. In this particular case Citi London trader Paul Moss, who is being interrogated by Interpol because of a recap email indicating Greece may, gasp, restructure (or, as it isknown in enlightened circles, conduct a 'liability management exercise'). Yet when Greece reads the following note by Citi's Stefan Nedialkov, it will most likely issue a cease and desist order in perpetuity against Vikram Pandit's bank. Nedialkov's summary (released one day after Moss' April 20 note): 'If a 42% haircut is taken in addition to these measures, we estimate Debt/GDP falls to below 90% in 2013 and below 60% in 2020.' The problem is that the market will likely give Greece at most a few months of breathing room in exchange for just a 90% debt/GDP reduction. If truly engaging in a liability exercise of some nature, Greece will likely pursue a permanently viable option. And as Nedialkov indicates, in order to achieve a far more credible 60% debt/GDP ratio, the country would need to take a 76% haircut now, or do nothing for five years, and eliminate a whopping 94% of its debt in 2015."

Greece Budget Deficit worse than forecast - From the WSJ: Greece's Budget Deficit Higher Than Expected Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger than forecast ... Lower-than-expected government revenue was the main culprit behind the higher deficit number. ... The Greek government was targeting a 2010 deficit of 9.4% of GDP ...The missed target was "mainly the result of the deeper-than-anticipated recession of the Greek economy that affected tax revenue and social security contributions," the Greek government said in a statement after the Eurostat announcement. More austerity coming - the beatings will continue until morale improves! The yield on Greece ten year bonds increased to 15.3% today and the two year yield is up to 24%. It seems like the markets expect a credit event soon.

Greek Deficit Tops Expectations as Euro-Area Debt Reaches Record (Bloomberg) -- Greece’s budget deficit exceeded expectations and the euro area’s overall debt reached a record, narrowing Europe’s options for putting an end to the fiscal crisis. Greece’s shortfall was 10.5 percent of gross domestic product in 2010, higher than a 9.4 percent estimate made by the Greek government in February, official European Union figures showed today. Greek bond yields surged, rekindling speculation that a debt write-off or extension of the country’s repayment timelines will be the only way out of the fiscal trap. “I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future,”

Greek Deficit Tops Forecasts as Merkel Aide Says Debt Must Be Restructured - Greece’s budget deficit exceeded goverment estimates and the euro area’s overall debt reached a record, narrowing Europe’s options for putting an end to the fiscal crisis.  Greece’s shortfall was 10.5 percent of gross domestic product in 2010, higher than a 9.4 percent estimate made by the Greek government in February, official European Union figures showed today.  Greek bond yields surged, rekindling speculation that a debt write-off or extension of the country’s repayment timelines will be the only way out of the fiscal trap.  “I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future,” Lars Feld, a member of the German government’s council of economic advisers, told Bloomberg. “Greece should restructure sooner than later.”

Greece, Ireland, Portugal Yields Hit Records on Default Concern - Yields on government securities from Greece, Ireland and Portugal reached records amid speculation the heavily indebted nations won’t be able to avoid restructuring. Ireland’s two-year yield reached a euro-era record 12.08 percent after the European Union said the nation’s debt burden surged the most in the currency area last year. Greek two-year yields have climbed almost 870 basis points this month, reaching 24.45 percent today as investors priced in losses, or so-called haircuts, they may incur in the event of a restructuring. Lars Feld, a member of German Chancellor Angela Merkel’s council of economic advisers, said Greece cannot avoid restructuring its debts.“There’s more speculation about debt restructuring, which is reflected in the Greek curve,”  “I don’t see where any support for Greek debt will be coming from. The prices are still quite a long way away from any reasonable haircut that people will expect if restructuring was announced.”.  Portugal’s two-year note yields touched a euro-era record of 11.74 percent, up from 8.78 percent at the end of last month. The 10-year yield reached a record 9.61 percent today, compared with 8.41 percent on March 31.

Greece's 2010 Deficit Blows Past Estimates And Now Germany Calls For It To Restructure - Greece's 2010 deficit has blown past government estimates and above the 10% of GDP range, according to eurostat. At 10.5% of GDP, above the 9.6% expected by the EU. While austerity may be cutting government costs, low growth is inhibiting the country's ability to generate revenues. Lars Feld, a member of German Chancellor Angela Merkel's economic council is now calling on Greece to restructure its debt, saying it should take action 'sooner than later,' according to Bloomberg. The country's two-year yields are now at 23.65%."

Can Greece Default and Keep the Euro?  -- Felix Salmon notes the following:Greece is going to restructure its debts — and it’s going to do so before mid-2013. That’s the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months. This is a major development. The markets haven’t believed Greece for a while — but now they don’t believe the European Union, either. Count me with the majority of the economists surveyed here; I've been suggesting for quite a while that default is going to prove to be the least bad option for Greece. (For a cogent counter-argument, however, see this post by Rebecca Wilder.) The reason that default seems increasingly likely is summed up in this picture from Deutsche Bank. It illustrates that the Greek government will have to run a primary budget surplus of more than 10% of GDP in order to simply stabilize its level of debt. How likely do you think that is? To me it seems frankly impossible. The only alternative is for German and French taxpayers to send Greece additional and ongoing chunks of money to make up that shortfall, and we seem to have reached the end of their willingness to do that.

And There Goes Greece Again - Yesterday's horrorshow continues. Yield on 2-year Greek debt is now close to 25%. The most stark way to visualize what's happened is to look at a 1-year chart on this, because we're just about to come on the 1-year anniversary of the bailout. Look at how yields collapsed when that was first announced, look how low they stayed, and look how low the previous peak seems in compared to this one. Definitely a depressing austerity fail.

Greek, Portuguese Yields Reach Records Amid El-Erian 'Lost Decade' Warning - Greek, Irish and Portuguese bonds slumped and costs to insure the securities against default climbed to all-time highs as concern deepened that the nations will need to restructure their debts. Greek two-year yields rose above 25 percent for the first time, while 10-year yields advanced to euro-era highs for the ninth consecutive day. Portuguese two- and 10-year and Irish 10- year yields also reached records. German two-year notes slid as a report showed inflation in Europe’s largest economy accelerated in April and the nation sold 10-year bonds.  “The talk about restructuring or rescheduling of Greek debt is not going away,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “As long as no one can offer the market reassurance that there isn’t going to be a rescheduling or a restructuring, then the market will keep on pricing in more and more.” Greek two-year yields surged as much as 171 basis points to 25.95 percent and were at 25.53 percent as of 4:17 p.m. in London.

European Bond and CDS Spreads - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of April 27th):  From the Atlanta Fed: Since the March FOMC meeting, peripheral European bond spreads (over German bonds) continue to be elevated, with those of Greece, Ireland, and Portugal setting record highs. Since the March FOMC meeting, the 10-year Greece-to-German bond spread has widened by 189 basis points (bps), through April 26. The spreads for Ireland and Portugal have soared higher by 85 and 237 bps, respectively, over the same period. The second graph shows the Credit Default Swap (CDS) spreads: From the Atlanta Fed: The CDS spread on Greek debt has widened about 430 basis points (bps) since the March FOMC meeting, while those on Portuguese and Irish debt continue to be high. Here is a story from Reuters discussing the Greece CDS (and possible haircuts of 60%): Upward bias seen for Greek bond yields, trade choppy The yield on Greece ten year bonds decreased to 15.7% today and the two year yield was down slightly to 24.9%.  Here are the ten year yields for Ireland at 10.4%, Portugal up to a record 9.7%, and Spain at 5.4%.

As Yields Blast Past 25%, Here's Who Gets Pounded In The Inevitable Greek Restructuring - Greek short-term yields are soaring and German officials are mumbling that the country will need to restructure in the short, rather than long-term. The potential for contagion within the eurozone, and beyond, is significant, as Greek debt is held in bulk by many of the world's banks. And while they're reducing their positions, what they hold may be enough to damage their balance sheets and impact growth throughout Europe.   Sources: Bank for International Settlements

Greek Two-Year Government Notes Drop on Restructuring Concerns; Bunds Fall - German two-year notes fell after a report showed euro-region inflation accelerated in April to the fastest pace in two and a half years, bolstering the case for the European Central Bank to raise interest rates.  Greek bonds dropped, extending their sixth consecutive weekly decline, amid speculation the nation will need to restructure its debt. Inflation in the 17-nation euro region quickened to 2.8 percent from 2.7 percent in March, the European Union’s statistics office in Luxembourg said today. Economists expected inflation to remain unchanged, according to the median of 34 forecasts in a Bloomberg News survey. Traders added to bets that policy makers will increase borrowing costs.  Greek two-year yields rose back above 26 percent, while 10- year yields reached 16 percent, both approaching euro-era all- time highs.

Guest Contribution: Why Spain Won’t Be Next - I am confident that the government will succeed in cutting the deficit to the planned 6.3% of GDP this year and 4.4% next year. What’s more, social unrest has been limited. The political system has been effective at implementing these cutbacks, unlike in Portugal and the U.S. The reason for the Spanish success is in part due to the fact that –with a few exceptions such as the 2% Value Added Tax hike — most austerity measures have left things where they were two or three years ago. For example, civil servants’ salaries were cut by 5% last year, which just about reversed the 3% salary hike of 2009. Income taxes on capital gains went up by between 1% and 2%, and income taxes for high income brackets increased 1% to 4%. But a wealth tax was abolished in 2008, succession tax cut in many regions and corporate taxes lowered. Hence total capital taxes are now probably still lower than in 2008. A 400-euro tax rebate which became effective in 2009 was abolished a year later, as were a childbirth allowance and an extension of unemployment subsidy. So the backlash to the cutbacks has been limited. That leaves the government with considerable scope for maneuver to reach its 6.3% public deficit target for this year.

Spain prices, unemployment soar; retail sales sink - Weak jobs data, sliding retail sales and rising inflation confirmed Spain's economic recovery is faltering as the government presses ahead with spending cuts to rein in the euro zone's third largest deficit. Spain expects its public deficit to reach 2.1 percent of gross domestic product in 2014, the government said in a document shown to reporters on Friday, down from 9.2 percent in 2010. But unemployment, running at more than double the European Union average, rose to a 14-year high of 21.3 percent, or 4.9 million people, in the first quarter, the National Statistics Institute (INE) said on Friday. Retail sales, meanwhile, posted their sharpest decline for more than two years in March, and in April consumer prices rose faster than at any time since October 2008, pointing to a further loss of momentum for a stagnant economy already beset by inflationary pressures and depressed consumer sentiment..

Towards $1.50 - For much of the last year, the euro’s exchange rate was torn between two opposing pressures: a downward from the financial crisis, and upward from policy divergence between ECB and Federal Reserve. The latter pressure clearly prevails right now, after Ben Bernanke yesterday signalled that the Fed would not be in any hurry to raise interest rates. The Fed did, however, raise its headline inflation forecast to a range of 2.1 and 2.8% this year, before dropping back to 1.4-2% in 2012. The euro/dollar rate was at $1.4867 this morning, a level uncomfortably high for many eurozone exporters, but (in our view at least) not yet sufficiently high to force the ECB into a premature policy change.  Bernanke did not really say anything new during his first-ever post FOMC news conference. Reuters Breakingviews had a nice account of his performance, comparing it to a Broadway show with initially positive reviews. He held up well. But in our view, the fact that the lack of any important statement is regarded by markets as a policy shift is telling in itself. The markets seem to have persuaded themselves that the Fed would tighten post-summer. All that will happen in fact is an end to QE2.

Tight Money Policies From The European Central Bank May Doom European Monetary Union - This post from Henry Kaspar is in German, but Google Translate renders it pretty cogently and it makes the important point that hard money policies from the European Central Bank threaten the viability of the overall monetary union. He makes the point with reference to an economic history article (PDF) :One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, Which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debt grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB’s policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt decumulation.

The limits of austerity - THIS is what insolvency looks like: Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger than forecast by either the Greek government or the European Union authorities, Eurostat, the EU's official statistics agency, said Tuesday. Lower-than-expected government revenue was the main culprit behind the higher deficit number. Greece has struggled to meet its goals for tax revenue under the rescue program overseen by the EU and the International Monetary Fund since last May. Economic growth has fallen short of forecasts, while the government has faced problems cracking down on tax evasion... The missed target was "mainly the result of the deeper-than-anticipated recession of the Greek economy that affected tax revenue and social security contributions," the Greek government said in a statement after the Eurostat announcement.

Can Keynesian Economics Save the Euro? - Henry Farrell has a new article with John Quiggin examining the European debt crisis.  They argue that the real problem is creating a solution that's politically sustainable: If the EU is to survive, it will have to craft a solution to the eurozone crisis that is politically as well as economically sustainable. It will need to create long-term institutions that both minimize the risk of future economic crises and refrain from adopting politically unsustainable forms of austerity when crises do hit. They must offer the EU countries that are the worst hit a viable path to economic stability while reassuring Germany, the state currently driving economic debates within the union, that it will not be asked to bail out weaker states indefinitely. Henry and I talked about European integration in a Bloggingheads four years ago.  Then, as now, I was much more skeptical than he about the ability of European institutions to handle painful EU-wide coordination problems.

Hard Keynesianism in the European Union - John Quiggin and I have a piece on the eurozone mess in the new issue of Foreign Affairs. The piece is subscriber-only, but we’re allowed to post it (in Web format) for six months or so on a personal or institutional website. Accordingly, the piece can be found below the fold. The piece was finished some weeks ago, but I think it holds up quite well. I suspect we would put our argument that the politics are more important than the economics even more strongly in the light of current events. It looks as though demonstrations against the austerity agenda are beginning to take on a European dimension. In addition, a dimension of the politics that we did not discuss – the rise of nationalist resentments in countries that are on the giving rather than receiving end of loans-linked-to-brutalism – has come more obviously to the fore with the success of the True Finns in the recent election.

Just Because It's Painful, It Doesn't Mean It's Good For You - Today might go down as the notion that austerity officially died in Europe. It's clear that Greece's efforts to solve its debt problem by cutting spending have been a gigantic flop. Its debt problem is now worse. The outcome is not surprising. What's surprising is that people ever believed it would work in the first place. Here's a post from a year ago explaining exactly what would happen, and it was spot on. The deficit got worse. So why did people believe in it, and continue to do so? Basically, because it fits nicely into a moral world. There's no good economic basis for it, but we like to believe that the solution to a crisis is pain. Greece had a boom, it spent too much, and the only way to get out of that is through years of austere economic misery. Unfortunately what Greece is getting is austere economic misery, but without the progress in the direction of its goals. The economy isn't a fable. Those who get wealth in some unfair way aren't bound to crash, and those who take a beating aren't bound to rebound. What's painful isn't always good for you."

Krugman: Psst, We Just Got Proof That Keynesian Economics Is Right - Earlier this morning we asked what the point of austerity in Europe was, given that it's not only making the PIIGS economies weaker, it's not even improving their deficit positions! Paul Krugman riffs on the same topic and concludes with: Contractionary policies, it turns out, are contractionary. And don’t tell anyone, but this means that Keynesian economics is right. Here's what's right: Keynesian economic tools could have easily told you that austerity would fail to solve Europe's debt woes. And it's also a lot more useful than the current conservative economic thinking of 'cut spending... job growth!' Whether that means that in the long term it makes sense to have an economic system where the government is always trying to cancel out booms and busts is a totally different question. Finally, it's important to recognize that in the European context, the PIIGS have had no other choice. Stimulus hasn't been an option for them, because of the bond markets. In their case, the only real solution is debt repudiation, and quite possibly ultimately leaving the euro"

Two deficits, two austerities, and quantities matter - The excellent Kindred Winecoff considers the troubled periphery of the Eurozone: [A]usterity must occur. It’s only a matter of how it occurs. The alternative to an internal devaluation through wage cuts, tax increases, and reduction of social services is external devaluation (exit from euro) and default. Call it the Iceland Alternative (Iceland was never in the euro, but it did devalue/default, which is what we’re talking about). In that scenario, the new drachma and Irish pound will collapse in value and the government will be unable to borrow from international capital markets. This is austerity too. The government budget will have to be balanced almost immediately, and unless there’s a full default will likely need to run a primary surplus for many years. Winecoff makes an important point, but I think he needs to cut his analysis a bit more finely. Economies run two very different kinds of deficits, a government fiscal deficit and an international current account deficit. Although the two deficits are related, there is no mechanical connection between the two. They do not reliably move together. A country that defaults on its international debt will find its paper shunned international capital markets for a while. In countries that have grown accustomed to running current account deficits — that is, countries whose citizens have grown used to consuming more imports than they pay for with exports — a forced return to international balance will undoubtedly be perceived as a form of austerity.

The Lump of Austerity Doctrine (Wonkish) - Krugman - Steve Randy Waldman has a good post critiquing the now widespread notion that debt-troubled economies will have to engage in the same amount of austerity regardless of what they do with their currencies.  But I would go further than Waldman here; it’s not just that the fiscal deficit and the external deficit are different things; even the fiscal deficit becomes much easier to reduce if you can have a devaluation-led boom. Look at Argentina before and after the 2001-2002 devaluation/default: Trade moved into large surplus, while the budget deficit was actually (after a brief spike) brought below its pre-crisis levels; but the suffering that had induced the crisis was greatly reduced thanks to a huge export-led boom, and rising revenues made budget control relatively easy. This wasn’t a unique experience: default-and-devaluation episodes have often been followed by “phoenix-like” economic recoveries (pdf).

Glencore Chairman Goes Off On “Not So Ambitious” Women Who Take 9 Months Off For Pregnancy - In an interview with the Telegraph, Simon Murray, incoming chairman of soon-to-IPO commodity bank Glencore, has said some un-PC things regarding women. What keyed him off was a question about board quotas for women: “Women in the boardroom? Terrific,” he says. “Why not? Always welcome. But why make a special case out of it? Why tell everybody you’ve got to have X number of women in the boardroom? Women are quite as intelligent as men. They have a tendency not to be so involved quite often and they’re not so ambitious in business as men because they’ve better things to do. Quite often they like bringing up their children and all sorts of other things. “All these things have unintended consequences. Pregnant ladies have nine months off. Do you think that means that when I rush out, what I’m absolutely desperate to have is young women who are about to get married in my company, and that I really need them on board because I know they’re going to get pregnant and they’re going to go off for nine months?”

UK has third biggest budget deficit in Europe  - Britain’s shortfall in its finances amounted to 10.4pc of gross domestic product (GDP) in 2010, according to data for each of the EU’s 27 member states from the statistics agency Eurostat. That meant the UK had a bigger deficit, or annual shortfall, than the recently bailed-out Portugal and also Spain, which is viewed as the next euro-using nation to potentially need international aid. The largest deficit in proportion to the size of the country’s economy was seen in Ireland, where the extra borrowing needed to shore up the banks left its deficit at 32.4pc of GDP. Greece, which received a €110bn bail-out last year, was second with a deficit of 10.5pc, followed by the UK. Spain, at 9.2pc, and Portugal, at 9.1pc, were in fourth and fifth place. The data showed the Greek finances were in an even poorer state than previously thought, as the latest figure – while trimmed from the previous year’s 15.4pc – was higher than the latest 9.6pc estimate from the European Union and the International Monetary Fund

How well is fiscal austerity working in the UK? - With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure. Let’s look at the timing of the cuts: So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5. Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place.  So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been. A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms.  There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built.  Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt.  Weak UK growth dates to some time back.

UK, Not OK - Krugman - The bad GDP number for the UK isn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past 6 months, with every reason to be worried on the downside looking forward, as Cameron’s austerity bites deeper. Jonathan Portes gets to the nub of it:  On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved.  Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged.  In short, there is no confidence fairy; and S&P can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called.

Central banks pump £3 trillion into world economy - The world's central banks have pumped £3 trillion into the global financial system since the crisis, the equivalent of 8pc of the world economy, according to new analysis by Fathom Consulting. The figures will intensify fears that the extraordinary injection of liquidity is responsible for rising stock markets, rather than any underlying pick-up in corporate health or investor confidence.  Erik Britton, a director at Fathom, compared the development to throwing lighter fuel on a barbecue. The question is, he said, "whether the coals are lit".  The warning is the result of the extraordinary measures to prop up the financial system, which have seen central banks resort to strategies such as buying up bonds to keep the flow of money circulating.  Fathom's economists are worried that last year may have marked the high point of the global recovery. "It remains unclear how much of the equity market rally has been 'genuine', rather than simply a 'mopping up' of that extraordinary injection of liquidity," they warned. "As that stimulus is gradually withdrawn, further gains in equity markets will be harder to achieve."

Threats to the world economy: in 8 charts - Telegraph - In its latest Global Financial Stability Report, released on Wednesday, the International Monetary Fund said risks to global financial stability have declined since October 2010. However, it warned that sovereign and banking system risks still remain high, and are lagging the overall economic recovery.