FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 24, 2013 - Federal Reserve Statistical Release
The High Cost of Tapering - With the new Federal Reserve Chairperson set to take the golden throne, there has been quite a bit of tongue wagging about the end of the Fed's seemingly endless program of shoving money down the economy's throat. Obviously, tapering will have repercussions that will echo through the world's economy and thanks to the IMF's latest Global Financial Stability Report, we have an idea of how costly the end of QE will be. The authors of the report begin by noting that the interest rate increases since the spring of 2013 have provided a "mini stress test" that has shown where the economy is fragile. As shown here, the value of bonds over the past year has been quite volatile, dropping over the period from June to the end of September 2013 as rumours of tapering took hold in the world's bond markets: The signalling by the Fed in May that improvements in the economy could prompt a sooner-rather-than-later tapering of its asset purchase program sent chills through the fixed income market which had, for years, been propped up by the seemingly endless ability of America's central bank and its fellow central bankers around the world to print and dump money into the economy. The authors note that "...gradually making the transition to a higher interest rate regime should be positive for financial stability, because risks associated with low rates and the accumulation of financial excesses will be curtailed. This is especially critical given that some of these risks have continued to build, including the deterioration in corporate credit conditions, yield-seeking behaviour among pension funds and insurers and an extension in portfolio duration.".
Jobs Report Keeps Fed on Hold for Now - The jobs market isn’t making it any easier for the Federal Reserve to make decisions about its $85 billion monthly bond-buying programs. Here are a few quick takeaways on what this report likely means for the Fed:
- –This assures that the Fed won’t act at its Oct. 29-30 policy meeting. Fed officials were hoping a few months ago that the economy would be showing enough strength by now to warrant pulling back on their bond-buying program. The economy isn’t meeting the test. Payroll employment growth is mediocre. It has averaged 143,000 per month over the past three months, a slowdown from 224,000 over a three month period when the Fed’s “taper talk” started in April.
- –This raises the bar to action in December. The next jobs report, for October, could be skewed by the government shutdown, which disrupted the data collection process and which will include the effects of government workers on furlough. The Fed will have an additional jobs report to go on by its Dec. 17-18 meeting; the Bureau of Labor Statistics reports November jobs data on Dec. 6. That doesn’t leave Fed officials with much additional data to go on when they meet at the end of the year to make their next judgment on the bond-buying program.
- –This worsens a conundrum for Fed officials. They have linked their two signature programs — bond-buying and a commitment to keep interest rates low — to the behavior of the unemployment rate. But the unemployment rate is behaving in peculiar ways. Now, because the labor force isn’t growing much, even small employment gains are bringing down the unemployment rate, even though millions of Americans remain parked on the sidelines.
Weak Job Data May Weigh on Fed’s Decision on Stimulus - Weakness in the September hiring figures — coupled with the complications about the upcoming releases — is expected to further delay the Federal Reserve’s decision to start tapering its stimulus programs. “The labor market lost, rather than gained, momentum over the summer, leaving us with less than a desirable cushion just as the government was shuttered in response to political shenanigans,” said Diane Swonk, chief economist at Mesirow Financial. While the Fed has been trying to stimulate the economy, fiscal policy has largely worked in the opposite direction, with multiple drags on growth resulting from a payroll tax hike that began in January, the across-the-board budget cuts of the so-called sequestration that began in March, and then the partial government shutdown and debt ceiling crisis in October. Even before the shutdown, the federal government had the lowest number of civilian employees on its payrolls since 1966, according to the September jobs report.
Fed Watch: Worth The Wait? -- Federal Reserve hawks clearly lost whatever leverage they had heading into the September FOMC, and any thought of changing policy in October disappeared long ago. I wrote earlier this month:It's not just difficult to explain a cut [in asset purchases] in the coming months. It just isn't going to happen. Stronger data? We no longer have any of the most important data. . Moreover, the impending leadership change also argues for delaying tapering until 2014. Unless the economy lurches upward, what exactly is the reason to pull the trigger on tapering before the March FOMC meeting, after which future Chair Janet Yellen will lead a press conference? None, really. The September employment report further cemented the idea that March is the next opportunity for an change to the asset purchase program. I am glad that I did not get out of bed early for that report. I am not exactly sure it was worth the wait. Rarely does one encounter such a lackluster mound of data, summed up in the pattern of flat-lining of job growth:
Estimates of the effects of the Fed's large-scale asset purchases - I attended a conference this weekend on lessons from the financial crisis for monetary policy. Among many interesting presentations, Federal Reserve Bank of San Francisco President John Williams provided updated estimates on the effectiveness of large-scale asset purchases and forward guidance. President Williams's analysis included a survey of academic studies of what effects the Fed's large-scale asset purchases seem to have had. The table below summarizes estimates that have been arrived at using a number of alternative data sets and methodologies for what we could expect to be the consequences for the 10-year Treasury rate of an additional $600 billion in Fed purchases. The estimates vary and are characterized by considerable uncertainty, but most studies would predict a 15- to 25-basis-point decline in the 10-year yield.
The Fed Can Only Fail - Chris Martenson - The basic predicament we are in is that the current crop of leaders in the halls of monetary and political power do not appear to understand the dimensions of our situation. The mind-boggling part about all this is that it's not really all that hard to grasp. Our collective predicament is simply this: Nothing can grow forever. Sooner or later everything must cease growing or it will exhaust its environs and thereby destroy itself. The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what they consider to be "normal." But the problem is -- or the predicament I should more accurately say -- is that the recent past was not normal. You've probably all seen this next chart. It shows total debt in the U.S. as a percent of GDP:(source) Somewhere right around 1980, things really changed and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail. It is simply not possible to grow your debts faster than your income forever. However, that's been the practice since 1980; and every current politician and Federal Reserve official developed their opinions about 'how the world works' during the 33 year period between 1980 and 2013.
The wrong reading of the money multiplier - Fatas I read the analysis of Lacy Hunt about how recent Federal Reserve policies have been a failure to lift growth. I am somehow sympathetic to the argument that Quantitative Easing has had a limited effect on GDP growth -- although one has to be careful when analyzing the effectiveness of QE by comparing it to the alternative scenario (no QE at all) rather than simply measuring the observed GDP growth. But I find that the analysis of the article is not accurate when it come to the working of central bank reserves (and I have made a similar point before). Maybe it is a matter of semantics but the way the author analyzes the relationship between reserves and the money multiplier is not consistent with the conclusions reached about the lack of effectiveness of monetary policy actions. The money multiplier has collapsed because the panic from the financial crisis triggered a very large increase in demand for liquidity. The money multiplier is inversely related to the demand for liquidity of households and financial institutions. In those instances, if the central bank does not increase the monetary base, the money supply will collapse with catastrophic consequences for the real economy (these were the dynamics of the Great Depression). By increasing the monetary base (QE) the central bank is ensuring that the money supply is not falling and therefore supporting growth. Reading the fall in the money multiplier as a failure of monetary policy to stimulate growth is not correct. The rest of the article makes some good points and refers to recent academic articles that suggest that QE has not been very powerful affecting interest rates or lending and I think that some of that evidence is useful and a good starting point to debate on the effectiveness of monetary policy when interest rates are zero.
Fatas and Hunt on Reserves and Quantitative Easing -- Lacy Hunt reports on three recent academic studies indicating that the Fed’s unconventional asset purchasing programs have failed. Antonio Fatas is “sympathetic to the argument that Quantitative Easing has had a limited effect on GDP growth”, but takes issue with some parts of Hunt’s analysis, and argues that the way Hunt analyzes the relationship between reserves and the money multiplier “is not consistent with the conclusions reached about the lack of effectiveness of monetary policy actions.” I believe there are problems with both Hunt’s analysis and Fatas’s analysis of that analysis. My best guess is that QE has had negligible macroeconomic effects. But some of the considerations Hunt and Fatas adduce in attempting to evaluate that question are red herrings, and don’t get us closer to an answer. Hunt claims: If reserves created by LSAP (Large Scale Asset Purchases) were essentially funding speculative activity, the money would remain with the large banks and the money multiplier would fall. This is the current condition. To which Fatas responds: How can reserves be funding speculative activities if they remain in the balance sheet of the banks? Reserves represent an asset in the balance sheet of commercial banks. They have increased by having commercial banks selling other assets to the central bank. So the amount of “riskier” or “less liquid” assets must have decreased. But contrary to what both Hunt and Fatas seem to imply, whether or not banks are using reserves for riskier speculative activities cannot be determined by looking at changes in aggregate bank reserve balances.
How Much is QE Driving Equity Markets? (Hint: Not 100%) - Ritholtz - Over the past few days, we have been discussing what the impact of QE has been on the economy. Forbes columnist Bob Lenzer channels Michael Cembalest of J.P. Morgan to dive deeper into that concept and look at what markets have been doing in response to QE, in a column titled You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009:“Here is the most important factual find about the stock market I’ve learned for some many years: More than 100% of equity market gains since January 2009 have taken place during the weeks the Fed purchased Treasury bonds and mortgages. And conversely, during the weeks when the Fed did NOT buy Treasuries or mortgage backed bonds, the stock market declined.” I have to respectfully disagree with Lenzner, Cembalest, and my pal Jim Bianco (who has also done yeoman’s work tracking the impacts of various Fed interventions).Note that I do not lightly challenge this trio — Lenzner is an all around smart guy, Cembalest is Chairman of Market and Investment Strategy fpr JPM, and Bianco (also all around smart guy), who was the first major analyst in early 2009 to fully recognize the future impact of QE, how it was going to impact equities and bonds, the transmission mechanism thereto, and articulate it in a way that was readily understandable by most people. There are several reasons I disagree with the thesis — in no particular order:
The Fed’s Exit Problem: Symptom of Paradigm Breakdown? - Yves here. This Real News Network interview with Yilmaz Akyüz, chief economist at UNCTAD, focuses on the conundrum of the Fed’s need to exit from QE from an international perspective, and layers in the further complication that China is not going to keep up its investment spending at the same level. Akyüz argues that “….we have problems at the end of the crisis which are as big as the ones during the crisis, and these problems are largely due to mismanagement of the crisis, particularly in the U.S. and Europe.” But I’m not sure it’s as simple as mismanagement. I’ve believed we are at the end of an economic paradigm, and the way out of those in the past has been breakdown. In ECONNED, I listed four theories, and I believe the last was the most problematic:
- Cognitive regulatory capture, meaning the regulators have adopted the industry worldview, which makes them reluctant to act.
- Extortion, meaning that the financial services industry controls infrastructure that is essential to capitalism, and cannot be displaced except at very high cost. Think of what happened to the civilization at Ur when the king shut down the overly powerful lenders.
- State capture, meaning the financial services industry now has the status of oligarchs in third world countries, having used its economic clout to buy so much political influence that they largely dictate policy regarding its interests.
- Paradigm breakdown, meaning key elements of the current system are no longer viable, but that is a possibility that no one is prepared to face, since the old system seemed to work well for a protracted period. Thus the authorities reflexively put duct tape on the machinery rather than hazard a teardown.
Alan Greenspan Sees Inflation - Alan Greenspan, the former Federal Reserve chairman, has largely avoided public comment on the Fed’s efforts to stimulate the economy, but he has said enough to make it clear that he is not a fan.The latest volley, from his new book, “The Map and the Territory,” is a warning that the Fed’s balance sheet expansion — $3.8 trillion and counting — may unleash inflation.“It is easy to contemplate price acceleration, with today’s Federal Reserve balances unchanged, ranging from 3 percent per annum to double digits over the next 5 to 10 years,” he writes.It’s been a long time since anyone accurately predicted higher inflation. Instead, inflation has sagged to the lowest levels on record. But here’s why Mr. Greenspan is worried. Each time the Fed buys a bond, it pays the bank that sells the bond by creating money and putting it into an account that the bank keeps at the Fed. Mr. Greenspan’s inflation prediction is based on his estimation of the consequences as that money flows out into the economy. The Fed could neutralize this threat by selling the bonds, sucking the money back out of the economy. Fed officials are confident in a second plan: The Fed pays interest on the money that banks keep on deposit, and as the economy improves, the Fed can increase the interest rate to induce banks to keep the money on deposit, eliminating the inflationary pressure. Mr. Greenspan acknowledges this possibility, but he wonders aloud whether the Fed will have the courage to act. “Unless the economy unexpectedly moves quickly into high gear, any credit tightening will, as usual, run into considerable political opposition. It always has.”
Greenspan is making a fool of himself again - Alan Greenspan is embarrassing himself again (or if not, he should be): "[Easy money] had absolutely nothing to do with the housing bubble," he says. "That's ridiculous." [One of my cartoons from April of 2006–click on image for larger version.] Greenspan continues to defend himself, unwilling to believe he could possibly have been responsible in any measure for the troubles we have all undergone over the past decade. Here's another blooper: "… [N]ot a single major forecaster of note or institution caught [the financial crisis]," he says. "The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely." Well, even stupid little me caught it, Mr. Greenspan, simply by reading people who make common sense. See my proof above, in April of 2006, and here, even earlier in February 2006. What planet does this guy live on? Read more of his latest mutterings here in this weekend's Wall Street Journal.
On QE's Gross Misallocation Of Capital -- Money put into the system would, in normal times multiply aggressively in use (e.g. Fed to bank, bank to business, business to consumer, consumer to restaurateur, restaurateur to farmer, farmer back to bank etc etc.) In reality, as Citi notes, there are often even more legs to this multiplier. However when QE puts artificial support under the Equity and Bond market you get misallocation of capital and no velocity of money. If ever there was a chart of the gross misallocation of capital caused by QE, this has got to be it... Velocity of Money (M2) and Core PCE- A once in 50 years dynamic.
- The last time both were as low as this was 1965 (Nearly half a century ago)
- Core PCE stands at 1.23% having seen a range in the last 54 years of 0.95% to 10.25% (Inflation floor anybody???)
Inflation does not show up in the true economy but in paper asset prices instead. (that worked well in prior cycles) One might even argue that as a consequence QE actually stifles economic growth, employment creation and inflation.
MMT vs. the merchants of doom: And the doomsayers don’t all hail from the right! - MMTers, I’ve observed, tend to be a somewhat optimistic lot. This is true even, or maybe even especially, when placed in juxtaposition to influential factions of the left. A great example of this was a recent post by Raúl Ilargi Meijer: “Winter In America Gets Colder : Why We Choose Poverty” Ilargi, it seems to me, has slid off into a too consistent pessimism. His foreboding determinism leads him to make statements like this:Over the next 30 years, 1975-2005, the standard of living still seemed to rise, but if we look behind the numbers and between the lines, we see that much of the wealth increase over that period is illusional, because it was increasingly based on credit, i.e. it was borrowed from the future.Or this:Today, in 2013, debt numbers all over are at levels that nobody would have believed possible only 30 years ago. Household debt, national debt and corporate debt hang around our necks like so many nooses, and all we can do to prevent ourselves from suffocating is to borrow more. Or this:Because, and it’s high time we acknowledge this, at this point in time, the only way the upper echelons of our societies can achieve some level of growth is to take it away from everyone else.All of these statements are predicated on a single prediction, and that is that there can be no future aggregate “growth,” whatever in the Sam Hill we assume “growth” to mean. And in so doing Ilargi treats the economy more like the 17th-century mercantilists did, who devoted themselves to the promulgation of legislation, which devoted itself, after about 1650, to the defense of the status quo or to the effort, by political action, to obtain a larger share for oneself of what was regarded as a static and unexpanding body of the world’s wealth.
Foreigners Sold U.S. Assets as China Reduces Treasuries - Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low. The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said. The Treasury data cover a period before the Federal Reserve opted against reducing its monthly bond buying at a Sept. 17-18 meeting. Since then, a 16-day, partial government shutdown slowed growth and created a pause in economic statistics releases that is expected to delay the Fed’s first tapering until March, according to a Bloomberg News survey of economists. Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.
Fitch's "Reserve Currency" Loophole: 80-90% Debt/GDP Rule Does Not Apply To You -- It would appear that French-owned Fitch, following its rating-watch-negative shift on the US credit rating last week, has got a tap on the shoulder from the powers that be. As Hollande complains about Obama's espionage, Fitch has released a statement explaining how the USA can do whatever it wants and not be downgraded. With only the Chinese ratings agency "able" to openly comment on the creditworthiness of the USA, it is no surprise that Fitch gave itself an "out" on the basis of the USDollar's exorbitant previlege. Via Fitch, Fitch Ratings says in a new report that even for a sovereign with the strongest credit fundamentals, there will be a gross general government debt (GGGD)/GDP level above which Fitch believes its rating is no longer compatible with 'AAA'. This is usually 80%-90%, but can be higher for sovereigns with exceptional financing flexibility, such as benchmark borrowers with reserve currency status. As we have highlighted before, for France, Germany and the UK, this threshold is currently 90%-100%, and for the US, it is currently 110%, provided debt is then placed on a firm downward path over the medium term.
Martin Wolf on the Contained Depression - Listen to this with your morning coffee. Two cups, it’s long but lively. Find attached a recent speech by the FT’s Martin Wolf on the evolving context of the post-GFC world and the lessons we have and haven’t learned. Essential weekend viewing.
Money For Nothing: A Panel Discussion by Black, Kelton and Wray - On the evening of October 21, 2013, there was a preview screening of the film “Money for Nothing” at the University of Missouri-Kansas City (UMKC). After the film, there was a panel discussion about the film with the filmmaker, Jim Bruce, and UMKC professors Dr. Stephanie Kelton, chair of the UMKC department of economics, economics professor Dr L. Randall Wray, and Dr. William Black, former financial regulator and associate professor of law and economics. Here is a link for the movie: http://moneyfornothingthemovie.org/ There is a little noise from handling the recorder in the first couple minutes of the recording, but then it settles down to decent audio. Here is the link for the panel discussion: https://soundcloud.com/tellsomebodyradio/money-for-nothing-panel
What’s Wrong with America? - Certainly this is the question I’m hearing from friends and other observers from abroad. Economic authorities, like the IMF or Asian bankers with large US holdings are understandingly expressing alarm. According to a British critic, “the rottenness of modern Washington makes outsiders gasp. The pomposity of its architecture can no longer dignify the log-rolling, the gerrymandering, the lobbyists’ egregious power, the money sloshing everywhere and the partisan polarization that drips from every news program.” The Chinese news agency, somewhat oddly when you consider the value of their dollar holdings, argued for a “de-Americanized world” that would include a “new international reserve currency that is to be created to replace the dominant U.S. dollar.” It’s particularly hard for foreigners with whom I’ve interacted in recent months to grasp the idea that Obamacare is somehow implicated in this latest round of dysfunction. How could this set of arcane changes to our health care delivery system possibly lead politicians to willingly default on our debt? I suspect the answer to the question of what’s gone wrong has many answers. My readers know mine: it’s the result of the toxic, and uniquely American, cocktail of concentrated wealth and money in politics. That combination blocks the policy set that would begin to address the challenges we face and promotes the ones you see around you: constant fiscal squabbles powered by rhetorical obsession with public debts and deficits that has a) nothing to do with our actual fiscal challenges (ones that Obamacare-type changes may actually be helping us to meet) and b) is “rhetorical” in the sense that it’s not about real solutions as about reducing taxes and shrinking government.
The Greatest Risk to the U.S. Economy Is Still the People in Charge of It - The 16-day shutdown of the federal government cost the U.S. economy billions of dollars in lost economic activity, from an idle district, to lost personal income and higher interest payments. But exactly how many billions did it cost? Counter-factual accounting is guess-work by definition, but a few research firms have tried to attach a number to the shutdown. Macroeconomic Macroeconomic Advisers put the figure at $12 billion. S&P estimate the cost was twice as high, at $24 billion. Split the difference, and you're talking about $18 billion in lost work. What's a good way to think about that kind of money—a sliver of the entire $15 trillion U.S. economy, but still, you know, $18 billion? In July this year, NASA funding was approved at around $17 billion for the fiscal year. So, there: The shutdown took a NASA-sized bite out of the U.S. economy. But that's just a nibble compared to the total cost of the budget showdowns stretching back to 2010. According to Macroeconomic Advisers, the total cost of Congress's assault on the economy going back to 2010—including the budget cuts, including sequestration, and fights around the budget cuts—was about 3 percent of our entire economy. That's $700 billion. That's not just NASA. It's one year's entire defense budget. According to the report, discretional spending cuts removed 1.2 million jobs from the economy, while policy uncertainty, graphed below by the New York Times, cost another 900,000. Two-plus million net new workers is 12 typical months of job creation. So, if the recession delivered a loss decade, Congress has delivered a lost year.
The Biggest Economy Killer - Our Government - The government shutdown and debt ceiling crisis inflicted a toll on the American economy, but that cost is only a fraction of the total damage that the federal government has been causing to the American economy. Without exaggeration, the single biggest impediment to a stronger economic recovery has been the years of dysfunction in Washington and the policies that have emerged. According to Standard & Poor’s, the shutdown itself will cost the economy $24 billion, an amount that would have paid for a large and valuable infrastructure project like the Big Dig, the massive highway improvement program in Boston. But far more harm has been done to the economy since early 2010 by terrible decisions as to how the government spends and the effect on both business and consumers of the uncertainty that stems from making policy crisis by crisis. Most substantively, the sharp decline in the budget deficit, from $1.4 trillion in 2009 to $642 billion in the 2013 fiscal year that ended Sept. 30, has braked the economy at a time when it was already improving only slowly, as Tuesday’s jobs report demonstrated.
How much did the shutdown cost the economy? Shutdowns aren’t cheap. This year’s closure, which ended Thursday, has likely cost the government and the economy billions of dollars, according to economists and policy analysts.Below are a few of the estimates we’ve seen, plus a video of Federal Diary columnist Joe Davidson discussing the financial impacts: $24 billion in lost economic output, or 0.6 percent of projected annualized GDP growth, according to the Standard and Poor’s ratings agency. Similarly, Moody’s Analytics estimated the impact at $23 billion. The ratings agencies calculate their estimates using complicated formulas that consider past economic behavior, combined with the number of federal employees and contractors who were not paid during the shutdown, according to Moody’s chief economist Mark Zandi. S&P said in a statement Wednesday that the threat of new debt-ceiling and shutdown standoffs early next year could “weigh on consumer confidence, especially among government workers that were furloughed.”“If people are afraid that the government policy brinksmanship will resurface again, and with the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks,” the agency said. “That points to another Humbug holiday season.”
CEA’s New Weekly Economic Index - The Council of Economic Advisers just released an interesting paper examining the macroeconomic harm from the government shutdown and debt limit brinksmanship. To do so, they created a Weekly Economic Index from data that are released either daily or weekly (and weren’t delayed by the shutdown). These data include measures of consumer sentiment, unemployment claims, retail sales, steel production, and mortgage purchase applications. The headline result: They estimate that the budget showdown cost about 120,000 jobs by October 12. Looking ahead, I wonder whether this index might prove useful in identifying future shocks to the economy, whether positive or negative. As the authors note: In normal times estimating weekly changes in the economy is likely to detract from the focus on the more meaningful longer term trends in the economy which are best measured over a monthly, quarterly, or even yearly basis. But when there is a sharp shift in the economic environment, analyzing high-frequency changes with only a very short lag since they occurred can be very valuable.
Better to Light a Candle... Against a backdrop of people who are dismissive of data and expertise, it is refreshing to see analysts rise to the challenge of tracking the economy while the government shutdown delayed the release of critical macroeconomic data. From Jim Stock of the CEA, "Economic Activity during the Government Shutdown and Debt Brinksmanship": To understand what [the deterioration in eight weekly activity indicators during the first two weeks of October] means for overall economic activity CEA combined these indicators into a “Weekly Economic Index” that is scaled to match the overall growth rate of economic activity (see Figure 1). This “Weekly Economic Index” is designed to extract the main common “signal” from the noise of these different indicators.Here is Figure 1 from the report. The eight indices used in constructing the weekly economic indicator are (1) the Johnson-Redbook Same-Store Sales Index (y/y % change), (2) ICSC Same-Store Sales Index (y/y % change), (3) New UI claims (thousands), (4) Gallup Job Creation Index, (5) Gallup Economic Confidence Index, (6) Rasmussen Consumer Index, (7) AISI Raw Steel Production (y/y % change), MBA Mortgage Applications (y/y % change). The Weekly Economic Index is the first principal component of these eight series, and the first PC accounts for 58% of the overall variance. (The series is rescaled to have the same mean as real quarterly GDP y/y growth rate from 2008 on.
Liquidity Preference, Loanable Funds, and Erskine Bowles - Paul Krugman - Here’s Erskine Bowles in March 2011: if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt. Strange to say, however, neither Bowles nor anyone else of similar views has, as far as I can tell, actually done what he urged: “stop and think for a minute what happens if they just stop buying our debt.” They just assume that it would be catastrophic, without laying out any kind of model of how that would work. Some commenters here have declared it obvious that a cutoff of Chinese funds would drive up interest rates, saying that it’s just supply and demand. That struck me, because it’s exactly what George Will said when I tried to argue, back in 2009, that budget deficits need not lead to high interest rates when the economy is depressed. And in fact the argument that foreigners will reduce their lending to us, sending rates higher, and shrinking the economy even though we have our own currency and monetary policy is, when you think about it, more or less isomorphic to the famously wrong argument that fiscal expansion is contractionary, because it will drive up interest rates.I am, by the way, grateful to those commenters — thinking about the equivalence of the China-debt and deficit-interest fallacies nudged me into a better, simpler formulation of my NK model, which I’ll say more about in a few days. And my model-building has, in turn, given me a new way to talk about what’s going on. So, here we go. Start from the observation that the balance of payments always balances:
Addicted to the Apocalypse, by Paul Krugman - Once upon a time, walking around shouting “The end is nigh” got you labeled a kook... These days, however, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable. And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go. Consider, for example, Stanley Druckenmiller, the billionaire investor, who has lately made a splash with warnings about the burden of our entitlement programs. He seems to feel that he must warn about the looming threat of a financial crisis worse than 2008. Or consider the deficit-scold organization Fix the Debt, led by the omnipresent Alan Simpson and Erskine Bowles. It was, I suppose, predictable that Fix the Debt would respond to the latest budget deal with a press release trying to shift the focus to its favorite subject. But the organization wasn’t content with declaring that America’s long-run budget issues remain unresolved, which is true. It had to warn that “continuing to delay confronting our debt is letting a fire burn that could get out of control at any moment.” On the Chicken Little aspect: It’s actually awesome, in a way, to realize how long cries of looming disaster have filled our airwaves and op-ed pages. For example, I just reread an op-ed article by Alan Greenspan ... warning that our budget deficit will lead to soaring inflation and interest rates ... published in June 2010... — and both inflation and interest rates remain low. So has the ex-Maestro reconsidered his views after having been so wrong for so long? Not a bit.
The 0.2 Percent Solution: Some Advice for Debt Hawks - Larry Summers recently noted that the projected long-term budget deficit for the federal government basically disappears if we’re able to achieve annual economic growth rates that are 0.2 percentage points higher than the Congressional Budget Office assumes. The notion that eliminating the budget deficit is a valuable goal in and of itself deserves some pushback. But if you start from the premises of those who do think (or claim to think) there’s a problem with debt levels of the sort projected by the CBO, then debt hawks should be running around promoting any scheme they can think of that will boost growth. If the debt really is as big of a problem as they claim, this ought to be their first priority. Now, it’s obviously the case that “push the US political system to pass policies that increase growth” isn’t an easy thing to accomplish, but there are a couple of reasons why this would be a better goal for (genuine) debt hawks to pursue. First, even if the FixtheDebters succeed in getting what they want, which seems to be a particular type of entitlement cut, it would be a tenuous accomplishment. The CBO recently evaluated the budgetary effects of raising the Medicare eligibility age to 67 and found that it would reduce deficits by … about $2 billion per year. Moreover, whether the hawks intended for this to happen or not (I believe the “grand bargain” blueprint still contains some pro forma calls for short-term stimulus), their contribution to the austerity campaign that has gripped the US political system since 2010 has resulted in changes to fiscal policy that hamper the United States’ growth potential — and thereby make more difficult the job of reducing the debt as a percentage of GDP.
What Happens Now? - In the aftermath of the great 2013 government shutdown/debt ceiling crisis, and the kicking of the can down the road while maintaining austerity once more, the subject on many minds is where do negotiations over fiscal policy go from here? Will the new “budget committee” produce more austerity and do a grand bargain including the “chained CPI”? Will Congress finally turn towards economic growth and job creation, or will we continue to have more shutdowns and debt ceiling crises in 2014? Let’s begin with “chained CPI” and possible “Grand Bargains.” The President seems to still want one, but the question is, does anyone else? And, if they don’t, can he still get it through? It’s dangerous for anyone running in 2014 to vote for chained CPI. Surveys show that overwhelming majorities of all Americans want no cuts to Social Security and Medicare, and also that 40% of tea party respondents are 55 or over, and are not likely to support such cuts, either. Nor do they appear to be anti- “their” Medicare. It’s the corporate Republicans who oppose these things. So, I don’t think the corporate Republicans would get much love from the tea baggers for supporting entitlement cuts, apart from Medicaid, which I think the tea party views as welfare. Certainly any credit the Congressional Republicans would get from their tea party base for voting for “chained CPI” would not outweigh their having given in on the CR and the rise in the debt ceiling just passed. So what can the corporate Republicans in Congress gain from voting for chained CPI? Very little, I think, unless the Democrats get behind it, and then they can run against the Democrats as having sold out Social Security, as long as not many Republicans vote for it. In that case, however, the Democrats won’t have enough cover to vote for it, so they are unlikely to do so. So, then we have to ask, what can induce the Democrats to vote for entitlement cuts knowing it will hurt them in the elections? Will the President be a big factor in the Congressional elections? . Can he deliver votes by campaigning for other Democrats? Does he even want to? Does it matter to Congressional Democrats if he gets annoyed at most of them? I doubt all of these things.
Obama Finally Fights GOP, Affirms a Role for Government, but Renews Threat to Shrink the US Economy - As the US government shutdown was still in effect and the prospect of a debt default loomed, President Obama held an extraordinary and revealing White House press briefing on October 8th in which he clarified his then position vis-à-vis the shutdown and debt ceiling. After the shutdown was (temporarily) ended on October 17th, Obama made a fairly extensive public statement airing his views of how he sees economic policy and government’s role. Obama went into unusual detail and lengths to expand on his views of politics, government and the economy. In addition, he marked out his most combative stance vis-à-vis the Republicans to date. However, he also, unfortunately, showed via his various seeming improvisations during the October 8th press conference and the end goals he set himself during the October 17th speech, how little he understands about how the economy works and how reluctant or unmotivated he is to use the powers of his office to do good for the broad swath of the American people. Tragically for the American people and for Obama’s legacy, if he takes overall social well-being seriously, the President persists in measuring his economic performance by how much he will have reduced budget deficits or, one surmises, have achieved a balanced budget at some point in the future. Obama either sincerely worships the “Balanced Budget Gods” or is simply a loyal servant of the faction of the political and economic elite, led by Wall Street billionaires, that sees fiscal austerity as in its interest.
Analysis: Despite budget win, Obama has weak hand with Congress (Reuters) - Despite his win last week in a debt ceiling standoff with Republicans, President Barack Obama has limited ability to achieve his policy goals through legislation, which could result in increased use of executive powers, administration officials and Democratic strategists said. The 16-day partial government shutdown highlighted Obama's challenges in basic governing. Although he refused to concede to Republicans in exchange for reopening the government and raising the U.S. borrowing limit, he could not block the emergence of what he called a "manufactured" crisis. The president would now like to seize momentum to push forward three legislative priorities: the farm bill, immigration reform and a more lasting budget deal. But his chances of progress on those issues, particularly immigration reform, depend on convincing embittered Republicans to work with a White House many of them detest. That leaves Obama more or less at the same strategic juncture he encountered before the shutdown began. "His only play is to just keep being consistent about trying to find ways for bipartisan cooperation on the things that need congressional action and then try to continue what he's been doing for years now ... and that's looking for ways to move the ball through executive action," a senior White House official told Reuters. "In that sense, nothing has changed in our approach except that we and the whole town had to burn however many weeks on this detour - which is a shame." Already this year, Obama has relied on executive actions to enact climate change and gun control policies that had weak congressional support. He could use the same authority to bypass lawmakers on other regulatory questions. But that strategy has limits. Some of the administration's climate rules are being challenged at the Supreme Court, and Obama still needs Congress to enact the major reforms that his advisers hope will define his legacy.
Obama’s Goal of Grand Budget Deal Elusive as Talks Begin - Forget talk of a budgetary grand bargain when members of Congress sit down to meet a December deadline for progress on a revenue-and-spending plan. Lawmakers say even a mini-bargain to carry the government through the next year or two would be difficult, never mind a breakthrough on entitlement spending limits and tax revenue that’s eluded negotiators for the past three years. “It’s kind of hard to be positive about it, particularly when we’ve gone through what we’ve gone through recently,” said Senator Saxby Chambliss, a retiring Georgia Republican. This week’s deal to end a government shutdown and avert the threat of a U.S. default followed weeks of stalemate that began when House Republicans tried to force a delay in the Affordable Care Act, President Barack Obama’s signature health-care law. The accord sets a Dec. 13 date for completing the budget talks that opened yesterday. It funds government operations through Jan. 15 and suspends the debt limit through Feb. 7. Senator Patty Murray of Washington, the lead Democrat on the congressional panel established by the agreement to write a budget, said the group will focus on a limited deal covering a shorter time horizon than the 10-year fiscal plan Congress tried and failed to negotiate in 2011. Negotiators will seek a mix of cost reductions and revenue increases that could replace the across-the-board spending cuts known as sequestration that Congress approved two years ago.
Washington needs to prove the political system still works - FT.com: The US, as we have frequently been reminded in recent days, still belongs to a small club of nations that in modern times have never intentionally defaulted on their debts. But to understand the short and long-term effects of our government’s recent brush with financial Armageddon, it is important to realise that more was at stake than a good payment record. Confidence in America derives not just from our sustained economic growth over the past century but also from our ability to reconcile the nation’s diverse political views. This is now in jeopardy. The US has always been a nation that set a standard. Our emergence in the 20th century as the bearer of the world’s reserve currency is based on the faith of global markets in the underpinning of our economic system by democratic principles and ability to overcome our differences. Based on conversations with leaders in business and government, in the US and beyond, I can tell you this faith was badly shaken during the 16 days of the government shutdown and the high-stakes poker over a debt-limit extension. While we can all breathe easier because the government is still making good on our obligations, it would be wrong to think we avoided doing real and potentially lasting damage to the economy, at home and worldwide.
Both Parties Seek Small Budget Deal — Republicans and Democrats will use budget talks that start next week to try to minimize or reorder broad spending cuts that began in March, with both sides Thursday playing down the possibility of a "grand bargain" that would address the nation's long-term fiscal problems. In de-emphasizing the likelihood of a larger deal, both parties appeared to be looking for limited areas of agreement in order to bypass the next round of the automatic spending cuts known as the sequester and buy time to deal with tax reform, entitlement cuts and other big-ticket items next year. Though their goal to avoid the sequester overlaps, the two parties are still sharply divided on how to proceed. They face a relatively small gap in how much money they want to appropriate for federal agencies to spend in the year that ends Sept. 30, 2014. But their split over whether to raise taxes as part of any agreement is proving so polarizing that neither side is optimistic a deal is within reach. A 2011 deficit-reduction law created nine successive years of spending cuts in programs Congress funds every year, such as the military, education, transportation and housing. Lawmakers from both parties have said the cuts—known as the sequester—are too steep and should be replaced by reductions in other programs. The cuts began in March and will reduce military spending by an estimated $20 billion starting in mid-January, the Congressional Budget Office has said. Spending on many other programs will be capped.House Budget Committee Chairman Paul Ryan (R., Wis.) said in an interview Thursday that the 29 House and Senate lawmakers on a new budget conference committee should try to identify "smart" reductions that could replace the sequester cuts. He wouldn't identify what programs might be targeted, saying this is a discussion he should have directly with Democrats.
Both sides agree: No major budget deal foreseen (AP) - On this, GOP budget guru Rep. Paul Ryan and top Senate Democrat Harry Reid can agree: There won't be a "grand bargain" on the budget. Instead, the Wisconsin Republican and the Nevada Democrat both say the best Washington can do in this bitterly partisan era of divided government is a small-ball bargain that tries to take the edge off of automatic budget cuts known as sequestration. Official Capitol Hill negotiations start next week, but Ryan and Reid both weighed in Thursday to tamp down any expectations that the talks might forge a large-scale agreement where several previous high-level talks have failed. Long-standing, entrenched differences over taxes make a large-scale budget pact virtually impossible, according to lawmakers, their aides and observers who will be monitoring the talks. Most Republicans say they simply won't agree to any further taxes atop the 10-year, $600 billion-plus tax increase on upper-income earners that President Barack Obama and Democrats muscled through Congress in January. Without higher taxes, Democrats say they won't yield to cuts in benefit programs like Medicare. "If we focus on some big, grand bargain then we're going to focus on our differences, and both sides are going to require that the other side compromises some core principle and then we'll get nothing done," Ryan, who chairs the House Budget Committee, said in an interview Thursday. "So we aren't focusing on a grand bargain because I don't think in this divided government you'll get one."
Republicans Demand Social Security And Medicare Cuts, Is It Reported? -- Republicans are demanding cuts in Social Security and Medicare if Democrats want to change the terms of the “sequester.” I’m sure their Tea Party “base” would be shocked if they understood this. So would most Americans. So is the media giving Americans the information they need in order to make informed decisions? Yesterday The Hill reported, in House GOP says sequester is leverage in next budget battle, that Rep. Paul Ryan is pushing for cuts in Social Security and Medicare:In a meeting with House conservatives, Rep. Paul Ryan (R-Wis.), told rank-and-file lawmakers that, as the party’s chief budget negotiator, he would push instead [of killing Obamacare] for long-term reforms to entitlement programs in exchange for changes to sequestration spending cuts that Democrats are expected to demand.[. . .] Rep. Matt Salmon (R-Ariz.) said that during the GOP meeting, Ryan pointed to sequestration as the party’s leverage with Democrats and said the Republican negotiators would not accept revenue increases in exchange.“We’re going to try to push for some substantial reforms on entitlement spending and our backstop is sequestration,” Salmon said in describing Ryan’s remarks. Most American’s don’t read The Hill. And most Americans don’t know that “long-term reforms” to “entitlement spending” specifically means cuts to Social Security and Medicare.
How the Budget Debate Could Help the Economy - I remain truly and deeply disturbed by the immediate pivot from the debt-ceiling debacle and government shutdown to yet another set of budget negotiations, with not even a head fake toward dealing with the slogging economy. Still, is there any lemonade to be made out of this lemon of a budget conference that’s about to get under way? I think there is. First, it is a good sign that all sides are eschewing the elusive “grand bargain,” in which the Democrats accept significant cuts to entitlements and the Republicans accept significant new tax revenues. That’s good news, because that route leads to gridlock — and presents a real risk of reducing essential income and health supports for economically vulnerable retirees and others who depend on Social Security, Medicare and Medicaid. In the hands of this Congress, a “grand bargain” could easily be a disaster for these folks. Second, there seems to be a bit of a consensus forming around replacing some of the sequester cuts that are partly responsible for the fiscal drag that’s been dampening economic growth. To remind you, sequestration is indiscriminately lowering both defense and non-defense discretionary spending by $109 billion per year.
The Illogic of the McConnell Debt Limit Rule -- What should be done to avoid another flirtation with default? (Let’s leave avoiding a shutdown for another day.) Some commentators, most recently the New York Times have proposed making the so-called “McConnell rule” the law of the land. The idea, named after Senate GOP Leader Mitch McConnell (R-KY), would allow the President to raise the debt ceiling unilaterally. Congress’s role would be limited to voting its disapproval of that increase. This is essentially how debt ceiling issues were resolved earlier this year. But making the McConnell rule law would be a mistake. It would enshrine the irresponsibility of all of those elected officials who have said they would never raise the debt limit to continue avoiding the responsibility for their actions. And it is based on a misunderstanding of why the debt ceiling has to be raised periodically. Congress does not raise the debt ceiling periodically because the President likes the idea. Congress must increase it in response to actions (such as spending authorizations and tax laws) it has already taken. Allowing the president to raise the debt ceiling (because Congressional actions made it necessary) so Congress can then vote its disapproval makes no more sense than having Congress require the President to order a pizza and then vote to object that it has too many calories.
Time to Eliminate the Debt Ceiling - Linda Beale - As the post-shutdown resumption of talking in Congress gets underway and the days start counting down to the next debt ceiling deadline (perhaps brought along sooner by the delay in the tax filing startup, as discussed in the last post), I suppose we must all at least hope that the Tea Party Republicans will be held in check by less reactionary members of their party. Or will they pursue their hostage-taking strategy yet again in connection with the debt ceiling, attempting to gain by economic terrorism what they could not win in the regular legislative process or the resumed budget negotiation talks? There has been a series of commentaries in The New Yorker on the debt ceiling, all of which are worth reading. Well before the shutdown and crisis had reached quite the fever pitch of this fall's end game, James Surowiecki wrote that it was time to Smash the Ceiling, The New Yorker. And in this year's ridiculous hostage-taking effort by the Tea Party/GOP rightwingers, he pointed out succinctly that acceding to the right's demands in connection with the shutdown "would in effect mean that controlling one house of Congres would be all you need to set policy" with "any law that hard-liners wanted to repeal (or pass) ....pegged to a debt-ceiling vote." James Surowiecki, After the Shutdown: The Debt Ceiling. And he's reminded us since that this whole debacle should be the "impetus for Congress to do away with the debt ceiling entirely, so that we don't have to go through this nonsense again." James Surowiecki, The Default Danger Next Time.
A Federal Budget to Prevent Another Government Shutdown - The deal President Obama signed Wednesday night included a budget patch at current spending levels through mid-January and an increase in the debt ceiling through early February.That’s right, we just went through all of that craziness — 800,000 workers initially furloughed, the waste of $24 billion in output, the threat of default, the shutting down of the national parks, the damage to businesses and markets, the raw exposure of our political dysfunction to the world — to get a three-month patch that maintains the lousy status quo.So, here’s my first point: regardless of where budget negotiators are in three months, we mustn’t go through this again. The options here are not “budget deal” or another shutdown. Both parties have now named negotiators to a budget conference, but even if these members make no progress on an actual budget agreement (versus another stopgap patch), the parties — and it’s really the House Republicans — must be disciplined enough to keep shutdown or default far away from the table. That’s not a plea to Senator Ted Cruz or the House Tea Party caucus. I expect business as usual from them. It’s a plea to more moderate voices to shut out such terribly destructive, uncompromising extremism, as they ultimately did earlier this week, though it took them far too long. Can they do better than another continuing resolution, as these temporary budget patches are called? Doubtful.
Replace Some of the Sequester by Closing Tax Loopholes -- The sequester (pdf) cut approximately $85 billon from Fiscal Year 2013 spending—half from reductions in defense spending and half from elsewhere in the budget. OMB calculated (pdf) that it would result in a 5 percent reduction in nondefense discretionary spending—funding for programs like education and housing assistance, veterans’ benefits and services, medical and scientific research, and health and safety regulations. I have long argued that cuts to government spending are uncalled for, given the lack of a robust economic recovery. However, if you are searching for sensible ways to shrink the deficit, there are better alternatives to sequestration. For example, we could eliminate the nondefense discretionary spending cuts in the sequester and shave $26 billion annually from the deficit by eliminating or closing a handful of tax loopholes. Tax loopholes, formally known as tax expenditures, reduce tax revenues by over $1 trillion every year. There are many reasons to keep tax loopholes in the tax code: some are very popular (e.g., the mortgage interest deduction), some provide incentives to socially beneficial behaviors (e.g., the earned income tax credit), and some are technically difficult to change (e.g., the exclusion for employer retirement plans).
Only Way New Budget Talks Will Succeed Is By Redefining Success - I have far less hope for the post-shutdown talks that are about to get underway than many of the others who follow, analyze, comment and report on federal budget doings. Actually, I am astounded at how quickly so many people who should know better seem to have forgotten the insanity of the past few years that led to the total craziness of the past few weeks and have decided there are no lessons to be learned from what happened. Here's what I've learned. It's nice to see that some members of Congress, especially some Republicans, have already rejected another showdown when the current continuing resolution expire and debt ceiling expire. It's important to note, however, that the representatives and senators who have said this are not the ones who will determine whether it happens again. Until tea partiers in both houses say a shutdown and debt ceiling fight isn't going to happen, the threat has to be considered a real possibility. Why does anyone think the tea partiers in Congress are going to throw in the towel on the budget just because they weren't successful this time? Nothing that has happened over the past few years indicates that legislative or election losses convince them to moderate their demands or tactics. In fact, just the opposite has occurred with tea partiers doubling down rather than moderating their preferences, demands and tactics after each failure. Does anyone really think that the tea party wing of the GOP is less frustrated legislatively now than it was before the shutdown?
Us Versus Them - Rising political polarisation in the US has gone hand-in-hand with rising income inequality, falling top-end tax rates, lower taxes on business, rising leverage and higher asset prices. These trends may be coincidental, but they seem to reinforce each other. The medium-term risk is that some of these trends reverse, as occurred after the 1920s. Congressional political polarisation and income inequality in the US are at multi-decade extremes (Exhibit 1). The polity is split; incomes are unequal. The rise in polarisation partly reflects electoral gerrymandering that has sharply reduced the number of contestable seats (Exhibit 2). Only 20% of House of Representatives seats would change hands on a 5% swing. This increases the centrifugal influence of the party members who dominate the increasingly-decisive party primary elections.However, rising political polarisation pre-dates the decline in contestable seats: it started as incomes became more unequal. Inequality has not risen because the rich got richer faster than the poor. It increased because the income gains of the past 30 years have gone to the top 1%. Average income for the bottom 99% is now unchanged in real terms over the past 40 years (Exhibit 3). The rising tide did not lift all the boats: it floated a few yachts.
GOP leader to Obama: “I cannot even stand to look at you” - During the negotiations over the government shutdown, one House GOP leader said to President Obama, “I cannot even stand to look at you,” according to a recent Facebook post from Illinois’ Dick Durbin, the No. 2 Democrat in the Senate. “Many Republicans searching for something to say in defense of the disastrous shutdown strategy will say President Obama just doesn’t try hard enough to communicate with Republicans,” the post begins. “But in a ‘negotiation’ meeting with the president, one GOP House Leader told the president: ‘I cannot even stand to look at you.’” “What are the chances of an honest conversation with someone who has just said something so disrespectful?” the post goes on to ask.
It is stupid to believe that the Tea Party has no brain - FT.com: Forrest Gump immortalised the phrase “stupid is, as stupid does”. In the wake of the latest federal shutdown, most Americans would readily apply it to the Tea Party movement. Can there be anything more idiotic than flirting with a voluntary sovereign default? Who is to say it will not try again in the coming months? Yet if the goal is to defeat the Tea Party, calling it stupid is not the smartest thing to do. Tea Partiers offer a never-ending supply of late night comic material. But insulting their IQ only improves the odds their Washington representatives will try again. It reinforces their worldview of a town run by Ivy League snobs. It is also hard to square with the facts. In the past two years, the Tea Party has converted Mr Obama’s fiscal stimulus into a sharp budgetary contraction – a key aim of the movement. It might be wrong-headed. But its success hardly qualifies it as stupid. Yet the temptation to belittle the Tea Party is very hard to resist. Earlier this year, Bill Clinton said the Tea Party was full of people who “check their brains in at the door”. In his first campaign, Barack Obama talked of economically beleaguered small-town people who “cling to guns, religion or antipathy to people who are not like them”. More recently Tea partiers have been described by members of the Washington establishment as “jihadists”, “morons” and “lemmings in suicide vests”. If only things were that simple. Politics is also about psychology. Ronald Reagan was partly able to defeat Great Society liberalism in the 1980s because he knew how Democrats thought. He had once been a Democrat and liked to socialise with them. Things are far more polarised in the US nowadays. Mr Obama rightly wants to eviscerate the Tea Party’s clout in Washington. In addition to blocking almost all of his domestic agenda, it has shown itself capable of serial recklessness. Yet Mr Obama shares little insight as to what motivates their support base.
Congress Shouldn’t Forget About Tax Entitlements In Its Search for Deficit Reduction - But there is another $1 trillion-plus in federal tax entitlements that are treated with the same legislative deference. Except that they are part of the tax code, these special subsidies are largely indistinguishable from the spending that Bob highlights. Like entitlement spending, they are automatic benefits you receive based on characteristics such as your age, family structure, and income. And, in the case of tax subsidies, on the particular form of income you receive or the economic activity in which you engage. Like spending entitlements, these tax expenditures are open-ended. Unlike appropriated funds, there is no limit to their total annual cost. You meet the definition of eligibility—you get the dough.I’m not arguing that all entitlements—tax or spending—are bad. Indeed, while some are boondoggles, others are enormously important. And it would be hard to imagine making major changes every year to transfer programs such as Social Security or tax subsidies such as, say, the mortgage interest deduction. Such uncertainty would create terrible problems. But no program is perfect. Yet, unlike agency spending, Congress rarely revisits these tax goodies. They have achieved legislative immortality. And they add a bundle to the deficit.For instance, in 2014 the government will provide about $250 billion in income tax and payroll tax subsidies for people whose employer buys them health insurance. You get employer-sponsored insurance, you are automatically entitled to the tax break that goes along with it. It’s the same with people who take out loans to buy a house. You get a mortgage, you get a tax deduction (with limits only for loans over $1 million). That tax break increases the deficit by more than $100 billion a year.
Tax Filing Season Delay - Linda Beale - The IRS announced that the 16-day federal shutdown will cause a delay in the start of tax filing season by a week to two weeks. The exact date when returns will first be accepted, to be announced in December, was to have been January 21, but may now be January 28 or later. See Annie Lowrey, Citing Shutdown, I.R.S. Says Tax Season Will Start Late, The delay is necessary to ensure that the IRS systems are functioning appropriately to handle the filings. The shutdown delayed that process as 90% of IRS employees were on furlough starting October first, and the IRS has a backlog of items requiring attention now that employees are back. Id.The delayed date will tend to be most detrimental for taxpayers who file early because they tend to be the ones who expect a refund and want to get their money as soon as possible: the US issued more refunds between 1/30 and 3/1 this year than in the period from 3/2 to 5/10, even though it received 50% more returns in the latter period. See Rubin, IRS Delays Start of 2014 U.S. Tax-Filing Season Citing Shutdown, Bloomberg. An even more troubling impact of the shutdown and the resulting delay may be on the US debt. According to Loren Adler at Committee for a Responsible Federal Budget, the delay--and the likelihood of more refunds than payments for early-filed returns--could mean that the government would reach the debt ceiling earlier than had been anticipated. So that can that just got kicked a few weeks down the road may open up to more worms sooner rather than later
Think Tank’s Tax Plan: Heartburn for the Wealthy? - Citizens for Tax Justice, a left-leaning think tank, released a new tax-overhaul plan Wednesday. For wealthy individuals and major corporations, it could make for painful reading. The good news, sort of, for those groups: Accomplishing a tax overhaul might be more difficult than ever in the wake of the shutdown showdown. The new plan would end the preferential tax rates for capital gains and stock dividends, replace the top three regular income rates (33%, 35% and 39.6%) with a single 36% rate, and tax capital gains at death. It also would increase the standard deduction. For businesses, the plan would end the current system of allowing multinational corporations to park their overseas profits offshore. That system, known as “deferral,” was intended to help U.S. companies compete against foreign rivals that often face no home-country tax at all on their overseas profits. But some critics say it has helped to engender a thriving industry in usually legal offshore tax dodging. It also has compelled U.S. companies to leave profits offshore rather than bring them back home, where the companies would face the relatively high U.S. corporate tax. Some critics say that has drained away money that could be used for domestic investment.
Why the 1% should pay tax at 80%, by Emmanuel Saez and Thomas Piketty - In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled, from less than 10% in the 1970s to over 20% today (pdf). A similar pattern is true of other English-speaking countries..., however, globalization and new technologies are not to blame. Other OECD countries ... have seen far less concentration of income among the mega rich.At the same time, top income tax rates on upper income earners have declined significantly since the 1970s... At a time when most OECD countries face large deficits and debt burdens, a crucial public policy question is whether governments should tax high earners more. The potential tax revenue at stake is now very large. ... There is a strong correlation between the reductions in top tax rates and the increases in top 1% pre-tax income shares... The data show that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. ... What that tells us is that a substantial fraction of the response of pre-tax top incomes to top tax rates may be due to increased rent-seeking at the top (that is, scenario three), rather than increased productive effort. By our calculations about the response of top earners to top tax rate cuts being due in part to increased rent-seeking behavior and in part to increased productive work, we find that the top tax rate could potentially be set as high as 83% (as opposed to the 57% allowed by the pure supply-side model).
US debt drama haunts ‘risk free’ assets - FT.com: While Washington prevented the October 17 US debt ceiling deadline leading to catastrophic payment glitches, the uncertainty caused by the political showdown has raised fears about the country’s growth prospects and its global economic influence. But other repercussions could haunt markets like yetis. The doubt cast on the ultimate safety of US debt hit the working of US financial systems – in short-term interbank loan markets, for instance. “I think it has opened people’s eyes up. We need ‘safe assets’ in the global financial system,” says Manmohan Singh, a collateral expert at the International Monetary Fund. “US Treasuries are safe assets. You could say German Bunds are safer but the size of the market is not the same and they are not denominated in the world’s principal reserve currency.” The idea of US debt as a virtually risk-free asset underpins global finance: US bonds are used to price dollar-denominated issuance globally. Movements in other bond prices – Bunds, for instance – are strongly correlated. What difference this week’s events will make depends on whether “safe” is an absolute concept, or a relative one, argues Mohamed El-Erian, chief executive of Pimco. “Until recently, there was no need to ask this question because the US was seen as triple A virtually across the board.” Fitch, the credit rating agency this week put the US on “negative watch”, a step towards possibly removing its triple A status. Standard & Poor’s downgraded the US in August 2011. But that did not mean US debt has become less safe compared with possible alternative longer-term investments. “There is no doubt that the ‘relative’ criterion is still being met as the US Treasury market remains the deepest and most liquid financial market – and that the dollar is the global reserve currency,” says Mr El-Erian.
Long-Term Mutual Fund Outflows $2.16 Billion in Latest Week, ICI Says - Long-term mutual funds fell by $2.16 billion in the latest week on continued withdrawals from bond funds, according to the Investment Company Institute. Equity mutual funds have recorded weekly increases for most of 2013 after investors shied from them following the 2008 financial crisis. Bond funds, meanwhile, have posted outflows in recent months amid concerns the Federal Reserve could start scaling back its bond-buying programs. For the week ended Oct. 16, equity funds had inflows of $2.94 billion, reversing a three-week streak of outflows. Equity funds had outflows of $3.12 billion in the prior week. Domestic stock funds rose by $839 million, while foreign equity funds added $2.1 billion. Bond funds had outflows of $5.71 billion, compared with prior-week outflows of $2.55 billion. Taxable bond funds fell by $3.86 billion, while municipal bond funds were down by $1.85 billion. Hybrid funds, which can invest in stocks and fixed-income securities, had inflows of $618 million, up from prior week inflows of $191 million.
Repo, Baby, Repo - Subprime mortgages did not cause the financial crisis, nor did the housing bubble or Lehman Brothers. The financial crisis originated in a corner of the shadow banking system called the repo market. That’s where the bank run occurred that froze the secondary market, sent prices on mortgage-backed assets plunging, and pushed the financial system into a death spiral. In the Great Crash of 2008, repo was ground zero, the epicenter of the global catastrophe. As analyst David Weidner noted in the Wall Street Journal, “The repo market wasn’t just a part of the meltdown. It was the meltdown.” Regrettably, the Federal Reserve’s nontraditional monetary policies (ZIRP and QE) have succeeded in restoring the repo market to it’s precrisis level of activity, but without implementing any of the changes that would have made the system safer. Repo is as vulnerable and crisis-prone today as it was when the French bank PNB Paribas stopped redemptions in its off-balance sheet operations in 2007 kicking off the tumultuous bank run that would eventually implode the entire system and push the economy into the deepest slump since the Great Depression. By failing to rein in repo, the Fed has ensured that financial crises will be a regular feature in the future occurring every 15 or 20 years as was the case before banks were more strictly regulated and government backstops were put in place. Repo returns us to Wild West “anything goes” banking. Why would the Fed be so reckless and pave the way for another disaster? We’ll get to that in a minute, but first, let’s give a brief explanation of repo and how the system works.
How to Make Money for Nothing Like Wall Street - Remember credit default swaps? The derivatives that some hedge funds (and banks) used to make not-so-small fortunes betting against the housing market. The derivatives that, in the process, multiplied subprime losses, and made it impossible to know just where they'd turn up. CDS trades are now publicly reported, and go through clearinghouses that require collateral. So CDS are more transparent, and it's harder to sell them if you can't afford to pay them.But even with these financial shock absorbers, there are still lots of clever-and-probably-legal-but-ethically-dubious ways to game CDS. Here are the two most devious.
- 1. Buy CDS on a bond, and then bribe the borrower to temporarily default. This is like taking out insurance on your neighbor's car and bribing him to get in an accident. You get the insurance, and then you kick some money back to him to upgrade his car. Sound far-fetched? It's not. It's essentially what a unit of the Blackstone Group did with the Spanish gaming operator, Codere SA. First, Blackstone bought insurance on Codere’s bonds, so it stood to make a nice bit of money if Codere missed an interest payment. But how do you make a company miss an interest payment? Well, Blackstone took over one of Codere's revolving loans, as a hostage, and told the gaming company: "We'll force you to pay back this entire revolving loan unless you kindly miss the next interest payment on your bonds." It was a clever ransom. And guess what? The clever ransom worked. The interest payment came late. Blackstone made $15.6 million from its CDS. And as for Codere, they turned out fine, too. Blackstone agreed to restructure its bonds, and reward the company for good behavior with another $48 million loan.
- 2. Sell so many CDS on a bond that you can pay to keep it from defaulting. This is like selling insurance to as many people as possible on a car that was obviously falling apart — and then paying to fix it before it could get in an accident.
OCC Replies to Elizabeth Warren Reveal Extent of Regulatory Capture on Derivatives - Yves Smith - I thought readers would have fun taking apart a reply by the Thomas Curry, the Comptroller of the Currency, to some written questions posed by Elizabeth Warren after a July 11 Senate Banking Committee hearing on systemic risk. In fairness, the letter is a mixed bag rather than a complete train wreck. Curry’s answers to Warren’s questions 3 (on what more might be done to address too big to fail) and 4 (on proposed changes in leverage ratios) are basically earnest defenses of current initiatives, and top bureaucrats have to carry that sort of water. Curry is in the middle of trying to change the culture of a way too bank friendly regulator, and my guess is he does not want to stick his neck too far on policy until he’s made more progress on that front. But his answers to questions on derivatives are cringe-making. Nevertheless, this letter illustrates the degree to which the OCC relies on rationales that are, or look like, they came straight from the banks. I’ll just go through the first two questions, although I encourage you to look at the reply to Question 8 (on p. 14) as similarly shred-worthy. 5-7 aren’t so great either.
Interview: Gary Gensler explains how financial reform is going: Health care wasn't the only area where the federal government launched an exchange this month designed to fix a broken system. On Oct. 2, the Commodity Futures Trading Commission (CFTC) oversaw the launch of “swap execution facility" platforms. Called the “future of derivatives trading” by Bloomberg, these platforms are the culmination of reforms in Dodd-Frank designed to bring price transparency to the opaque and dark over-the-counter derivatives market that helped cause the financial crisis. And, unlike the health-care exchanges in Obamacare, these electronic platforms launched without any notable problems. The Wall Street Journal reported no significant glitches, as roughly $462 billion in interest-rate swaps and $26 billion worth of credit derivatives were traded in these swap execution facilities (SEFs) in the first week alone. To better understand both the launch of this crucial part of financial reform, as well as how the status of derivatives reform is going more broadly, I spoke with Gary Gensler, the chairman of the CFTC. This interview has been edited for clarity and length.
ABS market is on a roll again - After a rough patch this summer (driven by "taper" fears), consumer asset backed securities (ABS) business is heating up again. The bulk of that business is represented by auto and credit card loans. The pick up in demand is visible in the ABS index credit default swap contract called ABX.As a result of this liquidity, this year's car purchaser will generally have no problem obtaining credit. This even applies to some so-called sub-prime auto borrowers with low credit scores. Furthermore, some of the longer term auto financing (5 years and longer) is on the rise. Fitch Ratings: - Auto loans with original terms of 60+ months (longer-term loans) increased in 2012-2013 auto loan ABS transactions versus 2009-2011 pools. Though Fitch Ratings believes the growth of these types of loans could be negative, as they have potential for increased loss severity, we currently view these loans as underwritten to account for this additive risk and do not expect transaction asset performance to be significantly affected. Overall, there has been a 20% increase in longer-term loans in auto ABS transactions in 2013 since 2010. The use of extended-term loans in nonprime ABS transactions increased with loan pools containing approximately 80% longer-term loans in transactions issued in 2013, up from 67% in 2010. Similarly, in the prime sector these loans comprised 43% of pools securitized in 2013 from 36% in 2010.
Fed Gives Middle Finger to Congress, Commodities Customers, and Public, Proposes to Allow More Banks to Participate in Commodities Business -- Yves Smith - Nothing like watching a captured regulator like the Fed use a public hue and cry to execute a big bait and switch. Here the ploy is to change rules to further disadvantage the parties making complaints. But it takes finesse to make the finger in the eye look plausible and reasonable, so that when the well-understood bad effects show up later, the perp can pretend to be mystified.The issue at hand is commodities speculation and price manipulation by major financial firms. In 2003, the Fed relaxed the rules that had formerly prohibited depositing-taking banks from trading commodities. In the early summer of this year, four members of Congress wrote to Bernanke asking whether the Fed had given adequate consideration of the systemic risk of letting major banks participate in the physical commodities. A timely bit of reporting by David Kocieniewski of the New York Times in July showed that these reservations were valid and used Goldman to provide a concrete example of demonstrable, measurable harm. And that harm was the direct result of the 2003 rule changes that allowed financial firms to operate in physical commodities, not just as traders in financial contracts. They started backward integrating into owning major components of the delivery and inventorying systems. Kocieniewski showed how Goldman had identified and exploited a critical choke point in the aluminum market. The new rules allowed Goldman to buy Metro International Trade Services, a business in Detroit with 27 warehouses that handles a bit over 25% of the aluminum available for delivery. Metro proceeded to lengthen delivery to end customers from six weeks to 16 months. And despite the firm’s pious claims that, really, it was doing the best it could, many warehouse employees reported that Goldman was using its trucks and staff not to deliver to customers, but to run ore around among the warehouses:
Warehouse queue conflicts -- The Wall Street Journal has been digging deeper into the metals warehouse logjam issue, and discovered that both Alcoa and Rusal may be beneficiaries of the situation due to the physical premiums they collect when end-users are forced to go direct to producers for metal so as to avoid queues. According to the WSJ the aluminium makers have reaped as much as $1.4bn in revenues from higher fees due to the logjam. The story then suggests this strips the credibility from their objections to proposed LME rules to ease the bottleneck. Now, it’s definitely the case that there seems to be a conflict of interest. However, when you look closely at the complaints of both Rusal and Alcoa, you realise things aren’t necessarily that simple. For one thing, Rusal’s Oleg Deripaska was one of the first to openly draw attention to the dislocations that were happening between physical and paper prices due to the financialisation of metal markets. This was at a time when most banking analysts were entirely dismissive of such assertions and propositions. We know this because FT Alphaville has been writing about inventory-generated dislocations (and how they are ultimately fuelled by passive speculator products such as ETFs) since at least 2010 and has had more than its fair share of “this is just baloney” feedback from official sources. Alcoa was not an early alarm ringer like Rusal, that’s for sure, but if you read their complaint, you realise that their ultimate issue is with the impact of financial speculators on their markets, the creation of parallel markets and the risk that inventory just goes completely dark. There is, in short, a much more complex picture here.
Diebold Charged With Bribery, Falsifying Docs, ‘Worldwide Pattern of Criminal Conduct’ -- One of the world's largest ATM manufacturers and, formerly, one of the largest manufacturers of electronic voting systems, has been indicted by federal prosecutors for bribery and falsification of documents.The charges represent only the latest in a long series of criminal and/or unethical misconduct by Diebold, Inc. and their executives over the past decade. According to Cleveland's Plain Dealer, a U.S. Attorney says the latest charges are in response to "a worldwide pattern of criminal conduct" by the company.... Federal prosecutors Tuesday filed charges against Diebold Inc., accusing the North Canton-based ATM and business machine manufacturer of bribing government officials and falsifying documents in China, Indonesia and Russia to obtain and retain contracts to provide ATMs to banks in those countries.
HSBC unit to pay $2.5 billion in fraud case - A division of Europe's HSBC has been ordered to pay about $2.46 billion in a class action lawsuit claiming it violated federal securities laws. Lawyers for the plaintiffs said that the judgment, which includes $1.48 billion in damages and nearly $1 billion in prejudgment interest, was the biggest ever following a securities fraud class action trial. HSBC Holdings, Europe's biggest bank by market value, said in a statement on Friday that it will appeal, noting that it was "the next step in an 11-year-old case and we believe we have a strong argument." James Glickenhaus of Glickenhaus & Co., one of the three lead plaintiffs appointed by the court in 2002 to represent the class, said in a statement that the judgment "shows that the fraud committed by Household International and the individual defendant officers will not go unpunished, and we look forward to having the judgment affirmed on appeal."The lawsuit named Household International Inc., which is now HSBC Finance Corp., and former executives William Aldinger, David Schoenholz and Gary Gilmer. It claimed that the company fraudulently misled investors about its predatory lending practices, the quality of its loans and its financial accounting from March 23, 2001 through Oct. 11, 2002.
JP Morgan Chase on the verge of $13bn deal over bad mortgage loans -- JPMorgan Chase has reached a tentative $13bn (£8bn) deal with the US Justice Department and other government agencies to settle investigations into bad mortgage loans the bank sold to investors before the financial crisis, a source familiar with the talks said on Saturday. The deal, which would be the largest ever between the US government and a single company, would not release the bank from criminal liability for some of the mortgages it packaged into bonds and sold to investors. That had been a major sticking point in the discussions, but the government refused to budge and JPMorgan felt it had no choice but to give in, according to a second source. Until recently, the most that JPMorgan was willing to pay was closer to $11bn. The biggest US bank sidestepped the worst of the financial crisis but now faces more than a dozen investigations globally into everything from alleged bribery in China to a possible role in manipulating benchmark interest rates known as Libor. JPMorgan investors have publicly supported chief executive Jamie Dimon, but privately many have expressed frustration at his run-ins with regulators. A Senate subcommittee report in March detailed how Dimon demanded that subordinates withhold data from one of the bank's regulators, the Office of the Comptroller of the Currency (OCC). Earlier this month, the bank said Dimon was no longer chairman of JPMorgan's main US retail banking subsidiary, which media reports said happened at the request of the OCC.
J.P. Morgan Reaches $13 Billion Tentative Deal with Justice Department - J.P. Morgan Chase & Co. has reached a tentative deal to pay a record $13 billion to the Justice Department to settle a number of outstanding probes of its residential mortgage-backed securities business, according to a person familiar with the decision. The deal, which was struck Friday night, doesn’t resolve a continuing criminal probe of the bank’s conduct, which could result in charges against individuals or the bank itself and possibly increase the penalty tab. The two sides continued to disagree over an admission of wrongdoing that would end the criminal probe and decided instead to resolve the civil allegations related to the mortgage securities. The deal includes $4 billion to settle claims by the Federal Housing Finance Agency that J.P. Morgan misled Fannie Mae and Freddie Mac about the quality of loans it sold them in the run-up to the 2008 financial crisis, another $4 billion in consumer relief, and $5 billion in penalties paid by the bank, according to a second person close to the talks. How the consumer relief and penalties get dispersed and distributed is largely up to the government, and those details are still unclear, this person said. The tentative settlement comes as J.P. Morgan tries to put as many legal woes behind it as possible. Earlier this week, J.P. Morgan agreed to pay $100 million and acknowledge wrongdoing to settle allegations by the Commodity Futures Trading Commission related to its botched “London whale” trades. Last month, the bank agreed to pay $920 million to settle similar charges with U.S. and U.K. regulators related to that 2012 trade.
So How Big a Deal is the Pending “$13 Billion” JP Morgan Settlement? - Yves Smith - One of the big news stories of the weekend is that JP Morgan and the Department of Justice, brokering a settlement of liability across multiple Federal agencies, have reached a tentative $13 billion settlement on the bank’s mortgage-related conduct in the run-up to the crisis. The terms have not been finalized because a big open item is that JP Morgan will make an admission of some sort, and the deal could still founder over that. While the media is all agog over the prospect of the “biggest settlement evah” with a single company, concentration has risen greatly in a lot of industries, particularly banking, so bigger companies and even mild inflation means settlements should get larger over time. So size is not a metric of accomplishment. The question is what was the actual liability and is the settlement an adequate remedy? We have the same problem here as with the mortgage settlement: save for a couple of types of bad conduct, it looks as if not enough discovery was done to know the extent of the conduct and hence what an appropriate remedy would be. And the American public’s instinct, that even a really big-sounding number isn’t adequate given all the damage done in the financial crisis, has been confirmed, at least on a general basis, by one of the most highly respected economists in the world, Andrew Haldane, the executive director of the financial stability at the Bank of England. Haldane ascertained that no fine was big enough because the banks couldn’t begin to pay for the damage they’d done. The alternative, in that case, is prohibition and other forms of aggressive regulation. Needless to say, we haven’t seen anything like that either.
No, sorry, the JPMorgan fine isn’t remotely big enough - The “biggest fine in history” that is soon to be levied on JPMorgan Chase, the notorious usury and fraud organization, will not be as big as the headlines claim. Alan Pyke and David Dayen have made that clear. The tentative deal includes a fine of a mere $9 billion, with the bank on the hook for another $4 billion in “relief for struggling homeowners,” which often includes actions banks would’ve undertaken anyway. But it is a big fine. ItMost important, it will not indemnify JPMorgan from ongoing and potential future criminal investigations, which is good, because there should be criminal investigations into crimes, even when banks commit them. Because of prior fines, and because the firm is lawyering up and spending a small (for them) fortune on “compliance,” JPMorgan just announced its first quarterly loss in nearly a decade.It is still not remotely enough, and, more important, there isn’t a dollar sign that would be “enough.” Or, to put it another way, any dollar sign that would approach “enough” would actually destroy the banking industry entirely. (See, for example, Yves Smith citing Andrew Haldane, who argues that the levy needed to recoup the costs of financial crises “would be in excess of $1.5 trillion per year,” which would bankrupt the entire international finance industry.) Still, penalties large enough to look good in headlines but small enough not to cause actual damage to megabanks with the power to destroy the world economy aren’t going to address what should be the No. 1 priority of securities law enforcement, which is to stop criminal and fraudulent behavior from happening to begin with. As much as I’d love to see some misbehaving bankers sent to banker jail, sending them to banker jail isn’t the goal in and of itself. Preventing future crises and fraud is.
JPMorgan negotiates through the revolving door - It is quickly becoming clear that JPMorgan’s tentative $13 billion settlement with the Department of Justice is not the massive, overly-punitive sanction that some press reports have made it out to be. The weaknesses in the deal may be explained in part by the fact that in arranging the settlement, JPMorgan was negotiating through the revolving door. We have the names of the key players involved, thanks to the New York Times: attorney general Eric Holder, associate attorney general Tony West, and deputy attorney general James Cole at the Justice Department, and JPMorgan CEO Jamie Dimon, general counsel Stephen Cutler, and outside counsel H. Rodgin Cohen on the other side of the negotiating table.Stephen Cutler, JPMorgan’s general counsel, is the former director of the SEC’s enforcement division, a job which gave him experience and contacts that likely serve him well as he fends off legal challenges to the bank. His new position, of course, is much more financially lucrative: he earned over $5 million from JPMorgan in stock awards alone in 2012 (this excludes all cash compensation). On the other side of the negotiating table (if there are two sides), Holder, Cole, and West are all former white collar defense attorneys. Holder was a partner at Covington & Burling, where his clients included Bank of America and UBS. Cole was a partner at Bryan Cave, where he was appointed as an independent consultant overseeing AIG’s disclosure and compliance practices (and appears to have failed spectacularly in this task).
What Fine? Why JP Morgan Is Laughing All the Way to the Bank --- “I am not a crook,” Jamie Dimon might as well have been insisting in his five telephone calls these past two weeks with U.S. Attorney General Eric Holder, asking that a criminal investigation of JPMorgan Chase be dropped as part of a plea deal on what has turned out to be a $13 billion fine on civil charges. (Photo: P/Gilles Martin-Raget)Nope, said Holder, who finally has found the backbone to stand up to the CEO of the nation’s biggest bank who was also once a strong supporter of the president for whom Holder works. Friday night, Dimon folded and accepted the record-breaking civil settlement while the rare criminal investigation into the allegedly fraudulent claims at the heart of the mortgage based banking securities that have wrecked the economy proceeds. Although the $13 billion fine on the civil charges, which includes $4 billion in direct assistance to swindled homeowners, mostly in depressed inner city neighborhoods, is to be applauded, it represents about half of the profit JPMorgan garnered last year. The company’s stock price, which has increased by 23 percent since January despite a barrage of crises and fines, has not been damaged by the latest settlement. But for the bank to admit that it committed a crime, as the Justice Department sought, was thought by Dimon to be far more threatening to JPMorgan’s legal position, and it was only Friday night that he agreed to go for the deal without the bank enjoying immunity on possible criminal charges.
The $13 Billion JPMorgan Settlement Is a Good Start—Now Someone Should Go to Jail - JPMorgan Chase, the star of mega-banks, is up against the wall at the Justice Department, trying to settle its myriad crimes for $13 billion. That’s real money, even for a trillion-dollar bank. So this is progress. After years of scandalous indifference, the Obama administration appears to have found its backbone. Better late than never, grumpy citizens can say. But that doesn’t settle the matter. Four years ago, Senator Ted Kaufman of Delaware crisply described the more fundamental problem posed by the wantonly reckless behemoths of Wall Street. “People know that if they rob a bank they will go to jail,” Kaufman said. “Bankers should know that if they rob people they will go to jail too.” Can we hear an amen on that? Not yet. But the complaint Kaufman voiced repeatedly is now on the table. “At the end of the day,” the senator warned, “This is a test of whether we have one justice system in this country or two. If we do not treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole $500 from a cash register, then how can we expect our citizens to have any faith in the rule of law?”
Opinion divided on JPMorgan settlement - FT.com: The $13bn settlement JPMorgan Chase has agreed to pay to US state and federal authorities has divided opinion in the US. Much of Wall Street and many of its lawyers believe the government has pulled off a shakedown, using the implicit threat of criminal prosecution to rake in billions of dollars. The view is guided by the fact that senior government officials urged JPMorgan to save a failing Bear Stearns and Washington Mutual in 2008. About 80 per cent of losses on mortgage securities are attributed to those two former companies, according to filings by JPMorgan. The New York Post’s front page on Sunday read: “Uncle Scam – US robs bank of $13bn.” “In the next financial crisis, the JPMorgan of the future, the Jamie Dimon in 2020 or 2018, I think they say, ‘this is your problem – I’m not going to put my balance sheet at risk’,” “There’s no question that the government asked JPMorgan to buy Bear and WaMu. The government essentially after the fact is doing some kind of evil thing here, changing the rules.” Others think the rules of the game have undoubtedly changed, but for the better. Never has the government taken such a hard line approach but five years on from the crisis, having been harangued for failing to hold Wall Street to account for its role in creating the turmoil of 2008, officials have suddenly got tougher.
The Ridiculous “Jamie Dimon as Victim” Meme on the Pending JP Morgan Mortgage Settlement - Yves Smith - Nothing like having a credulous, leak-dependent media to carry your messages. There’s been a remarkable hue and cry about the pending JP Morgan settlement, as if the amount is somehow too high. As we’ve discussed repeatedly, the director of financial stability for the Bank of England, Andrew Haldane, already ascertained that a mere 1/20th of low-end estimate of what the banks ought to pay for all the damage they did would wipe our their market capitalization. In other words, Dimon and all his crew should thank their lucky stars that they got off so well and didn’t have their banks turned into utilities. But that moment passed, so now we are haggling over price with ingrates. The overwhelming cost of the settlement is representation and warranty liability. There are well established parameters for that. Once the settlement is final and terms are disclosed, we should have a clearer idea of what JPM paid relative to the dollar value of loans at issue. But the idea that JP Morgan would pay more than the prevailing rate is spurious. There would be every incentive for the bank to fight in court otherwise. As a New York Times story points out:The largest sum, more than $6 billion, will serve as compensation for investors like pension funds that suffered losses from mortgage securities sold by JPMorgan, Bear Stearns and Washington Mutual, people briefed on the settlement talks said.
Gretchen Morgenson on Bill Moyers: Ignore Those Crocodile Tears for JP Morgan - Yves here. Gretchen Morgenson gives an accessible presentation of why no one should feel sorry for the fact that JP Morgan is set to pay a roughly $13 billion settlement of a raft of mortgage-related liability. And she also dispatches the myth that the Department of Justice took a tough stance. I’m still gobsmacked that Holder let Jamie Dimon plead his case in person.
JPMorgan: Fish Rot from the Head - William K. Black - The New York Times’ spin of the tentative settlement of JPMorgan’s latest myriad felonies begins early and runs throughout the article. JPMorgan and Attorney General Eric Holder have reached a common meme on their settlement: the Department of Justice (DOJ) and Holder are stalwarts who have demonstrated their toughness and JPMorgan is a model corporate citizen. The inconvenient facts that the senior officers of JPMorgan, Bear Stearns (Bear), and Washington Mutual’s (WaMu) grew wealthy through the frauds that drove the financial crisis and that JPMorgan’s senior officers will not be prosecuted and will not even have to repay the proceeds of their crimes never appear in the article.A word of caution is in order: I am discussing an article that is the product of leaks from DOJ and JPMorgan’s press flacks about a tentative deal, so reality is certain to differ from the spin. This article is a longer discussion of the settlement than my October 22, 2013 CNN op ed.I am writing a side piece on the irony and implications of the civil and criminal investigation led by the U.S. Attorney for Eastern District of California, Benjamin Wagner. The NYT article suggests that his investigation is of former WaMu officers. WaMu was one of the world’s largest criminal enterprises specializing in making fraudulent liar’s loans and then selling the fraudulent loans to the secondary market through fraudulent “reps and warranties.” These frauds destroyed WaMu. Dimon made the decision to buy WaMu – and to do so without receiving indemnification from the FDIC for any losses JPMorgan might suffer due to WaMu’s massive frauds.
JPMorgan in $5.1 billion deal with housing agency: (Reuters) - JPMorgan Chase & Co has agreed to pay $5.1 billion to settle claims that it and firms it bought misled Fannie Mae and Freddie Mac about the quality of mortgage securities and home loans it sold to them during the housing boom. The bank and the agencies' regulator said Friday evening that the settlement was expected to be part of a tentative $13 billion deal that JPMorgan is negotiating with federal and state agencies over its mortgage bond liabilities. But the unusually timed announcement, which appeared to catch other parties involved in the negotiations by surprise, covered not only $4 billion that was expected as part of the larger deal but also an additional $1.15 billion to cover separate issues over home loans. The $4 billion portion of the payment, which was agreed on several weeks ago according to people familiar with the negotiations, resolves a 2-year-old lawsuit in which the regulator accused JPMorgan of overstating the quality of loans in mortgage securities in sold to Fannie and Freddie.
JPMorgan Paying $5.1B in Fannie, Freddie Deal - New York-based JPMorgan will pay about $2.74 billion to Freddie and $1.26 billion to Fannie for the securitiesthat it sold. JPMorgan is also paying $1.1 million for home loans the bank sold to Fannie and Freddie ahead of the crisis. JPMorgan reached a tentative agreement with the Justice Department last weekend to pay $13 billion over bad loans and mortgage securities the bank sold ahead of the crisis. The FHFA originally participated in those negotiations. It’s unclear when the broader agreement will be finalized. New York-based JPMorgan will pay about $2.74 billion to Freddie and $1.26 billion to Fannie for the securitiesthat it sold. JPMorgan is also paying $1.1 million for home loans the bank sold to Fannie and Freddie ahead of the crisis. JPMorgan reached a tentative agreement with the Justice Department last weekend to pay $13 billion over bad loans and mortgage securities the bank sold ahead of the crisis. The FHFA originally participated in those negotiations. It’s unclear when the broader agreement will be finalized.
US task force probes nine banks on mortgage-backed securities - FT.com: At least nine banks face investigations by the US Department of Justice into their sales of mortgage-backed securities as part of an effort by the task force that reached the $13bn pact with JPMorgan Chase, people familiar with the matter say. The investigations, which span US attorney’s offices from California to Massachusetts, include the largest banks that underwrote and sold residential mortgage-backed securities. They include Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, Royal Bank of Scotland, UBS and Wells Fargo. Most of the probes are looking for civil violations for allegedly misleading buyers of RMBS, not criminal sanctions. It is not clear how many, if any, will result in lawsuits or settlements. The threat of potential action could spell more trouble for banks as they try to put the 2008 financial crisis and mounting legal bills behind them. People familiar with the investigations say document requests and discussions between the banks and government have picked up in recent months after Eric Holder, the US attorney-general, indicated publicly that more MBS lawsuits were coming by the end of the year. The investigations stem from the state and federal RMBS task force formed in January 2012 by the Obama administration. This was set up at the urging of New York attorney-general Eric Schneiderman to finalise a national settlement with five major banks over their foreclosure practices.
Mortgage watchdog seeks $6bn from BofA - FT.com: The US government agency that secured a large slice of the record $13bn penalty against JPMorgan Chase is demanding even more from Bank of America, as it ratchets up pressure on other big banks. Regulators at the Federal Housing Finance Agency are seeking a penalty of more than $6bn from BofA, compared with the $4bn to be paid by JPMorgan, according to people familiar with the matter. JPMorgan agreed to pay a total of $13bn to a variety of US state and federal agencies during a phone call on Friday night between Jamie Dimon, chief executive, and Eric Holder, attorney-general. The penalty, if confirmed, would be the biggest imposed on a single company by US authorities.The $4bn portion that JPMorgan has agreed to pay the FHFA may end up being the largest single amount, although the remaining $9bn – a combination of $5bn in cash and $4bn forgiveness of consumer debt – is still being divided up between the Department of Justice and New York’s attorney-general.The FHFA is the housing regulator that oversees Fannie Mae and Freddie Mac, the government-backed mortgage companies which came close to failing in 2008 because of the bad mortgage-backed securities they acquired from banks.The FHFA has sued 17 institutions asserting that they broke securities laws when selling the mortgage-backed securities to Fannie and Freddie. Bank of America has the biggest potential exposure, with a notional value of the securities of more than $57bn compared with $33bn at JPMorgan. Bank of America declined to comment on the case, which it is so far continuing to fight in court. The FHFA declined to comment.
Jury: Bank of America Liable in NY Mortgage Fraud - A New York jury has found Bank of America Corp. liable for mortgage fraud. The verdict was returned Wednesday after a monthlong civil trial in Manhattan. The trial related to mortgages the government said were sold at break-neck speed without regard to quality as the economy headed into a tailspin in late 2007 and 2008. The jury found Bank of America liable for actions carried out by its Countrywide Financial unit. Bank of America acquired Countrywide in July 2008. The government had accused the financial institutions of urging workers to churn out loans, accept fudged applications and hide ballooning defaults. Bank of America had denied there was any fraud.
Mirabile Dictu! Bank of America Found Guilty of Fraud for “Hustle” Subprime Lending Program - Yves Smith - Don’t get too excited. Even though a bank has been found guilty in a mortgage fraud case, it’s only by virtue of using a legal theory that extended the statute of limitations beyond the five year limit for the juicier ones, most important, securities fraud. And this is only a civil suit, which is expected to produce only modest fines, since the government alleged losses of $131 million (there could still be a punitive element in addition to restitution of losses). The positive elements of this verdict are that a former Countrywide executive, Rebecca Mairone, was also found guilty of fraud and thus will also be paying fines and the verdict could pave the way for civil suits. The scam was a Countrywide program called “Hustle” which created a “swim lane” in the late 2007. The subprime market was pretty much dead and Countrywide was trying to increase its origination of prime loans to compensate. But Fannie and Freddie loans have more stringent lending criteria than subprime, and this program looked to have been determined to make a joke of those standards. Experienced loan underwriters were replaced with unseasoned ones and the program had financial incentives for speed of production. It was like turbocharging a car and taking out the brakes; a crash was inevitable, the only question was how bad it would be. One criticism was that the government sued Bank of America based on the idea that the conduct hurt Bank of America. I don’t have a problem with that, but it does make explicit a problem with most of these cases: unless the board gets religion and starts shaking up management, fines like this don’t exert enough pressure on individuals to change behavior. Key sections of the write-up at the Wall Street Journal:
Bank of America To Cut 3K Mortgage Jobs -Bank of America is cutting 3,000 jobs by the end of the year as the number of refinancing applications and troubled loans has fallen. It is part of larger industry pull back in response to the changing housing market. Bank of America Corp. laid off 1,200 employees this week, primarily from a unit that handles mortgage origination. The company says this is in response to a “significant” drop in refinancing applications this year. The company plans to make the bulk of the remaining reductions in its unit that handles troubled mortgages as an economic recovery has eased the number of borrowers in distress.It is one of many lenders to cut jobs: Wells Fargo said last month that it would cut 1,800 mortgage related positions on top of prior cuts.
Citigroup Selling Mortgage Servicing Rights as Banks Retreat - The U.S. mortgage market’s largest lenders are pulling back amid looming regulations and a drop in refinancing that fueled record profits last year. Citigroup, the third-biggest U.S. bank, is selling mortgage-servicing rights on $63 billion of loans, or about 21 percent of its total contracts at midyear, according to two people briefed on the matter, who asked not to be identified because the sale is private. Wells Fargo, the largest home lender, began marketing rights on $41 billion of government-backed home loans in September. Banks are scaling back from the almost $10 trillion market for mortgage servicing rights, or MSRs, amid looming Basel III regulations. That’s attracting private-equity firms and hedge funds to assets that can increase in value when borrowing costs rise and giving them increased control over the rights to collect Americans’ monthly mortgage payments. Lenders such as Bank of America Corp. (BAC) are also cutting home-loan staff after refinancings dropped more than 60 percent since May, according to the Mortgage Bankers Association. “Three years from now, banks will be making fewer real-estate loans and servicing will be smaller,”
Fed Proposes a Rule to Help Big Banks Stay Liquid in Times of Crisis - During the financial crisis of 2008, the big banks fell dangerously short of cash, forcing them to take out enormous government loans to survive the tumult. To help prevent another giant cash squeeze, federal regulators proposed a rule on Thursday that requires big banks to hold a set amount of assets that they can quickly turn into cash. The hope is that, in times of turbulence, banks will have adequate funds to replace the cash that might be leaving them at a rapid clip. The new rule, known as the liquidity coverage ratio, is the first to systematically require banks to be in a position to cover a set amount of cash outflows. The rule is intended to complement new rules on capital that focus more on making banks resilient to losses on loans and securities. “The proposed rule would, for the first time in the United States, put in place a quantitative liquidity requirement,” Ben S. Bernanke, chairman of the Federal Reserve, said in a statement. He added that it “would foster a more resilient and safer financial system in conjunction with other reforms.” The liquidity rule works by asking large banks to estimate how much cash might flee in a 30-day period. They then have to have enough assets that they could quickly sell to cover that outflow. The requirement, scheduled to come into full effect at the start of 2017, could dent the profits of banks, particularly Wall Street firms that rely on huge amounts of short-term market borrowing. Still, regulators are concerned that the big institutions remain vulnerable to bank runs. And based on comments from prominent banking regulators on Thursday, banks should expect additional measures.
Reps. Alan Grayson and John Conyers Call for End to Bank Welfare, Tough Rules on Bank Capital - Yves Smith - Congressmen Alan Grayson and John Conyers have published a well-thought-out proposal on bank equity, with the objective of assuring that when banks do stupid things (which they do with great regularity, even before the era of casino banking, they’d embrace some new fad and run off the cliff together, like lemmings), they have enough capital to absorb losses. And that means a lot more capital than regulators are demanding they have now. So I urge you to co-sign their letter (full text below) at http://www.nakedcapitalism.com/ http://nobankwelfare.com/. It’s already at 15,300 signatures towards a target of 17,500. This letter relates specifically to proposed rules by the Office of the Comptroller of the Currency on how much equity systemically important banks should hold, which means defining how the ratio is determined and how it is applied to various bank entities. This is the sort of process in which public interest has an impact; Sheila Bair in her book Bull by the Horns said a petition by this site that garnered 12,000 signatures influenced a mortgage reform proposal.
Unofficial Problem Bank list declines to 677 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for October 18, 2013. Changes and comments from surferdude808: The OCC released its enforcement action activity through mid-September 2013 this week. The release led to many changes to the Unofficial Problem Bank List. In all, there were seven removals and one addition that leave the list holding 677 institutions with assets of $236.8 billion. A year ago, the list held 865 institutions with assets of $333.2 billion.Capitol Bancorp, Ltd. was in the news this week for agreeing to sell four of its banking subsidiaries to Talmer Bancorp, Troy, MI ($3.8 billion), which controls an Ohio-based thrift and a Michigan-based commercial bank.
AIA: Architecture Billings Index Increases in September - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment. From AIA: Architecture Billings Index Surges Higher Showing a steady increase in the demand for design services, the Architecture Billings Index (ABI) continues to accelerate, as it reached its second highest level of the year. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the September ABI score was 54.3, up from a mark of 53.8 in August. This score reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 58.6, down from the reading of 63.0 the previous month.
• Regional averages: West (60.6), South (54.1), Midwest (51.0), Northeast (50.7)
• Sector index breakdown: commercial / industrial (57.9), multi-family residential (55.6), mixed practice (55.4), institutional (50.4)
LPS: Mortgage Delinquency Rate increased in September, In-Foreclosure Rate lowest since February 2009 - According to the First Look report for September to be released today by Lender Processing Services (LPS), the percent of loans delinquent increased seasonally in September compared to August, and declined about 13% year-over-year. Also the percent of loans in the foreclosure process declined further in September and were down 32% over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 6.46% from 6.20% in August. The normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 2.63% in September from 2.66% in August. The is the lowest level since February 2009. The number of delinquent properties, but not in foreclosure, is down 434,000 properties year-over-year, and the number of properties in the foreclosure process is down 612,000 properties year-over-year. LPS will release the complete mortgage monitor for September in early November.
New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy - Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract: We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.
Half of nation's foreclosed homes still occupied - Foreclosure sounds like the end of the line, but actual eviction can take months or years -- even after the bank has repossessed a home. RealtyTrac estimates that 47% of the nation's foreclosed homes are currently occupied. The percentage actually tops 60% in some hot housing markets, like Miami and Los Angeles. Those still living in repossessed homes include both former owners and renters. Either way, their time in the homes is mortgage and rent free. To arrive at its estimate, RealtyTrac compared its database of foreclosed homes with postal records showing whether mail was still being collected and whether change-of-address forms had been filed. Even when occupants leave voluntarily, old owners typically take about two months to vacate. With renters, it can take a year or more. "If someone has a bona fide rental agreement, we have to abide by that," One issue, according to Wells Fargo spokesman Tom Goyda, is that the eviction process can take months as it winds through the legal process. The timing varies widely based on local laws and the backlog of cases in individual courts. Goyda said the bank has been trying to speed up the process by offering cash to prompt occupants to leave.
Average U.S. Rate on 30-Year Mortgage at 4.13 Percent — Average U.S. rates on fixed mortgages dropped this week to their lowest levels in four months, a positive sign for the housing recovery. Mortgage buyer Freddie Mac says the average rate on the 30-year loan fell to 4.13 percent. That’s down from 4.28 percent. The average on the 15-year fixed loan declined to 3.24 percent from 3.33 percent. Both averages are the lowest since June 20. Mortgage rates have been falling since September, when the Federal Reserve held off slowing its $85-billion-a-month in bond purchases. The bond buys are intended to keep longer-term interest rates low, including mortgage rates. And a slowdown in hiring in September makes it more likely that the Fed will continue its stimulus into next year.
MBA: Mortgage Applications Unchanged in Latest Survey - From the MBA: Mortgage Applications Essentially Unchanged in Latest MBA Weekly Survey: Mortgage applications decreased 0.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 18, 2013. This week’s results do not include an adjustment for the Columbus Day holiday. ...The Refinance Index decreased 1 percent from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.39 percent, the lowest rate since June 2013, from 4.46 percent, with points increasing to 0.41 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is up over the last six weeks as rates have declined from the August levels. However the index is still down 61% from the levels in early May. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has fallen since early May, and the 4-week average of the purchase index is now down 4% from a year ago.
DeMarco: No Mortgage Limit Declines Before Spring 2014 - Federal officials will delay any reduction in the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac until next spring at the earliest amid heavy resistance from the real-estate industry and many lawmakers in Congress. Currently, Fannie and Freddie can guarantee mortgages that have balances as high as $417,000 in most of the country and up to $625,500 in expensive housing markets, including parts of California and New York. Loans within the limits, called “conforming” loans ... Potential loan-limit changes will be announced six months ahead of their implementation date, [DeMarco] said, and such changes wouldn’t be announced until November at the earliest. “Anything we do would have a long lead time and would be gradual and measured,” said Mr. DeMarco. When the agency does move ahead with loan limit declines, the declines will apply to both the national limit and the high-cost limits, which were enacted on an emergency and temporary basis by Congress in 2008
House flipping makes a comeback --For the market as a whole, flips of single family homes fell 13% in the third quarter, according to new research from RealtyTrac, with investors earning a gross profit of nearly $55,000 on each property. But at the higher end of the market, homes seem to flip as quickly as a griddle full of hamburgers. Flipping increased 34% among homes worth $750,000 and over, 42% among $1 to $2 million houses, and 350% for properties worth between $2 and $5 million. Flipping tends to be most common in cities with a large supply of expensive homes. (To qualify as a flip, a home must be purchased and subsequently sold again within six months.) In fact, more than three-quarters of all high-end flipping took place in five markets: The New York metro area and Los Angeles, San Francisco, San Jose and San Diego. What’s behind these quick turnarounds? “Flipping happens when prices are rising rapidly even if price levels are low,” says Jed Kolko, chief economist for real-estate firm Trulia. It’s possible to double the value of a home, says Jeff Salgado, a San Francisco-based realtor. Investors could buy a dilapidated home for $1.2 million, invest $600,000 and sell it for $2.4 million, he says. “Our buying community is driven by the biotech and high tech sectors. These people are brilliant at what they do, but a good portion of them don’t know the difference between a screwdriver and a hammer.”
U.S. Existing Home Sales Drop 1.9 Percent in September -- Americans bought fewer existing homes in September than the previous month, held back by higher mortgage rates and rising prices.The National Association of Realtors says sales of re-sold homes fell 1.9 percent last month to a seasonally adjusted annual rate of 5.29 million. That’s down from a pace of 5.39 million in August, which was revised lower. The sales pace in August equaled July’s pace. Both were the highest in four years and consistent with a healthy market.Most economists expect housing will continue to recover, especially now that mortgage rates have stabilized in recent months. Final sales in September reflected contracts signed in July and August, when rates were about a percentage point higher than in May.Home prices have risen about 12 percent in the past year.
Existing Home Sales in September: 5.29 million SAAR, Inventory up 1.8% Year-over-year - The NAR reports: Existing-Home Sales Down in September but Prices Rise Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.9 percent to a seasonally adjusted annual rate of 5.29 million in September from a downwardly revised 5.39 million in August, but are 10.7 percent above the 4.78 million-unit pace in September 2012. Total housing inventory at the end of September was unchanged at 2.21 million existing homes available for sale, which represents a 5.0-month supply at the current sales pace, compared with a 4.9-month supply in August. Unsold inventory is 1.8 percent above a year ago, when there was a 5.4-month supply This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in September 2013 (5.29 million SAAR) were 1.9% lower than last month, and were 10.7% above the September 2012 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory was unchanged at 2.21 million in September. Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory. Inventory increased 1.8% year-over-year in September compared to September 2012. This is the first year-over-year increase since early 2011 and indicates inventory bottomed earlier this year. Months of supply was at 5.0 months in September.
Existing Home Sales - Affordability at Five Year Low - The NAR reported existing home sales declined -1.9% from last month and are up 10.7% from last year. Sales have increased on a yearly basis for the last 27 months in a row. Inventories are still a very tight five months of supply. Inventories increased 2.0% from last month but are down, -7.4% from a year ago. Existing homes sales nationwide have increased 10.7% from a year ago. Volume was an annualized and seasonally adjusted 5.29 million for September 2013. The national median existing home sales price, all types, is $199,200, a 11.7% increase from a year ago. Median price has seen double digit annual increases for the last 10 months. Below is a graph of the median price. One needs to compare prices only a year ago for increases due to the monthly ups and downs in prices associated with the seasons. The average home price for September was $247,400, a 9.2% annual increase. The bubble like price increases that may very well have much to do with the Federal Reserve mortgage backed securities purchases, known as quantitative easing. Yet, mortgages rates have increased. According to NAR a 30 year fixed mortgage was 4.49% interest and not this high since July's 4.55% rate. The higher the mortgage rate the less home one can afford. This is why NAR proclaimed existing homes are now becoming out of reach again for most Americans;Affordability has fallen to a five-year low as home price increases easily outpaced income growth. Expected rising mortgage interest rates will further lower affordability in upcoming months. Some of the hardest hit areas by the housing bubble and recession are now on fire for home prices. Detroit is up 44.6%; Las Vegas, increased 30.7%t; and Sacramento region are up 28.9% from a year ago in their for sale list prices.
Existing Home Sales Plunge At Fastest Pace In 15 Month As Affordability Drops To 5 Year Low -Thanks to a considerable downward revision of the magical NAR numbers, the existing home sales MoM 'beat' expectations for September but the two-month average shows the largest drop in sales since June 2012. From the "cylical peak" in July, of course extrapolated by any and all apologists as confirming the voyage to the moon, it seems, just as we noted, that "affordability" - long shunned by the bulls (because, like you know, interest rates are still low compare to the 1970s...) - has collapsed to five-year lows; worse, in fact, than we expected. With 33% of all transactions cash, it is little surprise that affordability has fallen to a five-year low as home price increases easily outpaced income growth.
Comments on Existing Home Sales - As expected, existing home sales declined in September, and I expect further declines over the next several months. From the NAR: “Just one impact of the recent government shutdown – delays in tax transcripts needed for approval of mortgage loans – put a monkey wrench in the transaction process and could negatively impact sales closings in next month’s report,” But lower existing home sales, and slower price appreciation, doesn't mean the housing recovery is over. What matters for jobs and the economy are new home sales, not existing home sales. And I expect the housing recovery to continue. The big story in the NAR release this morning was that inventory was now up 1.8% year-over-year in September. Inventory is still very low, but year-over-year inventory has now turned positive, and I expect inventory to continue to increase. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow. The NAR does not seasonally adjust inventory, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko sent me the seasonally adjusted inventory (see graph of NAR reported and seasonally adjusted).This shows that inventory bottomed in January (on a seasonally adjusted basis), and is now up about 7.5% from the bottom. On a seasonally adjusted basis, inventory was up 2.3% in September, even though the NAR reported inventory was flat (usually inventory declines in September).Another key point: The NAR reported total sales were up 10.7% from September 2012, but conventional sales are probably up close to 25% from September 2012, and distressed sales down
Analysis: Higher Mortgage Rates Hit Lower End of Housing Market - The Wall Street Journal’s Dan Loney talks with Wells Fargo Senior Economist Anika Khan about the dip in existing home sales during September.
Price Hikes Put Homeownership Out of Reach - A median-income household can only afford a median-priced home in eight of the nation’s 25 largest metro areas, down from 14 out of 25 a year ago. It’s harder that it has been for years for a median-income household to afford a median-priced home in the top 25 U.S. markets this year, according to a new Interest.com report. On average, home prices rose nearly 16 percent over the past year in the 25 cities, while incomes rose by about 3 percent. The national average for a 30-year fixed-rate mortgage rose from 3.70 percent to 4.43 percent. The mortgage rate increase alone added $84.50 to the monthly payment on a $200,000 mortgage. “The simple fact is that the very small improvement Americans have seen in their paychecks hasn’t kept pace with a jump in home prices and mortgage rates,” said Mike Sante, managing editor of Interest.com. Atlanta is the most affordable market (a median-income household exceeds the amount required to purchase a median-priced home by 25 percent), and San Francisco is the least affordable (a median-income household falls a whopping 48 percent short of being able to afford a median-priced home).
Institutions, All-Cash Buyers Are Driving The Housing Market - Institutional investors and all-cash buyers are driving the housing market. Institutional investors accounted for 14% of all sales in September, according to RealtyTrac's latest residential & foreclosure sales report. This is up from 9% in August, and 9% a year ago. In metros with a population of 1 million or more, Atlanta had the highest percentage of institutional investor purchases at 29%. Las Vegas, St. Louis, Jacksonville, and Charlotte rounded off the top five. Meanwhile, all-cash purchases represented 49% of all residential sales, up from 40% in August, and 30% a year ago. "The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash," Daren Blomquist, vice president at RealtyTrac said in a press release. "While the institutional investors are pulling back their purchases in many of the higher-priced markets — places like San Francisco, Washington, D.C., New York, Seattle and Sacramento — they are continuing to ramp up purchases in markets where median prices are still below $200,000 — places like Jacksonville, Atlanta, Charlotte, St. Louis and Dallas."
Ordinary Americans Priced Out Of Housing: Institutional Purchases Hit Record, Half Of All Deals Are "All-Cash" - If there was any doubt that the US housing "recovery" is anything but the latest speculative play by deep-pocketed (namely those who already have access to cheap funding) investors, who are now engaged in rotating cash gains out of capital markets and into real estate, on their way hoping to flip newly-acquired properties to other wealthy investors, then the most recent, September, RealtyTrac report will put that to rest. To wit: Institutional investors (purchasing 10 or more properties in the last 12 months) accounted for 14 percent of all sales in September, up from 9 percent in August and also 9 percent in September 2012. September had the highest percentage of institutional investor purchases of any month since RealtyTrac began tracking in January 2011....All-cash purchases nationwide represented 49 percent of all residential sales in September, up from a revised 40 percent in August and up from 30 percent in September 2012. In other words, institutional purchases are now at all time highs, with all-cash accounting for half of all transactions! From RealtyTrac: “The housing market continues to skew in favor of investors, particularly deep-pocketed institutional investors, and other buyers paying with cash,” said Daren Blomquist, vice president at RealtyTrac. “While the institutional investors are pulling back their purchases in many of the higher-priced markets — places like San Francisco, Washington, D.C., New York, Seattle and Sacramento — they are continuing to ramp up purchases in markets where median prices are still below $200,000 — places like Jacksonville, Atlanta, Charlotte, St. Louis and Dallas. The availability of distressed inventory also makes a difference. For example, institutional investor purchases have rebounded in Las Vegas corresponding to a recent rebound in foreclosure activity there.
Vital Signs: Higher Rates Slowing Home Sales - Sales of existing homes fall 1.9% in September, to a 5.29 million pace that was close to expectations. The National Association of Realtors said higher mortgage rates and surging home prices are cutting into affordability. The September fall in resales was flagged by the decline in the NAR’s index of pending home sales. Home buying, however, is proving resilient despite higher borrowing costs over the summer. Sales are up 10.7% from year-ago levels, sales of existing homes in the third quarter were the best since the housing bubble burst. With mortgage rates down a bit, job and income growth will probably determine how housing demand performs in coming quarters.
Fewer Homes for Sale Because Owners Waiting for Prices to Rise Even More - The relatively low level of homes available for sale appears to reflect the rising strength of the housing sector, rather than its weakness. Bloomberg Nerws New research from the Federal Reserve Bank of San Francisco released Monday argues that a study of housing market dynamics indicates that homeowners who are inclined toward selling their homes appear to be holding back in order to take advantage of rising prices. The report refutes the idea that the dearth of homes for sale reflects the inability of sellers to come to market because they owe more on their dwelling than they can sell it for. “County-level data suggest that many homeowners are waiting for prices to rise further in their markets” The paper seeks to address the question of why are there, relatively speaking, so few homes for sale given the prices finally appear to be on a sustained upward swing after the crash of the house market. The paper’s authors note that the bursting of the housing bubble continues to cast a long shadow over the decisions homeowners are making. With many having been so badly burned, homeowners are now being cautious and are patiently waiting for the market to rise more before putting their homes on the market. “It is well documented that house price changes are persistent, meaning that price rises are likely to be followed by more rises, and price drops by more drops,” the paper said. Homeowners with “flexibility” appear to be taking their time, with the researchers writing “If they observe prices going up, they may want to wait and gamble that the increases will continue, allowing them to sell later at a higher price.”
Home Prices Miss; Rise At Slowest Pace In 11 Months -- The FHFA reported home prices gained at the lowest pace in 11 months (0.3% MoM vs 0.8% expected) missing expectations by the 2nd largest amont on 13 months. It seems, just as we pointed out that with fast money leaving the room and slow money crushed by higher mortgage rates at the margin that indeed something had to give... Prices in the South Atlantic and East Central actually fell MoM.
Weekly Update: Housing Tracker Existing Home Inventory up year-over-year on Oct 21st - Here is another weekly update on housing inventory... There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for September). However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012 and 2013. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. Inventory in 2013 is increasing, and is now slightly above the same week in 2012 (red is 2013, blue is 2012). We can be pretty confidence that inventory bottomed early this year, and I expect the seasonal decline to be less than usual at the end of the year - so the year-over-year change will continue to increase. Inventory is still very low, but this increase in inventory should slow house price increases
Blackstone to sell bonds backed by lease payments - According to Bloomberg, Blackstone Group (BX) spent the past two years building its empire of single-family rental homes, spending $7.5 billion to acquire 40,000 houses. Now, the private-equity firm is planning to sell bonds backed by lease payments, which is a step in a new direction for the housing industry.Deutsche Bank AG may start marketing almost $500 million of the securities as soon as this week, according to a person with knowledge of the transaction. The debt will include a portion with an investment grade from at least one ratings company, according to two separate people, who asked not to be identified because the deal isn’t public. Blackstone has led hedge funds, private-equity firms and real estate investment trusts raising about $20 billion to purchase as many as 200,000 homes to rent after prices plunged 35 percent from the 2006 peak.
The dark side of rising rental costs - One factor that may continue to provide tailwinds to US housing recovery is the rental market. Rents are rising faster than inflation, widening the spread between housing costs and wages. Bloomberg: - For households with children, rising housing costs, elevated unemployment and stagnant earnings are increasingly placing rent beyond reach. The housing slump made matters worse as former homeowners turned into renters, increasing competition for available apartments. Nationally, the average hourly wage among renters is $14.32 this year compared with the $18.79 needed to afford an apartment at a fair-market rent, as defined by the U.S. Department of Housing and Urban Development, without spending more than 30 percent of income on housing, a National Low Income Housing Coalition report found in March. The $4.47 gap this year is wider than the $4.10 differential in 2012. Median household income has fallen every year for the past five after adjusting for inflation, with Americans earning no more than they did in 1996, according to data from the Census Bureau. The share of people making less than $15,000 climbed to 13 percent of the population in 2012, from 10.9 percent in 2000, and the share making less than $35,000 expanded to 35.4 percent from 31.4 percent. According to the Fed, the ratio of rental obligations to disposable income is now at post-recession high. Growing rental costs are a result of declining vacancies in the US. Of course the recent rise in interest rates has not helped either. Higher rates raise the break-even rent level for landlords who finance their properties.
U.S. Construction Spending Up 0.6 Percent in August — Spending on U.S. construction projects rose at a solid pace in August, helped by further gains in residential building. Overall construction activity climbed to the highest level in more than four years. The Commerce Department says construction spending increased 0.6 percent in August compared with July when spending increased a strong 1.4 percent. The July gain was revised to show an increase that was more than double the initial estimate. Total construction rose to a seasonally adjusted annual rate of $916.1 billion, the fastest pace since April 2009. The strength in construction should help the overall economy, which has been struggling this year with the adverse effects of government tax increases and spending reductions. The August gain reflected a solid rise in housing activity, which was up 1.2 percent.
Construction Spending increased in August - The Census Bureau reported that overall construction spending increased in August: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during August 2013 was estimated at a seasonally adjusted annual rate of $915.1 billion, 0.6 percent above the revised July estimate of $909.4 billion. The August figure is 7.1 percent above the August 2012 estimate of $854.0 billion. ... Spending on private construction was at a seasonally adjusted annual rate of $640.5 billion, 0.7 percent above the revised July estimate of $636.1 billion. ... In August, the estimated seasonally adjusted annual rate of public construction spending was $274.5 billion, 0.4 percent above the revised July estimate of $273.4 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 50% below the peak in early 2006, and up 49% from the post-bubble low. Non-residential spending is 27% below the peak in January 2008, and up about 34% from the recent low. Public construction spending is now 16% below the peak in March 2009 and up about 4% from the recent low. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending is now up 26%. Non-residential spending is up 4% year-over-year. Public spending is down 2% year-over-year.
Builder Confidence and Single Family Starts - Last week the National Association of Home Builders (NAHB) reported the housing market index (HMI) declined in October to 55 from 57 in September.Here is the press release from the NAHB: Builder Confidence Down in October; NAHB Estimates Sept. Housing Starts will Approach 900,000 Units For some time I've been posting a graph with both builder confidence and single family starts (first graph below). This chart shows that confidence and single family starts generally move in the same direction, but it doesn't tell us anything about the expected level of single family starts.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the October release for the HMI and the August data for starts. Builder confidence is based on a survey by the NAHB, and is designed so that any number above 50 indicates that more builders view sales conditions as good than poor. Since sales have picked up, builders are now more confident - and the surviving builders view sales as "good" - even though single family starts are still historically very low. Probably a better comparison is to look at the year-over-year change in each series (Builder confidence and single family housing starts). Once again the year-over-year change tends to move in the same direction, but builder confidence has larger swings (especially lately).
The kids are moving out - The chart from Goldman Sachs shows that the share of 18-34 year olds in the US who live with their parents has (possibly) peaked and started to decline. This is the subject of much talk about the boomerang generation and Millennials and whatnot, but it also has great relevance for the recovery of the housing sector and overall economic growth. The basic idea is that as the labour market recovers, the headship rate for young adults — the percentage of these adults with their own households — will recover to historically normal levels. In other words, young people who live with their parents will move out and get their own place, which will boost demand for both housing and the attendant stuff (furniture, renovations, cars, local neighborhood services) — which will itself create more jobs, leading to more young people starting their own households, and so forth. We’ve previously covered this topic at great length and won’t go through it all again here. Needless to say, the story is taking longer to play out than we had initially hoped. What the Goldman economists show is that not only do the underlying pressures remain, but there are nascent signs that they will soon be released. An extended excerpt from the note: As shown in our earlier research, two factors are most important in driving the headship rate of young adults. The first factor is labor market conditions. While older households typically do not have the option to move back with their parents, younger individuals’ decisions to live on their own depend on whether they can find a job. The second key driver of young individuals’ decisions to form their own households is related to marriage. For older cohorts, living with a spouse or an unmarried partner increases household size and reduces the headship rate. For young individuals, however, doing so often means moving out of parents or roommates’ place and establishing one’s own household, and therefore, it increases the headship rate. Our analysis of CPS data shows that the percent of 18-34 year olds who are either household head, spouse of the head, or unmarried partner of the head plunged since the onset of the recession. At the same time, the share of these young individuals living with parents increased sharply.
U.S. Economic Mobility Improving Very Slowly - More than four years into the economic recovery, upward mobility in the U.S. is climbing — but very, very slowly. A new report by Opportunity Nation, a network of over 250 nonprofit, business and other organizations, analyzed 16 economic and demographic indicators and found that America’s overall “Opportunity Score” — a broad measure of economic mobility — is now 50.9, barely higher than 50 in 2012 and 49.59 in 2011. (This “Opportunity Index,” a joint project with Measure of America, began in 2011.) About half the nation geographically-speaking — 24 states — showed declines in their scores or no improvement, the report said, even though the nation’s recession, which began in December 2007, ended in June 2009. Median household incomes declined between 2011 and 2013 across the country to an inflation-adjusted $48,958 from $51,050, the report said. Measures of poverty and income inequality increased over this period, even as the nation’s unemployment rate fell. A gauge of affordable housing — the share of U.S. households spending less than 30% of their income on housing — dropped slightly to 62.2% in 2013 from 62.6% in 2011, though the proportion with high-speed Internet rose to 67.8% from 63.9%. The report, which crunches state and county numbers on unemployment, incomes, and poverty along with indicators related to education and civic life, suggests many Americans, especially those with lower incomes, continue to face an uphill climb when it comes to improving their economic status — at least compared with Canada and some European countries.
Vehicle Sales Forecasts: Stronger Sales in October Despite Government Shutdown - Note: The automakers will report October vehicle sales Friday, Nov 1st. The consensus is for the sales rate to increase to a 15.5 million seasonally adjusted annual rate (SAAR) in October from 15.2 million in September. Here are a few forecasts: From Kelley Blue Book: October New-Car Sales Expected To Jump 12 Percent, According To Kelley Blue Book In October, new light-vehicle sales, including fleet, are expected to hit 1,220,000 units, up 11.7 percent from October 2012 and up 7.4 percent from September 2013. From JD Power: Government Shutdown Curbs New-Vehicle Sales on East Coast However, demand for new vehicles bounced back when the shutdown ended, according to the J.D. Power update, which is based on new-vehicle sales transaction data collected during the first 17 selling days of the month.October sales are projected to reach nearly 1.22 million units, up from 1.09 million unit sales in the same month of 2012. That's equal to a 15.4 million-unit seasonally adjusted annual selling rate, or SAAR, which is much stronger than last October's 14.2 million-unit pace. It's also slightly ahead of the selling pace in September 2013. From Edmunds.com: October Auto Sales Keep Pace Despite Threat from Government Shutdown, Says Edmunds.comEdmunds.com ... forecasts that 1,229,860 new cars and trucks will be sold in the U.S. in October for an estimated Seasonally Adjusted Annual Rate (SAAR) of 15.5 million. The projected sales will be an 8.2 percent increase from September 2013, and a 12.7 percent increase from October 2012. It looks the government shutdown impacted sales early in the month - especially on the east coast - but sales recovered towards the end of the month.
DOT: Vehicle Miles Driven increased 1.3% in August - The Department of Transportation (DOT) reported:
◦ Travel on all roads and streets changed by 1.3% (3.4 billion vehicle miles) for August 2013 as compared with August 2012.The following graph shows the rolling 12 month total vehicle miles driven. The rolling 12 month total is still mostly moving sideways.Currently miles driven has been below the previous peak for 69 months - almost 6 years - and still counting. The second graph shows the year-over-year change from the same month in the previous year.
◦ Travel for the month is estimated to be 267.0 billion vehicle miles.
◦ Cumulative Travel for 2013 changed by 0.3% (6.1 billion vehicle miles).
Vehicle Miles Driven: Population-Adjusted Fractionally Off Its June Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through August. Travel on all roads and streets changed by 1.3% (3.4 billion vehicle miles) for August 2013 as compared with August 2012. Travel for the month is estimated to be 267.0 billion vehicle miles. Cumulative Travel for 2013 changed by 0.3% (6.1). Cumulative estimate for the year is 1992.3 billion vehicle miles of travel (PDF report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data are fractionally above the post-financial crisis lows set in June.Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1988. My start date is 1971 because I'm incorporating all the available data from earlier DOT spreadsheets. The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The most recent decline has lasted for 69 months and counting — a new record, but the trough to date was in November 2011, 48 months from the all-time high.Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most meaningful analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.
EIA Forecast: Gasoline Prices down sharply Year-over-year, Expected to Decline Further in 2014 - Gasoline prices are down about 46 cents year-over-year at $3.43 per gallon nationally compared to $3.89 on October 15, 2012. Prices are expected to decline further in Q4 and in 2014 according to the current EIA forecast: Brent crude oil spot prices fell from a recent peak of $117 per barrel in early September to $108 per barrel at the end of the month as some crude oil production restarted in Libya and concerns over the conflict in Syria moderated. EIA expects the Brent crude oil price to continue to weaken, averaging $107 per barrel during the fourth quarter of 2013 and $102 per barrel in 2014. Projected West Texas Intermediate (WTI) crude oil prices average $101 per barrel during the fourth quarter of 2013 and $96 per barrel during 2014. The weekly U.S. average regular gasoline retail price fell by 18 cents per gallon during September, ending the month at $3.43 per gallon. EIA’s forecast for the regular gasoline retail price averages $3.34 per gallon in the fourth quarter of 2013. The annual average regular gasoline retail price, which was $3.63 per gallon in 2012, is expected to be $3.52 per gallon in 2013 and $3.40 per gallon in 2014. WTI oil prices have declined recently, with WTI at $100.81 per barrel. Brent is at $109.94 per barrel. A year ago, WTI was around $90s, and Brent was around $112 per barrel. Some of the year-over-year gasoline price decline is related to slightly lower Brent oil prices, but most of decline is because there were refinery and pipeline issues last year. In California, prices spiked last September and were still very high in October (put Los Angeles into the graph below to see the huge spike last year).
ATA Trucking Index Up Sharply in September, Up 8.4% Year-over-year -- Here is a minor indicator that I follow, from ATA: ATA Truck Tonnage Index Jumped 1.4% in September: The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 1.4% in September, which matched the August gain. (August’s increase was unchanged from what ATA reported on September 24, 2013.) In September, the SA index equaled 128.7 (2000=100) versus 126.9 in August. Compared with September 2012, the SA index surged 8.4%, which is the largest year-over-year gain since December 2011. Year-to-date, compared with the same period in 2012, the tonnage index is up 5.4%. Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. The index is at a new high and up solidly year-over-year. This is another minor indicator that suggests the economy is picking up (however this was prior to the government shutdown).
Chemical Activity Barometer for October Suggests Economic Activity Increasing - This is a new indicator that I'm following that appears to be a leading indicator for the economy. From the American Chemistry Council: Fourth Quarter to End Strong Shows Leading Economic Indicator The partial shutdown of the federal government earlier this month didn’t take the steam out of the U.S. economy, according to the American Chemistry Council’s (ACC) monthly Chemical Activity Barometer (CAB), released today. The Chemical Activity Barometer is a leading economic indicator, shown to lead U.S. business cycles by an average of eight months at cycle peaks, and four months at cycle troughs. The barometer increased 0.3 percent over September on a three-month moving average (3MMA) basis, and remains up 3.1 percent over a year ago. It continues to be at its highest point since June 2008. Prior CAB readings for July through September were slightly revised. This graph shows the year-over-year change in the 3-month moving average for the Chemical Activity Barometer compared to Industrial Production. It does appear that CAB (red) generally leads Industrial Production (blue). And this suggests that economic activity is increasing.
October US Manufacturing Output Tumbles To 2009 Levels - While hardly as followed as the other two key US manufacturing indices, the Mfg ISM and the Chicago PMI, the recently introduced Markit PMI, which comes from the same firm that tracks manufacturing data across the rest of the world, shows that in addition to the sliding job picture in September (and soon October), one other aspect of the US economy that took a big hit in October was manufacturing. As Markit just reported, "the U.S. manufacturing sector grew at its weakest pace for a year in October... based on approximately 85% of usual monthly survey replies. The flash PMI index registered 51.1, down from 52.8 in September, and was consistent with only a modest rate of expansion." Not only was this the lowest headline print in one year, and should the drop continue it would be the worst print since 2009, not only was the New Order index had its weakest number in 6 months, but worst of all, the Output index, plunging from 55.3 to 49.5, had its first contrationary print since 2009!
Durable Goods September Report Might Imply Slowing Economy -- The Durable Goods, advance report shows new orders increased by 3.7% for September 2013, but the gains are due to volatile aircraft and parts orders. Without transportation orders, which aircraft is a large part, durable goods new orders fell by -0.1%. Shipments increased by 0.2% and are at a record high level. Below is a graph of all transportation equipment new orders, which increased by 112.3% for the month. Motor vehicles & parts actually declined by -0.3%. Aircraft and parts new orders from the non-defense sector increased 57.5%. Aircraft & parts from the defense sector increased 15.2%. Aircraft orders are notoriously volatile, each order is worth millions if not billions, and as a result aircraft manufacturing can skew durable goods new orders on a monthly comparison basis. Core capital goods new orders declined by -1.1% for September, which implies a major slowing of economic activity. Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods. Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on. Capital goods are basically the investment types of products one needs to run a business. and often big ticket items. A decline in new orders indicates businesses are not reinvesting in themselves. Machinery by itself showed a -1.8% drop in new orders. In July core capital goods new orders dropped by -3.5%, so Q3 has shaken out to be in contraction. August showed a 0.4% increase.
Another Durable Goods Debacle, This Time Masked By Boeing Order Deluge - The headline September Durable Goods number was great: rising at 3.7%, this was well above the August revised 0.2% increase and far above expectations of a 2.3% increase. However, a quick glance into the reasons shows why the reality is - once again - far uglier. Actually, the reason is just one: Boeing, which reported 127 plane orders in September compared to just 16 in August. This translated into a 57.5% monthly increase in non-defense aircraft orders in September (and Syria's contribution can't be denied either, leading to a 15.2% increase in defense airplane orders). So what does the US capital spending climate look like when stripped away from very volatile (and very cancelable) Boeing orders? In a word ugly: Durable Goods ex transports actually declined by -0.1, on expectations of a rebound to 0.5%, following an even more downward revised August print of -0.4%.
Trade Deficit in August at $38.8 Billion - The Department of Commerce reported this morning: Total August exports of $189.2 billion and imports of $228.0 billion resulted in a goods and services deficit of $38.8 billion, up from $38.6 billion in July, revised. August exports were $0.1 billion less than July exports of $189.3 billion. August imports were virtually unchanged at $228.0 billion. The trade deficit was below the consensus forecast of $40.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through August 2013. . Imports and export were mostly unchanged in August. Exports are 14% above the pre-recession peak and up 4% compared to August 2012; imports are 1% below the pre-recession peak, and up about 1% compared to August 2012 (mostly moving sideways). The second graph shows the U.S. trade deficit, with and without petroleum, through August. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $100.26 in August, up from $97.07 in July, and up from $94.48 in August 2012. The petroleum deficit has been declining and is the major reason the overall deficit has declined since early 2012. The trade deficit with China increased to $29.9 billion in August, up from $28.7 billion in August 2012. The trade deficit is mostly due to oil and China.
U.S. Trade Deficit Widens Slightly to $38.8 Billion — The U.S. trade deficit widened only slightly in August, dragged lower by a modest decline in exports. U.S. farmers sold fewer agricultural products overseas, offsetting the best month of sales for American-made cars on record. The trade deficit grew 0.4 percent in August to $38.8 billion, the Commerce Department reported Thursday. That’s up from $38.6 billion in July. U.S. exports dipped 0.1 percent to $189.2 billion. Sales of wheat, soybeans and other farm products fell, while exports of autos and other manufactured goods rose. U.S. auto exports climbed to a record $13.1 billion, up 5.5 percent from the July level. Imports were mostly unchanged at $228 billion. Americans bought more foreign computers and machinery, while imports of oil and foreign-made cars declined. This year’s trade deficit is running 10.8 percent below last year’s, a positive sign for economic growth. A smaller trade deficit acts as a boost to economic growth when it shows American companies earning more in their foreign sales. The monthly deficit hit a four-year low in June. It has risen only slightly in the past two months. The deficit with China dipped 0.6 percent in August to $29.8 billion after hitting a monthly record of $30.1 billion in July. So far this year, the deficit with China is up 2.3 percent from its record pace in 2012. That could increase pressure on the Obama administration to take a harder line on trade issues with China. American manufacturers contend China manipulates its currency and engages in other unfair practices to gain trade advantages over U.S. companies. The International Monetary Fund trimmed its global economic forecast earlier this month in part because of slower growth in China, India, Brazil and other developing countries. These nations are big markets for U.S. goods so slower growth in the developing world could hurt American exports. Europe’s weak economy is also weighing on U.S. exports. The deficit with the 28-nation European Union fell 29.9 percent in August to $9.8 billion after surging to a record high in July. U.S. exports to the region rose 2.2 percent in August. But they are down 3.9 percent for the year, reflecting in part sub-par economic activity as many European countries are still struggling to overcome a prolonged debt crisis.
Vital Signs: Smaller Oil Gap Is Narrowing Trade Deficit The U.S. trade deficit might have risen slightly in August, but that masks a longer-run improvement in the U.S. trade position. One reason for the progress is the turn in America’s energy sector, a trend that is expected to continue longer term. Compared to the past few years, the U.S. is now exporting more energy products, including diesel to Europe, and importing less petroleum, thanks to greater domestic production of energy product and improved energy efficiency. As a result, the trade gap in petroleum stood at $18.6 billion in August, down from $23.5 billion in August 2012. The improved balance in oil is lowering the total trade deficit. The gap for all goods and services has narrowed $5.2 billion in the past year, and almost all of that came from energy products. Petroleum now accounts for 47.9% of the total trade deficit in August, down from 53.6% a year ago and a cycle high of 65.9% in March 2011.
The Federal Agency That Makes $1 Billion for Taxpayers and the Fight to Abolish It Many Americans are seriously concerned with how much federal government spending is adding to the national debt. So it’s unusual to consider the Export-Import Bank, an agency that returns money to taxpayers. The bank announced this week that it made a profit of more than $1 billion over the past twelve months. It’s rare for federal agencies to make a profit in the conventional sense. The Federal Reserve regularly sends profits to the Treasury, while the government-owned Fannie and Freddie have helped dampen the deficit—although taxpayers paid a heavy price for their takeover. Organizations like the Federal Communications Commission and the Bureau of Land Management often make money for the federal government through leasing or auctioning off public property like land and wireless spectrum. But the Ex-Im Bank churns regular profits just like any other bank by issuing loans and guarantees to businesses looking to export their products abroad.
LA area Port Traffic in September - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for September since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 0.4% in September compared to the rolling 12 months ending in August. Outbound traffic decreased slightly compared to August. In general, inbound traffic has been increasing and outbound traffic had been declining slightly. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year). This suggests an increase in the trade deficit with Asia for September - and possibly a fairly strong retailer buying for the holiday season.
Final October Consumer Sentiment declines to 73.2 - The final Reuters / University of Michigan consumer sentiment index for October was at 73.2, down from the September reading of 77.5, and down from the preliminary October reading of 75.2. This was below the consensus forecast of 74.8. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011. Unfortunately Congress shut down the government, and once again threatened to "not pay the bills", and this impacted sentiment (and possibly consumer spending) in October. The spike down wasn't as large this time, probably because many people realized the House was bluffing with a losing hand.
Michigan Consumer Sentiment: Lowest Level Since December 2012 - The University of Michigan Consumer Sentiment final number for October came in at 73.2. Today's number is below the Investing.com forecast of 75.0 and a 4.3 point decline from the September final reading of 77.5. Today's level is 11.9 points below the interim high in July and at the lowest level since December of last year. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 14 percent below the average reading (arithmetic mean) and 13 percent below the geometric mean. The current index level is at the 21st percentile of the 430 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us 3.9 points above the average recession mindset and 14.4 points below the non-recession average. It's important to understand that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.
Consumer Confidence Plunges To Lowest In 2013 - Following record UMich misses, Gallup's economic confidence collapse, the slump in the conference board's measure of confidence, and Bloomberg's index of consumer comfort signaling major concerns among rich and poor in this country (in spite of record highs in stocks), today's Consumer Confidence data from UMich continues to confirm a problem for all those 'hoping' for moar multiple expansion. Falling for the 3rd month in a row, and missing expectations for the 2nd month in a row, this is the lowest confidence print in 2013. Perhaps even more worrisome for the 'hope and change' crowd is that the 12-month economic outlook has collapsed to its lowest since Nov 2011. It would seem that all that free money flooding our 'markets' has reached peak efficacy in terms of confidence inspiration, and as Citi notes, when this cycle has played out in the past, equity market corrections are often quick to follow...
Vital Signs: Shutdown Dings Consumer Confidence Consumer confidence slumped in October to its lowest point in nine months, a reflection of Washington gridlock weighing on the public. But the political brinkmanship may not have a lasting effect on shoppers. October’s final reading of consumer sentiment from Thomson Reuters and the University of Michigan declined to 73.2, down from the end-of-September reading of 77.5. The figure is the lowest since December 2012. Whether that uncertainty persists, and weighs on shoppers heading into the holiday season, remains to be seen. A rising stock market and falling gasoline prices could bolster consumers’ feelings as the sting fades from the government shutdown that ended Oct. 17. Gallup’s daily tracker of economic confidence has already returned to levels recorded just before the shutdown began, after hitting a low for the year on Oct. 10, though it remains below mid-September levels. Previous fiscal battles in Washington also dragged down consumer confidence, but they proved to be a relatively short-term hit to sentiment and spending. When lawmakers flirted with breaching the debt ceiling in August 2011, sparking a downgrade of the government’s triple-A credit rating, confidence fell to a low point for the year. But by December, sentiment had rebounded to spring levels. Similarly, just ahead of the 1995-1996 government shutdowns, consumer confidence dropped to a two-year low. But confidence reached a six-year high less than a year after the shutdowns concluded.
Americans' Holiday Spending Not Shut Down by Shutdown: -- Americans, on average, expect to spend $786 on Christmas gifts this year, which is similar to their holiday spending estimates in each of the past two years. While not great news for the nation's retailers, it portends respectable seasonal sales growth -- particularly important in light of the recent government shutdown. Nearly nine in 10 U.S. adults say they will spend some amount of money this year on Christmas gifts. Underscoring the importance Americans place on holiday gift giving, 30% -- identical to last year -- plan to spend at least $1,000, and half plan to spend at least $500. Only 3% intend to spend less than $100. The current figures are based on an Oct. 3-6 Gallup poll, conducted in the first few days of the partial federal government shutdown. That closure, and the partisan stalemate preceding it, caused consumers' attitudes to sour on a number of dimensions, including their confidence in the economy, perceptions of their own standard of living, and their self-reported daily spending. With Americans' early October forecast for holiday spending the highest since 2007, at least numerically if not statistically, this could be a welcome indication of consumer resilience.
No, technology isn’t going to destroy the middle class - Is technology killing the middle class? The George Mason University economist and well-known blogger Tyler Cowen thinks so. In his new book, "Average Is Over: Powering America Beyond the Age of the Great Stagnation," Cowen predicts a world in which 10 to 15 percent of the population are skilled at working with the smart machines of the future. He believes they will become extremely wealthy, while everyone else will face stagnant or falling wages. To many people, such a gap between a meritocratic elite and most workers would be deeply unsettling. Some see extreme inequality undermining democracy; others think it would create economic crises and undermine economic growth. But is the bleak world depicted by "Average Is Over" really around the corner? There are good reasons to be skeptical. People have been predicting that technology will kill the middle class since Karl Marx. They have generally been wrong. True, middle class wages do stagnate sometimes, as has been the case for the last couple of decades. But over the long run, technology has made large numbers of ordinary workers relatively wealthy. Thanks to technology, the average wage in the United States today is over 10 times what it was 200 years ago, after adjusting for changes in the cost of living. Given the poor track record of these past predictions, there are strong reasons to be skeptical about Cowen’s forecast.
BLS: Job Openings "little changed" in August - From the BLS: Job Openings and Labor Turnover Summary There were 3.9 million job openings on the last business day of August, little changed from July, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.3 percent) and separations rate (3.2 percent) also were little changed in August. ....Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. Layoffs and discharges are involuntary separations initiated by the employer. ... The quits rate (not seasonally adjusted) rose over the 12 months ending in August for total nonfarm and total private but was unchanged for government.. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of turnover. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in August to 3.883 million from 3.808 million in July (revised up from 3.689 million). The number of job openings (yellow) is up 6.9% year-over-year compared to August 2012. Quits were up in August, and quits are up about 10.5% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits").
Help Out the Labor Market; Quit Your Job -- More Americans quit their jobs in August than in any month since the recession ended, an important sign that the labor market is continuing to heal, albeit slowly. Economists and policymakers, including Janet Yellen, President Barack Obama’s nominee to chair the Federal Reserve, have been worried about the low rate of job turnover during the recovery. When workers don’t move on to other jobs, they leave fewer opportunities for others to come in behind them, in effect gumming up the whole system. That can contribute depressed wages, low productivity growth and high levels of long-term unemployment. The voluntary quit rate plummeted during the recession, as nervous workers clung to their jobs, and has been slow to rebound amid anemic economic growth. The number of quits remains well below prerecession levels, but recently has shown some signs of a rebound. 2.4 million Americans left their jobs voluntarily in August, the Labor Department said Thursday. That’s just a modest uptick from July, but it represents the fourth increase in the past five months and a 10.5% increase from a year earlier. Other data from the government’s latest Job Openings and Labor Turnover Survey, or JOLTS, were less encouraging. Employers posted only slightly more jobs in August than in July, and actually filled fewer of them — the number of workers hired each month has been more or less flat through most of the year. Layoffs, meanwhile, ticked up slightly, although they remained at or below prerecession levels.
U.S. Unemployment Aid Applications Drop to 350,000 — The number of people seeking U.S. unemployment benefits dropped 12,000 to a seasonally adjusted 350,000 last week, though the total was elevated for the third straight week by technical problems in California.The Labor Department said Thursday that the less volatile four-week average jumped by nearly 11,000 to 348,250. Weekly applications have been inflated for the past three weeks, largely because California has been processing a huge number of applications that were delayed because of a computer upgrade. The 16-day partial government shutdown has also lifted claims this month because a number of government contractors were laid off temporarily. A government spokesman said the backlog in California affected last week’s figures but noted shutdown’s impact appears to be fading. Applications have declined for the past two weeks, suggesting California is working through its backlog. And in August, before all the distortions, applications had fallen to pre-recession levels. That indicated companies were cutting very few workers. Falling applications for unemployment benefits are typically followed by more hiring. But in recent months hiring has slowed, rather than accelerated.
Weekly Initial Unemployment Claims decline to 350,000 - The DOL reports: In the week ending October 19, the advance figure for seasonally adjusted initial claims was 350,000, a decrease of 12,000 from the previous week's revised figure of 362,000. The 4-week moving average was 348,250, an increase of 10,750 from the previous week's revised average of 337,500. The previous week was revised up from 358,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 348,250 - the highest level since July. Some of this recent increase in the four-week average was related to the government shutdown and some related to processing issues in California..
September Jobs Report Sees Fewer Gains, 7.2 Percent Unemployment - The U.S. economy gained fewer jobs than forecast in September, but the unemployment rate still ticked down to 7.2 percent, the Bureau of Labor Statistics said Tuesday morning. Non-farm payrolls increased by 148,000, less than the 180,000 Wall Street had expected. Part-time jobs dipped and full-time jobs increased, Business Insider reports, as employers slowly but surely continue to ramp up during a still-sluggish economic recovery. Job gains in August were revised upwards, and the unemployment rate dropped from 7.3 percent to 7.2 percent. The September jobs report was supposed to come out earlier this month but was delayed because of the government shutdown. The latest numbers don’t yet reflect any economic impact of the 16-day shutdown.
Nation added 148,000 jobs in September -- The jobs situation stayed mostly unchanged in September with the unemployment rate hovering at 7.2% and 148,000 jobs added to the payrolls, the Labor Department said Monday. In the wake of the government shutdown, analysts expected disappointing labor market data. The data from September shows the market made little to no gains in September, but the unemployment rate did fall a bit from August when it came in at 7.3%. The number of unemployment persons stayed consistent at 11.3 million even though unemployment has fallen by 522,000 since June. Adult men had an unemployment rate of 7.1%, while adult women had an unemployment rate of 6.2%. Teenagers had the highest unemployment rate of 21.4%.
September payrolls: +148,000, and unemployment rate 7.2 per cent - Patience in waiting for the September employment situation report was rewarded with another letdown. Aside from a modest upward revision to the August payroll numbers, which itself was partly offset by a downward revision to July’s, there was little to feel good about in this report. Jobs growth in the summer appears to have slowed from its pace earlier in the year, and that was before the government shutdown. The macroeconomic fallout from the shutdown probably will be small. But it is unlikely to be entirely costless, and it reinforced the idea that fiscal policy probably won’t be of much help anytime soon. As for monetary policy, attention remains focussed on the timing of the first QE tapering, which was postponed at the last meeting at least until December. Today’s employment situation report increases the chances that it will pushed back yet again to early next year. A disappointing report, and as usual we’ll update this post as we make our way through it. For now here are the main bits: Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in construction, wholesale trade, and transportation and warehousing. The unemployment rate, at 7.2 percent, changed little in September but has declined by 0.4 percentage point since June. The number of unemployed persons, at 11.3 million, was also little changed over the month; however, unemployment has decreased by 522,000 since June. Total nonfarm payroll employment increased by 148,000 in September, with gains in construction, wholesale trade, and transportation and warehousing. Over the prior 12 months, employment growth averaged 185,000 per month.
September Employment Report: 148,000 Jobs, 7.2% Unemployment Rate - From the BLS: Total nonfarm payroll employment rose by 148,000 in September, and the unemployment rate was little changed at 7.2 percent, the U.S. Bureau of Labor Statistics reported today. ...The change in total nonfarm payroll employment for July was revised from +104,000 to +89,000, and the change for August was revised from +169,000 to +193,000. With these revisions, employment gains in July and August combined were 9,000 more than previously reported. The headline number was below expectations of 180,000 payroll jobs added. This graph is ex-Census meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes. The second graph shows the unemployment rate. The unemployment rate declined in September to 7.2% from 7.3% in August. This is the lowest level for the unemployment rate since November 2008. The unemployment rate is from the household report. The third graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was unchanged in September at 63.2%. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics. The Employment-Population ratio was unchanged in September at 58.6% from (black line). The fourth graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous high
Establishment Survey: +148K Jobs, Household Survey: +133K Jobs, Unemployment Rate 7.2% - The establishment survey showed a gain of 148,000 jobs. July was revised lower, from +104,000 to +89,000. August was revised higher, from +169,000 to +193,000. The net effect was +9,000 more than previously reported. This was the third straight month of revisions. The previous two revisions were significantly lower. Perhaps the BLS has numbers they are happy with now. The unemployment rate dropped 0.1 to 7.2%. It's the household survey that determines the unemployment rate, not the establishment survey. So let's take a look at the factors.
- Employment rose by 133,000
- Those in the labor force rose by 73,000
- The civilian population rose by 209,000.
- The Participation Rate (The labor force as a percent of the civilian noninstitutional population) was flat at 63.3%, a low dating back to 1979.
- Payrolls +148,000 - Establishment Survey
- US Employment +133,000 - Household Survey
- US Unemployment -61,000 - Household Survey
- Involuntary Part-Time Work +15,000 - Household Survey
- Voluntary Part-Time Work -372,000 - Household Survey
- Baseline Unemployment Rate -0.1 to 7.2% - Household Survey
- U-6 unemployment -0.3 to 13.7% - Household Survey
- Civilian Labor Force +73,000 - Household Survey
- Not in Labor Force +136,000 - Household Survey
- Participation Rate +0.0 at 63.2 - Household Survey
Highlights from the September Jobs Report - September’s jobs report, the last monthly employment gauge before the government shutdown and debt-ceiling fight, showed a weakening labor market. Here are highlights.
- Job gains: The economy added 148,000 jobs in September, below forecasts for 180,000 new positions and below the 185,000 monthly average for the prior 12 months. Employment gains for July and August were revised upward by a modest 9,000. (July now shows a gain of 89,000 jobs, while August is at 193,000.)
- Unemployment: The pace of hiring is too slow to quickly reduce an unemployment rate that remains historically high four years after the recession officially ended. The unemployment rate — based on a separate survey — fell to 7.2%, its lowest rate since November 2008, but far higher than the less than 5% level it stood at just before the economy went into recession in late 2007.
- Fed Watch: The central bank is not expected to make any changes until it can assess the full effects of the 16-day government shutdown and debt-ceiling fight on the broader economy. But a weakening jobs picture could force it to push out this date out further.
- Broader gauges: Labor force participation, a measure of how many people are working or looking for work, held steady at 63.2%, a 35-year low. The number of people who have given up looking for work was 852,000, slightly less than last month. The unemployment rate that includes discouraged workers and part-time workers seeking full-time employment also fell slightly, to 13.6%.
- Job quality: Job quality improved somewhat thanks to a 20,000 gain in higher paying construction jobs and a 23,000 gain in warehousing jobs. The retail sector added 20,800 jobs. Average hourly earnings for private sector employees rose by $0.03 to $24.09.
Unemployment Edges Down as People Continue to Leave the Workforce in September, by Dean Baker - The unemployment rate edged down to 7.2 percent in September, the lowest level since November of 2008. The Labor Department’s establishment survey showed a gain of 148,000 jobs. With modest upward revisions to the prior two months’ data, this brings the average rate of job growth over the last three months to 143,000. This compares with an average rate of job growth of 186,000 a month over the last year. In spite of the September drop in unemployment, the employment-to-population rate (EPOP) remained unchanged at 58.6 percent. This continues the pattern that we have seen throughout the recovery as the unemployment rate falls mainly because workers leave the labor market. The unemployment rate is now down by 2.8 percentage points from its 10.0 percent peak in October of 2009. However, the EPOP is up just 0.4 percentage points from its low point in June of 2011. Over the last year the EPOP actually edged down by 0.1 percentage point, while the unemployment rate dropped by 0.6 percentage points. This drop in labor force participation is now occurring at an equal pace among men and women, with the participation of both dropping 0.5 percentage points in the last year. By educational attainment, workers with less than a high school degree were the big winners in September with a drop of a full percentage point in their unemployment rate to 10.3 percent. That is down from a peak of 15.7 percent in November of 2010. This decline was also accompanied by a drop of 0.3 percentage points in the EPOP over the last month, but over the last year the EPOP for the least-educated workers is down by just 0.1 percentage point. This is also likely due to the aging of the population since older workers disproportionately lack high school degrees. The strong relative gains by workers with the least education does not easily fit with accounts of the economy increasingly demanding higher-skilled workers. Foreign-born workers also seem to be doing relatively well in the recovery. In the last year their unemployment rate is down by 1.1 percentage point to 6.5 percent, while their EPOP rose by 1.0 percentage points to 61.9 percent. By comparison, the unemployment rate for native-born workers fell by just 0.5 percentage points to 7.1 percent.
The jobs report was totally blech. And it may get worse.: Soft. Tepid. Blech. Meh. Choose your non-inspiring adjective, possibly in Yiddish, and it nicely describes the long-awaited September jobs report. It wasn't terrible by any stretch -- the nation added 148,000 jobs, and the unemployment rate edged down a tenth of a percent to 7.2 percent. But it is far short of the kind of robust jobs recovery that Americans have been waiting for these last four long years. If there is any good news to be found, it is that the unemployment rate is now the lowest it has been since November 2008. But, two important observations: November 2008 was hardly the best of times for the U.S. economy. And much of that decline has occurred because of people dropping out of the workforce; the ratio of Americans who have a job is basically unchanged over the last four years. Indeed, if there is a trend at all, it is in the wrong direction. In the first six months of 2013, the nation averaged 195,000 net new jobs a month. In the last three months, that average has been a mere 143,000. And as a reminder, this is a report covering September, before the government shutdown and debt ceiling showdown that rattled consumer and business confidence. While we won't necessarily see direct evidence of that disruption in the October numbers (due out Nov. 8), what is clear is that the weak September numbers can't be chalked up to one-time disruptions coming from Washington.
A Discouraging Picture -Another weak jobs report has been released, with data on the September labor market. The report is late because of the shutdown but it shows that payrolls were up a scant 148,000 last month, though the unemployment rate ticked down a touch, to 7.2 percent from 7.3 percent (and not because people left the job market, which is why the jobless rate fell in earlier months).And remember, this report doesn’t count the impact of all those furloughed government employees and other shutdown-related negative impacts from the first half of this month. The monthly jobs data are notoriously noisy, so let’s take advantage of the fact that we now have data for the first three quarters of the year. We can thus smooth out the bips and bops of monthly changes over three months. That leads to the picture below, showing average monthly payroll gains over each quarter of the year for both the total job market and the private sector.It’s just a very discouraging picture. Over the most recent quarter, payrolls were up an average of 143,000 per month, down from 182,000 in the second quarter, and 207,000 in the first quarter. Private payrolls expanded by only 129,000 a month on average last quarter, well down from the average monthly gain of 212,000 (itself just a moderate pace of employment growth) in the first quarter of the year.It’s possible that employers were exercising some caution in hiring decisions based on their suspicions that a government shutdown was imminent. But I doubt it. The pattern of deceleration seems to me a lot more consistent with same weak demand story that’s been plaguing this disappointing recovery for years.
Mostly Good News in Drop in Unemployment Rate - The U.S. unemployment rate dropped 0.1 percentage point to 7.2% in September and a broader measure of unemployment fell to 13.6% from 13.7%, as more Americans were working last month. In contrast to recent months, the drop in the main unemployment rate was almost totally for positive reasons. The number of people employed jumped by about 133,000, while the number of people who said they were unemployed dropped by 61,000. That’s an improvement from August, when the unemployment rate only dropped because people dropped out of the labor force. Last month, the labor force participation rate, which is the percent of the population either working or looking to work, took a tumble to 63.2% — its lowest level since 1978. The participation rate stayed put last month in one somewhat piece of disappointing news. While the unemployment rate declined for the right reasons, there wasn’t exactly a rush back into the jobs market by the thousands of frustrated workers who gave up their search. A broader unemployment rate, known as the “U-6″ for its data classification by the Labor Department, also posted a drop last month. That rate includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The drop in the U-6 rate was also influenced by the drop in the overall number of unemployed, but also driven by a relatively flat reading on the number of people working part time, but who want full-time work. Though that number rose slightly in September, it’s still more than 300,000 below its July level. Despite this month’s improvement, there’s still a big hole in the jobs market More than four million people have been out of work for more than six months and over 11.5 million in total are looking for work.
The September jobs report: We waited three weeks for this? - Maybe the federal government should have stayed shut down. If it had, then we wouldn’t have to pick through the lousy September jobs report for some good news. And it isn’t easy. Nonfarm payrolls increased just 148,000 last month, the Labor Department said, less than the 180,000 that Wall Street economists had been expecting. Now maybe this number will be revised higher. But right now it suggests a decelerating labor market — not one that’s gaining momentum. As economist Justin Wolfers points out, quarterly job growth over the past four quarters has declined from 209,000 (4Q 2012) to 207,000 (1Q 2013) to 182,000 (2Q 2013) to 143,000 (3Q 2013). To put that quarterly number in context: At a 143,000 jobs a month, it would take until 2022 — eight years and 10 months — before the job market returned to pre-Great Recession levels, according to the Hamilton Project’s Jobs Gap calculator. A few other points:
- 1. While the unemployment rate dipped to 7.2%, the employment rate — that share of the adult civilian population with a job — stayed flat at 58.6%. (See above chart.) It’s barely risen from its recession lows and is exactly where it was in November of 2009.
- 2. Likewise the labor force participation rate remained unchanged at 63.2%. It if were back at pre-recession levels, the jobless rate would be 11.2%. Factoring out demographics probably gives you a “real” jobless rate in the 9-10% range. Indeed, the broader U-6 unemployment-underemployment rate dipped just a bit to 13.6%.
- 3. One bit of good news is that the September data suggest that for now at least, Obamacare is not causing a surge in part-time employment at the expense of full-time jobs. Last month, according to the volatile household survey, full time employment was up 691,000, part-time employment down 594,000. So since last December, the economy has created about 1 million full-time jobs vs. a loss of 100,000 part-time jobs. From The Wall Street Journal: ”The uptick in part-time employment earlier this year now looks like a statistical blip: Part-time employment fell in late 2012, then rebounded in early 2013, and has now fallen for two consecutive months.” See the BLS charts below:
Delayed September Jobs Report: More Meh - The headline for September2013 employment is that 148,000 jobs were added, and the unemployment rate decreased from 7.3% to 7.2%. July was revised yet lower (under 100,000) and August were revised higher, for a net gain of 9,000 . First, let's look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. These were mixed.
- the average manufacturing workweek decreased 0.1 hours from 41.9 hours to 41.8. This is one of the 10 components of the LEI and will affect that number negatively
- construction jobs were up 20,000.
- manufacturing jobs rose by 2,000.
- temporary jobs - a leading indicator for jobs overall - increased by +20,000.
- the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 33, and remains about 158,000 off its lows.
- The average workweek for all workers was unchanged at 34.5 hours
- Overtime hours were also unchanged at 3.4 hours.
- the index of aggregate hours worked in the economy increased 0.1 hours from last month's level of 98.8 to 98.9.. This is also a post-recession record.
- The broad U-6 unemployment rate, that includes discouraged workers fell from 13.7% to 13.6% also a new post-recession low.
- The workforce increased by 73,000. Part time jobs for economic reasons rose by 15,000.
September Employment Growth Slows - Today’s nonfarm payrolls report finally arrived, but it wasn’t worth the wait. Private-sector employment increased by a net 126,000 jobs last month on a seasonally adjusted basis, according to the US Labor Department. That’s not the slowest pace this year, but it’s close. Only July’s meager 100,000 rise is lower so far in 2013. There’s nothing to cheer about in today’s employment release, but it’s still not obvious that the jig is up for the business cycle. True, the latest monthly perspective looks discouraging, but that's not the only statistical lens at our disposal. Consider that the year-over-year percentage change for private-sector employment continued to expand by just over 2% through last month. That rate is unchanged from the previous month and is in line with the annual pace of growth we’ve seen so far this year. Nonetheless, the best you can say about the labor market at the moment is that it’s growing modestly. Perhaps today’s update is an early warning that the trend is set to deteriorate in the months ahead. Maybe, but at this point that’s just speculation fueled by looking at last month’s estimate alone.
September Nonfarm Payrolls Miss 148K vs Exp. 180K; Unemployment Rate Drops to 7.2% - September jobs are a disappointment at 148K vs expectations of 180K and private jobs only 126K well below the 180K expected, but August was revised higher this time, from 169K to 193K even as July dipped once again from 104K to 89K. Net for the three months, largely a wash. The unemployment rate, at 7.2 percent, changed little in September but has declined by 0.4 percentage point since June. The number of unemployed persons, at 11.3 million, was also little changed over the month; however, unemployment has decreased by 522,000 since June. Among the major worker groups, the unemployment rates for adult men (7.1 percent), adult women (6.2 percent), teenagers (21.4 percent), whites (6.3 percent), blacks (12.9 percent), and Hispanics (9.0 percent) showed little or no change in September. The jobless rate for Asians was 5.3 percent (not seasonally adjusted), little changed from a year earlier. In September, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 4.1 million. These individuals accounted for 36.9 percent of the unemployed. The number of long-term unemployed has declined by 725,000 over the past year. Both the civilian labor force participation rate, at 63.2 percent, and the employment-population ratio at 58.6 percent, were unchanged in September. Over the year, the labor force participation rate has declined by 0.4 percentage point, while the employment- population ratio has changed little. And the establishment: Total nonfarm payroll employment increased by 148,000 in September, with gains in construction, wholesale trade, and transportation and warehousing. Over the prior 12 months, employment growth averaged 185,000 per month. Employment in construction rose by 20,000 in September, after showing little change over the prior 6 months. The Labor Force Participation Rate was flat at 63.2%: the lowest in over 30 years.
The BLS Jobs Report Covering September 2013: End of Summer, No Improvement - The government shutdown is over, and the Bureau of Labor Statistics has belatedly released its jobs report for September 2013. The seasonally adjusted numbers were little changed. Unemployment dropped a tenth of a percent to 7.2%. The real story is on the unadjusted side. September marks the end of summer and the beginning of the school year. The labor force declines as people leave or their jobs end. The official unemployment declines too as the unemployed leave as well. However, real unemployment (~12.4%) and real disemployment (~17%) remain high, and little changed. Officially in the business survey, 148,000 jobs were added in September (seasonally adjusted). Although with all the revisions we have seen in recent months, this should be taken with a large grain of salt. At the same time, on the unadjusted side of the survey, the end of summer and the beginning of the school year are reflected in a loss of 350,000 private sector jobs and government adding 1 million. Wages and hours worked, which are always seasonally adjusted, changed little or not at all last month. In September, seasonally adjusted, the labor force increased 73,000 from 155.486 million to 155.559 million Unadjusted, the labor force decreased by 435,000 from 155.971 million to 155.536 million. You will remember that the unadjusted labor force declined 1.225 million last month. August and September mark the end of the seasonal summer drop off in the labor force. There is usually a big rebuild in October. It will be interesting to see what the effect of the government shutdown, if any, will be on this. The respective changes in the labor force are reflected in the participation rate, the ratio between labor force and the potential labor force as represented by the NIP. Seasonally, adjusted the participation rate was unchanged at 63.2%. Unadjusted, it fell two-tenths of a percent to 63.2%, as we would expect with the fall in the unadjusted labor force.
Unemployment is a Flat Line No Change for September 2013 - America's employment is the same as last month and we might look at the BLS report telling us, Doctor, the patient is still dead. Someone bring the crash cart for employment in America needs to be resuscitated. The BLS employment report shows the official unemployment rate declined a percentage point to 7.2%. The record low labor participation rate did not improve and neither did the record low of the employed to the civilian noninstitutional population ratio. More people dropped out of the labor force again which has been the primary driver of the official unemployment rate decreases. This article overviews and graphs the statistics from the Current Population Survey of the employment report. Be afraid, very afraid of the next chart. The labor participation rate is now 63.2%, mentioned above. The labor participation rate has declined -0.4 percentage points from a year ago. This implies that those who were dropped from the labor force are staying out of the labor force The -0.4 percentage point drop over a year represents about 985 thousand people who are not considered part of the labor force anymore. This implies over the past year almost a million people have dropped out out of either looking for work or have a job. For those claiming the low labor participation rate is just people retired, we proved that false by analyzing labor participation rates by age.The number of employed people now numbers 144,303,000, a 133,000 monthly increase, well within the margin of error. We describe here why you shouldn't use the CPS figures on a month to month basis to determine actual job growth. These are people employed, not actual jobs. In terms of labor flows, those employed has increased 1.329 million from a year ago. The noninstitutional population has also increased by 2.396 million during the same time period, so by just the annual change in employment to population gives a ratio of 55.5%, which is terrible and well below the monthly 58.6% employment to noninstitutional civilian population ratio. The statistics from the CPS do generally vary widely from month to month, yet two million more employed per annum is not enough to correct the jobs crisis in America. An annual increase of only 1.3 million is akin to the Walking Dead showing up on your doorstep for Halloween, looking for work. Below is a graph of the Current Population Survey employed.
A Graphic Look at Payrolls from the September Employment Report - July's were revised down to 89,000 and August was revised upward to 193,000. The BLS employment report is actually two separate surveys and we overview the current population survey in this article. The United States is now down -1.72 million jobs from December 2007, five years, nine months ago as shown in the below graph. We broke down the CES by industry to see what kind of percentage changes we have on the share of total number of payroll jobs from 2008 until now. Below is the percentage breakdown of jobs by industry for January 2008. Below is the breakdown of jobs growth per industry sector for September 2013. From these two pie charts we can see the job market has changed into more crappy, low paying service jobs of health care assistance and restaurant workers. We expected to see construction jobs shrink relative to total payrolls and it did, by 1.1 percentage points. Manufacturing, of which the auto industry is a part, has contracted 1.1 percentage points as share of total jobs. The financial sector, only shrank 0.2 percentage points as it's share of payroll jobs, in spite of being the maelstrom behind the recession. The manufacturing sector just continues to erode and if one thinks about it, the manufacturing job implosion should not be so great due to the causes of the recession. Health care has gained the most jobs, yet working in a nursing home and as attendants are also low paying jobs. Below is a bar chart showing the employer's payroll growth since January 2008. We see health care jobs, part of education and health sector, is the only real growth sector, along with very low paying restaurant jobs in leisure and hospitality. Remember professional and business includes waste management and low paying administrative types of jobs. Manufacturing has just been decimated.
Reminder: Don’t Put Too Much Stock in One Jobs Report - In August, women accounted for all the gains in employment — 186,000 more women were working in August than in July, while the number of employed men actually fell by more than 300,000. This month? The exact opposite. Male employment increased by 288,000, while women’s fell by 154,000. (These figures come from the “household survey” and are separate from the monthly count of payroll jobs.) It isn’t just women and men. Youth employment fell by 170,000 in August, then bounced back by about 300,000 in September. Older workers showed the opposite pattern. Breaking jobs down by education reveals similar month-to-month swings. What’s going on? The monthly jobs figures are based on a survey of some 60,000 households. That’s a big survey — far larger than the ones used to predict presidential elections, for example — but it’s still subject to a significant margin of error. And the more finely you slice the data — by sex, age, race, or other factors — the smaller the sample sizes become, and the bigger the margins of error. That means that some developments that might appear significant at first turn out to be little more than statistical noise. That can be true even for trends that last for several months: Earlier this year, for example, the share of Americans working part-time rose for four consecutive months, raising fears of a lasting shift toward part-time work. Instead, the trend quickly reversed, and the share of Americans working part-time fell to a recovery low in September.
US Somehow Adds 691K Full-Time Jobs In September - The last time we caught the BLS systematically making up data, specifically as pertains to the NFP-parallel JOLTS survey, the result was truly epic: a one time adjustment in which the Bureau did everything it could to, in one month, plug the gap we had highlighted, resulting in the most skewed (and hilarious) data series we had every observed. This time around, the BLS has once again outdone itself, focusing however not on the JOLTS survey, but on the one aspect of the labor force that has dominated public attention: the impact of Obamacare on the distribution of jobs by full-time vs part-time. As is well-known, and as we have been reporting for the past three or so years but becoming particularly acute in the last 3 months, virtually all job gains reported by the BLS had come in the ranks of the part-time workers, and to the detriment of full-time jobs. This resulted in substantial criticism of Obama, and the impact Obamacare has on jobs. Well, some time in the past month and a half, the Obama administration called up the BLS and told them to remedy this. Sure enough, while the September Establishment Survey was a disappointing +148K, far below expectations, it was the Household Survey where the fun was.On the top line, the gain in jobs was comparable to the Establishment number: a timid 133K. However, looking at the breakdown between Full-Time and Part-Time jobs reveals something simply hilarious. The chart below summarizes it.
Some Key Job Sectors Turn Softer - Last year, restaurants and health care accounted for about a third of all the country’s job growth. So some economists were concerned to see, deeper in Tuesday’s jobs report, a softening in those sectors. Health care posted a gain of only 6,800 jobs, compared with a monthly average this year of 22,000. And restaurants actually lost jobs, 7,100 of them, when they had been adding 25,000 a month. “These were important sources of job creation, and if they’re fading we might be seeing a slower pace of growth” in the immediate future, said Dean Baker, the co-director of the Center for Economic and Policy Research in Washington. Diane Swonk of Mesirow Financial said the health care sector had been slowing for some time, in keeping with a flattening of health care spending. Less spending on medical care may be good for the economy, but not so good for the fragile job market. On the other hand, slowdowns in leisure and hospitality, a sector that includes restaurants and amusement parks, and in specialty construction, which includes home remodeling, point to a pullback in discretionary spending, as did a disappointing back-to-school shopping season. “A month ahead of the shutdown, it’s particularly worrisome, because we knew that tourism would be hit hard when the government closed,” Ms. Swonk said. Of course, both economists cautioned against reading too much into just one month of data, noting that the trend could reverse in next month’s report.
Where The September Jobs Were: Truck Drivers, Bureaucrats, Salesmen And Temps - As part of our monthly NFP-day tradition, we break down the monthly job gains (and losses) by industry. So here they are: in September the biggest job gaining sectors, accounting for 86K jobs or 58% of the total 148K jobs added, were the following four industries:
- Transportation and Warehousing: + 23K
- Government: +22K
- Retail Trade: +21K
- Temp Help: +20K
In short: nearly two thirds of all jobs created in September (according to the BLS' increasingly more flawed data so these numbers are likely completely made up) were truck drivers, bureaucrats, salespeople and temps. What about "real" jobs: well, Financial Activities were down 2K, Manufacturing were up 2K, Information (those very critical programmers so instrumental in the glitchless roll out of Obamacare): +4K, and Professional and Business Services (ex temps): +12K. Quality all the way.
Housing Construction Gains Not Translating to Much Hiring -The housing sector continues to be unable to translate strong growth into larger job gains. Construction employment advanced by 20,000 in September, the Labor Department said Tuesday. A noteworthy gain after six months of holding essentially flat, but about three-quarters of the improvement was tied to nonresidential construction. Jobs connected directly to home building advanced by 5,400 last month, a gain that’s slightly below the average monthly improvement recorded since March. From a year earlier, employment in home building was up 4.8% in September. That surprisingly weak considering spending on residential construction had advanced better than 18% from August 2012 to August 2013, according to Commerce Department data released Tuesday. “Home building firms and subcontractors have chosen not to hire additional workers, but simply use the people they have more intensely,” Modest hiring speaks to still relatively weak confidence among home builders in some parts of the country, he said. Builders prefer to pay existing workers overtime rather than inflating payrolls only to see demand dry up due to rising interest rates or other economic factors. Still, construction spending rose 0.6% in August from a month earlier, mainly reflecting a solid pickup in home construction. Private residential construction rose by 1.2% in August and nonresidential spending improved just 0.1%.
"Peak Bartenders" - After A Record 42 Consecutive Months, Waiters Suffer First Monthly Job Decline -- The last time employees in the "Food Services and Drinking Places" category experienced a monthly job decline was February 2010. Since then, for 42 consecutive months, the US eating and drinking industry went on an epic hiring spree without a single month of net layoffs, adding over 1 million workers and hitting an all time high 10.334 million workers, even as actual restaurant retail sales have recently tumbled as a result of the middle-class US household once again running on fumes as a result of the Fed's disastrous wealth-transferring policies. Well, as the chart below shows, after 42 months of relentless hiring of bartenders and waitresses, we may have just hit "peak bartenders."
September 2013 Jobs: Teens In, Adults Out - Although the September 2013 jobs report was delayed for two and half weeks, thanks to the partial federal government shut down, and though it was considered disappointing by many, we did find something curious in it. Compared to August 2013, the number of teens counted as having jobs increased by 168,000, while the number of adults Age 25 or older fell by that same number! It's as if only the exit of older workers could make room for the entry of an equal number of teens.... We realize that this could very much be just a one-off anomaly in the household employment survey, which will likely disappear when the household data is revised in 2014, but it is interesting to see in the data. Meanwhile, according to the jobs report, all of the net gain of 133,000 Americans counted as being employed in September 2013 was confined to the Age 20-24 demographic, which is really impressive since this group accounts for just 9.5% of the 144,303,000 Americans counted as having jobs. By contrast, the U.S. teens whose number of employed increased by 168,000 in the month of September 2013 make up just 3.1% of the employed U.S. civilian labor force. All in all, September 2013 would appear to have been a good month to be among the 12.6% of the U.S. civilian labor force under Age 25 and looking for work. 301,000 more Americans meeting that description were counted as having jobs in September 2013 than had jobs in August. The remaining 87.4% of the U.S. work force was not so lucky. It will be interesting to see if the pattern reverses itself with the October jobs report. Or really, the November jobs report, because the partial government shut down in October will affect that month's data.
Alt Underemployment - In the past, I have shown that most of the improvement in the unemployment rate since its peak of 10 percent in the fall of 2009—and all of the improvement in the unemployment rate over the last year—has not been for good reasons. It has been due to people either dropping out of, or not entering, the labor force due to weak job opportunities.But what about other measures of labor market slack that the Bureau of Labor Statistics publishes? The most comprehensive direct measure of labor market slack published by the BLS is the U-6 measure of labor underutilization, the so-called “underemployment” rate. Like the unemployment rate, the underemployment rate has declined substantially in this recovery, from a peak of 17.1 percent in the fall of 2009 to its current rate of 13.6 percent. While still very elevated—the U-6 averaged 8.3 percent in 2007—that is significant improvement. Is it a sign of major healing? Yet again, the answer is no. The U-6 includes three groups: the officially unemployed, people working part-time but who want and are available for full-time work, and the “marginally attached”—jobless workers who are available to work and have looked for work in the last year but have given up actively seeking work. By including the marginally attached, the U-6 measure captures some of the “missing workers”—workers who are neither employed nor seeking work but who would be in the labor market if it were healthy. However, the U-6 is capturing a smaller and smaller share of the total number of missing workers as the weak recovery drags on. One reason is that to be defined as marginally attached, a jobless worker must have looked for work in the last year. After more than 5 years of extremely elevated unemployment, there are more and more jobless workers who want to work but nevertheless haven’t actively searched for a job in over a year. Right now there are 2.3 million marginally attached workers, but I estimate that there are more than 5 million missing workers.
Wary Employers Turn to Temp Workers - The temporary-help business notched respectable gains in September but the industry is feeling businesses’ reluctance to commit to even short-term workers. Staffing firms accounted for 20,000 of the 148,000 jobs the nation added last month, the Labor Department reported Tuesday. The September jobs report—initially due for release Oct. 4—was delayed because of the federal government shutdown. Thus far in 2013, the staffing industry has added an average of 20,000 jobs a month. September’s tally raises the industry’s share of all U.S. jobs to levels last seen in early 2000, said Richard Wahlquist, chief executive of the American Staffing Association, an industry group. In April of that year, temporary work accounted for 2.03% of all seasonally adjusted nonfarm payroll positions. The share dropped to 1.34% as the recession was ending in mid-2009, and has climbed back to just above 2.02%, Mr. Wahlquist said. However, businesses that learned to do more with less during the recession are slowing their pace of temporary hiring as the recovery enters its fifth year. “Every business I know is operating at a higher level of efficiency post-recession than they did prerecession,” Mr. Wahlquist said. “American businesses just have not had a sufficient increase in demand for products and services to add big numbers of workers.”
The Trend Toward Part-Time Employment: A Closer Look - The monthly employment report is among the most popular and controversial of the government's economic reports. The latest one released yesterday was no exception, with its weaker-than-expected new jobs but a decline in the unemployment rate from 7.3% to 7.2%. One of the reasons the monthly employment report is so controversial is that it's an incredible hodgepodge of data from bipolar sources: the Current Population Survey (CPS) of households and the Establishment Survey of businesses and government agencies. For example, the Nonfarm Employment number comes from the establishment data, but the unemployment rate is calculated from household data. Additional complications are the substantial revisions to both the CPS and Establishment data, and the complexities of seasonal adjustment, which is available for many, but not all, of the data series. Let's take a close look at some CPS numbers on Full and Part-Time Employment. Buried near the bottom of Table A-9 of the Household Data are the numbers for Full- and Part-Time Workers, with 35-or-more hours as the arbitrary divide between the two categories. The Labor Department has been collecting this since 1968, a time when only 13.5% of US employees were part-timers. That number peaked at 20% in January 2010. The latest month is only slightly lower at 19.0%. Here is a visualization of the trend in the 21st century, with the percentage of full-time employed on the left axis and the part-time employed on the right. We see a conspicuous crossover during Great Recession.
Don’t Blame Health Law for High Part-Time Employment - Don’t blame the health law for high levels of part-time employment. In fact, using the law’s definitions, part-time work isn’t increasing at all as a share of employment, at least not yet. Nearly 8 million American were working part-time in September because they couldn’t find full-time work. Overall, 27 million people — nearly a fifth of all employees — are working part-time, well above historical norms. Many critics of the Obama administration have pointed the finger for the prevalence of part-time jobs at the Affordable Care Act, the 2010 law better known to some as “Obamacare.” The law’s so-called “employer mandate” requires most midsize and larger companies to offer health insurance to their full-time employees. That, critics argue, provides companies with an incentive to hire part-timers instead. The Obama administration earlier this year said it would delay the requirement until 2015 to give companies more time to comply. But some employers have said they are nonetheless cutting back on full-time hiring. Indeed, part-time employment rose early this year, while full-time employment growth stalled. But a closer look at the data provides little evidence for the notion that the health law is driving a shift to part-time work, although it could as the mandate deadline approaches.
Little Sign of Jobs Impact From Health Care Law - Is the Affordable Care Act causing a surge in part-time employment? According to the September jobs report, no – at least not yet. The number of part-time workers for economic reasons increased ever so slightly, to 7.93 million from 7.91 million. But that’s down from 8.6 million a year ago. Indeed, there’s still little sign that the Affordable Care Act has had much of an impact on employment one way or another. Why? Well, the so-called “employer mandate” does not come into effect until 2015. Economists expect some businesses to hire more part-time workers to avoid the mandate, but do not think it is likely that they would do so until late next year. The provisions of the law that are currently in place, such as a rule preventing insurers from discriminating against applicants with pre-existing conditions, are unlikely to have any effect on hours worked or employment. So what is driving the decrease in part-time work? Probably the same trends behind the falling unemployment rate: in part an improving economy, and in part the continued bleeding of workers from the labor force.
Measuring What Didn't Happen: Did Obamacare Cause an Increase in Part-Time Jobs? No Says Ritholtz, and Reuters; Yes, Says Mish - A friend sent me an article in Reuters today that claims Little evidence yet that Obamacare costing full-time jobs. One in five businesses in the service sector think President Barack Obama's signature healthcare reform has hurt employment at their firms over the last three months, a National Association of Business Economics survey showed on Monday. But there is little discernible impact in the employment figures released in recent months, including the September numbers out on Tuesday. The number of people with part-time jobs who want full-time work, for example, was essentially flat in September at 7.9 million. Did Obamacare Cause an Increase in Part-Time Jobs? Barry Ritholtz at the Big Picture Blog says "no" in his October 7 post Did Obamacare Cause an Increase in Part-Time Employment? As you can see in the black line below, the number of part time workers spiked because of the Great Recession. It peaked and began to slowly reverse before the ACA [Affordable Care Act - Obamacare] was even passed. For now, let's assume the above chart from the Economic Policy Institute is correct. Does that imply there was no Obamacare effect? Of course not, and Ritholtz should know better. Even if the EPI chart is correct, it does not show what would have happened had Obamacare not passed. Realistically, to determine the Obamacare effect, we need to measure what we didn't see (which is what would have happened in the absence of Obamacare). I am inclined to believe what corporate CEOs are saying given strong evidence they did what they said. Reuters reported "Many businesses polled by the NABE said they were holding back on hiring due to the costs imposed by the law. The survey also showed 15 percent of service sector firms planned to shift to more part-time workers due to Obamacare."
What Happened to the Part-Time Employment Story? - For many skeptical observers, the big employment theme for this year has been an assertion that new jobs were of low quality and mostly part-time. This theme resonated with those who want to disparage economic growth, including sellers of political themes, gold, page views, fear, and related (high-commission) products. All of these sources pounded the drum when part-time employment was high – ignoring and dismissing the obvious seasonal effects. What about now? After the delayed release of the September employment numbers, what did you read about part-time employment? The answer is --- nothing. Sherlock would call it a "dog not barking." What was the real news? The seasonal part-time effects have reversed. If you have joined us in following Bob Dieli's work, you would get this chart and explanation: "Quick show of hands: How many of you heard that there were 691,000 full-time jobs created in September? Another quick show of hands: How many you remember hearing that there were 360,000 part-time jobs created in June?" Resulting in this (chopped inexpertly from his report) –
Workforce, Population, Jobs by Age-Group -- Here are a few demographic-related charts of the workforce, civilian non-institutional population, and jobs, by age-group, from reader Tim Wallace.
Bloated Government? Federal Employment at 47-Year Low - In September, before the government shutdown, the government had 2,723,000 employees, according to the latest job report, on a seasonally adjusted basis. That is the lowest figure since 1966. Until now, the lowest figure for the current century had been 2,724,000 federal employees in October 2004, when George W. Bush was seeking a second term in the White House. Now, the federal government employs exactly 2 percent of the people with jobs in this country. In 1966, the figure was more than twice that, 4.3 percent. All these figures, by the way, are for civilian jobs. Members of the armed forces are not counted. If they were included, the contrast would be even sharper. In 1966 the Vietnam War was going on, and around 2.6 million people were on active duty. This year the figure is around 1.4 million. While the federal government continues to shrink — the September figure is down 3.1 percent from a year ago — state and local government jobs have begun to grow again, albeit slowly. September is, of course, a month when teachers are back on the job, and it is useful to look at the unadjusted numbers each year to see how school employment is growing, or not. Over the past 12 months, the number of people working in state and local government education jobs rose 0.6 percent. The prior year, through September 2012, the figure was up 0.3 percent. That came after three consecutive years of declines. Other state and local jobs are up 0.02 percent — 2,000 jobs — over the past 12 months. That is not much, but if revisions do not change it, a string of four consecutive annual declines will have been erased.
Number of the Week: So Far, Not So Good on President’s Manufacturing Goal -- 25,333: The number of manufacturing jobs the U.S. needs to add every month, on average, to achieve President Barack Obama‘s goal of creating 1 million new factory jobs in his second term. One of the more ambitious goals President Obama set for his second term was to create 1 million new manufacturing jobs. How’s that working out? No so good. As the folks over at the Alliance for American Manufacturing point out, the U.S. has added only 12,000 net new manufacturing jobs since the start of 2013. The year actually started pretty strong, with the U.S. adding a combined 37,000 manufacturing jobs in January and February. That means the pace wasn’t too far off of the average monthly increase of 20,833 needed over 48 months to reach the president’s goal. But since then, the job machine has sputtered. Manufacturers shed workers for five straight months—including a hefty 17,000 cut in July—and only started adding workers again in the last two months. September’s delayed job report, released earlier this week, showed 2,000 factory jobs added during that period. The latest tally shows the U.S. is 988,000 jobs away from reaching the mark and would need to add an average 25,333 each month for the rest of President Obama’s term to meet the goal.
America’s Real Economic Crisis Is Flat Wages - Now that we have a working government, we also have a September jobs report. But I almost wish we didn’t. While everyone was expecting October’s report, which will reflect the government shutdown and debt-ceiling wrangling, to be bad, the September numbers show that even before the Tea Party decided to scupper what recovery there was, job growth was actually slowing. In the three months leading up to and including September, the U.S. economy was creating about 140,000 jobs a month. Six months ago, that number was 200,000, which is really the minimum we need in order to have a more robust recovery. Sure, unemployment ticked down a notch, to 7.2%. But that’s in part because the workforce-participation rate, which is a crucial element of economic growth, is so sluggish. In fact, at the current 63.2%, it’s the highest it’s been since women entered the labor force en masse in the 1980s. If you don’t get more people working, you don’t have the sort of wage competition that encourages firms to raise workers’ pay. And if you don’t have higher wages, you won’t have more robust consumption spending (which encourages firms to hire; it’s a snowballing cycle). As I have written many times, the single most worrisome thing in the economy right now is that wages are flat and have been for five years now. You don’t have to be an economist to see that you can’t have a robust recovery in an economy that is 70% consumer spending when most people haven’t gotten a raise since the financial crisis began.
Employment Report Comments - Overall this was a weak employment report. The decline in the unemployment rate to 7.2% in September, from 7.3% in August, was a little bit of good news, but the recent decline has been mostly due to declining participation. If we look at the year-over-year change in employment - to minimize the monthly volatility - total nonfarm employment is up 2.225 million from September 2012, and private employment is up 2.290 million. That is essentially the same year-over-year gain as in August (2.215 million total, 2.282 million private year-over-year in August). So the story mostly remains the same: slow and steady job growth.Unfortunately the next employment report will be impacted by the government shutdown (both impacting employment and data gathering). A few more graphs ...Since the participation rate declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle. The ratio was unchanged at 75.9% in September. This ratio should probably move close to 80% as the economy recovers, but that also requires an increase in the 25 to 54 participation rate. The participation rate for this group declined to 80.9% in September. . This graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. At the recent pace of improvement, it appears employment will be back to pre-recession levels next year (Of course this doesn't include population growth). The number of part time workers increased slightly in September to 7.926 million. These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 13.6% in September from 13.7% in August. This is the lowest level for U-6 since December 2008. This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 4.146 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 4.290 million in August. This is generally trending down, but is still very high. Long term unemployment remains one of the key labor problems in the US. This graph shows total state and government payroll employment since January 2007. State and local governments lost jobs for four straight years
Vital Signs: Don’t Blame McJobs for Slow Wage Growth - The September jobs report disappointed not just in the low number of jobs added in September, but also in the continued weak growth in hourly pay. Average pay for all private-sector employees increased a mere 3 cents to $24.09. Hourly pay is up just 2.1% in the past year. The popular wisdom is that the economy is only creating McJobs and Wal-Work that are holding down wages. But that’s not the full story. Employment in the 4 lowest-paying sectors (retail, nondurable manufacturing, leisure and hospitality and other services) has actually grown a bit slower than total private payrolls. Since private payrolls bottomed out in early 2010, private employment has risen 7%, and low-paying jobs have increased 6%. Looked at another way, low-paying jobs have a 34% share of all private jobs, but have accounted for only 29.6% of total hiring since 2010.The wage drag seems to be coming from the lack of new jobs in high-paying sectors (mining and logging, utilities, information and finance). These four sectors have increased employment by just 2.8% since early 2010. While the sectors have a 10.5% share of all jobs, they have accounted for only 4.3% of job growth.
Almost 6 million young Americans out of school, work, study says - Almost 6 million young people are neither in school nor working, according to a study released Monday. That's almost 15 percent of those aged 16 to 24 who have neither desk nor job, according to The Opportunity Nation coalition, which wrote the report. Other studies have shown that idle young adults are missing out on a window to build skills they will need later in life or use the knowledge they acquired in college. Without those experiences, they are less likely to command higher salaries and more likely to be an economic drain on their communities. "This is not a group that we can write off. They just need a chance," "The tendency is to see them as lost souls and see them as unsavable. They are not." The coalition also finds that 49 states have seen an increase in the number of families living in poverty and 45 states have seen household median incomes fall in the last year. The dour report underscores the challenges young adults face now and foretell challenges they are likely to face as they get older. A young person's community is often closely tied to his or her success. The Opportunity Nation report tracked 16 factors — Internet access, college graduation rates, income inequality and public safety among them — and identified states that were doing well for its young people. Topping the list of supportive states are Vermont, Minnesota and North Dakota. At the bottom? Nevada, Mississippi and New Mexico. "Their destiny is too often determined by their ZIP code,"
Vital Signs: Expect More ‘Help-Wanted’ Signs in Future - Falling jobless claims, weak hiring, flat job openings, better job optimism among consumers. How to make sense of the mish-mash of jobs data? No worries, the Conference Board has done it for you. The board’s employment trend index is a compilation of 8 labor-related datapoints, including claims, real business sales and temporary-help workers. The ETI is designed to filter out the noise in the data to reveal the real trend in labor markets, says the board. In September, the index increased for the third consecutive month, rising 0.7%. The ETI is up 6.3% from its year-ago level, double the yearly pace seen this past spring. The board says seven of the index’s eight components contributed to the September increase. That broad improvement offers hope to jobseekers who might have been disappointed by Tuesday’s news from the U.S. Labor Department that September payrolls increased just 148,000. “In contrast to the gloomy headlines from Tuesday’s jobs report, the ETI signals upward momentum in labor market conditions in the months ahead,”
White House: Showdown Cost U.S. 120,000 Jobs - The White House on Tuesday put a finer point on how the government shutdown and threat of default harmed the U.S. economy, saying it shaved 0.25% off economic growth for the fourth quarter and, so far, has resulted in 120,000 fewer jobs being created. Jason Furman, chairman of the White House Council of Economic Advisers, said the shutdown and threat of default lowered sales, steel production and the number of mortgage applications filed. He said the council look at a variety of data, including consumer confidence surveys, sales growth figures and claims for unemployment insurance, to arrive at their number. The government was shut down for 16 days and reopened on Oct. 17amid a budget dispute in Washington that injected uncertainty into financial markets. The White House data took into account information only through Oct. 12, meaning the economic harm could grow once more information is available. This all just really underscores how unnecessary and harmful the shutdown and the brinksmanship was for the economy, why it’s important to avoid repeating it and instead consider jobs that are adding to growth, not subtracting,” Mr. Furman said from the White House.The new estimates come as the Labor Department said the U.S. added 148,000 jobs in September, fewer than expected, suggesting that the labor market stumbled heading into the latest budget battles in Washington. Mr. Furman said the White House would be releasing a report Tuesday evening with details of the data and how it was calculated. (Update: Here is the report.)
How the Furloughed Will Be Counted - There has been a lot of speculation about how the federal government shutdown will affect numbers for the October jobs report, due out Nov. 8. The jobs report is based on two different surveys — one of households, and one of employers — and it turns out that furloughed federal government workers will be treated as unemployed in the first survey but employed in the second. In other words, the temporary layoff of federal workers will probably increase the unemployment rate, but not (at least directly) depress the payroll job growth numbers. The key reason that furloughed federal workers affect the results of one survey but not the other has to do with the different ways the two surveys categorize workers who ultimately receive back pay. In the survey of households, workers who were furloughed during the entire week of Oct. 6-12 (the week that the survey asks respondents about) and therefore did not work at all will be classified as “unemployed, on temporary layoff.” According to an e-mail from a Bureau of Labor Statistics economist, for the purposes of the household survey, “workers on temporary layoff need not be actively looking for work to be counted as unemployed, and they are so classified regardless of whether or not they are, or expect to be, paid for the time they are on temporary layoff.” Got that? Even if you get back pay, if you didn’t spend any time working, you’re still considered unemployed by the household survey. That is not true in the establishment survey (which surveys nonfarm payroll employers).
Unemployment rates lower in August in most metropolitan areas: Unemployment rates were lower in August than a year earlier in 311 of the 372 metropolitan areas, higher in 47 areas, and unchanged in 14 areas, the U.S. Bureau of Labor Statistics reported today. Twenty-eight areas had unemployment rates of at least 10 percent, and 41 areas had rates of less than 5 percent. Two hundred and eighty-eight metropolitan areas had over-the-year increases in nonfarm payroll employment, 72 had decreases, and 12 had no change. The national unemployment rate in August was 7.3 percent, not seasonally adjusted, down from 8.2 percent a year earlier.Yuma, Ariz., and El Centro, Calif., had the highest unemployment rates in August, 32.6 percent and 26.3 percent, respectively. Bismarck, N.D., had the lowest rate, 2.4 percent. A total of 207 areas had August unemployment rates below the U.S. figure of 7.3 percent, 158 areas had rates above it, and 7 areas had rates equal to that of the nation.El Centro, Calif., had the largest over-the-year unemployment rate decrease in August (-5.6 percentage points). Twenty-two other areas had rate declines of at least 2.0 percentage points, and an additional 113 areas had declines between 1.0 and 1.9 points. Yuma, Ariz., had the largest over-the-year jobless rate increase (+2.0 percentage points). No other area had an increase larger than 0.8 percentage point.Of the 49 metropolitan areas with a Census 2000 population of 1 million or more, Riverside-San Bernardino-Ontario, Calif., had the highest unemployment rate in August, 10.4 percent. Minneapolis-St. Paul-Bloomington, Minn.-Wis., and Oklahoma City, Okla., had the lowest rates among the large areas, 4.7 percent each. Forty-three of the large areas had over-the-year unemployment rate decreases, five had increases, and one had no change. The largest rate decline occurred in Riverside-San Bernardino-Ontario, Calif. (-2.2 percentage points). No large area had a jobless rate increase greater than 0.3 percentage point.
McDonald’s helps workers get food stamps - McDonald's workers should have no problem qualifying for government programs like food stamps and heating assistance. The hamburger chain pretty much admits that in a call made by a worker to "McResource"-- a helpline set up for its workers. The advocacy group Low Pay is not Ok recorded a phone call made to the helpline by one McDonald's worker Nancy Salgado. The group circulated an edited video of the recording. McDonald's said the video was "not an accurate portrayal of the resource line" because it was "very obviously" edited. However, CNNMoney reviewed the full recording of the call. Salgado, who has worked at a Chicago McDonald's for 10 years and makes $8.25 an hour, asked the McResource representative a number of questions related to getting assistance to pay for her heating bill, her groceries and her sister's medical expenses. Salgado told the representative that she was recording the call for her sister. The helpline operator never asked Salgado how much she made per hour, and how many hours per week she worked beyond the fact that she was a full-time employee. But she said that Salgado "definitely should be able to qualify for both food stamps and heating assistance."
Video: McDonald’s tells workers to get food stamps - An audio recording released by labor activists Wednesday afternoon captures a staffer for McDonald’s’ “McResources Line” instructing a McDonald’s worker how to apply for public assistance. The audio – excerpted in the campaign video below – records a conversation between Chicago worker Nancy Salgado, a ten-year employee currently making the Illinois state minimum wage of $8.25, and a counselor staffing the company’s “McResources” 1-800 number for McDonald’s workers. The McResources staffer offers her a number to “ask about things like food pantries” and tells her she “would most likely be eligible for SNAP benefits” which she explains are “food stamps.” After Salgado asks about “the doctor,” the staffer asks, “Did you try to get on Medicaid?” She notes it’s “health coverage for low income or no income adults and children.” “It was really, really upsetting,” Salgado told Salon Wednesday, “knowing that McDonald’s knows that they don’t pay us enough, and we have to rely on this.” Noting that McDonald’s was “a billionaire company,” she asked, “how can they not afford to pay us?” In the full, fifteen-minute audio, which was provided to Salon by the campaign, the McResources counselor can also be heard telling Salgado she “definitely should be able to qualify for both food stamps and heating assistance.” She tells Salgado that having food stamps “takes a lot of the pressure off how much money you spend on groceries.” She also tells Salgado she may possibly qualify for Medicaid, though “I wouldn’t want to get your hopes up.”
What an 81% Increase in Food Stamp Use Really Means for the U.S. Economy: Each day, there's growing evidence that suggests the American economy isn't experiencing any economic growth. Unequal job creation is just one of the main topics discussed in the mainstream, but sadly, there are many other facts and figures that show a gruesome image of the U.S. economy as well. Consider this: since the financial crisis struck in the U.S. economy, the number of people using food stamps has been increasing. In 2007, there were 26.3 million Americans who were using food stamps; fast-forward to July 2013, and that number had enlarged to 47.6 million, an increase of almost 81% at the rate of roughly 13.5% per year. (Source: "Program Data," United States Department of Agriculture, October 21, 2013.) Food stamp use in the U.S. economy is a key indicator of economic growth, showing how Americans are relying on the government to help them with even food, the most basic of needs. This is very contradictory to economic growth; if there was growth in the U.S. economy, then we would see this number decline. Unfortunately, the horror story that is the U.S. economy just doesn't end there. Consumers in the U.S. economy aren't happy. According to the Thomson Reuters/University of Michigan's consumer sentiment index preliminary results, consumer confidence in the U.S. economy declined to a nine-month low in October. The index, which gauges how consumers feel in the U.S. economy, collapsed to 75.2 in October, from 77.5 in September. If it declines, it suggests consumers are not happy and, as a result, they will hold back on their spending, which hints that consumer spending will be headed downward. The U.S. economy has many problems that need to be fixed before any talks of real economic growth can begin. I have said many times in these pages before that for there to be prosperity in the U.S. economy, we have to see the standard of living for Americans increase. What I have just explained above does not support the argument for economic growth.
Some food stamp cuts take effect Nov. 1, and Congress is contemplating more cuts - On Nov. 1, Supplemental Nutrition Assistance Program (SNAP) participants will stop receiving a boost to their benefits. The boost was implemented in 2009 as part of the federal government's response to the recession and financial crisis. In addition, in Farm Bill legislation, Congress is considering proposals for moderate cuts ($4 billion over ten years in Senate legislation) and deep cuts ($40 billion over ten years in the House of Representatives). I do not think any of these cuts are a good idea. The economic recovery has not yet effectively reached the labor markets most important for low-income Americans. Still, given the state of things in Washington, I am resigned to the end of the 2009 benefit boost, and to cuts of the magnitude proposed in the Senate, which are proportional to cuts being made to other Farm Bill programs. I reserve the word "terrible" for the deeper cuts proposed in the House of Representatives, in part because of their magnitude, and in part because the proposals have been accompanied by intemperate language that seemed hateful toward the poor.
CHARTS: The Hidden Benefits of Food Stamps -- In September, just two days after a Census Bureau report showed that food stamps helped keep 4 million Americans out of poverty last year, the US House of Representatives approved a $39 billion cut to the program (known as the Supplemental Nutrition Assistance Program, or SNAP) over the next decade.The House proposal, now being negotiated along with smaller, yet still significant, Senate cuts of $4 billion, would result in 3.8 million people being removed from food stamps in 2014, according to the Congressional Budget Office. The haggling comes at a time when more than 15 percent of Americans remain mired in poverty, and more than half are at or near the poverty line when stagnant middle-class wages are matched against rising costs of living, US Census data show.Although the Republican-controlled House cuts are unlikely, given a promised veto from President Obama, food stamps will still be slashed by $5 billion on Nov. 1, when the 2009 Recovery Act that increased the aid along with other stimulus spending expires. The 13.6 percent temporary boost in food stamp dollars helped more than half a million Americans escape food insecurity, and millions more to climb out of poverty—4.7 million in 2011 alone, according the Center on Budget and Policy Priorities (CBPP).Eighty-three percent of food stamps go to households with children, seniors, and nonelderly people with disabilities. The Nov. 1 reduction means $46 less per month for a family of four and $11 less for a single person. In 2012, the average recipient got $133.41 in food stamps per month—that works out to $1.48 per meal. "Without the Recovery Act’s boost, SNAP benefits will average less than $1.40 per person per meal in 2014," reports the CBPP.
Who is the true beneficiary of welfare? or Please define: Entitlement - Understand that 0.0098 is the fraction of our GDP spent on welfare. That is 0.98% of our GDP. I did not include the medicaid/healthcare expenditures. Of course there was the often heard comment to this article about welfare recipients not contributing. No skin in the game, not contributing, blah, blah, blah….stuff for free. My first response and really the only needed response is “So what?” Is the welfare person really stopping you from getting your Mercedes?Well here’s the so what. The Public cost of low-wages in the Fast -food Industry“Nearly three-quarters (73 percent) of enrollments in America’s major public benefits programs are from working families. But many of them work in jobs that pay wages so low that their paychecks do not generate enough income to provide for life’s basic necessities.”Well, isn’t that special! But it gets even more special: More than half (52 percent) of the families of front-line fast-food workers are enrolled in one or more public programs, compared to 25 percent of the workforce as a whole.One in five families with a member holding a fast-food job has an income below the poverty line, and 43 percent have an income two times the federal poverty level or less. Even full-time hours are not enough to compensate for low wages. The families of more than half of the fast-food workers employed 40 or more hours per week are enrolled in public assistance programs.
CHART: Welfare Reform Is Leaving More In Deep Poverty - The economy is picking up in some parts of the country, but for those on the lowest rung of the economic ladder, life may be getting even harder. A new report from the Center on Budget and Policy Priorities (CBPP) looks at cash benefits provided under the Temporary Assistance for Needy Families (TANF) program, commonly known as "welfare." It finds that the value of monthly cash benefits that make up the fragile safety net for the poorest families with children has continued to decline steadily since the program was "reformed" in 1996. Back then, benefits weren't exactly generous, but they did manage to keep a whole lot of kids out of really deep poverty. Today, those benefits are almost nonexistent. The lucky few who are able to get cash assistance aren't getting enough to pay rent or keep the lights on in most states, and the value of the benefits has declined precipitously since 1996—even more so since the recession started. According to CBPP, there is not a state in the country whose welfare benefits are enough to lift a poor single mother with two kids above 50 percent of the poverty line, or about $9700 a year. In many southern states, TANF doesn't provide enough money to get a poor family much above 10 percent of the poverty line. What's especially troubling about these figures is that, as CBPP reports, TANF benefits are often the only form of cash assistance poor families receive. They may be getting food stamps, which definitely help their situations, but you can't buy diapers or pay the rent with food stamps
The number of families with children living in deep poverty has gone up 130 percent since 1996 - Funding for the Temporary Assistance for Needy Families block grant hasn’t increased since welfare was “reformed” in 1996. Since then, the number of families with children living on $2 a day or less has gone up nearly 130 percent. A new report from the Center on Budget and Policy Priorities report shows how inadequate assistance from the program has pushed America’s poorest families deeper into poverty during the same time period. As Stephanie Mencimer at Mother Jones notes, there isn’t a single state in the country where welfare benefits provide enough to bring a poor single mother with two kids above 50 percent of the poverty line. In many Southern states, the program doesn’t even provide enough assistance to get a poor family above 10 percent of the poverty line. Even when Supplemental Nutrition Assistance Program benefits are factored in, most families with no other income are still below the poverty line.
It’s Time to Bolster TANF - Cash assistance benefits for the nation’s poorest families with children fell again in purchasing power in 2013, we explain in our annual update of state benefits under the Temporary Assistance for Needy Families (TANF) program. Seven states increased TANF grant amounts last year — and encouragingly, no state cut benefits — but most kept family grant levels unchanged, allowing inflation to continue eroding the benefits’ value. TANF is often the only source of support for participating families and, without it, they would have no cash income to meet their basic needs. Yet, this critical safety net program supports fewer families — and its benefits are worth less — than ever before. Consider:
- In 2012, just 25 of every 100 poor families received TANF benefits, down from 68 of every 100 in 1996, the year policymakers created TANF to replace the former Aid to Families with Dependent Children program.
- TANF benefit levels are at least 20 percent below their 1996 levels in 37 states, after adjusting for inflation.
- As of July 1, 2013, every state’s benefits for a family of three with no other cash income were below 50 percent of the federal poverty line, measured by the Department of Health and Human Services 2013 poverty guidelines (see map). Benefits were below 30 percent of the poverty line in most states.
Chris Hedges: Let's Get This Class War Started - The rich are different. The cocoon of wealth and privilege permits the rich to turn those around them into compliant workers, hangers-on, servants, flatterers and sycophants. Wealth breeds a class of people for whom human beings are disposable commodities. Colleagues, associates, employees, kitchen staff, servants, gardeners, tutors, personal trainers, even friends and family, bend to the whims of the wealthy or disappear. Once oligarchs achieve unchecked economic and political power, as they have in the United States, the citizens too become disposable. The public face of the oligarchic class bears little resemblance to the private face. I had classmates whose fathers—fathers they rarely saw—arrived at the school in their limousines accompanied by personal photographers (and at times their mistresses), so the press could be fed images of rich and famous men playing the role of good fathers. I spent time in the homes of the ultra-rich and powerful, watching my classmates, who were children, callously order around men and women who worked as their chauffeurs, cooks, nannies and servants. When the sons and daughters of the rich get into serious trouble there are always lawyers, publicists and political personages to protect them—George W. Bush’s life is a case study in the insidious affirmative action for the rich. The rich have a snobbish disdain for the poor—despite well-publicized acts of philanthropy—and the middle class. These lower classes are viewed as uncouth parasites, annoyances that have to be endured, at times placated and always controlled in the quest to amass more power and money. My hatred of authority, along with my loathing for the pretensions, heartlessness and sense of entitlement of the rich, comes from living among the privileged. It was a deeply unpleasant experience. But it exposed me to their insatiable selfishness and hedonism. I learned, as a boy, who were my enemies.
The Disability-Industrial Complex - Americans on average are healthier and living longer. U.S. jobs on average are moving away from hard physical labor and toward service jobs and brainwork. And yet, the percentage of Americans who are officially too disabled to work has been rising for a quarter-century. Tad DeHaven lays out some of the trends in "The Rising Cost of Disability Insurance," Here's a figure showing the share of those receiving federal disability payments per 1,000 U.S. workers. Back in the mid-1980s, there were about 30 recipients of disability for every 1,000 workers; now, it's up to 75 recipients of disability for every 1,000 workers. . As you might guess, this sharp rise in disability has less to do with a sharp drop in levels of physical health, and more to do with a sharp rise in people who are disabled with "nonexertional conditions," like someone who has a high level of depression or anxiety, or who experiences pain, often back pain, from a "musculoskeletal condition." These are real conditions, and they are conditions where is can be hard to verify their severity. DeHaven points out that the National Academy of Medicine estimates that 116 million Americans suffer from some form of chronic pain, and the National Institute of Mental Health estimates that 61 million Americans suffer from some mental disease. Of course, most people with these conditions manage to continue their day-to-day functioning, including holding a job. The Social Security Disability Insurance program is funded by a payroll tax of 1.8 percent of income up to a certain level, which is $113,700 this year. With the rising number of recipients, it's no wonder that the SSDI trust fund is even now dropping below the minimum level for financial solvency and will probably be empty in a few years, according to the annual report of the system's actuaries. (The top line shows the path of the Social Security trust fund, with three scenarios for the future; the bottom line shows the path of the disability insurance trust fund, again with three scenarios.)
California v. Red States, What Causes Growth, and the Great Stagnation - Lately there has been a small cottage industry of California v. Texas comparisons, with California getting the apparent short end of the stick. California has been the punching bag as long as I can remember. Texas usually plays the role of the victor, but every so often another state is put up as the shining paragon. Over the years I’ve seen California get the negative comparison treatment relative to Colorado (mostly in the 1980s), North Carolina (mostly in the 1990s), Tennessee (a few times over the decades), and even (lately) North Dakota. The graph below shows the indexed real state GDP for each of these states using state GDP and deflator data from the Bureau of Economic Analysis (www.bea.gov). Figures go back to 1963: It’s fairly obvious where the story comes from. California’s growth has looked anemic, at least relative to Colorado, North Carolina and Texas. So far the standard narrative fits the data. The BEA’s data helpfully breaks out components of the GDP by line. One such line is the state and local spending’s contribution to GDP. The BEA also provides a deflator for that spending. Here’s indexed real state and local spending looks like:As the graph shows, the growth in state and local government spending in the socialist republic of California has exploded relative to the other states, thus explaining the anemic California’s anemic growth. Wait, no, that’s not what the graph shows at all. Colorado, North Carolina, and Texas, the three states which grew faster than California, all also had much faster increases in the growth rate in state and local government spending. In general, except for the period in which the resource boom in North Dakota in the last few years, a casual look at the graphs indicates that the indexed state and local spending moves proportionally to the indexed state GDP.
Puerto Rico’s debt crisis (The Economist) ALTHOUGH investors are now less jittery about a possible default by the American Treasury, they are rightly still nervous about a drama unfolding in the market for state and local debt. Since May, yields on bonds issued by Puerto Rico, a self-governing American territory, have shot up to between 8% and 10%, despite their (barely) investment-grade rating and tax-exempt interest. Puerto Rico carries outsized importance in America’s almost $4 trillion municipal-debt market, which includes bonds issued by states and other local authorities as well as by cities. The island’s current debt, between $52 billion and $70 billion (depending on how it is measured), is the third-largest behind California’s and New York’s, despite a far smaller and poorer population. In America’s 50 states the average ratio of state debt to personal income is 3.4%. Moody’s, a ratings agency, puts Puerto Rico’s tax-supported debt at an eye-watering 89% (see chart). Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes—of particular appeal to investors in high-tax states. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments in similar penury.
Quality Preschool Is the 'Most Cost-Effective' Educational Intervention - For an upper-middle-class family like mine, enrolling my kids in a half-day nursery school program with all of its benefits (socialization and school readiness, among them) was a no-brainer.Now, amid a highly contentious national debate about whether preschool should be made available to all children, a new study provides a mountain of evidence that my parental instincts were right on the money. Literally. High-quality preschool programs are “the most cost-effective educational interventions and are likely to be profitable investments for society as a whole,” concludes the study, financed by the Foundation for Child Development and produced in collaboration with the Society for Research in Child Development. The report, written by an interdisciplinary group of 10 early-childhood experts, is actually a “research brief” — an overview of “the most recent rigorous research” on a hot-button issue. Among its key findings:
- •Large-scale, high-quality public preschool programs can have substantial impacts on children’s early learning.
- •Quality preschool education can benefit middle-class children as well as disadvantaged children, though children from low-income families benefit more.
- •Quality preschool education is a profitable investment, with $3 to $7 saved for every $1 spent.
How a Radical New Teaching Method Could Unleash a Generation of Geniuses - Sugata Mitra was chief scientist at a company in New Delhi that trains software developers. His office was on the edge of a slum, and on a hunch one day, he decided to put a computer into a nook in a wall separating his building from the slum. He was curious to see what the kids would do, particularly if he said nothing. He simply powered the computer on and watched from a distance. To his surprise, the children quickly figured out how to use the machine. Over the years, Mitra got more ambitious. For a study published in 2010, he loaded a computer with molecular biology materials and set it up in Kalikuppam, a village in southern India. He selected a small group of 10- to 14-year-olds and told them there was some interesting stuff on the computer, and might they take a look? Then he applied his new pedagogical method: He said no more and left. Over the next 75 days, the children worked out how to use the computer and began to learn. When Mitra returned, he administered a written test on molecular biology. The kids answered about one in four questions correctly. After another 75 days, with the encouragement of a friendly local, they were getting every other question right. “If you put a computer in front of children and remove all other adult restrictions, they will self-organize around it,” Mitra says, “like bees around a flower.” A charismatic and convincing proselytizer, Mitra has become a darling in the tech world. In early 2013 he won a $1 million grant from TED, the global ideas conference, to pursue his work. He’s now in the process of establishing seven “schools in the cloud,” five in India and two in the UK. In India, most of his schools are single-room buildings. There will be no teachers, curriculum, or separation into age groups—just six or so computers and a woman to look after the kids’ safety. His defining principle: “The children are completely in charge.”
Study: In 17 US States the Majority of Public School Students Are Poor - In 17 U.S. states, the majority of public school students are low-income. But the poverty isn’t distributed evenly across the country, according to a new report from Southern Education Foundation. Thirteen of the states are in the South, and the other four are in the West. The situation is dire. Researchers measure the landscape by the numbers of students who qualify for free or reduced lunch, a rough proxy for gauging poverty. Students are eligible for free or reduced meals if their family household income is 185 percent beneath the poverty threshold. In 2011, a student from a single-parent home with an annual income of $26,956 or less would qualify for free or reduced lunch. In Mississippi, 71 percent of public school students qualify for free and reduced lunch. In New Mexico it’s 68 percent; in California 54; in Texas it’s 50 percent. The recession that began in 2008 certainly exacerbated trends, but childhood poverty is a problem much older than the recession. Between 2001 and 2011, the numbers of children in public schools who classified as low-income grew 32 percent, or by some 5.7 million kids. As a result, by 2011 low-income students made up nearly half of all public school students. While 30 percent of white students attend schools where the majority of students are low-income, 68 percent of Latino students attend schools classified as such. And 72 percent of black public school students go to schools where the majority of students are low-income.
Maps of Economic Disaster - America has a problem, a big one, the middle class has been wiped out. It is economic genocide and the target is most of America. The statistics just continue to pour in on how poorly America is doing. Even as the great manufactured crisis is over in D.C., the political agenda once again has nothing to do with helping America's middle class. Why jobs are not job #1 by this government we do not know. To drive home just how bad it is below we should some damning maps. The Southern Education Foundation has a new report showing the percentage of low income students in public schools from 2011. In 2010 and 2011 there was a new record set, the majority of kids in public schools in the West are poor. Below is their map showing in the South and West, the majority of students are low income. In other words, America is now raising a nation of poverty stricken kids. A majority of public school children in 17 states, one-third of the 50 states across the nation, were low income students – eligible for free or reduced lunches – in the school year that ended in 2011. Thirteen of the 17 states were in the South, and the remaining four were in the West. Since 2005, half or more of the South’s children in public schools have been from low income households.Low income is defined as below 130% of the poverty line and these kids qualify for a free lunch. Poverty also significantly impacts reading test scores, school opportunities and the ability to go to college. When one just looks at cities, the situation is much worse. Kids in public schools who are low income account for 59.8% on average of all students in K-12 public schools. Any urban area with a population greater than 100,000 is teeming with America's poor. Mississippi had the highest rate of low income students, 83%, In New Jersey cities 78% of the students are poor and Louisiana, Illinois and Oklahoma all low income rates of greater than 70% for their K-12 students.
The United States, Falling Behind - New York Times Editorial - Researchers have been warning for more than a decade that the United States was losing ground to its economic competitors abroad and would eventually fall behind them unless it provided more of its citizens with the high-level math, science and literacy skills necessary for the new economy. Naysayers dismissed this as alarmist. But recent data showing American students and adults lagging behind their peers abroad in terms of important skills suggest that the long-predicted peril has arrived. A particularly alarming report on working-age adults was published earlier this month by the Organization for Economic Cooperation and Development, a coalition of mainly developed nations. The research focused on people ages 16 to 65 in 24 countries. It dealt with three crucial areas: literacy — the ability to understand and respond to written material; numeracy — the ability to use numerical and mathematical concepts; and problem solving — the ability to interpret and analyze information using computers. Americans were comparatively weak-to-poor in all three areas. In literacy, for example, about 12 percent of American adults scored at the highest levels, a smaller proportion than in Finland and Japan (about 22 percent). In addition, one in six Americans scored near the bottom in literacy, compared with 1 in 20 adults who scored at that level in Japan. American numeracy skills were termed “very poor.” The United States outperformed only two comparison countries: Italy and Spain. Nearly one in three Americans scored near the bottom in numeracy. That Americans were slightly below average in problem solving using computers was especially discouraging.
To Compete, America Needs 6-Year High Schools - Back in April of 2012, I wrote a column touting a 6-year high school in Brooklyn as a model for a new kind of secondary education. In his State of the Union Address earlier this year, the President lauded the P-tech school, which is a collaborative effort between New York public schools and City University of New York and IBM, which donates time, expertise and mentors, but no money. Student at P-tech, many of whom will be the first in their families to graduate from high school, will come out with not only a high school diploma, but also an associate’s degree in a high-tech concentration like computer science or engineering. As the President put it, “We need to give every American student opportunities like this.” In fact, there’s a strong argument to be made that P-tech should be the future of high school nationwide. Hundreds of billions of dollars of government money, as well as countless man-hours of time and energy are spent trying to get kids to graduate from high school. But the truth is that a high school degree is, in today’s economy, largely worthless. Of the 14 million new jobs that will be created in this country over the next decade, nearly all will require at least a 2-year associates degree.
The Middle Class Gets Wise - Five years after the Lehman collapse triggered the deepest recession in eight decades, the middle class may be solving the vexing problems of income inequality and stalled wages on its own. Faced with unemployment and dim job prospects, Americans made one significant change that should alter their fortunes and those of the middle class for decades: they went back to school. During the recession, there has been a sharp surge in the number of Americans who are getting a college degree. For much of the last several decades young Americans, particularly young men, had shied away from college. As a share of the population, there were actually more male college degree holders among those ages 25 to 29 in 1976 than there were in 2006. Between 2000 and 2006, the share of all Americans ages 25 to 29 with a four-year college degree dipped by 0.7 percentage points, with men leading the decline, falling from 27.9 percent to 25.3 percent. Americans have now reversed that decline by going to school in unprecedented numbers. In 2011, there were 3.2 million more people enrolled in higher education than there were in 2006. This 18 percent increase in enrollment was the largest such jump since the end of the Vietnam War.
Let Them Eat MOOCs - I am not unsympathetic to the argument for MOOCs and their derivatives — that many people who need knowledge and skills don’t have the resources to acquire them in those expensive and inefficient bundles called “universities.” Nor am I blind to the problems facing business schools and higher education at large, or lacking in my enthusiasm for technology. I am not immune to flattery either.I can easily concede that for many topics, the right numbers and platform may foster online learning and interactions as meaningful as those that take place in the average classroom or seminar room, specially for students and faculty accustomed to living part of their social lives online. And I believe that the conscious intent of MOOC proselytizers is altruistic.However, as the Princeton sociologist who discontinued his popular MOOC illustrated, if you are a prominent faculty member at an elite university the idealistic prospect of spreading free knowledge to the masses may distract you from pondering your MOOC’s more troublesome potential social consequences.MOOCs can be used as a cost-cutting measure in already depleted academic institutions and become another weapon against battered faculty bodies. They may worsen rather than eliminate inequality by providing credentials empty of the meaning and connections that make credentials valuable. Worst of all, they may become a convenient excuse for giving up on the reforms needed to provide broad access to affordable higher education. The traditional kind, that is, which for all its problems still affords graduates higher chances of employment and long-term economic advantages.
What exactly do student evaluations measure? - We don’t measure teaching effectiveness. We measure what students say, and pretend it’s the same thing. We dress up the responses by taking averages to one or two decimal places, and call it a day. But what is effective teaching? Presumably, it has something to do with learning. An effective teacher is skillful at creating conditions that are conducive to learning. Some learning will happen no matter what the instructor does. Some students will not master the material no matter what the instructor does. How can we tell how much the instructor helped or hindered learning in a particular class? Measuring learning is not simple: Course grades and exam scores are poor proxies, because courses and exams can be easy or hard. If exams were set by someone other than the instructor—as they are in some universities—we might be able to use exam scores to measure learning.But that’s not how our university works, and there would still be a risk of “teaching to the test.”Performance in follow-on courses and career success may be better measures of learning, but time must pass to make such measurements, and it is difficult to track students over time. Moreover, relying on long-term performance measures can complicate causal inference. How much of someone’s career success can be attributed to a single course?
Higher-education chief: Student-loan debt up 27% in last three years -- The amount of student-loan debt for graduates of public colleges and universities in Massachusetts has increased by 27 percent over the past three years, Commissioner of Higher Education Richard Freeland told a legislative subcommittee Monday. "Over the past 10 years, as the state has struggled with its own fiscal challenges, funding for our public colleges and universities has simply not kept up with growing enrollments and rising costs, which has resulted in a steady shift of the cost of education from the state to students," Freeland said, according to his prepared remarks. The Subcommittee on Student Loans and Debt, an offshoot of the Committee on Higher Education, has been discussing educational borrowing around the state, and met Monday at Suffolk University, where Freeland testified. Debt aversion among the children of immigrants and low-income college students is "linked" to lower participation in higher education, Freeland said in his prepared speech. "My public college presidents tell me, for example, that more and more students are attending part time rather than full time, and stretching out their time to degree, in order to deal with increased costs," Freeland said. "Even more concerning, some students are almost certainly being priced out of our system because it has simply become too costly although we do not have hard statistics that show significant reductions in college participation among low-income students."
The Rise of an American Debtcropper System for the Young - Yves Smith - Readers have often been using the term “neofeudalism” to describe the outlines of the new economic order, in which the uber wealthy and a thin cadre of their advisors, managers, and other elite professionals do well, with a network of less lofty managers helping oversee and orchestrate the provision of services to the broad base of the public, and they struggle to eke out a meager existence. Debt appears to be the “one ring that rules them all” of this emerging order. And if that is the case, it’s likely to be much more like the old sharecropper system of the post Civil War era, where poor whites and blacks were kept on a debt treadmill that turned them into slaves in all but name. Even though readers of this blog recognize the individual pieces of the hardships facing young people, I’m not certain older people can readily grasp the totality. For instance, going to college is seen as being for people who grew up with college educated parents as a basic requirement; it’s a marker of accomplishment, a necessary but no longer sufficient condition for entry into the middle class, and at least in some circles, still seen as desirable in and of itself (as in an opportunity to gain knowledge and culture, as quaint as those ideas may be). High school kids face a decision they are not well equipped to make. Most people suffer from optimism bias, and teenagers may feel not going to college is an admission of failure. So the short form is the system is increasingly set up to load young people up with debt. And it’s not just student loans. This comes from a post by EshaC, a college student who traveled to seven cities across the country at the behest of her credit union employer to talk to students about student loans, credit cards, credit scores, and budgeting. The article is written cautiously, but the author casts doubt on claims like “nearly 50% of students know how to use a credit card effectively”. What is “effectively”? They can swipe and sign?
The Young, the Shutdown, Austerity, and Wealth - I can not help but wonder if Friedman takes delight in the predicament of the Young and Baby Boomers as he writes about Druckenmiller excursions on to college campuses . Tom Friedman writes in the NYT about the young being screwed by the baby boomer generation and trumpets for rebellion against the kicking of the can down the road of higher costs and taxes due to Social Security, Medicare, Medicaid, and entitlements. Tom Friedman’s NYT article “Sorry Kids, We Ate It All” masks the real threat to student and their productivity going into the future. “as our politicians run for the hills the minute someone accuses them of ‘fixing the deficit on the backs of the elderly’ or creating ‘death panels’ to sensibly allocate end-of-life health care. Could this time be different? Short of an economic meltdown, there is only one thing that might produce meaningful change: a mass movement for tax, spending and entitlement reform led by the cohort that is the least organized but will be the most affected if we don’t think long term — today’s young people.” “Sorry Kids, We Ate It All” The young face greater issues and problems with the limitations placed upon them by student loans and the lack of jobs than a fully funded Social Security and partially funded Medicare. 66% of the $1.3 Trillion and growing student loan deficit is owned by those 39 years and younger with little recourse other than to pay it off, die, become disabled, or go with little or no income for the next 20-25 years. Fix this deficit which blocks their ability to invest in the future and increase economic growth in a demand-led economy and the younger generations will thrive. There is far more danger in this student deficit than small tweaks of payroll wage tax increases over a 10-20 year year period. Fully funded entitlements and healthcare are not the danger this cohort of 39 and under faces when compared to the increased risk assigned to domestic programs such as Student Loans through the usage of Fair Market Valuation as advocated by Elmendorf of the CBO, Delisle of the New America Foundation, and Richwine of Heritage as well as many well heeled taxpayers. FMV will only serve to assign higher risk to programs increase the interest rates paid.
Americans’ debt growing faster than retirement savings, report warns – A majority of Americans with 401(k)-type savings accounts are accumulating debt faster than they are setting aside money for retirement, further undermining the nation’s troubled system for old age saving, a new report has found. Three in 5 workers with defined contribution accounts are “debt savers,” according to the report released Thursday, meaning their increasing mortgages, credit card balances and installment loans are outpacing the amount of money they are able to save for retirement. The imbalance is expanding even as policy makers are encouraging people to set aside more by offering generous tax breaks and automatically enrolling workers in retirement accounts that in some cases automatically escalate the amount of money over time. Currently, workers with retirement savings accounts put aside more than 11 percent of their pay for retirement — 5 percent in their own accounts, and 6.2 percent in Social Security. Despite that — and despite the $2.5 trillion the report says employers have poured into defined contribution accounts from 1992 to 2012 — the retirement readiness of most Americans has been slipping, according to the report by HelloWallet, a District of Columbia firm that offers technology-based financial advice to workers and conducts research of economic behavior.
60% Of 401(k) Participants Accumulated More Debt Than Retirement Savings -- The average 401(k) and other defined contribution (DC) plan participant now defers over 8% of their annual income toward retirement savings through their plan and social security taxes, making it one of the largest expenses for households. However, as HelloWallet found, retirement readiness remains stubbornly low: the typical worker near retirement only has about 2 years of replacement income saved, or about 15 years short of the median lifespan post-retirement. One explanation for the stubbornly low retirement readiness of workers may be an increase in household debt. With more household income going to pay off debt, households may have less money to save and face higher costs of living in retirement. In fact, over 60% of workers accumulated more debt than they contributed to retirement savings between 2010 and 2011. The study, which analyzed consumer finance data from the Federal Reserve and the U.S. Census Bureau, underscores the need for retirement plan sponsors to provide participants with holistic, independent financial guidance. Without that support, increases in 401(k) and other DC account balances will be off-set by growing liabilities on the other side of a participant's ledger. The research finds that 20% of participants in 401(k) retirement programs added more credit card debt to their family balance sheet than they contributed to retirement savings. Other findings in the research include:
- Monthly debt payments for households near retirement increased by 69% between 1992 and 2010, now totaling $.22 for every $1.00 earned by DC plan participants near retirement.
- DC participants who accumulate debt faster than retirement savings have 50% less of their annual income saved for retirement compared to DC participants who contribute more to their retirement funds than they accumulate in debt.
- Most DC participants who accumulate debt faster than retirement savings are over 40 years old, college educated, earn over $50,000, and have insufficient emergency savings.
One-third of Americans see a lifetime of work - To retire, or not to retire, that is the question. Wells Fargo asked it, and Americans answered–a third said it’s the latter.According to the bank’s annual retirement study, released Wednesday, 37% of respondents with incomes between $25,000 and $100,000 said they expected to work until they physically could not work anymore–either because illness, or death stopped them. The survey also found that 34% anticipated working until at least age 80, up from 25% two years ago. The trend is due in large part to a lack of confidence that the economy and stock market will allow middle class Americans to save and plan for retirement. Fifty-nine percent reported everyday bills as their chief financial concern, while 42% said it wasn’t possible to pay them and save at the same time.
- WALLACE: Why can’t you just make a deal, short-term spending for long-term entitlement reform — which, Senator, you support and President Obama support. You have supported the idea of some entitlement reform.
- DURBIN: That’s right. I do, and I’ll tell you why — because Social Security is going to run out of money in 20 years. I want to fix it now, before we reach that cliff. Medicare may run out of money in 10 years, let’s fix it now. And that means addressing the skyrocketing cost of health care. That’s what ObamaCare is focused on, and yet, the Republicans want nothing to do with it. If we don’t focus on the health care and dealing with the entitlements, the baby boom generation is going to blow away our future. We don’t want to see that happen. We want to make sure that Social Security and Medicare are solid.
The “. . . may run out of money. . . . ” and “. . . dealing with entitlements. . . “ memes, in reply to Chris Wallace’s question together suggest that a deal trading increased revenues for Social Security and other entitlement cuts is acceptable to him. So, Durbin’s argument is that because Social Security Trustee and CBO projections, based on very pessimistic economic growth projections for the whole period, show a shortfall in the Social Security “Trust Fund” in 20 years, it is acceptable to make entitlement cuts now if the Democrats can get increased revenue from higher taxes, as if entitlement “reform” were the only way to meet the perceived Social Security solvency problem. But who would it be acceptable to? 82 percent of Americans oppose cuts to Social Security to reduce the deficit. It’s pretty clear that making cuts to Social Security would not be acceptable to the American people, generally, and probably even less acceptable to Senator Durbin’s heavily Democratic constituency in Illinois.
Another billionaire is predicting doom. Ignore him. - Hedge fund billionaire Stanley Druckenmiller is really, really worried about the future of the United States. He is doing an event at Georgetown next week making the case that entitlement spending will form the next mega-financial crisis, and not for the first time.This kind of quasi-apocalyptic talk is breathtakingly common. His is of a thread with a lot of commentary that suggests that the whole world economy is just a shell game being propped up by profligate government spending and central bank money-printing, that it’s all a scam that will implode soon enough. [T]here are Druckenmiller’s arguments on Social Security obligations as the trigger of the next global financial crisis. The poster advertising Druckenmiller's speech last week argues that the "true national debt" is more than $200 trillion. What the sponsor seems to be doing is looking at the liabilities side of the balance sheet, but not the asset side. Yes, Social Security and Medicare are on the hook to pay out a lot of money in the future. But they are also on track to collect many trillions in tax revenue in the future.
Medicaid and the Incentive to Work - The Affordable Care Act is — to state the obvious — aimed at bolstering insurance coverage in the United States. But the law is so big that it will necessarily have widespread economic ramifications, economists think, including an effect on the labor market. For instance, the Congressional Budget Office has surmised that the law may lead more workers to choose early retirement, since they would not fear losing their insurance coverage if they did so. It might also lead certain employers to hire more part-time workers, to avoid the so-called “employer mandate.” But economists and policy researchers have been divided on the effect that the Medicaid expansion in the health care law might have on workers. “People have made the argument that expanding Medicaid could be great stimulus, by improving people’s health and productivity and security, and making it easier for them to find employment,” . “Others have argued the opposite: People were seeking employment in order to get access to health insurance, and they might stop working” once covered by law. A new paper – the latest to come out of the famed Oregon Health Insurance Experiment — finds that neither of those arguments seems to hold up. Medicaid turns out to have little short-term effect on the labor-force participation or earnings of low-income Americans.
Lousy Medicaid Arguments, by Paul Krugman - For now, the big news about Obamacare is the debacle of HealthCare.gov, the Web portal through which Americans are supposed to buy insurance on the new health care exchanges. For now, at least, HealthCare.gov isn’t working for many users. It’s important to realize, however, that this botch has nothing to do with the law’s substance, and will get fixed. After all, a number of states have successfully opened their own exchanges, doing for their residents exactly what the federal system is supposed to do everywhere else. Connecticut’s exchange is working fine, as is Kentucky’s. New York, after some early problems, seems to be getting there. So, a bit more slowly, does California. In other words, the technical problems, while infuriating — heads should roll — will not, in the end, be the big story. The real threat remains the effort of conservative groups to sabotage reform, especially by blocking the expansion of Medicaid. This effort relies heavily on lobbying, lavishly bankrolled by the usual suspects, including the omnipresent Koch brothers. But it’s not just money: the right has also rolled out some really lousy arguments. And I don’t just mean lousy as in “bad”; I also mean it in the original sense, “infested with lice.”
Lies, Damned Lies, and Fox News - Paul Krugman - The other day Sean Hannity featured some Real Americans telling tales of how they have been hurt by Obamacare. So Eric Stern, who used to work for Brian Schweitzer, had a bright idea: he actually called Hannity’s guests, to get the details. Sure enough, the businessman who claimed that Obamacare was driving up his costs, forcing him to lay off workers, only has four employees — meaning that Obamacare has no effect whatsoever on his business. The two families complaining about soaring premiums haven’t actually checked out what’s on offer, and Stern estimates that they would in fact see major savings. You have to wonder about the mindset of people who go on national TV to complain about how they’re suffering from a program based on nothing but what they think they heard somewhere. You might also wonder about what kind of alleged news show features such people without any check on their bona fides. But then again, consider the network.
AP sources: 476,000 applications filed for Obamacare; officials won’t give enrollment figures — Administration officials say about 476,000 health insurance applications have been filed through federal and state exchanges, the most detailed measure yet of the problem-plagued rollout of President Barack Obama’s signature legislation. However, the officials continue to refuse to say how many people have actually enrolled in the insurance markets. Without enrollment figures, it’s unclear whether the program is on track to reach the 7 million people projecting by the Congressional Budget Office to gain coverage during the six-month sign-up period.Obama’s advisers say the president has been frustrated by the flawed rollout. During one of his daily health care briefings last week, he told advisers assembled in the Oval Office that the administration had to own up to the fact that there were no excuses for not having the website ready to operate as promised. The president is expected to address the problems on Monday during a health care event at the White House. Cabinet members and other top administration officials will also be traveling around the country in the coming weeks to encourage sign-ups in areas with the highest population of uninsured people. The first three weeks of sign-ups have been marred by a cascade of computer problems, which the administration says it is working around the clock to correct. The rough rollout has been a glaring embarrassment for Obama, who invested significant time and political capital in getting the law passed during his first term.
Health Law Is a New Front in Fight Against Infant Mortality - As the health care bill that was to become known as Obamacare was making its way through Congress in 2009, Senator Jon Kyl, Republican of Arizona, sought to block the requirement that health insurers cover a minimum set of health benefits determined by the federal government. “I don’t need maternity care,” said Senator Kyl, who retired from the Senate last year at the age of 70. “Requiring that on my insurance policy is something that I don’t need and will make the policy more expensive.” Mr. Kyl’s proposed amendment embodied the conservative view: The Affordable Care Act that passed Congress in 2010 is an unacceptable intrusion into the private decisions of American families and businesses. The Senate Finance Committee, by a vote of 14 to 9, rejected the amendment, opting for a different approach that could change, in subtle but profound ways, the nature of the American social contract. Pregnant women, across the country and anywhere along the income spectrum, will for the first time have guaranteed access to health insurance offering a minimum standard of care that will help keep their babies alive.
For thousands, keeping your old health insurance policy isn’t an option— Health insurance companies are sending notices of cancellation to hundreds of thousands of people who buy their own coverage, frustrating some consumers who want to keep what they have and forcing others to buy more expensive policies.Insurers say the cancellations are necessary because the policies fall short of what the Affordable Care Act requires starting Jan. 1. Most are ending policies sold after the law passed in March 2010. At least a few are canceling plans sold to people with pre-existing medical conditions. By all accounts, new policies to replace the canceled ones offer consumers better coverage, in some cases for comparable cost – especially after the inclusion of federal subsidies for those who qualify. They cover 10 “essential” benefits the law now requires, including prescription drugs, mental health treatment and maternity care, and they generally have lower thresholds for what consumers will have to spend before the plan picks up the full cost of treatment.But the cancellation notices, which began arriving in August, have shocked many consumers in light of President Barack Obama’s promise that people could keep their plans if they liked them. “I don’t feel like I need to change, but I have to,” said Jeff Learned, who must find a new plan for his teenage daughter, who has a health condition that has required multiple surgeries.
Out of Network, Not by Choice, and Facing Huge Health Bills "He told us to go home, get packed and get to the hospital, where they will be waiting for us,” Ms. D’Andrea knew she had already selected a comprehensive plan a few years earlier. She gave her insurance card to the hospital staff, but her daughter, Sienna, was ultimately treated by several doctors who were not in their plan’s network. “We assumed that because we showed them our insurance card and nobody had any objections, we were covered,” “But I also wasn’t in the mind-set to ask, or to have them stop doing heart surgery on her.” Sienna left the hospital in early March, two weeks after a successful operation repaired her aorta. And just a few weeks later, after vomiting through the night, she spent another 17 days in the hospital. As the family finally arrived back home in mid-April, piles of bills from out-of-network doctors started to roll in. It’s not uncommon for patients who visit an in-network hospital to learn later that they’ve been treated by out-of-network providers, resulting in thousands of dollars in charges. And while the Affordable Care Act generally caps what consumers must spend out of pocket when using providers within their plan’s network, it doesn’t protect consumers from large bills from outside providers. Those providers may be free to charge the consumer for the balance of the bill that the insurer did not pay, known as “balance billing.” “When the doctors work in the hospital, not for the hospital, which is often the case, they’re not obliged to join the same networks as the hospital,” said Karen Pollitz, a senior fellow at the Kaiser Family Foundation. “And patients generally have no say in selecting those doctors. Sometimes the patients don’t even see them — for instance, if their X-rays get sent to a radiologist or their tissue to a pathologist,” patients won’t even know the name of that doctor until the bill comes.”
Obamacare sites pirated copyrighted web scripts - The list of complaints waged at the White House over its Healthcare.gov site continues to grow, but the latest incident involving the online home of the Affordable Care Act is one that could end with legal action being taken. The main “Obamacare” website has been marred with bugs and glitches since it went online over two weeks ago, and the problems are still piling up. Now according to The Weekly Standard, the Department of Health and Human Services could be sued by the British developers who coded part of the site but were never credited. Standard reporter Jeryl Bier noted on Thursday that one of the scripts used in powering Healthcare.gov is called DataTables, and it was released by a British company called SpryMedia on condition that anyone who utilized the open-source software provide proper attribution. “DataTables is free, open source software that you can download and use for whatever purpose you wish, on any and as many sites you want,” Bier quotes from SpryMedia’s website. “It is free for you to use! DataTables is available under two licenses: GPS v2 license or a BSD (3-point) license, with which you must comply (to do this, basically keep the copyright notices in the software).” HHS, apparently, didn’t read that memo and now might end up in hot water. Bier has provided a number of examples showing how the Obama administration essentially pilfered the code piece-by-piece, except for the attribution that its developers insisted be included.
Contractors See Weeks of Work on Health Site - Federal contractors have identified most of the main problems crippling President Obama’s online health insurance marketplace, but the administration has been slow to issue orders for fixing those flaws, and some contractors worry that the system may be weeks away from operating smoothly, people close to the project say. Administration officials approached the contractors last week to see if they could perform the necessary repairs and reboot the system by Nov. 1. However, that goal struck many contractors as unrealistic, at least for major components of the system. Some specialists working on the project said the online system required such extensive repairs that it might not operate smoothly until after the Dec. 15 deadline for people to sign up for coverage starting in January, although that view is not universally shared. In interviews, experts said the technological problems of the site went far beyond the roadblocks to creating accounts that continue to prevent legions of users from even registering. Indeed, several said, the login problems, though vexing to consumers, may be the easiest to solve. One specialist said that as many as five million lines of software code may need to be rewritten before the Web site runs properly. “The account creation and registration problems are masking the problems that will happen later,” said one person involved in the repair effort. Millions of Americans have spent countless hours in frustration trying to use the federal Web site, healthcare.gov, and its extensive problems have become a political crisis for the administration, providing new opportunities for Republicans who want to roll back the health care law.
Sebelius: President didn't know of Obamacare website's woes in advance - -- President Barack Obama didn't know of problems with the Affordable Care Act's website -- despite insurance companies' complaints and the site's crashing during a test run -- until after its now well-documented abysmal launch, the nation's health chief told CNN on Tuesday. In an exclusive interview with Health and Human Services Secretary Kathleen Sebelius, CNN's Dr. Sanjay Gupta asked when the President first learned about the considerable issues with the Obamacare website. Sebelius responded that it was in "the first couple of days" after the site went live October 1. "But not before that?" Gupta followed up. To which Sebelius replied, "No, sir." Sebelius admitted that there is concern in her department and the White House over the technical debacle surrounding the website rollout, saying "no one could be more frustrated than I am and the president." The site was supposed to make it simple for people to search and sign-up for new health care policies starting on October 1, but instead it's been clunky and, at times, inoperable. "We're not at all satisfied with the workings of the website," Sebelius said. "We want it to be smooth and easy and let consumers' compare plans."
Doomed From the Start: Why Obamacare’s Disastrous Rollout is No Surprise - It would be an understatement to say that this month’s rollout of the Affordable Care Act, U.S. President Barack Obama’s initiative to ensure that all Americans have access to health insurance, has not gone according to plan. On October 1, the online insurance marketplaces that are the lynchpin of Obamacare (as the law has colloquially become known) were opened for business -- but it quickly became clear that they are not functioning properly. Computer malfunctions have prevented enrollment, consumers are frustrated, and politicians and pundits are attacking Obama for the resultant “train wreck.” The problems are all the more embarrassing given that publicly funded health-insurance programs are commonplace in most other countries. But the fact that the White House is having trouble implementing Obamacare also should not come as a particular surprise. It is not that the Obama administration is especially incompetent. Rather, the program it is charged with executing is a complex public-private hybrid that has no real precedent elsewhere in the world. The blend is purely American: Policymakers in the United States have a history of jerry-rigging complicated programs of this sort precisely because they have little faith in government. The result is a self-fulfilling prophecy that fuels only deeper public cynicism about the welfare state.
HealthCare.gov really is the purest political failure - While the US was distracted in its negotiations over whether to have a government, the health insurance exchange, HealthCare.gov, launched. It was beset by technical issues. Put simply, it couldn’t handle the load. This isn’t surprising. The right way to design a site like this is for robustness in on-going use — that is, for the stable flow of applicants — and not for the initial influx — that is, the stock of currently uninsured. The problem is that the launch was open to all and so you have the flow trying to handle the stock with inevitable consequences. It is claimed that these troubles were unexpected but I find that pretty near impossible to believe. Enough people knew this problem was coming. The question is: why was it ignored? To understand this, we need to think about what should have happened. HealthCare.gov needed a private beta whereby the stock was managed into a flow via specific invites; basically, a queue was needed. The problem was that the queue meant that some would get health insurance earlier than others. And that was when the idea of a private beta became politically unpalatable. There would be a queue and someone, somewhere was worried that the media could find someone not getting medical care and another insured but not using medical care and there would be a really bad looking story. The alternative was technical chaos. But the one thing that was true about the chaos is that it could be perceived as fair. Everyone is having trouble! It is, of course, the worst kind of policy to deal with inequity; make sure no one is getting a better deal than others by giving everyone the worse deal.
How Healthcare.gov Could Be Hacked - With Healthcare.gov plagued by technical difficulties, the Obama administration is bringing in heavyweight coders and private companies like Verizon to fix the federal health exchange, pronto. But web security experts say the Obamacare tech team should add another pressing cyber issue to its to-do list: eliminating a security flaw that could make sensitive user information, including Social Security numbers, vulnerable to hackers. According to several online security experts, Healthcare.gov, the portal where consumers in 35 states are being directed to obtain affordable health coverage, has a coding problem that could allow hackers to deploy a technique called "clickjacking," where invisible links are planted on a legitimate web page. Using this scheme, hackers could trick users into giving up personal data as they enter it into the web site, potentially placing Americans at risk of identity theft or allowing fraudsters to file bogus health care claims. And it's not just the federal exchange that has security problems. Some of the 15 states that have established their own online exchanges aren't using standard encryption throughout their Obamacare websites—leaving user information at risk.
Security Founder John McAfee: "Obamacare is a Hacker’s Wet Dream" - Security founder John McAfee of McAfee Associates, a computer anti-virus company, reflects on Obamacare: "This Is A Hacker's Wet Dream".
NEIL CAVUTO: What do you make [of Obamacare]? Obviously, a lot of people have been focusing on the law but not really cognizant of the privacy part of the law, and how hackers could have a field day with it. Is it that bad?
JOHN McAFEE: Oh, it is seriously bad. Somebody made a grave error, not in designing the program but in simply implementing the web aspect of it. I mean, for example, anybody can put up a web page and claim to be a broker for this system. There is no central place where I can go and say, 'Okay, here are all the legitimate brokers, the examiners for all of the states and pick and choose one.' Instead, any hacker can put a website up, make it look extremely competitive, and because of the nature of the system, and this is health care, after all, they can ask you the most intimate questions, and you’re freely going to answer them. What’s my Social Security number? My birth date? What are my health issues?[CROSSTALK] Well, here's the problem -- it's not something software can solve. I mean, what idiot put this system out there and did not create a central depository? There should be one website, run by the government, you go to that website and then you can click on all of the agencies. This is insane. So, I will predict that the loss of income for the millions of Americans who are going to lose their identities -- I mean, you can imagine some retired lady in Utah, who has $75,000 dollars in the bank, saving her whole life, having it wiped out one day because she signed up for Obamacare. And believe me, this is going to happen millions of times. This is a hacker's wet dream. I cannot believe that they did this.
Health Care Thoughts: Don’t Blame the Techies! - The early phases of the exchange sign up have been an unqualified disaster. It must be the techies, right? Not necessarily. The program design is wildly complicated, with the exchange system trying to do a start-to-finish on a very complicated transaction and pinging for information verification from various government and data firm web sites. Some of the states sites are reported as working well, but the IRS verification piece is not being completed because it cannot be. Are states sites accurate? Dunno. This matches the rest of ACA, a program in which almost every segment is incredibly complicated, even while good intentioned. Don’t blame the techies. This is a program design problem.
The U.S. Needs a Tech-Smart Government - Modern software developers move quickly. They push out the door what they call “minimum viable products,” revising as needed, based on their users’ experiences. They often use “open source” software -- code that’s more stable because it’s free and therefore tested more widely by more users. The company executives who employ these software makers are themselves knowledgeable about technology, and they track the progress of their own products and others’ as well. They deploy elaborate quality-assurance testing and strong project management to make sure new software never cripples their businesses. When’s the last time you saw LinkedIn stop working when it rolled out a new product? The embarrassing rollout of HealthCare.gov shows how differently the government operates. It should also be taken as an unparalleled opportunity for public actors at all levels -- local, state and federal -- to fix the government’s relationship with technology. This isn’t just about getting access to better software programs -- after all, the National Security Agency seems to have access to whatever it wants. The problem underlying the HealthCare.gov debacle is more cultural than technical.
Health Law Fails to Keep Prices Low in Rural Areas -- As technical failures bedevil the rollout of President Obama’s health care law, evidence is emerging that one of the program’s loftiest goals — to encourage competition among insurers in an effort to keep costs low — is falling short for many rural Americans. While competition is intense in many populous regions, rural areas and small towns have far fewer carriers offering plans in the law’s online exchanges. Those places, many of them poor, are being asked to choose from some of the highest-priced plans in the 34 states where the federal government is running the health insurance marketplaces, a review by The New York Times has found. Of the roughly 2,500 counties served by the federal exchanges, more than half, or 58 percent, have plans offered by just one or two insurance carriers, according to an analysis by The Times of county-level data provided by the Department of Health and Human Services. In about 530 counties, only a single insurer is participating. The analysis suggests that the ambitions of the Affordable Care Act to increase competition have unfolded unevenly, at least in the early going, and have not addressed many of the factors that contribute to high prices. Insurance companies are reluctant to enter challenging new markets, experts say, because medical costs are high, dominant insurers are difficult to unseat, and powerful hospital systems resist efforts to lower rates.
Should Obamacare Be Delayed — And More to the Point, Can It? - Social security numbers allegedly passed around in clear sight. Page after page of unworkable code. And no clarity on when it will all be fixed. Just another day of trying to log in to healthcare.gov.Two weeks after its launch, the federal health insurance exchange is a "failure," says The Washington Post's Ezra Klein. Some officials deserve to be fired, according to Robert Gibbs, who until February 2011 was one of President Obama's closest advisers. And those are the Affordable Care Act's supporters.Even the president conceded on Tuesday that healthcare.gov had "way more glitches than I think are acceptable."Those glitches could take months -- or even years -- to fix, according to reports. But there's a key deadline looming: Jan. 1, 2014, when the ACA's individual mandate takes effect.Under the mandate, millions of Americans who were expected to use the exchanges to obtain health insurance will face fines if they haven't purchased coverage by Feb. 15, raising the question of whether the mandate or other Obamacare provisions should be postponed -- an uncomfortable position for an administration already trying to implement a politically divisive law.But at this late date, what parts of the ACA can legally be delayed? "In a sense, all of it," Timothy Jost, a Washington & Lee law professor, told California Healthline. But "there'd be a high political price to pay. And delay could result in litigation."
Driving a New Bargain on Obamacare - Tyler Cowen - The Affordable Care Act has gotten off to a rocky start. Federal and state online health insurance exchanges, which opened for business at the beginning of the month, have been bedeviled by technical snags. And opposition to the law from some House Republicans blocked funding for the entire federal government, leading to its partial shutdown. In fact, with all the conflict and vituperation over Obamacare, it sometimes seems that one of the few things Democrats and Republicans agree on is that the law is imperfect at best. Just to get started, I will assume that, at some point, Democrats will be willing to acknowledge that not everything has worked out as planned with the legislation, and that they would consider a rewrite that would expand coverage. I’ll also assume that Republicans will acknowledge that a feasible rewrite of the bill cannot give the Democrats nothing. And Republicans will need to recognize that repeal of Obamacare should not be their obsession, because they would then be leaving the nation with a dysfunctional yet still highly government-oriented health care system, not some lost conservative paradise. Both sides have a lot to gain, and, at some point, they should realize it. Let’s look at some of the current problems in the health care system and see whether they might be patched up.
Saving Obamacare Without Congress - The problem comes if the exchange websites aren’t fixed before people have to buy insurance to comply with the individual mandate. Under the law, the mandate applies whether or not there’s a functional exchange. That means that the penalty would be imposed even on those uninsured who had tried, and failed, to buy insurance on an exchange. It would be unfair, though, to penalize people for failing to buy insurance from a website that’s broken. In principle, of course, one could purchase insurance off the exchange. But subsidies are only available for exchange-purchased coverage. And the whole point of the subsidies is that many Americans can’t afford insurance without them. Fortunately, there’s a better solution. The federal government has the legal flexibility to waive the penalty for people subject to the mandate but unable to access a functioning exchange website. Nestled in the health-care law is a “hardship exemption.” It waives the penalty for anyone who “is determined by the Secretary of Health and Human Services under section 1311(d)(4)(H) to have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.” In turn, section 1311 requires exchanges to “grant a certification” for particular individuals attesting that “there is no affordable qualified health plan available through the Exchange.” Putting the two provisions together, it could be a “hardship” if there’s “no affordable qualified health plan available through the Exchange.” That statutory language fits this case: if an exchange doesn’t work, then no plans are available through it. Health and Human Services Secretary Kathleen Sebelius has already issued hardship exemptions for discrete groups, including people who would have qualified for Medicaid but for their state’s decision not to expand the program. She could do the same for those who can’t access an exchange
What If ObamaCare was a Fighter Jet? - Imagine if you will…an epic government failure. Chronic mismanagement and cost over-runs. Incomplete software coding, timely political donations and undelivered promises. And zero accountability. Like the comically bad roll-out of the Affordable Care Act’s website, the long-delayed and often-rejiggered F-35 program is a costly disaster rife with technological snafus, software problems and repeated contractor incompetence. Unlike the circle-jerk of posturing, pontification and media preoccupation that gave us The Shutdown of 2013, the “first $1 trillion weapon system in history” has quietly metastasized into a debacle that is, to quote Sen. John McCain, “worse than a disgrace.” And although increasingly well-compensated contractors will “surge” over the next few weeks to remediate the epic fail of a healthcare website that has ballooned from an estimated cost of $94 million to over $400 million, it pales in comparison to an “aerospace megaproject” that is seven years behind schedule and 70% over the initial budget estimate of $233 billion—all to deliver 409 fewer planes than originally planned.
What Kind of Problem is the ACA Rollout for Liberalism? - Healthcare.gov looks to be having a disastrous launch. People are naturally asking about the practical and political implications of this disaster. Is it a problem for the Affordable Care Act as a whole, with its mixture of individual mandates and risk-pooling? Is it a political disaster for President Obama and the Democrats? Does this show us major problems in the way that government procures its contractors? These are important questions, but some are asking a bigger one: is this a problem for liberalism as a political governance project? Does this rollout failure discredit the core goals of a liberal project, including that of a mixed economy, a regulatory state, and social insurance? Conservatives in particular think this website has broad implications for liberalism as a philosophical and political project. I think it does, but for the exact opposite reasons: it highlights the problems inherent in the move to a neoliberal form of governance and social insurance, while demonstrating the superiorities in the older, New Deal form of liberalism. This point is floating out there, and it turns out to be a major problem for conservatives as well, so let's make it clear and explicit here.
Individual Mandate Delayed Six Weeks - Yesterday afternoon, chief executives of 12 major health insurers—including Aetna, Humana, WellPoint, and Kaiser Permanente—trudged to the White House to “discuss…ongoing implementation of the Affordable Care Act.” The meeting was off the record, but we have a pretty good idea of what happened. Insurers were likely to urge the White House to delay the implementation of Obamacare’s exchanges until the website, Healthcare.gov, gets fixed. And it appears they got their wish. Last night, the White House confirmed that it intends to delay the enforcement of the individual mandate by as much as six weeks. “The White House is meeting with insurance industry executives,” a consultant to insurers told Ezra Klein, “and I can tell you what they’re talking about. [They’re saying] you need to get this fixed, because you’re setting us up for a real fall with our customers. [Patients are] not going to blame Kathleen Sebelius if they walk into their doctor’s office and the doctor doesn’t know who they are. They’ll blame the insurance company. And I’m sure what the insurers are telling the White House today is we will not let you put us in that position.” I recently spoke to one of those CEOs, Bruce Broussard of Humana, at the Forbes Healthcare Summit. Broussard expressed optimism that the website would eventually get fixed. But he was more cautious about whether or not healthy and young people will pay lots more for health insurance in order to subsidize other people.
‘HealthCare.gov is in de facto shutdown’ - Ezra Klein - Robert Laszewski is president of Health Policy and Strategy Associates, a policy and marketplace consulting firm that has him working closely with many in the heath industry as they try to navigate the Affordable Care Act, as well as the author of the excellent Health Care Policy and Marketplace Review blog. As such, he has a unique view on how the rollout looks from the industry side. We spoke on Wednesday. A lightly edited transcript of our conversation follows.
White House Expects Health-Law Website to Be Fixed by End of November - The Obama administration said Friday it has named a unit of UnitedHealth Group Inc. ( UNH ) to oversee repairs to its troubled health-insurance website and for the first time gave a specific estimate--the end of November-- for when the site would be fixed. The move followed a congressional hearing Thursday at which contractors for the site said each of their individual parts functioned but no one in the government made sure all of them worked together properly. The federal Centers for Medicare and Medicaid Services acted as its own systems integrator for the site--an unusual arrangement for such a complex project. The administration is under pressure to get the site fixed quickly. The 2010 Affordable Care Act sets penalties for those who fail to carry coverage in 2014, and critics say it isn't fair to punish people who can't use a balky website. Ten Democrats on Friday sent a letter to Health and Human Services Secretary Kathleen Sebelius Friday saying she should consider extending the current March 31, 2014, deadline by which people must enroll or pay a penalty. A spokeswoman for the Centers for Medicare and Medicaid Services said the government has tapped Quality Software Services, Inc. or QSSI, a unit of UnitedHealth's Optum, to act as the general contractor for what officials have described as a "tech surge" to fix the site. The government said an existing contract with QSSI was being renegotiated but didn't say how much it would pay for the new service.
New, Improved Obamacare Program Released On 35 Floppy Disks -- Responding to widespread criticism regarding its health care website, the federal government today unveiled its new, improved Obamacare program, which allows Americans to purchase health insurance after installing a software bundle contained on 35 floppy disks. “I have heard the complaints about the existing website, and I can assure you that with this revised system, finding the right health care option for you and your family is as easy as loading 35 floppy disks sequentially into your disk drive and following the onscreen prompts,” President Obama told reporters this morning, explaining that the nearly three dozen 3.5-inch diskettes contain all the data needed for individuals to enroll in the Health Insurance Marketplace, while noting that the updated Obamacare software is mouse-compatible and requires a 386 Pentium processor with at least 8 MB of system RAM to function properly. “Just fire up MS-DOS, enter ‘A:\>dir *.exe’ into the command line, and then follow the instructions to install the Obamacare batch files—it should only take four or five hours at the most. You can press F1 for help if you run into any problems. And be sure your monitor’s screen resolution is at 320 x 200 or it might not display properly.” Obama added that the federal government hopes to have a six–CD-ROM version of the program available by 2016.
Your health plan changing? Employers, insurers largely to blame - Using the Affordable Care Act as a smokescreen, several high profile firms announced they were cutting health care benefits for their workers and their families. Meanwhile, some insurers are using the ACA's new patient protection requirements to jack up rates, cancel existing individual policies and shed higher cost customers. Consider the business side of the equation first. Including Medicare, roughly 263 million Americans--about 85 percent of the population--already have health insurance. As the nonpartisan Congressional Budget Office (CBO) estimated in May, 156 million are workers and their family members who received insurance from their employers. But as the chart above shows, the percentage of Americans getting coverage through their workplace has been dropping for years, and nose-dived during the recession. But that's not the only indicator of an employer health insurance system "coming apart at the seams." For years, businesses have been shifting the costs for health care onto their workers by hiking employee contributions, raising deductibles, dropping spousal coverage and more. In its 2009 Employer Health Benefits Survey released six months before Obamacare became law, the Kaiser Family Foundation found the pace of cost-shifting was accelerating. As the Washington Post reported the findings from KFF: Forty percent of employers surveyed said they are likely to increase the amount their workers pay out of pocket for doctor visits. Almost as many said they are likely to raise annual deductibles and the amount workers pay for prescription drugs.
Why electronic medical records are dangerous to older adults - A recent experience with my father-in-law reminded me of something that has concerned me for some time. While EMRs have some benefits for older adults, on balance I believe that they portend more dangers. There are multiple reasons, but the biggest is that health care providers tend to believe everything they read in an EMR. Even if what they read is wrong! A wise computer programmer once told me that “computer’s are dumb as posts,” they are only as good as the information that human beings load into them. Human beings make mistakes, hence, inaccurate or false information will find it’s way into an EMR. The doctor who reviewed my father-in-law’s EMR prior to seeing him made the first cardinal sin, he believed everything that he read in the record. The second error was in not directly getting the history from my father-in-law and myself as I sat at the bedside. The final mistake was in doing a cursory examination and forgetting the most important tool a physician has, his own eyes, nose and ears. I’ve often told my patients that the most important thing I ever do is to pay attention to how they look and act when I walk into the exam room. My experience and instincts will sound alarms that then lead me on my search to figure out what I need to do to help them.
Associate director at Centers for Disease Control: We’ve reached ‘the end of antibiotics, period’ - In an interview that aired on PBS’s Frontline, an associate director of the Centers for Disease Control and Prevention, Dr. Arjun Srinivasan, said that “for a long time, there have been newspaper stories and covers of magazines that talked about ‘The end of antibiotics, question mark?’ Well, now I would say you can change the title to ‘The end of antibiotics, period.’”“We’re in the post-antibiotic era,” he continued. “There are patients for whom we have no therapy, and we are literally in a position of having a patient in a bed who has an infection, something that five years ago even we could have treated, but now we can’t.” As an example, Dr. Srinivasan discussed the spread of Methicillin-resistant Staphylococcus aureus, or MRSA, which recently made headlines when word spread that three players from the NFL’s Tampa Bay Buccaneers were battling it. The options for treating it have always been limited, but until the past decade, MRSA infections were rarely seen outside of health-care facilities.
Dutch scientists manipulating genes to strains of H7N9 virus to explore worst-case scenario --The studies aim to genetically modify the virus to see what it needs to give it more of a deadly pandemic kick. Dutch scientists hidden away in a top-security laboratory are seeking to create mutant flu viruses, dangerous work designed to prepare the world for a lethal pandemic by beating nature to it. The idea of engineering viral pathogens to be more deadly than they are already has generated huge controversy, amid fears that such viruses could leak out or fall into the wrong hands. Hidden away in an un-signposted corner of the campus of the Erasmus Medical Centre in the port city of Rotterdam, a handful of top security-cleared researchers are selecting, deleting and adding genes to strains of the H7N9 virus to check what it might be capable of in a worst-case scenario. The studies aim to genetically modify the virus to see what it needs to give it more of a deadly pandemic kick. That could mean making it more virulent, more pathogenic and, crucially, more transmissible - capable of passing easily in droplets through the air from one mammal to another.
McDowell County, USA Has Close to Haiti's Life Expectancy: Welcome to Third World America - According to the World Health Organization, the U.S. lags behind a long list of countries when it comes to overall life expectancy. WHO has reported that the U.S., factoring in both genders, has an overall life expectancy of 79 (76 for males, 81 for females) compared to 83 in Japan and Switzerland, 82 in France, Iceland, Spain, Italy, Australia, Canada, Israel, Luxembourg, Singapore and Sweden, 81 in Germany, the Netherlands, Austria, New Zealand, Finland, South Korea, the Republic of Ireland and Norway, and 80 in Belgium, Slovenia, the U.K., Malta, Kuwait and Portugal. Those WHO figures for the U.S. take into account the country as a whole, and overall, Americans clearly aren’t living as long as Europeans. But the news becomes even more troubling when one examines a report that the Institute of Health Metrics and Evaluation at the University of Washington released in July 2013. That study broke down life expectancy for men and women in different parts of the U.S., showing a strong correlation between income levels and longevity. The report found that life expectancy is 81.6 for males and 84.5 for females in Fairfax County, Virginia (a very affluent area) and 81.4 for males and 85.0 for females in Marin County, California (another upscale area) compared to only 63.9 for males and 72.9 for females in McDowell County, West Virginia or 66.7 for males and 73.3 for females in Tunica County, Mississippi. The fact that males in McDowell County are, on average, dying 18 years younger than males in Fairfax County or Marin County speaks volumes about inequality in the U.S. That type of disparity is more typical of a developing country than a developed country. Yet when one compares life expectancy in McDowell County to life expectancy in Guatemala, one of Latin America’s poorest countries, Guatemalans come out slightly ahead. WHO has reported an overall life expectancy of 69 for Guatemala (66 for men, 73 for women).
Mexico Tries Taxes to Combat Obesity - Congress's lower house of Congress passed late Thursday a special tax on junk food that is seen as potentially the broadest of its kind, part of an ambitious Mexican government effort to contain runaway rates of obesity and diabetes. The House passed the proposed measure to charge a 5% tax on packaged food that contains 275 calories or more per 100 grams, on grounds that such high-calorie items typically contain large amounts of salt and sugar and few essential nutrients.The tax, which was proposed just this week, is sure to stir controversy among big Mexican and foreign food companies that operate here. It comes on top of another planned levy on sugary soft drinks of 1 peso (8 U.S. cents) per liter that was passed by the same committee, an effort that New York Mayor Michael Bloomberg supported. The taxes—both aimed at curbing consumption—have broad political support and were expected to later be approved by the Senate as part of a sweeping tax overhaul. The snack food levy is part of a bigger tax proposal from President Enrique Peña Nieto which aims to raise the government's non-oil tax collections.The taxes would put Mexico, a country notorious for its love of sweets, fried foods and pastries, on the cutting edge of government efforts to cut obesity rates.
Here are the world’s worst cities for air pollution, and they’re not the ones you’d expect – Quartz: In 2010, some 223,000 people around the world died from lung cancer caused by exposure to air pollution, the World Health Organization (WHO) said yesterday. And more than half of those deaths are believed to have been in China and elsewhere in East Asia. Here are the world’s worst cities for air pollution, according to the WHO. Exposure to air pollution is getting worse in parts of the world, especially industrializing countries, according to the WHO. The WHO’s key announcement yesterday was that it has included outdoor air pollution on its definitive list of the world’s known carcinogens—an addition that, it hopes, will get governments to do something about it. Air pollution is the world’s worst environmental carcinogen and more dangerous than second-hand smoke, for instance, the health body said. As the chart above shows, the cities with the worst air are often not big capitals, but provincial places with heavy industry in them or nearby. Ahwaz, for instance, in southwestern Iran, far outstrips infamously polluted cities like New Delhi or Beijing, with 372 parts per million of particles smaller than 10 micrometers (PM10), compared to the world average of 71. Life expectancy for the city of 1.2 million residents is the lowest in Iran.
Waterworld USA: Climate Is Adversely Impacting Regional Water Resources - According to the National Oceanic and Atmospheric Administration, between 1958 and 2011 the amount of rain falling in heavy downpours increased by an astounding 74 percent in the Northeast, turning rivers and creeks into torrents, tearing up undersized culverts, and wrecking streamside roads. By 2100, scientists expect New England’s precipitation to increase by 10 percent in spring and summer, 15 percent in fall, and 20 to 60 percent in winter. By then, New York City may be submerged in a 100-year flood once per decade. While a growing number of super thunderstorms and flashfloods impact the East, the West is seeing the reverse. Despite the recent record flashfloods north of Denver, the American West has withered under worsening drought for more than a decade. Colorado’s southeast plains have turned into a swirling dustbowl. Nevada is relocating herds of wild horses and cattle off parched federal rangelands. The Wyoming Weather Modification Pilot Program is regularly seeding clouds to make rain, and all of New Mexico is in drought, with the Rio Grande so low it’s been dubbed the “Rio Sand.” In Texas, 30 communities could run out of water by year’s end, says the Texas Commission on Environmental Quality. Nearly 15 million people are on water rationing, with no end in sight. The Texas drought is forecast to drag on for 5 to 15 more years. And nationally, at the end of September, the U.S. Drought Monitor indicated that more than 40 percent of the continental U.S. was in moderate or worse drought—almost all west of the Mississippi River.
The ocean is broken -- IT was the silence that made this voyage different from all of those before it. Not the absence of sound, exactly. The wind still whipped the sails and whistled in the rigging. The waves still sloshed against the fibreglass hull. And there were plenty of other noises: muffled thuds and bumps and scrapes as the boat knocked against pieces of debris. What was missing was the cries of the seabirds which, on all previous similar voyages, had surrounded the boat. The birds were missing because the fish were missing. Exactly 10 years before, when Newcastle yachtsman Ivan Macfadyen had sailed exactly the same course from Melbourne to Osaka, all he'd had to do to catch a fish from the ocean between Brisbane and Japan was throw out a baited line. "There was not one of the 28 days on that portion of the trip when we didn't catch a good-sized fish to cook up and eat with some rice," Macfadyen recalled. But this time, on that whole long leg of sea journey, the total catch was two. No fish. No birds. Hardly a sign of life at all.
"There Won't Be Any Fish Left" - As I went through the gigantic piles of human bullshit which must be sorted through if one wants to get a fleeting glimpse of the current state of the Planet's Health, I found a gem at The Guardian called Yachtsman describes horror at ‘dead’, rubbish strewn Pacific Ocean. Even I was taken aback because it is hard to gauge just how degraded the oceans are. An Australian sailor has described parts of the Pacific Ocean as “dead” because of severe overfishing, with his vessel having to repeatedly swerve debris for thousands of kilometres on a journey from Australia to Japan. Ivan MacFadyen [image left] told of his horror at the severe lack of marine life and copious amounts of rubbish witnessed on a yacht race between Melbourne and Osaka. He recently returned from the trip, which he previously completed 10 years ago. “In 2003, I caught a fish every day,” he told Guardian Australia. “Ten years later to the day, sailing almost exactly the same course, I caught nothing. It started to strike me the closer we got to Japan that the ocean was dead. “Normally when you are sailing a yacht, there are one or two pods of dolphins playing by the boat, or sharks, or turtles or whales. There are usually birds feeding by the boat. But there was none of that. I’ve been sailing for 35 years and it’s only when these things aren’t there that you notice them. MacFadyen said that the lack of ocean life started at the edge of the Great Barrier Reef, describing Queensland waters as “barren” and “unquestionably overfished”.Check this out. They just trawled the whole ocean...
United States urges flexibility in new global climate deal (Reuters) - The United States called on Tuesday for a more flexible approach to a new United Nations' climate deal which balances the needs of all countries and has a better chance of success. Two years ago, some 190 countries agreed to develop a pact to succeed the Kyoto Protocol which would force all nations to cut their greenhouse gas emissions. The deal is to be signed by 2015 and come into force in 2020. Countries will meet again next month to work on the content and design of the new deal in Warsaw but progress this year has been slow. Meanwhile, a scientific consensus that mankind is to blame for global warming has grown, putting pressure on governments - many of which have been focused on spurring weak economies rather than fighting climate change - to commit to ambitious emissions cuts. In a speech at a conference at Chatham House in London, U.S. Special Envoy for Climate Change Todd Stern said for a new deal to be ambitious and fair it will require flexibility. "A rigid approach is the enemy," he said. Rather than negotiated targets and timetables, countries should be allowed to determine their own levels of commitment depending on their circumstances and means, Stern said.
One year after Sandy — ignoring climate change at our own peril - It’s been one year since Hurricane Sandy made landfall on the eastern coast of the United States, affecting 24 states and devastating parts of New Jersey and New York. Thousands of homes and businesses were destroyed. Millions were left without power. As many as 100 people died; most of whom drowned as the storm surged in Staten Island and Queens. At $65 billion, Sandy was the second costliest storm in U.S. history. Today, communities that were reduced to rubble are steadily recovering. And yet, one year later, policymakers have yet to address climate change, which undoubtedly contributed to the strength, magnitude and danger of Sandy. There is little discussion of rebuilding in a way that better prepares us for the ravages of future storms. And after Washington’s most recent shameful display of deadlock and dysfunction, it would be wishful thinking to presume that Congress will act on this issue anytime soon. Today, too much of the climate change discussion is framed in terms of sacrifice and competition. From the personal — recycle more, waste less — to the national — regulate more, drill less — there’s a kind of temperance, a buzzkill, associated with protecting our planet. This restrictive ethos has been thoroughly absorbed and repurposed by resentful tea partyers who warn, in apocalyptic terms, that environmentalists are elevating “nature above man.” These climate deniers are, in effect, pitting the (free-range) chicken against the egg.
Analysis: Greenhouse gases case - Stepping into the ongoing national debate over global warming, the Supreme Court has opted to clarify how far the federal government may go with its power to limit the amount of so-called “greenhouse gases” that enter the nation’s atmosphere. Although the Court picked out a single issue to decide, from a broad list of challenges, that one question is at the heart of a deep dispute over federal regulation of air pollution under the Clean Air Act. After the Court’s review order came out Tuesday, it became clear immediately that the U.S. Environmental Protection Agency has the authority to regulate greenhouse gases on the premise that they contribute to heating up the planet and thus pose a threat to human health and to the environment, and that the agency definitely can curb such emissions from the exhausts of cars and trucks. What the Court did take on was a sharp new controversy over a policy that EPA has been following for thirty-three years, even before global warming was thought to be a problem. Since 1980, EPA has understood that once it decided to regulate any single kind of air pollution, it could reach out further and deal with all such pollutants and their sources. This, the agency has argued, follows from the simple fact that the Clean Air Act gives it power over “any air pollutant.”EPA followed that policy when it concluded in June 2010 (prompted by a Supreme Court ruling in 2007) that it should deal with pollution from cars and trucks (“mobile sources”) and, from there, it automatically moved on to claim the power to deal with larger, stationary sources of greenhouse gas emissions: that is, generating plants for power companies, and industrial factories.
Unprecedented Arctic Warming: Average Summer Temperatures in Last 100 Years May Be Warmest in 120,000 Years — The heat is on, at least in the Arctic. Average summer temperatures in the Eastern Canadian Arctic during the last 100 years are higher now than during any century in the past 44,000 years and perhaps as long ago as 120,000 years, says a new University of Colorado Boulder study. The study is the first direct evidence the present warmth in the Eastern Canadian Arctic exceeds the peak warmth there in the Early Holocene, when the amount of the sun's energy reaching the Northern Hemisphere in summer was roughly 9 percent greater than today, said CU-Boulder geological sciences Professor Gifford Miller, study leader. The Holocene is a geological epoch that began after Earth's last glacial period ended roughly 11,700 years ago and which continues today. Miller and his colleagues used dead moss clumps emerging from receding ice caps on Baffin Island as tiny clocks. At four different ice caps, radiocarbon dates show the mosses had not been exposed to the elements since at least 44,000 to 51,000 years ago. Since radiocarbon dating is only accurate to about 50,000 years and because Earth's geological record shows it was in a glaciation stage prior to that time, the indications are that Canadian Arctic temperatures today have not been matched or exceeded for roughly 120,000 years, Miller said. "The key piece here is just how unprecedented the warming of Arctic Canada is," said Miller, also a fellow at CU-Boulder's Institute of Arctic and Alpine Research. "This study really says the warming we are seeing is outside any kind of known natural variability, and it has to be due to increased greenhouse gases in the atmosphere."
Climate report shows security threat - Bangkok Post opinion: On Sept 27, the 195 member countries of the United Nations Intergovernmental Panel on Climate Change (IPCC), supported by the work of thousands of scientists from around the world, released the Fifth Assessment Report. Even for a military man like me, the latest scientific evidence on global warming makes for a chilling read.When I was a major-general in Bangladesh's military, my job was to avoid conflict while planning for the worst-case scenario. And, from the perspective of the military, the consequences of global warming constitute the worst-case scenario. My country, Bangladesh, is a frontline state in the face of climate challenges. It is ground zero for the effects of climate change and the security implications they present. In Bangladesh, climate change is not a theory, a story, or a concept; it is a way of life. As I write, lives are being lost to rising seas, water shortages and the resulting diseases. Gradual and large-scale displacement of people is taking place, and every day the threat is increasing. Bangladesh, like India, China, and Pakistan, depends for its water on the glaciers of the Himalayas. Those glaciers are disappearing, and the world's most populous countries _ all with significant military capabilities, including nuclear weapons _ will find themselves facing an existential crisis if too little water is available. We know that this will happen, and we know that people do not always make the wisest decisions when faced with deprivation of an essential resource.
Post Carbon Institute Calls on Environmentalists to Embrace Post-Growth Economics - A new policy paper from the Post Carbon Institute, a nonprofit think tank, argues the environmental movement must embrace what the authors have deemed a "new normal" of declining economic growth while building solidarity with the so-called new economy movement, emphasizing community-based, sustainable solutions in an era of globalization.The paper, "Climate After Growth," was cowritten by Post Carbon Institute’s executive director, Asher Miller and Rob Hopkins, founder of the Transition Network, which supports community-led responses to climate change and helps to build strong, sustainable local economies. The paper hopes to put to rest the false dichotomy between the imperative of economic growth over environmental protection once and for all by making the case that the over-arching paradigm of economic growth is coming to an end in any case, regardless of the ongoing climate crisis."There’s an opportunity for environmental groups and others to offer up an alternative, and that alternative, we argue, could be emphasizing community resilience," Miller told Truthout. "If we can address climate issues while improving quality of life, we can build resilience, which we need to do; we can reduce our dependence on fossil fuels; and we can offer up a different way of creating goods and well-being that aren’t relying upon globalized [economic] growth."
Metrics: Replace GDP with Disposable Energy - Why was the worst economic crisis since the Great Depression a surprise? Gross Domestic Product, GDP is an ineffective metric, completely failing to warn or inform. Effective metrics are predictive, aligned with the mission, actionable, simple, timely and ungameable. Gross Domestic Production (GDP) metric is none of these. This paper recommends replacing the economic metric of GDP with Disposable Energy. Disposable Energy is an extremely simple measure of how much energy can people buy with their disposable income. Disposable Energy increases as people obtain energy more economically, expend energy more efficiently, employment increases, and the economy becomes healthier. Approaching the Sept 2008 crash, the worst economic event since the Great Depression, GDP completely failed to provide a warning as indicated by the Blue Line. In contrast, Disposable Energy warned of both the crisis and its scale in 8 of 10 years.
Growth is Obsolete: Kunstler - The first act ran on coal and allowed populations to expand because it extended the extractive reach for resources by colonialist nations. The second act featured exploitation of oil, which was more powerful and versatile than coal. It also lent itself much more directly than coal to being converted into food for people. The use of oil powered farming machines, oil and gas (an oil byproduct) based herbicides, insecticides, and fertilizers, and oil based long distance food transport, has allowed us to convert oil into food pretty directly. This has led to the “hockey-stick” swerve of population growth that took human numbers worldwide from under 2 billion in the year 1900 to more than 7 billion today. We are in the third act of the industrial melodrama now where the dire sub-plot of peak oil has taken stage. Despite the wishful thinking and happy-talk propaganda lighting up the media-space, we have arrived at the problematic point of the story: the end of cheap oil. This is poorly understood by the public and, apparently, by leaders in business, politics, and the media, too. They misunderstand because they insist on thinking that peak oil was simply about running out of oil. It’s not. It’s about running out of the ability to extract it from the earth in a way that makes economic sense — that is, at a price we can afford in terms of available capital and energy invested (and also ecological destruction). That dynamic is now exerting a powerful influence on modern civilizations. We ignore it -- even at the highest levels of intellectual endeavor -- because we have made no alternate plans for running the complex operations of everyday life, and because the early manifestations of the dynamic present themselves in the realm of finance, which is dominated by academic viziers and money-grubbing opportunists who benefit from obfuscating reality.
Fossil Fuel Use Continues to Rise - Despite concerted global efforts to reduce carbon emissions through the expansion of clean and renewable energy resources, fossil fuels continued to dominate the global energy sector in 2012, according to new figures released yesterday by the Worldwatch Institute. Coal, natural gas and oil accounted for 87 percent of the world's primary energy consumption last year, the group reported in a new "Vital Signs Online" report. While the U.S. boom in shale gas helped push the fossil fuel's share of total global energy consumption from 23.8 to 23.9 percent, coal also increased its share, from 29.7 to 29.9 percent, as demand for coal-fired electricity remained strong across much of the developing world, including China and India, and parts of Europe. As such, coal is expected to surpass oil as the most consumed primary energy source in the world, the report said. In 2012, China alone accounted for more than half the world's total coal consumption, mostly for electric power generation. But natural gas is also seeing significant gains, both in the United States and in countries like Japan, which are shifting their energy portfolios away from nuclear power. "With increasing shale gas fracking and many countries' interest in displacing coal generation with natural gas due to the lower greenhouse gas emissions, natural gas use seems well poised to grow," the report states.
Hinkley China Power. - A huge reminder about the shifts in economic power arrived with the news about the development of Hinkley C nuclear power station. This project is partly financed by foreign direct investment from China's National Nuclear Corporation and China's General Nuclear Power Corporation, to build reactors designed by EdF. The short term capital flows will be seen as a boost to developing the UK's infrastructure, but over time, there will be a outflow of dividends, interest from the UK to China. The Energy Secretary Ed Davey claims that it is the first nuclear deal which is not financed by the UK taxpayer. This might be a surprise to those who have guaranteed the minimum prices for power generation. The government have now agreed with EdF that the "strike price" will be £92.50 for every megawatt hour of energy Hinkley C generates per hour. This is almost twice the current wholesale cost of electricity.
Radioactivity level spikes 6,500 times at Fukushima well - Radioactivity levels in a well near a storage tank at the Fukushima nuclear power plant in Japan have risen immensely on Thursday, the plant’s operator has reported. Officials of the Tokyo Electric Power Company (TEPCO) said on Friday they detected 400,000 becquerels per liter of beta ray-emitting radioactive substances - including strontium - at the site, a level 6,500 times higher than readings taken on Wednesday, NHK World reported. The storage tank leaked over 300 tons of contaminated water in August, some of which is believed to have found its way into the sea through a ditch. The well in question is about 10 meters from the tank and was dug to gauge leakage. TEPCO said the findings show that radioactive substances like strontium have reached the groundwater. High levels of tritium, which transfers much easier in water than strontium, had already been detected.
After Storm, Toxic Water Overflows in Japan — The operator of Japan’s wrecked nuclear plant said Monday that rainwater from a weekend storm became contaminated as it collected behind barriers meant to stop radiation leaks. The toxic water overflowed those barriers at several locations, with some of it possibly spilling into the Pacific Ocean. It was the latest in a litany of lapses and aggravations for the problem-plagued cleanup of the Fukushima Daiichi plant. The operator, the Tokyo Electric Power Company, or Tepco, said water from heavy rain on Sunday had accumulated behind foot-high concrete walls that encircle clusters of storage tanks. Tepco built those barriers to contain spills from the storage tanks, a problem that has led to intense public criticism of the company. However, on Sunday the barriers acted as dams to trap the rainwater into ponds. Water levels in 11 of those ponds rose high enough to spill over the barriers, Tepco said. It said some of the spilled water may have flowed down a drainage ditch into the Pacific outside the plant’s artificial harbor.
With a Plant’s Tainted Water Still Flowing, No End to Environmental Fears - NYTimes.com: For months now, it has been hard to escape the continuing deluge of bad news from the devastated Fukushima nuclear power plant. Even after the company that operates the plant admitted this summer that tons of contaminated groundwater was leaking into the Pacific Ocean every day, new accidents have added to the uncontrolled releases of radioactive materials. This week, newly tainted rainwater overflowed dikes. Two weeks before that, workers mistakenly disconnected a pipe, dumping 10 more tons of contaminated water onto the ground and dousing themselves in the process. Those accidents have raised questions about whether the continuing leaks are putting the environment, and by extension the Japanese people, in new danger more than two and a half years after the original disaster — and long after many had hoped natural radioactive decay would have allowed healing to begin. Interviews with scientists in recent weeks suggest that they are struggling to determine which effects — including newly discovered hot spots on a wide swath of the ocean floor near Fukushima — are from recent leaks and which are leftovers from the original disaster. But evidence collected by them and the plant’s operator, the Tokyo Electric Power Company, or Tepco, shows worrisome trends. The latest releases appear to be carrying much more contaminated water than before into the Pacific. And that flow may not slow until at least 2015, when an ice wall around the damaged reactors is supposed to be completed. Beyond that, although many Japanese believed that the plant had stopped spewing radioactive materials long ago, they have continued to seep into the air.
Special Report: Help wanted in Fukushima: Low pay, high risks and gangsters - Out of work, Hayashi found a second job at Fukushima, this time building a concrete base for tanks to hold spent fuel rods. His new employer skimmed almost a third of his wages - about $1,500 a month - and paid him the rest in cash in brown paper envelopes, he says. Reuters reviewed documents related to Hayashi's complaint, including pay envelopes and bank statements. In reviewing Fukushima working conditions, Reuters interviewed more than 80 workers, employers and officials involved in the unprecedented nuclear clean-up. A common complaint: the project's dependence on a sprawling and little scrutinized network of subcontractors - many of them inexperienced with nuclear work and some of them, police say, have ties to organized crime. Tepco sits atop a pyramid of subcontractors that can run to seven or more layers and includes construction giants such as Kajima Corp and Obayashi Corp in the first tier. The embattled utility remains in charge of the work to dismantle the damaged Fukushima reactors, a government-subsidized job expected to take 30 years or more. Outside the plant, Japan's "Big Four" construction companies - Kajima, Obayashi, Shimizu Corp and Taisei Corp - oversee hundreds of small firms working on government-funded contracts to remove radioactive dirt and debris from nearby villages and farms so evacuees can return home.
Rising Energy Prices Force UK to Turn to Renewable Energy - Energy prices are rising in the UK by fairly large margins. Last week SSE, one of the largest energy companies in Great Britain, said that it will increase its prices by 8.2% from the 15th of November; British Gas has just followed suit by announcing that its prices will rise 9.2% on the 23rd of November. More suppliers are expected to declare similar rises in the coming months. The UK is already a country pushed to the edge of bankruptcy by the financial crisis, and these hikes in energy prices are doing no favours for some of its poorer communities, where, as EcoSeed puts it, families may have to begin choosing between “heating and eating." The rapid rise in energy prices over recent years has far outpaced any other commodity, and unfortunately it doesn’t seem as though the rate of increase is set to slow anytime soon. If prices continue to rise, the situation for families in the UK will only get worse, and at some point the government may be forced to intervene. Labour have stated that they will freeze energy prices if they manage to win the 2015 general election, and whilst this will prevent further increases, it doesn’t help if people are already unable to pay their energy bills. Another solution would be for the installation of renewable energy, especially rooftop solar panels.
The shale-gas boom won’t do much for climate change. But it will make us richer.: The shale-gas boom in the United States won't, by itself, keep driving down U.S. carbon-dioxide emissions in the years ahead. That's because, in addition to killing off coal-fired plants, cheap gas will also crowd out cleaner energy sources like wind, solar, and nuclear. On the other hand, the glut of natural gas from fracking will make the country a bit wealthier and clean up other harmful air pollutants from power plants. Those are the conclusions of a big new report from Stanford's Energy Modeling Forum, which convened 50 experts and 14 different modeling teams from industry, academia, and government to look at how the surge in natural-gas production could transform the U.S. economy. Here are four key points:
- 1) The shale-gas boom will provide a modest boost to U.S. economic growth. On average, the models in the Stanford study predicted that the natural-gas boom would raise GDP by about $70 billion each year over the next several decades (in current dollars). "Although this amount appears large," the report notes, "it represents a relatively modest 0.46 percent of the U.S. economy."
- 2) The shale-gas boom won't do much to solve climate change — at least not on its own. In recent years, a glut of natural gas has helped displace coal power in the U.S. power sector and reduce carbon-dioxide emissions significantly. After all, burning natural gas for electricity produces about half the carbon dioxide that burning coal does.
- 3) Natural gas will, however, help clean up other air pollutants. There's some good environmental news here. Natural gas is considerably cleaner than coal when it comes to other types of harmful air pollution, such as sulfur-dioxide and nitrogen-dioxide.
- 4) There's a fair bit of disagreement between forecasts. Note that we've mainly been discussing the aggregate conclusions of all these different models. But some of the forecasts do vary significantly.
Thousands Worldwide Urge Leaders to Ban Fracking - On Saturday, October 19, 2013, thousands of people joined together in an international day of action, with more than 250 events on six continents, calling for a ban on fracking. The second annual Global Frackdown 2, a project of Food & Water Watch, challenged policy makers to oppose fracking and support investment in renewable energy. A sampling of Global Frackdown 2 events in the U.S., included:
- California: On the heels of Gov. Brown signing a weak bill on fracking, Environment California coordinated with student activists on several University of California campuses.
- New Jersey: Activists and students attended events in New Brunswick and Highland Park, two towns that have banned fracking.
- Wisconsin: Volunteers organized citizens to write hand-written letters to state legislators to stop frac-sand mining, which is threatening land, water and farms in the western part of the state.
- Colorado, New York, New Mexico and North Carolina: Volunteers urged citizens to sign petitions calling on leaders and policy makers to take action to stop fracking.
- Massachusetts: Community members attended a farmers’ market to let local farmers know about the threat of fracking to water, soil and livestock.
- Pennsylvania: PennEnvironment addressed thousands of students gathered in Pittsburgh for the Powershift conference, coordinated a march and rally, and distributed Student Frack Packs for action when they get back to campus.
- Ohio: A letter, signed by Food & Water Watch, Buckeye Forest Council, FRAC Action Columbus and more than 30 local, state and national groups, was delivered to Gov. Kasich’s office calling for a ban on injection wells in the state.
Fracking Protests in NB: Why Resource Projects Are in Peril - Thus the energy hubbub in New Brunswick is ongoing and has a definite history consisting of: a) resource protests, b) project blockages and c) legal precedents before the Supreme Court of Canada. So the Rexton protest has to be viewed as being on this continuum. More over, natives and eco-activists know that today -- without gaining 'social license' -- all resource projects are in peril. Here's a list of such concerns arising from how events in Rexton played-out:
1. CBC photos of 'RCMP snipers' in prone position, scoped-in, taking a bead, are eerily akin to policing missteps at Ipperwash.
2. Torched police cars -- hardly the 'welcome mat' for the Energy East Pipeline.
3. Arresting the local chief of the biggest reserve in NB likely empowers him.
4. Out west, disgruntled chiefs and pipeline adversaries will be taking notes for promoting their anti-energy strategies along those opposed right-of-ways.
So this latest energy hubbub is not about corporate power and exploitation rights. Rather it's about the rise of native empowerment and the deal that Canada has yet to strike with natives that recognizes that they are power-brokers in shaping project outcomes. Rexton is but a symptom that all is not well, right across the country, in terms of business-as-usual approaches for resource access. There's more to come!
More Than 15 Million Americans Now Live Within One Mile Of A Fracking Well - The natural gas boom has led to an “unprecedented industrialization” of many Americans’ backyards, an analysis from the Wall Street Journal has found. The WSJ looked at census and natural gas well data from more than 700 counties in 11 major natural-gas producing states, and found that at least 15.3 million Americans have a natural gas well within one mile of their home that has been drilled since 2000. That’s more than the population of Michigan or New York. The boom has left some towns inundated with natural gas operations. In suburban Johnson County, Texas, 99.5 percent of the area’s 150,000 residents now live within a mile of the county’s 3,900 wells — in 2000, there were fewer than 20 oil and gas wells. And the construction of natural gas wells isn’t letting up anytime soon. Production of the Marcellus Shale region is growing faster than expected, reaching 12 billion cubic feet a day — enough that, if it were a country, the Marcellus Shale would be the eighth-largest producer of natural gas in the world. America will have “a million new oil and gas wells drilled over the next few decades,” a Duke professor told the WSJ. And it’s likely many of those wells could end up in Americans’ backyards — a recent Reuters analysis uncovered the unsettling trend of home developers keeping the rights to oil and gas reserves under the houses they sell, in many cases without notifying the homes’ buyers outright. That way, the home developer can lease the land of an entire neighborhood to a natural gas company — with or without the residents’ consent.
The Oil And Gas Industry Wants To Start Fracking At The Source Of D.C.’s Water Supply - Standing at the top of the Staunton Dam in Virginia’s million-acre George Washington National Forest, Nancy Sorrells says “there are beautiful places in the world, but this forest is one of the most beautiful.” But underneath its postcard views and undeveloped backcountry sits a natural gas deposit that is now believed to underlie approximately half of the national forest. An extension of the Marcellus Shale, which has fueled a massive gas boom in Ohio, Pennsylvania, and West Virginia, the George Washington’s gas reserves are the subject of a contentious debate about whether there should be limits on where the fossil fuel industry is allowed to drill. This debate will come to a head in the coming weeks, as the U.S. Forest Service decides whether or not to allow horizontal drilling (and the accompanying hydraulic fracturing, or ‘fracking’) within the forest’s boundaries. With drilling comes traffic and noise, the threat of air and water pollution, and enduring changes to nearby communities and their way of life. The George Washington contains some of the largest undeveloped, roadless expanses of public lands east of the Mississippi. It is also home to the headwaters of the mid-Atlantic region’s three most significant rivers: the Potomac, the Shenandoah, and the James. These rivers supply water to many of the nine million people who live in the counties that are 75 miles or less from the forest boundary, as well as to both Washington, D.C. and Richmond, Virginia (each less than three hours away). “This national forest,” Sorrells says, “was created for water quality protection.”
The razing of 1101 Carter Road: The rest of the story… Land “covenant” in deed forbids “human habitation” - The Sautner property – adorned with anti-fracking posters and inhabited by some of the most vocal and visible of fracking critics -- had become a particular symbol of the tensions that divided the community. Julie and Craig were featured in various high-profile accounts of the conflict as either victims, heroes or phonies. The aquifer that provided water to their home on 1101 Carter Road, and to 64 other homes in the area, was the focus of a controversial EPA investigation that found pollution at levels posing safety threats in 8 percent of the wells. As part of an eventual settlement, the Sautners sold their property to a Cabot subsidiary for $167,500. Cabot demolished the vacant house, company spokesman George Stark told me after my visit last month, because the company was planning to sell the property, and it was more marketable without the structure. Yet that answer doesn’t square with information on a deed that has since been filed in the Susquehanna County Court House in Montrose. After demolishing the house, Cabot sold the 3.3 acre parcel to Tim and Debbie Maye – owners of an adjoining property -- for $4,000. (Perhaps the absence of the house is an asset to Cabot, which retained the mineral rights on the Sautner acreage, although it’s worth noting that the DEP has forbid the company to drill in the area until it resolves the persistent problem of methane seeping into some water supplies in nine square miles around Carter Road. It's also worth noting that the Mayes have a history with Cabot that's antithetical to the Sautner's. The Mayes, who were once critical of the company, became shale gas supporters after they settled pollution claims of their own ) The most striking aspect of the sale, however, is this: The new owners of 1101 Carter Road are bound by certain conditions set forth in the deed, in parlance that may fairly be described as epic. It forbids a “residence or dwelling for human habitation” on the land. The time frame for this and other restrictions is “forever,” to be observed by future generations as “covenants running with the land.”
The Product Of An Oil Boom: Violence, Addiction, And STDs - Oil drilling’s attitude towards people is much the same as it is toward the climate: protecting them is a burden that prevents the cheapest possible extraction and sale of fuel. That’s why it is no surprise that Peter Rugh, writing for Vice, finds fracking operations are connected with violence against women, sexually transmitted disease, and drug use. The thousands of fracking wells operating in the Bakken, producing more than 660,000 barrels of crude oil a day, require thousands of workers, drawn from across the country, separated from any existing social connection. Most of them are men, “80 guys for every woman,” according to an industry veteran quoted in Vice. Prostitution and strip clubs have appeared around these “man camps” to capitalize off of the gender imbalance, but the gender imbalance is putting women in danger as well. A Department of Justice report is in progress to examine the impact of oil industry camps on “domestic violence, dating violence, sexual assault, and stalking.” Susan Connell, a truck driver in North Dakota’s Bakken, said in a National Geographic profile that she needs to carry around a metal rod as a weapon to fend off assault in the “testosterone cloud” of the oil towns.
Five Months After Tar Sands Leaks Are Reported In Alberta, Company Ordered To Find Cause - Alberta is ordering Canadian Natural Resources (CNRL), the company responsible for a series of ongoing tar sands leaks that were reported in May, to find the cause of the leaks — something the company has failed to do since the four leaks were reported five months ago.The province is also ordering CNRL to test for groundwater contamination near the site of the leaks, one of which is occurring directly below a lake on the Primrose tar sands operation in northeastern Alberta. Right now, the company is in the process of draining the lake so it can attempt to stop the leak, something it was ordered to do a month ago by the Alberta government. Meanwhile, little has been done to stop the other three leaks besides surrounding them with barriers to keep the oil from going into the forest. As of September 11, the leaks have spilled more than 403,900 gallons of bitumen onto the surrounding landscape, and two beavers, 49 birds, 105 amphibians and 46 small mammals have been killed. Other than the enforcement order from Alberta, which will hopefully lead to the discovery of the cause of the leaks, three other investigations are planned into the leaks. Alberta’s department of Environment and Sustainable Resource Development will look into the overall environmental impacts of the spill, including whether the spill impacted groundwater; the Alberta Energy Regulator will investigate the cause of the leaks; and Environment Canada will look into how the leaks impacted wildlife.
State Of Emergency Declared As Another Oil/Gas Train Derails In Canada - Thirteen cars came off the tracks around 1 a.m. Saturday -- 9 of which were carrying liquefied petroleum gas and four that were carrying crude oil. The derailment prompted local officials to declare a state of emergency and the evacuation of the nearly hamlet of Gainford about 80km west of Edmonton. As AP reports, an eyewitness noted "the fireball was so big, it shot across both lanes of the Yellowhead (Highway)... there's fire on both sides." According to the latest reports, the train cars remain ablaze as the liquified hydrocarbons continue to leak. Parkland County police chief added "how it exploded and why is yet to be determined," but while only 2 injuries (CN employees) and no deaths have been reported, he noted "it's still a risky situation so we need to contain as much as possible and keep people far away." This explosion comes just 3 months after the disaster that too 47 lives in Lac-Megantic and once again raises questions over the safety of dramatically increased rail traffic from/to the Bakken.
How changing the definition of oil has deceived both policymakers and the public - Everyone knows that world oil production has been running between 88 and 89 million barrels per day (mbpd) this year because government, industry and media sources tell us so. As it turns out, what everyone knows is wrong. It's wrong not because the range quoted above can't be found in official sources. It's wrong because the numbers include things which are not oil such as natural gas plant liquids and biofuels. If you strip these other things out, then world oil production has been running around 75 mbpd this year. The main thing you need to know about the worldwide rate of production of crude oil alone is that it has been stuck between 71 and 75 mbpd since 2005 (calculated on a monthly basis). And, that has already had huge negative effects on the world economy and world society through high energy prices that are partly responsible for our current economic stagnation. But because natural gas plant liquids production has been growing rather rapidly due to recent intensive drilling for natural gas and because those liquids are misleadingly lumped in with oil supplies, people have been mistakenly given the impression that world oil production continues to grow. Not true! What's growing is a category called "total liquids" which encompasses oil, natural gas plant liquids, biofuels and some other minor fuels. Total liquids are growing only because of large gains in natural gas plant liquids and minor gains in biofuels. And, this is why it is so important to understand what natural gas plant liquids are.
US Energy Independence: The Numbers Don’t Add Up - Recently, friend and colleague Jeffrey Brown--who is best known for his Export Land Model which foretold of shrinking global oil exports--did some fairly simple math to show how difficult it will be for the United States just to maintain its current production, let alone produce all the oil and natural gas it consumes. In a recent email Brown, who is a Dallas-based independent petroleum geologist managing a joint-venture exploration program, wrote the following:The EIA's [U.S. Energy Information Administration's] estimate for the most recent four week average crude oil production rate (Crude + Condensate)[which is the definition of oil] was 7.6 mbpd (million barrels per day). Refinery runs were 15.8 mbpd, and net crude oil imports averaged 8.0 mbpd. The numbers for total liquids are, of course, different. As several people have noted for some time, the primary problem with the tight[oil]/[natural gas] shale plays is the high decline rate.At a (probably conservative) 10%/year decline rate for existing U.S. crude oil production, in order to simply maintain current U.S. crude oil production, the industry would have to put on line the productive equivalent of every current oil field in the U.S. over the next 10 years, or in round numbers we would need the productive equivalent of 10 new Bakken plays over 10 years, in order to maintain current crude oil production.
Shell Claims Global Liquid Fuel Demand will Peak in 2035 - Some said that the automobile would never replace the horse, so when it has been said that oil will never be replaced as the main driver behind society’s existence, maybe we shouldn’t be too quick to believe it. Shell, one of the largest energy companies in the world, has come out and admitted that “by 2070, the passenger road market could be nearly oil-free.” It is just one of several bold predictions made in a recently published report titled “New Lens Scenario: A Shift in Perspective for a World in Transition”, made all the more remarkable by the fact that is a large oil company that is basically admitting the future decline of its industry. Market analysts at the Motley Fool said that “it seems almost impossible that an oil company would make the claim that electric vehicles will be the predominant transportation fuel, but Royal Dutch Shell is making that very claim.” Shell believes that as more and more people move to live in cities, the amount of energy used by cities will increase, and the demands made of the energy will change. Cities around the world currently use 66% of global energy, and over the next 30 years that volume will grow to 80 percent. As urban populations increase public transport will become more popular as it will be the easiest way to travel through inner city areas. Shell claims that it is likely that public transport will be electrically powered, and any cars that are still used on the roads will also be electric.
Reasons behind the sell-off in crude oil - WTI crude oil has undergone a substantial correction in the last few days. What's going on? A few reasons for this price adjustment come to mind:
1. Iran seems to be getting ready to enter the market as it prepares for sanctions to be lifted. Reuters: - Iran is reaching out to its old oil buyers and is ready to cut prices if Western sanctions against it are eased, promising a battle for market share in a world less hungry for oil than when sanctions were imposed. New Iranian President Hassam Rouhani's "charm offensive" at the United Nations last month, coupled with a historic phone call with U.S. President Barak Obama, revived market hopes that Iranian barrels could return with a vengeance if the diplomatic mood music translates into a breakthrough in the stand-off over Tehran's disputed nuclear programme.
2. Yesterday's employment report points to weak economic growth, tapering demand expectations for crude. In particular, private payrolls growth came in way below expectations.
3. Related to the slower growth expectations for the US as well as to the recent government shutdown is the buildup of crude oil inventories.
Saudis sever links with U.S. over Syria: A diplomatic dispute between the U.S. and Saudi Arabia burst into the open Tuesday in a development that could threaten one of the Middle East’s core alliances and Washington’s leadership in the region. The head of Saudi intelligence declared that the kingdom was “scaling back” cooperation with the CIA over arming and training Syrian rebels and seeking alternate weapons suppliers to the U.S.The unprecedented rebuke by Prince Bandar Bin Sultan al-Saud came after Saudi Arabia shocked diplomats by rejecting a prized seat on the UN Security Council. Prince Bandar reportedly told diplomats that the decision was intended as “a message for the U.S.” concerning Saudi frustration with the Obama administration’s failure to arm rebels in Syria and the rising prospect of a nuclear deal that would favour Iran, Riyadh’s foe.
The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar - The number one American export is U.S. dollars. It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars. But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States. In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table". If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.
How the Sunni-Shia schism is dividing the world - The Muslim world’s historic – and deeply tragic – chasm between Sunni and Shia Islam is having worldwide repercussions. Syria’s civil war, America’s craven alliance with the Sunni Gulf autocracies, and Sunni (as well as Israeli) suspicions of Shia Iran are affecting even the work of the United Nations. Saudi Arabia’s petulant refusal last week to take its place among non-voting members of the Security Council, an unprecedented step by any UN member, was intended to express the dictatorial monarchy’s displeasure with Washington’s refusal to bomb Syria after the use of chemical weapons in Damascus – but it also represented Saudi fears that Barack Obama might respond to Iranian overtures for better relations with the West. The Saudi head of intelligence, Prince Bandar bin Sultan – a true buddy of President George W Bush during his 22 years as ambassador in Washington – has now rattled his tin drum to warn the Americans that Saudi Arabia will make a “major shift” in its relations with the US, not just because of its failure to attack Syria but for its inability to produce a fair Israeli-Palestinian peace settlement. What this “major shift” might be – save for the usual Saudi hot air about its independence from US foreign policy – was a secret that the prince kept to himself.
Why Iran’s Influence May Decide Pakistan’s Energy Fate - U.S. President Barack Obama met Wednesday with Pakistani Prime Minister Sharif in the Oval Office. Their meeting followed on the heels of a damning report from Amnesty International questioning the legality of U.S. drone missile strikes on suspected terrorist targets inside Pakistan. Bilateral relations between Islamabad and Washington have been tepid at best since the terrorist attacks of Sept. 11, 2001. Pakistan, however, may be doing more in Washington than looking to allay national security concerns. Ahead of the meeting, Islamabad reportedly scrambled its legal officials to gauge the prospects for a natural gas pipeline long planned from Iran. Washington opposes the natural gas pipeline because of its economic potential for Tehran. But given Iran's recent diplomatic moxie, it may be two against one. An early readout from Vice President Biden's office said Washington is committed to standing beside a "strong, democratic [and] prosperous Pakistan." Bilateral ties hit a low point in 2011 when the now notorious SEAL Team Six killed al-Qaida leader Osama bin Laden at his Pakistani compound without Islamabad's prior knowledge. Ties are complicated further by U.S. drone strikes inside Pakistani territory, which Amnesty International said Tuesday may be a violation of international law. Islamabad said it was mulling various prospects to get the U.S. government's support for a natural gas pipeline from Iran. The Pakistani government in January backed an agreement where Iran would provide $500 million to support the pipeline's construction across the border. Pakistan is struggling to keep the lights on and sees the 310 billion cubic feet of gas slated from Iran each year as a panacea for its energy woes. Pakistani authorities argue that, since the pipeline would be overseen by organizations outside the government, U.S. sanctions wouldn't apply. Pakistani Prime Minister Sharif came to power early this year in part by promising to bring the Pakistani people in from the dark. The U.S. State Department, however, brushed off suggestions the project would actually get off the ground. If it does, it may trigger sanctions on Iran.
Citing Red Tape, Mining Giant Quits Indian Exploration Projects - Anglo-Australian mining giant BHP will withdraw from nine of its ten Indian oil and gas exploration projects, reportedly due to regulatory delays, Reuters says. The move is a major setback for India, the world’s fourth biggest fuel importer. The country has been trying to reduce dependence on energy imports and boost domestic production. “Sentiments are already negative and the exit of BHP Billiton is going to do more harm,” R.S. Sharma, former chairman of state-run Oil and Natural Gas Corp told Reuters. India’s efforts to attract foreign investors have been in trouble lately with companies like Walmart, Posco and ArcelorMittal abandoning projects citing policy hitches.
China Is Now The World’s Largest Importer Of Oil - What Next? - Last month the world witnessed a paradigm shift: China surpassed the United States as the world’s largest consumer of foreign oil, importing 6.3 million barrels per day compared to the United States’ 6.24 million. This trend is likely to continue and this gap is likely to grow, according to the EIA’s October short-term energy outlook. Wood Mackenzie, a leading global energy consultancy, echoed this prediction, estimating Chinese oil imports will rise to 9.2 million barrels per day (70% of total demand) by 2020. This trend has been driven by a combination of factors. Booming American oil production, slow post-recovery growth, and increasing vehicle efficiency have all served to reduce crude imports. In China, however, continued economic growth has brought with it a growing middle class eager to take to the road. While the automobile market had cooled earlier this year, September saw sales rise by 21%—a trend that is putting increasing strain on China’s infrastructure and air quality in addition to oil demand. Some of the world’s largest traffic jams are now commonplace in major Chinese cities, and air quality issues have pushed authorities to pursue synthetic natural gas technology to offset the need for coal-fired electricity. Increasing oil consumption will only serve to exacerbate these issues.
China’s Insatiable Hunger for Energy Resources - Largely below the media radar, China has intensified its global search for energy supplies to secure its dynamic economy. Given the difficulties in increasing domestic output to underwrite the country’s relentless economic growth, in the last four years Chinese companies, including China National Offshore Oil Co. (CNOOC) and Sinopec have spent more than $100 billion worldwide to secure oil and gas assets. Chinese domestic oil production peaked at roughly two percent a year in 2001, against consumption growth of 6.3 percent the same year and 4.5 percent last year, hence Beijing’s scouring the world for resources. China's largest oil fields are mature and their production has largely peaked, leading Chinese energy companies to focus on developing still untapped reserves in both Xinjiang and offshore fields. Despite the increasing global shift towards natural gas, while its use is rapidly increasing in China, as of 2009 the fuel comprised less than four percent of the country's total primary energy consumption. According to the U.S. government’s Energy Information Administration, “the imminent emergence of China as the world's largest net oil importer has been driven by steady growth in Chinese demand, increased oil production in the United States, and a flat level of demand for oil in the U.S. market.” China holds 20.4 billion barrels of proven oil reserves as of January 2012, up over 4 billion barrels from three years ago and the highest in the Asia-Pacific region.
China's Back-Door Natural Gas Supply - One of the most critical changes in global energy flows we've seen for years happened this week. China inaugurated one of its boldest pipeline projects in recent memory. A 2,500 kilometre pipe to carry natural gas and oil from the Indian Ocean across Myanmar in southeast Asia and into southwest Yunnan province. The gas portion of the line became fully operational this week, according to China National Petroleum Corp (CNPC). The line is expected to carry over 1 billion cubic feet of gas per day into China. The twin oil line is expected to follow. This massive development has several key implications for the global energy balance. For one, it means that Myanmar's significant offshore natural gas reserves (and growing production) now have a "go-to" market. This could mean less natgas supply for other consumers in the region. Possibly the reason why fellow Myanmar gas user Thailand said this week that it wants to make coal its official fuel of choice going forward, moving away from natural gas. It also shows that China is committed to diversifying its natural gas import base. As one of the highest payers for LNG imports on the planet, China needs all the gas it can get. And "back door" supply options like the Burmese pipeline are going to be a focus. Finally, the oil segment of the pipeline has the potential to re-make the crude shipping business. The line is expected to deliver over 22 million barrels yearly, or about 440,000 barrels per day into China. Most of this will be tanked oil, offloaded at Myanmar for transit through the pipe.
Unclean Coal: Record-Breaking Air Pollution Nearly Shuts Down Chinese City - Extreme levels of air pollution forced schools, roads and the airport to close in a large city in northeastern China on Monday. In Harbin, the capital of the Heilongjiang province, fine particulate matter (PM2.5) reached levels of 1,000 micrograms per cubic meter in some parts of the city, readings 40 times the level of 25 or less micrograms per cubic meter that the World Health Organization considers ideal for human health and more than three times the level of 300 that’s considered hazardous — for comparison, as the New York Times notes, the air quality index in New York was 41 on Monday morning. It was the first time PM2.5 readings have hit 1,000 since China began releasing data on PM2.5 in January 2012. Reducing visibility to less than 50 yards in some areas, the smog forced elementary and middle schools to cancel classes, closed some highways and led to cancellations of at least 40 flights. It was the first time this winter, a period known as the “heating season” that smog caused major problems for Chinese residents. In China, the heating season begins when city managers switch on the heating systems in homes and city buildings, which in Harbin happened on Sunday. The extra coal it takes to heat China’s cities in the winter, coupled with winter weather patterns makes the season especially prone to high levels of smog in the country.
China Tries to Clean Up Toxic Legacy of Its Rare Earth Riches — In northern China, near the Mongolian border, radioactively contaminated leaks from two decades of rare earth refining have been slowly trickling underground toward the Yellow River, a crucial water source for 150 million people. In Jiangxi province in south-central China, the national government has seized control of rare earth mining districts from provincial officials after finding widespread illegal strip-mining of rare earth metals. And in Guangdong province in southeastern China, regulators are struggling to repair rice fields and streams destroyed by powerful acids and other runoff from open-pit rare earth mines that are often run by violent organized crime syndicates. Communities scattered across China face heavy environmental damage that accumulated through two decades of nearly unregulated rare earth mining and refining. While the Chinese government has begun spending billions of dollars to clean up the damage, the environmental impact is becoming an international trade issue, with a World Trade Organization panel in Geneva expected to issue a crucial draft report on Wednesday. Arriving three years after an international tempest over the rare earths trade and 19 months after the World Trade Organization litigation was actually filed, the coming decision may not make a big difference to the rare earth industry itself, industry executives and officials said. China, the world’s dominant producer of rare earth metals, quietly and unilaterally imposed taxes and annual tonnage limits on its rare earth exports seven years ago. It then gradually raised the taxes and lowered the tonnage limits in subsequent years, slowly throttling supplies to overseas manufacturers.
Survey: China Manufacturing Rises to 7-Month High — Chinese manufacturing rose to a seven-month high in October, suggesting continued momentum for the rebound in the world’s second-biggest economy. The report released Thursday follows Chinese data earlier this month that showed quarterly economic growth rose to 7.8 percent after hitting a two-decade low in the second quarter, easing pressure for further stimulus and allowing leaders to focus on reforms. The preliminary version of HSBC’s purchasing managers index rose to 50.9 from September’s 50.2 on a 100-point scale on which numbers below 50 indicate contraction. The report, released before a similar official survey, provides an early indication each month of the health in China’s mammoth manufacturing sector. Output, new orders and new export orders all increased at a faster rate, according to the survey, which is based on 85-90 percent of responses from 420 factories.
Big China Banks Triple Debt Write-Offs to Brace for Defaults - China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan ($3.65 billion) of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring. Erasing the worst of the bad debts may allow the banks to mitigate a surge in nonperforming-loan ratios amid rising defaults in the world’s second-largest economy. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.
China money rates shoot up as tightening worries rise (Reuters) - China's primary short-term money rates rose on Wednesday in a delayed reaction to signals from regulators they are considering tightening liquidity to tamp rising inflationary pressure. A policy adviser to the People's Bank of China (PBOC) told Reuters on Tuesday that the authority may tighten cash conditions in the financial system to address inflation risks. The benchmark seven-day repo contract, which has been on a steady slide since Oct. 9, rose steeply in the morning session with quotes as high as 4.55 percent, up more than a full percentage point from the previous final closing quote. Beijing is concerned that unexpected rises in inflation and property prices may be partly attributable to liquidity washing into the interbank market from capital inflows and fiscal deposits.
Spike in China money rates raises cash-crunch fears - FT.com: China’s money rates shot up on Thursday after the central bank withdrew cash from the financial system, fuelling worries that the world’s second-biggest economy might see a replay of a liquidity squeeze that rattled global markets earlier this year. The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, opened at 5 per cent, a four-month high and up 150 basis points from the end of last week. But analysts said concerns of a cash-crunch redux were premature, with tightening moves by the central bank only mild so far and in large part directed at counteracting big inflows of cash from abroad. “We believe the central bank is just doing a little tightening on the margins and that overall it is maintaining a neutral stance in monetary policy. It won’t lead to a big surge in interbank lending rates,” In June when the central bank drained money from the Chinese economy, interbank rates briefly spiked to double digits and the gears of the financial system gummed up before it intervened again with targeted cash injections. Since then interbank rates have stabilised at relatively low levels, but a big jump in credit issuance in recent months and hefty capital inflows from abroad have led investors to brace for another round of policy tightening by the central bank. The People’s Bank of China hinted that this might be coming last week when it said credit growth had been on the fast side. It followed up this hint by withdrawing a small amount of cash from the financial system. By refraining from conducting open-market operations for three consecutive sessions, the effect will be a net drain of Rmb58bn ($9.5bn) from the interbank market this week as previously issued bills mature
American Debt, Chinese Anxiety - Though a potential global financial crisis was averted at the last minute, one notable development has been a string of warnings by Chinese officials. Prime Minister Li Keqiang told Secretary of State John Kerry that he was “highly concerned” about a possible default. Yi Gang, deputy governor of China’s central bank, warned that America “should have the wisdom to solve this problem as soon as possible.” An opinion essay in Xinhua, the state-run media agency, called “ for the befuddled world to start considering building a de-Americanized world.” These statements, unusually blunt coming from the Chinese, show that repeated, avoidable crises threaten the privileged position of the U.S. as issuer of the world’s main reserve currency and (until now) risk-free debt. It is unlikely that China would provoke a sudden, international financial calamity — for instance, by unloading U.S. Treasury securities and other government debt. Nonetheless, the process of repeated crises and temporary reprieves will only solidify the Chinese government’s determination to diversify its holdings away from dollar-denominated assets. ... Foreign entities — governments, companies and individuals — hold nearly half of the publicly held debt owed by the United States. Of China’s $3.6 trillion in foreign exchange reserves, about 60 percent is estimated to be held in U.S. government securities. As foreign exchange reserves have soared over the last decade, Chinese monetary authorities have attempted to diversify away from dollar-denominated assets, with limited success. The motivation for diversification is understandable: Since July 2005, the Chinese currency has been appreciating against the U.S. dollar, so that in terms of local purchasing power, dollar-denominated holdings have been losing value.
What The Debt Ceiling Debacle Should Teach China - Stephen Roach - Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling. But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter. As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake. . Along with roughly $700 billion in Chinese holdings of US agency debt (Fannie Mae and Freddie Mac), China’s total $2 trillion exposure to US government and quasi-government securities is massive by any standard. China’s seemingly open-ended purchases of US government debt are at the heart of a web of codependency that binds the two economies. China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity. It certainly is not attracted by the return and seemingly riskless security of US government paper – both of which are much in play in an era of zero interest rates and mounting concerns about default. Nor is sympathy at work; China does not buy Treasuries because it wants to temper the pain of America’s fiscal brinkmanship. China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 years. As a surplus saver, China has run large current-account surpluses since 1994, accumulating a massive portfolio of foreign-exchange reserves that now stands at almost $3.7 trillion. China has recycled about 60% of these reserves back into dollar-denominated US government securities, because it wants to limit any appreciation of the renminbi against the world’s benchmark currency. If China bought fewer dollars, the renminbi’s exchange rate – up 35% against the dollar since mid-2005 – would strengthen more sharply than it already has, jeopardizing competiveness and export-led growth.
Japan and China brace for next dollar drama - Deal or no deal, the US Congress’ dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill. The 11th-hour agreement on Wednesday between Congressional Republicans and Democrats to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on US Treasury bonds that had threatened the global economy and financial system. But Congress gets another chance to hold US creditworthiness hostage early next year ahead of a new February 7 deadline to approve a debt ceiling increase. “We’re glad a deal has been struck,” said a Japanese policymaker, who spoke on condition of anonymity. “But the uncertainty will remain and it will be the same thing all over again early next year.” He and other Japanese officials say they have already developed contingency plans that include flooding Japan’s banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose Communist leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the US dollar in international trade. “They might actually consider accelerating the process,” said Vincent Chan, head of equity research at Credit Suisse in Hong Kong. “You strengthen the case for making the renminbi a genuine international currency, because the Americans are unreliable.”
Asia Seeks to Cut its Dollar Dependency - Recent market volatility over expected U.S. monetary tightening has made Asia keenly aware of its reliance on the dollar, boosting efforts to use local currencies for trade and other transactions. On Tuesday, China and Singapore announced they would introduce direct trading between their currencies. Beijing also said it would allow Singapore-based investors to take yuan funds raised in the city-state and invest them in mainland securities markets. Singapore follows in the footsteps of London – which gained so-called RQFII status last week – and Hong Kong. The move, designed to promote use of the yuan and broaden the investor base in China’s markets, builds on other measures taken recently that aim to reduce Asia’s dependence on the U.S. dollar. Earlier this month China signed a 100 billion yuan ($16.4 billion) swap deal with Indonesia. It has existing pacts with Australia, South Korea and a number of European countries. South Korea this month signed currency-swap agreements with Indonesia, Malaysia and the United Arab Emirates worth around $20 billion. Officials say they’re considering more such deals, in addition to existing pacts with China and Japan.Swap agreements – in which central banks pledge to provide each other with currency, usually on a short-term basis – often are enacted during periods of financial turmoil, but more recently have taken on a greater role in trade and diplomacy.
Why are the World's Best Central Bankers All Asian? - Recently, Global Finance released this year's list of the world's best central bankers, a sort of Pro Bowl for central banking. In a sign that the "Asian Century" has come to central banking at least, all of the featured top vote-getters were from Asia. (Perennial selection Mark Carney famously moved to the UK from Canada so the jury is still out on him.) Again, I believe this points out that since the Asian financial crisis, these states have learned their lessons about prudent monetary policy in the face of unusual situations: avoidance of extremely negative real interest rates, balance sheet abuse, market-misleading pronouncements and so on. Obviously none of these holds insofar as Ben Bernanke is concerned. Faced with its own crisis, the United States has embarked on Wild West experiments in central banking that, quite frankly, have not produced much of anything. Anyway, to the press blurb:Global Finance magazine has named the heads of the central banks of Malaysia, the Philippines and Taiwan as the World’s Best Central Bankers over the past year, in recognition of their achievement of an “A” rating on Global Finance’s Central Banker Report Cards. In addition, the central bankers of Chile and the European Union earned “A-” ratings. The Central Banker Report Cards, published annually by Global Finance since 1994, grades central bank governors of more than 50 key countries (and the European Union) on an “A” to “F” scale for success in areas such as inflation control, economic growth goals, currency stability and interest rate management. (“A” represents an excellent performance down through “F” for outright failure.) Subjective criteria also apply.
Asia Enjoys Stronger Global Demand - Export data for South Korea and Taiwan on Monday added to the view that Asia is seeing the benefits of a gradual pickup in global demand, though the path remains bumpy. South Korean exports rose 2.9% from a year earlier in the first 20 days of October, supporting the analysis that September’s 1.5% contraction was due to a large number of public holidays. In Taiwan, a major semiconductor exporter that’s seen as a bellwether for the global cycle, export orders rose 2% on the year in September, as they were buoyed by demand from the U.S. and Europe for new electronic gadgets. That marked the third consecutive month of gains and was much better than the 1% decline predicted by a Wall Street Journal poll of 11 economists. Orders from the U.S. rose 7%, while orders from Europe jumped 15.6%.More stable economic and financial conditions in the euro zone, which emerged from an 18-month recession in the second quarter, are part of the improving picture, analysts say. The U.S. is also growing at a steady rate, while China’s economy has strengthened, quelling earlier fears of a hard landing. Not every country is feeling the benefits just yet: Data Monday showed Japanese export volumes fell 1.9% in September, even as the weak yen raised the value of exports. Some of the decline may be due to the changing nature of Japan’s economy: Businesses increasingly are moving manufacturing overseas to take advantage of cheaper labor elsewhere in Asia, meaning the full impact of the global recovery isn’t being felt in Tokyo.
Corporations Now Using Foreign Tribunals to Attack Domestic Court Rulings - Should an international tribunal of three private attorneys, sitting outside of any domestic legal system, have the power to overrule domestic courts? That’s the question addressed in the recent analysis, “Investment Agreements versus the Rule of Law?,” published on UNCTAD’s Investment Policy Hub. The piece highlights the little-known but creeping practice of corporations asking foreign tribunals to second-guess domestic court decisions not in their favor and to order taxpayer payment as compensation. These tribunals are the product of the “investor-state” system, a little-known creation of “trade” and investment deals that empowers foreign corporations to skirt domestic courts and directly challenge governments before extrajudicial tribunals for policies and decisions that they claim as undermining “future expected profits.” Under this extreme system, foreign corporations have challenged toxics bans, land-use rules, regulatory permits, water and timber policies, medicine patent policies, pollution clean ups, climate and energy laws, and other public interest polices. As if undermining a government’s public interest laws and regulations was not enough, foreign investors are increasingly using the investor-state system to challenge court judgments, undermining the principles of legal certainty, state sovereignty, and rule of law more generally. While domestic courts often employ safeguards, such as the principle of judicial review, judicial independence and transparency in their decision-making, these safeguards are notably absent in investor-state arbitrations, where lawyers who represent the investors take turns as ostensibly “impartial” arbitrators, interpretations of international law are regularly inconsistent and erroneous, and decisions often cannot be appealed.
The Trans-Pacific Partnership Legalizes Corporate Rights Prevailing Over Human Rights -There is simply no disputing this given the prima facie reality of the current configuration of the US economy. Workers in the manufacturing sector have seen their jobs and factories shipped overseas. As a result, they have become unemployed. If they are lucky enough to get a new job, it's most often at a much lower pay with fewer if any benefits. This is not true of all blue collar workers, but it's the accelerating trend. Congressman Alan Grayson (D-FL) calls what is known of the framework of the secretively negotiated Trans-Pacific Partnership (TPP) "a punch in the face to the middle class." Larry Cohen, CWA president, adds that the TPP represents "a race to the bottom and we need a race to the top": TPP is bad for working families, because, like nearly every other trade agreement that’s been negotiated by the U.S. in the past 20 years, TPP isn’t concerned with U.S. workers or jobs. Every other nation starts out with jobs and the economy as priorities. The U.S. unfortunately has a different focus, and looks at trade in terms of national security and global corporate interests, not ensuring the economic well-being of working families. Virtually everyone in the United States who is not part of the 1% of corporate and executive branch negotiators is in the dark about the specific provisions of the TPP because it is being negotiated without any transparency whatsoever. It's being hammered out in secret because there is an obvious fear that too many citizens and advocacy groups would be in an uproar about how it globalizes corporations to supercede sovereignty at the expense of workers, human rights, the environment, taxpayer subsidies for offshoring jobs, and many more provisions that betray the interests of all but corporations.
Trade: Hyperglobalisation and metropolitan gravity - The Economist - NOT long ago, Paul Krugman published a little blog post documenting some calculations he had run on trade growth in America from 1997 to 2011. Foreign trade soared over the period, growing more than twice as fast as output. Domestic trade, by contrast, had grown less than GDP. Mr Krugman wrote:I think this makes sense: the forces behind hyperglobalization — reduced transportation and communication costs leading to vertical disintegration of production — are encouraging mainly long-range trade to save a few percent on labor costs, not shipping stuff between U.S. cities. Interregional trade seems even to be lagging GDP, possibly because our cities are becoming less specialized than they used to be. (What does Atlanta do for a living, exactly?) I responded that while growth in domestic trade in goods might be lagging GDP, total domestic trade—including trade in services, but also in the domestic value-added of what are nominally imports (like the engineering and design in an iPhone)—has probably been soaring. I still think that is right. But after reading Mr Krugman's recent and related paper on the subject (for which he was doing the calculations that inspired the blog post), I think we are not so much disagreeing as talking about different things. The story Mr Krugman tells in his paper is both fascinating and important.
Selling to each other impossible as worldwide trade diminishes - When HSBC Holdings Plc’s economists from around the world recently pooled their forecasts, virtually all had a similar source of growth in mind for the region they monitored: exports. The impossibility of every nation being able to sell more than it buys means some of the analysts must be wrong -- unless the rest of the solar system becomes a source of demand for the globe’s products. The bet on trade is flopping for companies and policy makers who had hoped it would power recoveries held back by weak domestic demand. This week alone, Caterpillar Inc. and Unilever complained of sliding overseas buying and data showed global trade volumes fell in August by the most since February. Trade is falling short as emerging markets from Brazil to India slow and the dollar resumes a slide abetted by the Federal Reserve’s maintaining stimulus. A report yesterday highlighted the issue: The Hague-based CPB Netherlands Bureau for Economic Policy Analysis estimated global trade volume fell 0.8 percent in August, eroding a 1.8 percent jump of the previous month. It was the weakest performance since a 1.1 percent decline in February and left the three-month average lagging its historical pace.Data from individual countries reflects the gloom. The U.S. trade gap was little changed in August at $38.8 billion as exports fell 0.1 percent and imports barely budged. Chinese exports unexpectedly fell in September and shipments from Taiwan and South Korea also declined. Even with the yen falling this year, the volume of Japanese exports fell last month.
Japan Posts Trade Deficit for Record 15th Month - Japan posted a trade deficit in September for a 15th straight month, the longest stretch on record, pointing to an apparent structural change in the economy and uncertainties about global growth. The merchandise trade balance showed a ¥932.1 billion ($9.5 billion) deficit in September, making the run of monthly deficits the longest since January 1979, when the data were first compiled in the current format, finance ministry figures showed Monday. It was also the largest deficit ever for the month of September. The previous record of 14 straight months stretched between July 1979 and August 1980 in the wake of the 1979 energy crisis. Several structural factors were to blame for the latest deficit. The first was Japan’s dependence on fossil-fuel imports. With nearly all the country’s nuclear plants shut following the 2011 Fukushima nuclear accident, fossil fuels now account for around 90% of country’s energy needs compared with about 60% before the accident. Tensions in Syria have exacerbated the situation, keeping the import price of crude oil high, around $110 a barrel, in September. The value of all imports rose 16.5% on year, while the value of exports grew by 11.5%. In volume terms, exports declined 1.9%. It was the first drop in three months, undercutting the government’s earlier claims that its measures to increase exports were producing results.
Abenomics Humiliated Again As Japan Posts 15th Consecutive (And Record) Trade Deficit - Overnight Japan posted its latest, September, trade numbers which were absolutely abysmal, as the trade deficit rose to a fresh record high of 932 billion yen ($9.5 billion), the 15th consecutive monthly shortfall. The deficit for April-September rose to nearly 5 trillion yen ($51 billion), also a record for the first half of the fiscal year. The reason: surging cost of energy and food far outweighed any incremental benefits for exports courtesy of the ongoing Yen devaluation. Breakdown by component: Imports rose 16.5 percent in September from a year earlier to 6.90 trillion yen ($70.3 billion), while exports, helped by recoveries in key overseas markets such as the US and EU, climbed 11.5 percent to 5.97 trillion yen ($60.9 billion). Imports of oil and gas accounted for nearly a third of the total but fell 1 percent as oil prices moderated. Imports of soybeans and other food and machinery surged at double-digit rates. Exports were boosted by rising shipments of vehicles, iron and steel, rubber, chemicals and machinery. The US remained Japan’s largest export destination, at 1.11 trillion yen ($11.3 billion), while imports totaled 665 billion yen ($6.8 billion). The resulting 533 billion yen ($5.4 billion) surplus rose 25 percent from a year earlier. The biggest irony, however, was in Japan's trade relationship with its nemesis China, which has once again outsmarted its island neighbor. Instead of escalating militarily over a bunch of rocks in the East China Sea, China is now intent on using Japan as a mercantilist source of GDP growth. And, alternatively, Japan's GDP is getting clobbered thanks to its soaring deficit with China: Japan’s trade deficit with China jumped 87 percent to 620 billion yen ($6.3 billion) as imports of such items as cellphones and solar panels surged 31 percent to 1.68 trillion yen ($17 billion) while exports were up 11 percent at 1.06 trillion yen ($10.8 billion). Japan’s shipments to China, Japan’s biggest trade partner, grew 11.4 percent to 1.06 trillion yen in September, while imports from China soared 30.9 percent to 1.68 trillion yen.
Japan’s Abenomics: time to take stock - IMF Blog - Almost one year ago, the term Abenomics first surfaced in Japan. The idea of a coordinated policy effort to revive Japan’s economy and end deflation seemed a bold idea, but also a long-shot. With Abenomics approaching the one-year mark, is the new strategy working? The year started with a flurry of new policy initiatives: in January, the Bank of Japan (BoJ) adopted a 2 percent inflation target, followed by new fiscal stimulus, and a decision to join negotiations over the Trans-Pacific Partnership (TPP), a proposal for a free trade agreement spanning countries from Australia, Brunei, to Chile, Canada, and the U.S. Shortly after, Haruhiko Kuroda took the helm at the Bank of Japan and introduced Quantitative and Qualitative Monetary Easing—an aggressive plan to reach 2 percent inflation in about 2 years mainly through large-scale bond purchases. Just, a few days ago, the government agreed to go ahead with the consumption tax increase in 2014 and announced further fiscal stimulus to soften the growth impact. The strength of the recovery in the first half of this year has surprised many. The rebound in equity markets, yen depreciation, and new public spending all contributed to a remarkable turnaround, with growth reaching almost 4 percent in the first six month of the year. That said, the transition to a private demand-led recovery is still at an early stage. Private investment has not taken off and labor markets, while tighter, have not generated much wage growth. A good start, yes, but not a homerun.
IMF Warns Japan About Using Monetary Policy as Crutch - Since Japanese Prime Minister Shinzo Abe took office last December, both the yen and yields on sovereign debt have gone down, largely due to the government and the Bank of Japan's heavy involvement in the economy’s monetary framework. But with the BOJ now purchasing Japanese government bonds at a faster pace than Japan’s government can issue debt, economists at the International Monetary Fund warn that Mr. Abe’s plans to revive the economy through monetary policy could hit a wall unless more fundamental reform measures take their place. “Without ambitious growth and fiscal reforms in train, the BOJ could face difficulties in mainintaining stable long-term rates,” a working paper released by the global financial watchdog showed. “Monetary policy alone cannot counter a potentially rising fiscal risk premium under current policies.” While public spending along with private consumption have been key factors in recent strong readings of gross domestic product, underlying economic data that reflect what fundamentally drives the nation’s economy paint a different picture. Neither industrial production nor machinery orders have logged significant gains in recent years, while the country has racked up 15 straight months of merchandise trade deficits.The IMF has long called for radical, market-driven reforms as a way to kick-start Japan’s long-dormant economy. Deregulating the agricultural sector, encouraging foreign investment, increasing labor mobility and relaxing immigration rules are among the recommendations the IMF made in its annual consultation with Japan this year.
Moody's Credit Officer: Looking At Progress Of Japan Govt's Deficit Reduction - A Moody's Investors Service credit officer said Tuesday that the ratings firm is looking at the progress of Japanese government budget-deficit reduction to assess the nation's creditworthiness. Such reductions have to be achieved through a combination of tax hikes and expenditure cuts, said Tom Byrne, regional credit officer for Asia and the Middle East. He also said the government's decision to raise the consumption tax earlier this month was a "lesser evil" than the other alternatives of raising the corporate tax or individual income tax. While there has been no major progress in reducing expenditures," our understanding is that expenditure restraint will also be considered, particularly making social welfare expenditures more efficient," Mr. Byrne said. The Japanese government decided earlier this month to raise the consumption tax to 8% from 5% in April to help improve the nation's coffers. The central government debt is now over Y1 quadrillion, more than twice the size of the economy, by far the highest level among industrialized economies.
Japan CPI Data a Real Inflation Signal, or Just Noise? - Skeptics of Japan’s efforts reverse 15 years of falling prices may have now have one less reason to be critical.Drum roll … for the first time since 2008, the most basic measure of prices — which excludes food and energy costs — was unchanged in September from the same month the year before.Why is that important?In recent months, the government has been proudly trumpeting rises in consumer prices, including energy, as proof of its success in ending deflation. Yet non-believers have said that’s cheating, as the yen’s 11% fall against the dollar this year has naturally pushed up prices of imported energy.So a “flat” reading in “core core” inflation could signal that other prices are finally starting to tick up. But economists still aren’t convinced. Some of the non-food, non-energy prices that are rising are for things like computers, which are still imported. Economists say that if the Bank of Japan wants to reach its goal of a 2% annual rise in prices, prices of non-import items such as rents and services need to go up as well.
Why Have Young People In Japan Stopped Having Sex? - Japan's under-40s appear to be losing interest in conventional relationships. Millions aren't even dating, and increasing numbers can't be bothered with sex. For their government, "celibacy syndrome" is part of a looming national catastrophe. Japan already has one of the world's lowest birth rates. As The Guardian reports, 45% of Japanese women aged 16-24 are "not interested in or despise sexual contact". More than a quarter of men feel the same way. Is Japan providing a glimpse of all our futures? Many of the shifts there are occurring in other advanced nations, too. Across urban Asia, Europe and America, people are marrying later or not at all, birth rates are falling, single-occupant households are on the rise and, in countries where economic recession is worst, young people are living at home...
How No-Strings Aid Affects the Poor - GiveDirectly is an unusual charity. Donors give money. GiveDirectly, well, gives it directly to the poor. It does not tell them how to spend it or when to spend it. In the trial, GiveDirectly sent certain poor rural households money through M-Pesa, the Kenyan mobile money system. There was variation in whether it gave the money to the household’s wife or husband, whether it went out in a lump sum or installments and in the size of the transfer. (Read about how GiveDirectly conducted the study here.) Here are some of the headline results:
- The value of the recipients’ “assets” — like farm animals and metal roofs — increased 58 percent.
- The recipients were 23 percentage points more likely to have a metal roof rather than a thatch roof, and the value of their livestock increased by half.
- The transfer reduced recipients’ hunger, increasing food consumption 20 percent and reducing the likelihood of a respondent going hungry the week before by 30 percent.
- The recipients invested some of their money, increasing their revenue from animal husbandry and other small-scale enterprises.
- The recipients were happier, more satisfied and felt less stress, with big transfers even reducing the recipients’ levels of cortisol, a stress hormone.
- But not all poverty indicators improved, with little evidence of an effect on health or education.
India to Infuse $2.3 Billion in State-Run Banks on Soured Loans - India will inject 140 billion rupees ($2.3 billion) into government-run banks including State Bank of India and Central Bank of India (CBOI) to guard against soured loans amid forecasts for the slowest economic growth in a decade. The recapitalization of state-controlled banks will enable them to raise money through share sales, Rajiv Takru, the Finance Ministry’s banking secretary, told reporters in New Delhi today. State Bank of India will receive 20 billion rupees, while IDBI Bank Ltd. (IDBI) and Central Bank of India will get 18 billion rupees each, he said. The injection is part of a ministry goal to help banks boost credit and meet tighter capital-reserve requirements. Bad debt as a percentage of Indian bank lending rose to a six-year high in June, with government-run banks holding a higher share of non-performing loans, central bank data show.
The Five Pillars of Raghuram Rajan -- Reserve Bank of India Governor Raghuram Rajan has big plans to reform India’s financial sector during his term as the central bank chief. His strategy takes a cue from Japanese Prime Minister Shinzo Abe, who this summer unveiled a plan for boosting Japan’s growth based on three elements, which Mr. Abe calls arrows. “They have three arrows, I have five pillars,” Mr. Rajan said at an event of The Institute of International Finance in Washington D.C. earlier this month. “Five pillars of reform over the next few years,” he said. Here they are:
- Pillar 1: Monetary policy framework.“We’ve got to get our monetary policy framework clear and understood by the broader public,” “And of course, also, bring it up to modern standards of transparency and credibility,”
- Pillar 2: Reform India’s banking system.
- Pillar 3: Liberalizing Indian markets.
- Pillar 4: Financial inclusion. Mr. Rajan said that India would look to use technology increasingly to bring financial services to millions of unbanked people in smaller towns and rural areas. “We have a committee which is looking into how we should do this better,” said Mr. Rajan.
- Pillar 5: Dealing with financial distress. “Whether it be corporate distress, or financial institution distress: we need to improve our mechanisms to make it simpler, cleaner, and less value-reducing,”
Australia Raises Debt-Ceiling to A$500bn to Avoid US-Like Crisis - Australia's government is increasing the country's debt limit by two thirds to avoid a potential fiscal crisis in the future, as it is projected to reach the current debt ceiling by the end of 2013. Treasurer Joe Hockey said after a federal Cabinet meeting in Canberra on 22 October that the country will increase its debt limit by A$200bn (US$193bn, £120bn, €141bn) to A$500bn. Australia is projected to reach its current A$300bn ceiling in December. "The Coalition Government will have to increase the debt limit for Commonwealth government securities to $500bn," said Hockey."We are increasing it to that level because I've been advised that on December 12, the current debt limit of $300bn will be hit."He said the country's debt had been expected to peak at A$370bn, but recent trends revealed it will exceed A$400bn."The debt limit needs to be set so as to provide sufficient headroom to ensure there is stability and certainty for the financial markets about the government's capacity to finance its operations for the foreseeable future," Hockey said. "We need not look any further than the recent events in the United States to realise how imperative stability and certainty is for confidence."
The best cure for "easy money" is easier monetary policy - Nick Rowe - Reading Bank of Canada Monetary Policy Reports doesn't normally annoy me, but reading this latest one did. Specifically, this bit: "Although the Bank considers the risks around its projected inflation path to be balanced, the fact that inflation has been persistently below target means that downside risks to inflation assume increasing importance. However, the Bank must also take into consideration the risk of exacerbating already-elevated household imbalances." Translation: "We would maybe like to cut interest rates to prevent inflation staying below target, but we are scared of doing this because it might cause some people to borrow too much, so we are just crossing our fingers and hoping something will turn up so we don't need to cut interest rates." First off, there's a massive implicit fallacy of composition in that sort of reasoning. If you cut interest rates for one individual that individual will respond by borrowing more and spending more. But that is not how monetary policy works for an economy as a whole. Because one person's spending is another person's income. So if people spend $100 more per month then people earn $100 more income per month, so they don't need to borrow anything more in order to spend more. And it's even less true in an open economy, if a cut in interest rates causes exchange rate depreciation so foreigners spend more on Canadian goods, so Canadian net borrowing from abroad actually falls, as net exports increase.
Emerging-Market Bank Lending Conditions Tighten Further - Bank lending conditions in emerging markets have deteriorated to their worst levels in over a year, according to a new industry survey. It’s another sign of weakening growth in emerging markets, and shows how vulnerable many developing economies are to an eventual Federal Reserve exit from the U.S. central bank’s easy money policies. Lending conditions in Asian economies are showing the worst degradation, with wholesale funding conditions rapidly decaying, credit standards tightening sharply and demand for loans falling and non-performing loans rising, according to the Institute of International Finance’s quarterly survey. Lending conditions had already started to degrade since the beginning of this year as growth in emerging markets slowed. But when Fed officials started talking about weaning markets off cash injections meant to spur U.S. growth, investors pulled out of developing economies in droves. That capital exodus hit currency, bond and stock markets hard in those countries, exacerbating concerns about growth. “This tightening reflects in part banks’ reaction to the capital market volatility over the summer months,” the global banking trade group. The group represents over 400 of the world’s largest private financial institutions and IIF’s survey is based on the responses of senior loan and credit officers from 134 banks.
Central Banks Drop Tightening Talk as Easy Money Goes On - “We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London. Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world. The risk is that continued stimulus will inflate asset bubbles central bankers will have to deal with later. Already, talk of unsustainable home-price increases is spreading from Germany to New Zealand, while the MSCI World Index of developed-world stock markets is near its highest level since 2007. “We are undoubtedly seeing these central bankers go wild,” said Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York. They “are just pumping liquidity hand over fist and promising to keep rates down. It’s not normal.” Normal or not, that’s been the environment now for five years after monetary authorities fought to protect the world economy from deflation and to hasten its recovery. In the advanced world, central banks drove interest rates close to zero and ballooned their balance sheets beyond $20 trillion through repeated rounds of bond purchases, a policy known as quantitative easing.
Greeks are 40 percent poorer than 5 years ago, 1.37 million jobless - Greeks are nearly 40 percent poorer than 5 years ago, with disposable incomes down by a third since the country entered into recession. Financial struggles linger after the 2008 crisis,and the government austerity measures haven’t yielded promised growth. Gross disposable incomes fell 29.5 percent between the second quarters of 2008 and 2013, the ELSTAT statistics service said on Tuesday in a report. Adding in cumulative consumer price inflation over the same period takes the decline close to 40 percent. Workers’ compensation has fallen 34 percent since the second quarter of 2009, according to the ELSTAT report. The government, under strict pressure to reduce the ballooning budget deficit, has cut social benefits by 26 percent. Greece’s crisis, which has haunted the economy for 6 years, has forced it to dismantle and privatize its state assets to meet its austerity targets under the international bailout plan. Unemployment has hit record highs – and nearly 1.37 million are jobless, the highest rate among any EU country. 55.1 percent of people under 25 are without a job.
Should Europe write-down Greece’s debt? - In Europe, an open dispute has emerged between the IMF and the German government on the vexing issue of how to bring Greece’s public debt down to a more sustainable level. The IMF has taken the position that Greece’s official creditors, other than the IMF itself, should accept some write down of their claims on Greece. The German government for its part is strongly resisting such calls since it does not wish to saddle the German taxpayer with the bill. Greece’s public debt to GDP ratio at around 175% is high by any standards. It also makes it extremely difficult for Greece to reach the 110% of GDP public debt target for 2022 set by the IMF-EU Greek financial support program. Following the radical 2011 restructuring of Greece’s privately held debt, more than 90% of Greece’s public debt is held by its official creditors. This is the rationale for the IMF’s call for official debt restructuring in order to relieve Greece from a further round of severe budget austerity. It would seem that the IMF is too insistent on a given public debt to GDP target for Greece and is not paying attention to the more substantive issue of Greece’s real debt burden. This is blinding the IMF to an obvious compromise with Greece’s official creditors. Instead of asking the official creditors to actually write down the face value of Greece’s public debt, the IMF should be asking those creditors to substantially extend the term of that debt to say 50 years and to give Greece a 10-year grace period before Greece had to start paying interest on that debt.
Italy plans to offer guarantees on government bond derivatives (Reuters) - A new system of guarantees Italy is planning to introduce will make it cheaper for banks to negotiate derivative contracts with the Treasury over government bonds, potentially increasing their ability to buy Italian debt. The move is linked to new Basel III international banking rules that require lenders to hold more capital against their exposure to derivatives contracts. The plan comes at a time when Italian banks are expected to slow down purchases of domestic bonds, making it more important for the Treasury to find foreign buyers for its debt. Italy is one of the world's biggest sovereign borrowers and has narrowly avoided being sucked into the euro zone debt crisis. Under the new system, outlined in a draft decree linked to the budget law that parliament must pass by year-end, the Treasury and the banks will exchange cash sums on a short-term basis to guarantee their respective derivatives positions, based on their mark-to-market value. The sums held as collateral will bear interest at money-market rates.
New Rules for Italy Banks "I'll Guarantee Your Derivatives If You Guarantee Mine" - New Basel III rules require extra capital for derivative positions. Banks in Italy have already figured out a way around that rule. Eurointelligence reports ... We have been on the watch-out for stories that government and central banks encourage banks to continue to act as buyers of last resort of government debt. Here is one from Reuters, according to which Italy is planning to circumvent the Basel III requirement that banks must hold more capital against derivative contracts through which they hedge their exposures on government bonds. Reuters has the story that the 2014 budget includes a two-way guarantee whereby banks and the state guarantee each others’ derivative positions. Reuters reports Italy plans to offer guarantees on government bond derivatives A new system of guarantees Italy is planning to introduce will make it cheaper for banks to negotiate derivative contracts with the Treasury over government bonds, potentially increasing their ability to buy Italian debt. The move is linked to new Basel III international banking rules that require lenders to hold more capital against their exposure to derivatives contracts.Under the new system, outlined in a draft decree linked to the budget law that parliament must pass by year-end, the Treasury and the banks will exchange cash sums on a short-term basis to guarantee their respective derivatives positions, based on their mark-to-market value. The sums held as collateral will bear interest at money-market rates.
Italy’s Government Looks to Tap Pensions Funds - In a world of hefty debt piles, it makes sense for governments to make sure demand for their paper remains strong. The Italian government is doing just this, looking at how local money coming from retirement savings could be used to buy larger piles of government bonds. This makes sense, as local banks may not be the ready buyers in the future to the same extent they have in the past, while foreign money pouring into Italian government debt has dropped. “The objective is twofold: understanding how to mobilize savings to invest in the country’s debt and for the country’s growth,” Economy Undersecretary Pierpaolo Baretta, who has started to speak to local pension funds, told the Wall Street Journal on Friday. However, the first reactions were not encouraging and raised questions on whether draining those funds could be in conflict with the ultimate role of these institutions: paying pensions to scheme members. “Pension funds already invest a lot in Italian government bonds. We have nothing against supporting the country but that has to be done in accordance to our need to finance our members’ pensions,” Andrea Ortolani, chairman of the Fonchim, Italy’s second largest pension fund with €4 billion under management.
French Officialdom Now Discussing Eurozone Exit - Yves Smith - As anti-Euro candidate Marine Le Pen is leading in polls in France, respected members of its ruling bureaucracy are deeming the Euro as a failed experiment and presenting detailed plans as to how an breakup could be executed. Mind you, the Eurozone has been limping from crisis to crisis for so long that it’s hard to take new signs of trouble seriously. . But it does mean that the idea of leaving the eurozone is no longer relegated to the lunatic fringe in France, one of the cornerstones of the currency union. In addition, there are are more credible proposals being floated for how to effect a dissolutions. Ambrose Evans-Pritchard of the Telegraph, who provides a detailed write-up of the Heisbourg plan, is not wild about it, particularly since Heisbourg calls for a second go at a monetary union in ten years after Eurozone members have put the needed Federal architecture in place. After an ugly breakup, it’s hard to see how citizens can be rallied to take up an initiative that failed a second time. There is one reason to pay attention to the French divorce talk: the French-German alliance is the backbone of the eurozone. Evans-Pritchard tells up: The splendid Joschka Fischer called Germany’s decision to line up with Russia and China in the Libyan crisis “a scandalous mistake,” warning that Germany risked waking up one day to find itself in “a very precarious position” if it continued to play this game. You can perhaps read too much into the Libya episode, but the Franco-German body language has not improved much over Syria. Or as my esteemed Telegraph colleague Con Coughlin puts it: that Germany’s default position is now pro-Moscow. You might conclude – though Prof Heisbourg does not go so far – that Germany is no longer an ally of France in any meaningful sense in defence and foreign policy (or indeed trade), and if so that has shattering implications. You might even conclude that the EU is already dead, an empty shell.
French Unemployment Surges As Another "Technical Glitch" Crushes Hopes Of Recovery - When France released its August Jobseekers data in August, and it beat expectations dramatically reversing the trend of ongoing malaise with little to no supporting evidence of 'why', we were skeptical. Fast forward one month and we are almost speechless in that not only are European PMIs rolling over just as we warned but the French jobs data is totally screwed up as yet another technical glitch meant 20,000 'text' messages that went unreplied were responsible for the entire improvement. French Labor Minister Michel Sapin is back tracking fast, admitting pre-emptively that "September's data won't be good... due to the 'statistical incident'." The 50k drop last month has been was bettered by a 60k rise to a new record high for French unemployment. France reported a big "improvement" on unemployment in August. Now the labor minister Michel Sapin had to backtrack. Apparently a significant part of the improvement (20,000) was due to the fact that network provider SFR "forgot" to send 20 000 SMS messages. As these folks didn't reply to the SMS, they assumed they were employed again...
More Barely Good News for Spain: Jobless Rates Down by a Hair - Spain continued to inch out of a recession on Thursday. According to the Associated Press, its jobless rate had ticked down from 26.3% to 26.0%. This comes on the heels of yesterday’s barely good news that the economy had grown by 0.1%. The gains may look like rounding errors, but after two years of economic measures going in the wrong direction, the first signs of growth were enough for the government to declare that a recovery had begun, thanks to its austerity measures. Still, Prime Minister Mariano Rajoy cautioned, the recovery would be “slow and gradual.”
ECB, on new mission, sets out tougher bank health tests (Reuters) - The European Central Bank promised on Wednesday to put top euro zone banks through rigorous tests next year, staking its credibility on a review that aims to build confidence in the sector. The ECB wants to unearth any risks hidden in balance sheets before supervision comes under its roof as part of a banking union designed to avoid a repeat of the euro debt crisis, which was exacerbated by massive bad property loans in countries such as Ireland and Spain. However, some analysts say that if the review is too strict and reveals unexpectedly large problems at some banks, it could backfire by undermining the very confidence it aims to bolster. Euro zone bank shares fell sharply after the ECB announcement. Setting out its plans to scrutinize 128 top euro zone lenders, the ECB said it would use tougher new measures set out by Europe's regulator - the European Banking Authority (EBA) - in the asset quality review it will conduct next year. "A single comprehensive assessment, uniformly applied to all significant banks, accounting for about 85 percent of the euro area banking system, is an important step forward for Europe and for the future of the euro area economy," ECB President Mario Draghi said. "We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets," he said.
Mario Draghi Says ECB Won’t Hesitate to Fail Banks in Stress Tests - European Central Bank President Mario Draghi said officials won’t hesitate to fail banks in its stress test next year as the ECB sets out to prove its vigilance in its new role of banking supervisor. “Banks do need to fail” to prove the credibility of the exercise, Draghi said in a Bloomberg Television interview with Francine Lacqua in Frankfurt, after the ECB published plans for its bank-asset check. “If they do have to fail, they have to fail. There’s no question about that.” The ECB is running a three-stage probe into the health of the euro-area banking industry as a precondition for taking over supervision next year, and it set a benchmark capital-to-assets requirement of 8 percent today. A series of stress tests, which pit the banks’ balance sheets against a range of adverse scenarios, will be conducted with the European Banking Authority as the final step. “The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets,” Draghi said. “Ultimately that’s the objective, to have private-sector money to be put into the banking industry.” ECB Executive Board member Joerg Asmussen said this month that “this is our third and last chance to restore confidence” after two previous stress tests by the EBA failed to do so.
Eurozone public debt reaches 90 per cent of GDP - OFFICIAL figures released yesterday show that the Eurozone’s public debt pushed past 90 per cent of GDP in 2012, despite falling government deficits. Between 2009 and 2012, government debt as a percentage of the currency union’s GDP has swelled from 80 to 90.6 per cent, while government deficits have dropped from 6.4 to 3.7 per cent over the same period. The figures hide significant differences between countries: while Germany ran a 0.1 per cent surplus according to the European Commission’s statisticians, Spain’s government ran a deficit equivalent to more than a tenth of its economy in 2012, at 10.6 per cent of GDP. Greece had the highest proportion of government debt recorded, at 156.9 per cent of GDP. Estonia, which joined the euro area just less than three years ago, posted the lowest ratio of government debt to GDP, at only 9.8 per cent. The Eurozone country with the highest general public spending as a proportion of GDP is France, where 56.6 per cent of the economy was accounted for by expenditure in the public sector last year.
IMF: EU Hid Sensitive Data on its Financial Sector - Sometimes, the absence of data is a data point itself. Take, for example, a paper published Friday on transparency trends in the International Monetary Fund’s surveillance. The paper — see Table 4 — reveals that the European Union and its member countries deleted sensitive information about their financial sector in more than a quarter of the IMF’s reports on their economies last year. It also shows that emerging Asian countries are more confident about public scrutiny of their exchange-rate policies than they were in 2010, when they deleted sensitive references to their exchange rates in nearly one-fifth of the IMF’s country reports on the region’s emerging market economies. The fund’s annual reports on member countries’ economic policies—called Article IVs in a reference to the specific IMF bylaw that created them–are a hallmark of the global lending institution’s analysis. The reports are designed to ensure both domestic and international economic stability. Member countries have the right, however, to delete material in the reports they deem too sensitive, delay publishing of reports, and even prevent the IMF from publishing reports altogether. The deletions are to help rid surveillance reports of market-sensitive and potentially market-damaging data and preserve the IMF’s role as a trusted adviser. (See Table 8 for publication lags.) But many members–especially the most powerful advanced and emerging market countries–abuse the privilege, according to the IMF’s in-house watchdog, the Independent Evaluation Office. The IEO said in a report published earlier this year that more than a quarter of the deletions are illegitimate. (See page 26.)
What is wrong with the USA? - A lot of US blog posts have asked this after the US government came very close to self-inflicted default. It was indeed an extraordinary episode which indicates that something is very wrong. All I want to suggest here is that it may help to put this discussion in a global context. What has happened in the US has of course many elements which can only be fully understood in the domestic context and given US history, like the enduring influence of race, or cultural wars. But with other, more economic, elements it may be more accurate to describe the US as leading the way, with other countries following. Jared Bernstein writes “The US economy has left large swaths of people behind. History shows that such periods are ripe for demagogues, and here again, deep pockets buy not only the policy set that protects them, but the “think tanks,” research results, and media presence that foments the polarization that insulates them further.” Support for the right in the US does appear to be correlated with low incomes and low human capital. Yet while growing inequality may be most noticeable in the US, but it is not unique to it, as the chart below from the Paris School of Economics database shows. Stagnation of median wages may have been evident for longer in the US, but the recession has led to declining real wages in many other countries. Partly as a result, we have seen ‘farther right’ parties gaining popularity across Europe in recent years.
Paper by EU Economist Backs Austerity’s Critics - Coordinated austerity in euro-area countries has stifled economic recovery and deepened the crisis across the currency bloc, according to a new technical paper prepared by an economist at the European Commission. Spending cuts in Germany in particular have made things worse for the weaker members of the euro area through “spillovers” – the economic impact on economies connected to Germany’s– the paper says, adding that limited stimulus programs in richer countries could help the whole of the currency bloc. The paper, which doesn’t necessarily represent the views of the powers-that-be at the Commission, presents some inconvenient conclusions for European authorities from one of their own economists. The European Union and national governments have come under fire from outside economists for pursuing austerity across the euro zone. These critics have argued that Germany in particular should be running bigger deficits to help drag the bloc’s weaker members out of their slumps. The commission paper backs the critics. It claims that the effects of brutal cuts in the weaker euro-zone countries could have been mitigated if Germany and other core euro-zone nations had refrained from also cutting spending and raising taxes at the same time. “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries,” the paper says.“These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries,” it concludes.
Draghi on the edge of deflation - The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem: That’s the Spanish median inflation rate. Though, as the team reports on Friday, it’s not as if Euro area headline inflation and core inflation are that much more reassuring:Concern is consequently growing that the downtrend in inflation over the past year or so will continue until the euro area is extremely close to, or in, deflation.As the team notes:Given the recent recession, the considerable accumulated spare capacity – as evidenced by high unemployment rates in most euro area economies, for example – should remain a disinflationary force. Some measures of shorter-term inflationary momentum have stabilized, suggesting that the downshift in “underlying” inflation may have paused around 1%. That may be a response to the stabilization in economic activity earlier this year. If so, the current insipid recovery may be preventing underlying inflation from sinking further. That would contain the risks of the euro area, or parts of it, from moving into deflation. Our assessment is that although the risks of deflation have risen over the past year they have not – with the exception of Greece – yet materialized. But some countries – most notably Spain – are worryingly close to it. Continued recovery may be a necessary condition to prevent that deflation from materializing.
For the First Time Since WWII, Bikes Outsell Cars in Europe - Car sales across Europe may have hit a 20-year low, but bike sales are going strong. So strong, in fact, that bikes have outsold cars in nearly every member country of the European Union, according to a surprising set of graphs from NPR. In Italy, bikes outsold cars for the first time since World War II and in Spain for the first time ever. The flip coincides with Europe’s economic crisis, which wreaked havoc on household budgets and suppressed demand for big ticket purchases. If the trend toward bikes continues, the term “lean times” may take on a much more literal meaning.
Chinese banks and UK taxpayers - The decision by the Chancellor to allow Chinese banks to operate in the UK as branches rather than subsidiaries has caused something of a stir. And as usual, the implications have been widely misunderstood. This from Willy Hutton in the Guardian (in an otherwise strong piece) is typical: Compounding the error, he has decided to allow Chinese banks to trade in London through branches. Iceland's bankrupted banks operated in Britain through branches. Never again, we said. If a bank wants to function here, it must put its own capital behind its British operations. But desperate to win the City's right to trade in renminbi, Bambi wants to waive this obligation uniquely for Chinese banks. China's banking system is precarious; non-performing loans could be as high as $5trn, proportionally far in excess of pre-crisis Iceland. At least the British taxpayer will be able to underwrite their British operations when the system crashes, as it almost certainly will. This is simply wrong. Let me explain. A branch of a bank is an integral part of the bank. It is not legally separated from any other part of the bank's operations, except for activities held in separate subsidiaries. So if a Chinese bank sets up a branch in the UK, it IS putting its own capital behind its British operations. What it is not doing is ring-fencing a proportion of capital for exclusive use by the British operations, which is what it would do if the British operation were a subsidiary.
Is a currency crisis bad for you at the ZLB? - My and Paul Krugman’s comments on Ken Rogoff’s FT piece have generated an interesting discussion, including another piece from Ken Rogoff, a further response from Paul Krugman, and posts from Brad DeLong, Ryan Avent in the Economist, Matthew Klein, John McHale (follow-up here), Nick Rowe and Tony Yates. The discussion centred on the UK, but it is more general than that: a similar thought experiment is if China sells its US government debt. Paul Krugman has promised more, so this may be the equivalent of one of those annoying people in a seminar audience who try and predict with questions what the speaker will say. The track I want to pursue starts from my argument that Quantitative Easing (QE) will ensure that the UK government never runs out of money with which to pay the bills. The obvious response, which Paul Krugman’s comment took up, is that a market reaction against UK government debt might be accompanied by a reaction against the UK’s currency, leading to a ‘sterling crisis’. For those with a long memory of UK macro history, would this be 1976 all over again?
A Sovereign Country With Its Own Currency, Namely The UK, Cannot Borrow Without Risking Default - Some time ago, Ken Rogoff argued that the UK could not simply pile debt on top of debt without regard to the issues. Rightfully, the blogosphere asked, why not? After all, UK Sovereign Debt is simply a promise to pay a given amount of UK Currency (GBP) at sometime in the future. The British Parliament can ultimately print as much GBP as it wants, whenever it wants, so this promise can always be met if Parliament chooses to meet it. From what I gather this simply doesn’t sit well with Rogoff’s gut, but he is not exactly sure why. This is why he warns that such actions could undermine “credibility” without saying exactly why credibility is of fundamental importance. Well, as best I can figure Rogoff is right, credibility does matter and here is why. If investors sense that Parliament is about to flood the market with GBP they will naturally attempt to sell GBP against other currencies. Everyone can’t be a seller so the price crashes. I think everyone agrees on this. The crux is in the fallout. To see why its not credibility all the way down, its useful to appeal to extremes. In the extreme GBP is worthless relative to other currencies. What that implies is that the UK cannot engage in foreign trade. The problem is that the UK consumes a very important product which it cannot produce itself – Natural Gas. Without Liquefied Natural Gas imports the UK would face a serious challenge in providing winter heat for families. Lack of Natural Gas would also cripple Industry and Utilities which need to produce process heat on demand.