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

Saturday, November 26, 2011

week ending Nov 26

Fed Balance Sheets Decreases Slightly Over Past Week - The U.S. Federal Reserve's balance sheet shrank just a little over the last week as the central bank adjusts its portfolio of securities to spur economic growth. The Fed's asset holdings in the week ended Nov. 23 stood at $2.825 trillion, down slightly from the $2.834 trillion reported a week earlier, the central bank said in a report released Friday. Holdings of U.S. Treasury securities declined to $1.665 trillion from $1.676 trillion the week before. The central bank's holdings of mortgage-backed securities fell to $841.60 billion from $841.98 billion. The Fed's portfolio has more than doubled since the financial crisis of 2008 and 2009 as the central bank bought mortgage and government bonds to keep interest rates very low and stimulate the economy.  The report Friday showed holdings of Treasury securities with a remaining maturity ranging from more than five years to 10 years increased over the past week. Total borrowing from the Fed's discount lending window was $9.88 billion, down from $10.5 billion a week earlier. Borrowing by commercial banks rose to $105 million from $4 million. The Fed report showed that U.S. marketable securities held in custody on behalf of foreign official accounts fell to $3.450 trillion from $3.469 trillion in the latest week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.730 trillion from $2.750 trillion the previous week. Holdings of agency securities climbed to $719.72 billion, from $718.73 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - November 25, 2011

FOMC Minutes: Discussion of providing "likely future path of the target federal funds rate" -  From the Fed: Minutes of the Federal Open Market Committee, November 1-2, 2011. Excerpts: participants generally agreed that, even with the positive news received over the intermeeting period, the most probable outcome was a moderate pace of economic growth over the medium run with only a gradual decline in the unemployment rate. While some factors were seen as likely to support growth going forward--such as pent-up demand, improvements in household and business balance sheets, and accommodative monetary policy--participants observed that the pace of economic recovery would likely continue to be held down for some time by persistent headwinds. In particular, they pointed to very low levels of consumer and business confidence, further efforts by households to deleverage, cutbacks at all levels of government, elevated financial market volatility, still-tight credit conditions for some households and small businesses, and the ongoing weakness in the labor and housing markets. While recent incoming data suggested reduced odds that the economy would slide back into recession, participants still saw significant downside risks to the outlook for economic growth. Risks included potential spillovers to U.S. financial markets and institutions, and so to the broader U.S. economy, if the European debt and banking crisis were to worsen significantly. In addition, participants noted the risk of a larger-than-expected fiscal tightening and the possibility that structural problems in the housing market had attenuated the transmission of monetary policy actions to the real economy.

Big hints on Fed communications - Money Supply - For me, the most interesting passage in the November Fed minutes was: “The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going. A possible statement of the Committee’s longer-run goals and policy strategy is interesting. As the minutes make clear, the obstacle to setting a numerical Fed inflation objective is the concern that by doing so, you would downplay the unemployment side of the Fed’s mandate. A statement of longer-run goals might be a way to resolve this: you could put in a numerical inflation objective along with a verbal statement on unemployment.

Minutes of the Federal Open Market Committee - FRB

Fed's Lockhart: prefer language change to bond buys (Reuters) - A top Federal Reserve official said on Monday that given recent improvements in the U.S. economy, any further central bank actions to boost growth should be through clearer communications about policy, rather than expanded bond buying. "In light of the somewhat better performance of the economy, notwithstanding the slow pace of reduction of unemployment... if we're looking at options, I would prefer communications," Atlanta Fed President Dennis Lockhart told reporters after a speech to business students. The U.S. central bank cut benchmark borrowing costs to near zero almost three years ago and has bought $2.3 trillion in bonds to spur economic activity. More recently, it has shifted its portfolio to hold more longer-term bonds to lower mortgage interest rates and has announced it is unlikely to raise rates before the middle of 2013, a proclamation aimed at reassuring markets it won't budge from easy money policies at the first sign the recovery has gotten stronger. Many in financial markets believe that a persistently high unemployment rate will prompt the Fed to take further steps to boost growth next year. Lockhart repeated his view that the Fed should set a high bar for any further bond buying, also referred to as quantitative easing.

Kocherlakota Says Targeting Unemployment May Be 'Dangerous' - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said while U.S. unemployment is too high at 9 percent, central bank policies to target a level of joblessness could lead to a jump in inflation. “Changes in minimum wage policy, demography, taxes and regulations, technological productivity, job market efficiency, unemployment insurance benefits, entrepreneurial credit access and social norms all influence what we might consider maximum employment,” Kocherlakota said today in Winnipeg, Manitoba, Canada. “Trying to offset these changes in the economy with monetary policy can lead to a dangerous drift in inflationary expectations and ultimately in inflation itself.” Measures to add stimulus to the economy drew dissent from Kocherlakota, Federal Reserve Bank of Philadelphia President Charles Plosser and Dallas Fed chief Richard Fisher at the central bank’s August and September meetings. A

Signals from Unconventional Monetary Policy - SF Fed - Federal Reserve announcements of future purchases of longer-term bonds may affect asset prices by changing market expectations of the future supply of targeted securities. Such announcements may also affect asset prices by signaling that the stance of conventional monetary policy is likely to remain loose for longer than previously anticipated. Research suggests that these signaling effects were a major contributor to the cumulative declines in Treasury security yields following the eight Fed announcements in 2008 and 2009 about its first round of large-scale asset purchases. Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”

Fed Words as Important as Action - It turns out the Federal Reserve‘s words are just about as powerful as its actions, based on the financial market reaction to its recent bond buying programs. According to a new paper published Monday by the Federal Reserve Bank of San Francisco, the efforts commonly referred to as QE1 and QE2 influenced bond markets as much by shaping the outlook on interest rates, as they did through actual purchases. In two separate initiatives starting in 2008 and 2009, respectively, the central bank purchased massive combinations of Treasury and mortgage debt securities, in a bid to improve financial conditions and lower borrowing costs, in a bid to stimulate better economic performance and lower the unemployment rate.

Federal Reserve Rejects NGDP Targeting - Readers who followed by from ThinkProgress will know that I've become a proponent of the idea that the Federal Reserve ought to adopt a policy known as Nominal GDP level targeting—in effect a guarantee that total economy-wide spending will catch-up to some pre-crisis trend. The idea has long been floating around in monetary theory circles, and during the course of the Great Recession was pushed by a smallish band of dissident right-wing economists, most notably Scott Sumner and David Beckworth. More recently it got a huge boost from the Goldman Sachs macroeconomic forecasting team, which led to some additional cheerleading from Christina Romer, Paul Krugman, and other heavyweight progressives. In the economics blogosphere, it's become quite popular with proponents from Brad DeLong to Ramesh Ponnuru and fans at the Economist and Wall Street Journal as well as now here at Slate. Under the circumstances, it's encouraging that the Federal Reserve's Open Market Committee considered the issue at their meeting early this month. Unfortunately, according to the minutes they rejected it for reasons that seem pretty shallow:

We Now Know What "Interesting Conversation" Means - Ben Bernanke said in his last post-FOMC press conference that the committee had an "interesting discussion" on nominal GDP targeting.  The FOMC minutes released today shed some light on this discussion:The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability.

Fed Announces Members for Advisory Council - The Federal Reserve announced the members and top officers that will serve next year on a council that advises top central bank officials on the economy and lending conditions. The Fed on Monday said Howard Boyle will serve in 2012 as president of the Community Depository Institutions Advisory Council. Boyle is president and chief executive officer of Home Savings Bank in Kent, Ohio. Peter Humphrey, president and chief executive officer of Five Star Bank and Financial Institutions Inc., in Warsaw, N.Y., will serve as vice president. The CDIAC meets twice a year with the Fed board in Washington.

Will Ben Bernanke and the Federal Reserve bail out Europe? - Federal Reserve chairman Ben Bernanke is a student of the Great Depression. And he has an apologetic view of the Fed’s role in it. As he said in a 2002 speech on Milton Friedman’s 90th birthday, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna [Schwartz, Friedman's coauthor]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” And with the European Central Bank about to reprise the role of the Fed in the 1930s, economic analyst Ed Yardeni thinks Bernanke may well ride to the rescue of the eurozone and the global economy: Given the ECB’s reluctance to act, I suspect that the Fed will spearhead the formation of a Global Liquidity Facility (GLF) to avert a global financial meltdown. Fed Chairman Ben Bernanke demonstrated that he is a master at putting together such emergency measures back in 2008. In effect, it would act as the world’s central bank. Mr. Bernanke is clearly very worried about the prospect that the European sovereign debt crisis is a contagion that could spread to the US, as evidenced by his bizarre town hall meeting with troops returning from Iraq on November 10. The GLF would receive deposits from the Fed and other participating central banks, including the ECB. The funds would be used to buy the bonds of debt-challenged governments that would be required to accept strict supervision of their fiscal and regulatory policies by the IMF.

Super Complacency Means Printing Will Commence Post-Election - We believe that the Super Commitee’s lack of action portends for inaction by our government until the 2012 election is concluded. We also believe, that no matter who wins the printing presses are gearing up. Super Duper Committee Needed The United States is in a morass of political indecision that is hampering our ability to let the right idea bubble to the surface. Yesterday’s failure of the much vaunted SuperCommittee to do anything, a structure empowered to do what is needed to solve the deadlock, has underlined the effect of political indecision as the primary driver behind why we are where we are today. As crazy and inappropriate as it was to downgrade the U.S. partially on the basis of political gridlock…. It was true. Hippies with Brains Those “Occupy” people out there are right; it is the politicians themselves and the prioritizing of their job retention over their responsibility to their constituents that is preventing the right decision to be made. We do not claim to know what the right decision is, but we do expect them to know. All we can do is offer a decision tree to readers of what we think will happen and why it will occur in this fashion.

The inflation fallacy - Nick Rowe - Sometimes I despair. Sometimes I wonder if the inflation fallacy is at the root of all the US and Eurozone troubles. It's so easy to get popular support for the idea that printing money will cause inflation, and inflation means a fall in our real income. So it's much better to have high unemployment, low employment, low real output, and errrr, low real income, than to risk having low real income. The inflation fallacy is an invalid argument about why inflation is bad. Now, an invalid argument can sometimes have a true conclusion. Maybe inflation is bad. Maybe inflation does reduce our real incomes. But it's still an invalid argument. It doesn't give any good reason for thinking that inflation is bad, or reduces our real incomes. A lot of non-economists believe the inflation fallacy.  Sometime in February, I will ask my ECON1000 students: "So, why is inflation a bad thing?"  I can anticipate the look on their faces. Some will give me that look of sympathy, normally reserved for those who aren't too bright.  Finally one will answer. "Because if all prices rise 10% we will only be able to afford to buy 10% less stuff. Duh!" Except the "Duh!" is silent. That's the inflation fallacy.

Will The Barricades Fall? - The Treasury market's inflation forecast is slipping… again. If the descent rolls on, it'll be a dark sign of things to come, just as it has been in the post-crisis mire of recent years. The battle isn't lost yet, but the forces of inflation and deflation are clearly locked in a new round of conflict. For the moment, it's unclear which side will win if we're looking solely at the yield spread between the nominal less inflation-indexed 10-year Treasuries. But in a world once again flush with deflationary instincts, confidence is low that that defenders of prices can hold the line. The good news is that the inflation forecast, which has been a harbinger of sentiment and markets in the New Abnormal, is above previous interim troughs. But as the euro crisis deepens and the odds rise for austerity via automatic budget cuts in the U.S., faith that we'll pull away from the brink is growing thin.

Death By Hawkery - Krugman - What the world needed in this global deleveraging crisis was deficit spending and higher inflation targets. What it got was fiscal austerity and obsessive concern with inflation risks that weren’t real. Hence the catastrophe now unfolding. Judging from recent comments, many readers missed my earlier analyses on these issues — I’m still getting the “You idiot, debt got us into this mess, how can debt get us out?” type of comment. So let me re-repost my discussion of this whole issue in full, followed by a couple of brief notes on the European situation.

Yanks Foresee Yuan as World's Top Currency? - There's interesting stuff from Reuters on the contents of the just-released 2011 Annual Report to Congress of the US-China Economic and Security Review Commission. The latter body, as most of you probably know, was created by the US congress in 2000 with some foresight that China was becoming an increasing force in the global political economy that the US had to deal with. Although some members of this commission are definitely scaremongers, their views are for the most part counterbalanced by more nuanced opinions. I have yet to sift through this mammoth 400-page report which you can avail of by e-mailing a request to However, the parts concerning the yuan AKA renminbi (RMB or people's money) becoming an international standard currency are quite interesting. Indeed, these folks may be playing up the role of the yuan more than their Chinese counterparts who still follow a strategy of not drawing too much attention to their currency machinations. Rest assured, though, that the Yanks staffing this commission sense the Chinese are up to something: China's economy is moving up the value chain and its currency could "mount a challenge" to the U.S. dollar in five to 10 years, a congressionally created commission reported Wednesday. "Similarly, it no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years," the commissioners said, 10 years after China joined the World Trade Organization...

The Failure to Forecast the Great Recession - NY Fed - The economics profession has been appropriately criticized for its failure to forecast the large fall in U.S. house prices and the subsequent propagation first into an unprecedented financial crisis and then into the Great Recession. In this post, I examine the performance of the forecasts produced by the economic research staff of the Federal Reserve Bank of New York (New York Fed) over the period 2007-10 and consider some of the reasons why we, like most private sector forecasters, failed to predict the Great Recession. This spreadsheet contains staff forecasts, the outcomes, and a standard measure of private sector forecasts—the Blue Chip consensus. In addition, staff material prepared for bi-annual meetings of the New York Fed Economic Advisory Panel provide some further insights into the evolution of the staff outlook.   The staff forecasts of real activity (unemployment and real GDP growth) for 2008-09 had unusually large forecast errors relative to the forecasts’ historical performance, while the forecasts for inflation were in line with past performance. Moreover, although the risks to the staff outlook were to the downside throughout this period, it wasn’t until fall 2008 that a recession as deep as the Great Recession was given more than 15 percent weight in the staff assessment.

Chicago Fed: Economic activity up slightly in October - This is a composite index from the Chicago Fed: Index shows economic activity up slightly in October:Led by improvements in production-related indicators, the Chicago Fed National Activity Index edged up to –0.13 in October from –0.20 in September. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. This index suggests the economy was growing in October, but below trend.

U.S. Could Be Facing Another Year of Uncertainty - It was a long shot to begin with. When the supercommittee was formed, the hope was that the 12 congressional members could defy long odds and come up with a creditable plan to cut the federal deficit over the next 10 years in order for the U.S. to avoid the chaos now going on in the euro zone. Absent a last-minute miracle, leaders of Congress’s supercommittee are expected to announce Monday afternoon there will be no deal. Sadly, the outcome wasn’t unexpected. And no surprise, politics drove the supercommittee’s super failure. “Both sides seek a popular mandate to wrap debt reform along competing ideological lines,” says Eric Green, chief U.S. rates strategist at TD Securities. “That moment is the next presidential election, not today.” But Washington’s dysfunction has consequences. The equity markets have already shown their immediate displeasure, with stock prices plunging in early-morning trading

The real lesson from Japan - IT HAS become the worst fear of politicians in America and Europe: after the immediate crisis passes, the developed world will settle into a lost decade (or more) of low growth and deflation, just like Japan. Japan is used as a cautionary tale of ineffective and/or inept economic policy, which failed to revive its economy after a bad recession. But as my colleague points out and as an article from our print edition this week suggests, there’s not much more that short-term fiscal and monetary policy could have done. A large share of Japan’s woes can be blamed on its aging population. Anemic Japanese growth rates resulted from having fewer young, productive workers, and from the redirection of an increasing share of resources to the elderly exiting the labour force as opposed to the younger, still productive population. This can also be seen in Japan’s high debt to GDP ratio.

Third Quarter GDP Growth Revised Downward - Our not so robust recovery is weaker than first reported: Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2011 ... according to the "second" estimate released by the Bureau of Economic Analysis. ... The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.5 percent... So once again the advance estimate captured headlines and allowed policymakers to say hurray, things are improving, we don't have to act. I disagreed at the time -- even 2.5 percent is a sputtering recovery compared to what we need to reemploy the millions of jobless and policymakers have waited far too long already -- but the headline figure was enough to allow policymakers to "wait and see." Now, with growth even lower than we thought, will policymakers change course? Though I see no reason to let them off the hook, I gave up on fiscal policy authorities long ago. I just hope they won't make things worse. But monetary authorities ought to be acting now to bolster the economy further, especially given the substantial risks from Europe and elsewhere, and it's disappointing that they haven't done more already. More comments at CBS News.

US Economic Growth Is Revised Down to 2 Percent - The United States economy grew at a slightly slower pace than previously estimated in the third quarter, but weak inventory accumulation amid sturdy consumer spending strengthened analysts’ views that output would pick up in the current quarter. Gross domestic product grew at a 2 percent annual rate in the third quarter, the Commerce Department said in its second estimate on Tuesday, down from the previously estimated 2.5 percent. The revision was below economists’ expectations for a 2.5 percent growth pace. But the details of the G.D.P. report, especially data showing still-firm consumer spending and the first drop in businesses inventories since the fourth quarter of 2009, appeared to set the stage for a stronger economic performance this quarter. Data so far suggest the fourth-quarter growth pace could exceed 3 percent, which would be the fastest in 18 months. Despite the downward revision, last quarter’s growth is still a step up from the April-June period’s 1.3 percent pace. Part of the pick-up in output during the last quarter reflected a reversal of factors that held back growth earlier in the year.

GDP Growth for Q3 Revised Downward - While Washington looks uneasily at the demise of a deficit committee that was completely irrelevant to reducing the deficit, the real problem for the country, the troubling lack of growth, continues. The Bureau of Economic Analysis downgraded GDP growth for the third quarter back to 2% from 2.5%. This follows a 1.3% second quarter. The slow growth is simply not enough to catch up to trend growth, and increase demand to a level that can reduce unemployment. And this could get even worse. The internals in the data led economist Justin Wolfers to exclaim that “we are only one small data revision away from declaring the US is in a recession, which began in mid-2011.” And that’s even more true going forward. If the payroll tax cut and unemployment benefits expire at the end of the year, the estimate is that will shave up to 1.5% off of growth. That leaves pretty much nothing left, and a Japanification at best, if not a recession. What happens in Europe, of course, could damage this even further. And if you want to extend this out to 2013, it’s hard to see where the bounce-back comes from. Becuase even if we get through the 2012 rough patch, by 2013 the trigger hits, and the impact on non-defense spending, not defense spending, is what everyone should actually be worried about:

Q3 real GDP growth revised down to 2.0% annualized rate - From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the "second" estimate released by the Bureau of Economic Analysis. This was revised down from 2.5% and below the consensus of 2.4%. The downward revisions was mostly due to a large decline in the "change in real private inventories " - this subtracted 1.55 percentage points from the third-quarter change in real GDP (second estimate) as opposed to 1.08 percentage points in the advance estimate. Final domestic demand was mostly unchanged (the inventories will probably reverse in Q4). Still sluggish growth ...

Rough spots behind, rough spots ahead - THIS morning, the Bureau of Economic Analysis released revised data on America's third-quarter growth performance. The headline figure—the third-quarter annualised GDP growth rate—was revised down from an initially reported 2.5% to 2.0%. Dig deeper, however, and one finds both good news and bad news. The good news is that some of the downward revision to growth is due to a downward revision to private inventories. That implies that if conditions soften moving forward, there will be less room for inventory declines to sap future growth. There's also good news in some of the upward revisions in the report; both durable goods production and exports were higher than initially reported.  But there's also bad news. A downward revision to residential investment was responsible for another big chunk of the change; housing-market recovery is still progressing painfully slowly despite much better conditions in rental markets. This release also contained the first look at third-quarter Gross Domestic Income, an alternative measure of national output that economists have begun to follow more closely. New research indicates that GDI may be a more accurate measure of output than GDP. In the third quarter, GDI rose at just a 0.4% annual pace. That was up from a 0.2% performance in the second quarter, but it suggests that underlying growth over the summer was weaker than GDP numbers indicated.

Mohamed El-Erian Puts The US Recession Risk At 50% - PIMCO's Mohamed El-Erian was on Bloomberg TV this morning. He says the GDP miss plus super committee failure bring recession risk as high as 50%. "We critically need a catalyst to bring the two parties together in a forward looking movement. We need progress, we can't simply stall." "If we don't move quickly our economy will become more fragile and the functioning of markets will become more problematic. "The right thing for investors today is to be generally defensive and only selectively offensive." He says America's problem is smaller than Europe, which has both a political problem and a structural problem. Regarding austerity versus money printing in Europe, El-Erian says: "There is no costless way forward at this point. There are no easy solutions. As to which of the two to take in order to save the euro, that is a pure political decision. But they need to make that decision quickly." Should the Fed implement QE3?

Vital Signs: GDI, the Darker Side of GDPGross domestic income, an alternative gauge of economic output to gross domestic product, shows the U.S. near a standstill. GDI — income received by U.S. households and businesses — rose 0.4% in the third quarter. GDI should, in theory, be equal to GDP, which rose 2%. The discrepancy raised fears that third-quarter growth was much slower than GDP figures suggest.

Notes on GDI (Gross Domestic Income) - Justin Wolfers continues to remind everyone that we have two measures of the size of the US economy, Gross Domestic Production and Gross Domestic Income. It turns out that GDI is more accurate in real time that GDP. That’s true. However, a couple of things

  • 1) My understanding is that were we get most of the movement is on inventories and imports. If we look at Final Sales of Domestic Product its much more stable under revision that GDP.
  • 2) I, at least, can’t get much out of the GDI report. It breaks things up into where people got their income from: wages, profits, interest and rent. However, with exception of rent that doesn’t tell me a lot about what’s going on in the economy. Especially, when we think we are dealing with demand constrained output, what we are interested in is the proximate sources of demand. We get that out of GDP, not GDI.

Downward Revision of US GDP Strengthens Case for New Stimulus -  The second estimate of U.S. GDP for the third quarter of 2011 shows a downward revision, making the real growth rate 2 percent rather than the 2.5 percent reported in last month’s preliminary estimate. The slowing growth rate makes the expansion look weaker than before and strengthens the case for new stimulus. Almost all of the expansion, 1.63 out of the 2 percentage points of growth, came from personal consumption. Most of that came from consumption of services, with health care leading the way.Fixed investment contributed 1.45 percentage points to reported growth, with computer equipment and software as the strongest component.  However, growth of fixed investment was more than offset by a sharp drop in nonfarm inventories, so that the overall contribution of gross private domestic investment was actually slightly negative. Optimists can hope that at least some of the drop in inventories was unplanned, in which case it could be a harbinger of restocking orders later in the year. Pessimists will worry that the rundown of inventory reflects a planned reduction based on unfavorable business expectations.The government sector contributed little to growth one way or the other. The only positive element was  defense spending, which was slightly more than offset by decreases in federal nondefense, state, and local government expenditures.

Is It Really Possible to Decouple GDP Growth from Energy Growth?  - In recent years, we have heard statements indicating that it is possible to decouple GDP growth from energy growth. I have been looking at the relationship between world GDP and world energy use and am becoming increasingly skeptical that such a decoupling is really possible. Prior to 2000, world real GDP (based on USDA Economic Research Institute data) was indeed growing faster than energy use, as measured by BP Statistical Data. Between 1980 and 2000, world real GDP growth averaged a little under 3% per year, and world energy growth averaged a little under 2% per year, so GDP growth increased about 1% more per year than energy use. Since 2000, energy use has grown approximately as fast as world real GDP–increases for both have averaged about 2.5% per year growth. This is not what we have been told to expect. Why should this “efficiency gain” go away after 2000? Many economists are concerned about energy intensity of GDP and like to publicize the fact that for their country, GDP is rising faster than energy consumption. These indications can be deceiving, however. It is easy to reduce the energy intensity of GDP for an individual country by moving the more energy-intensive manufacturing to a country with higher energy intensity of GDP.

A Mixed Bag Of Economic News For October - Because of the Thanksgiving holiday tomorrow, the government released three major economic reports today: income & spending, initial jobless claims, and new orders for durable goods. Overall, the numbers show an economy that continues to struggle. There's just enough growth in the latest data points to keep the debate open about what happens next, but the macro trend still looks precarious no matter how you spin the numbers.The strongest number is disposable personal income (DPI), which rose 0.3% in October—its highest monthly increase since March. The engine here is the stronger growth in private sector wages over the last two months. That’s certainly good news, but more of the same is needed in the months ahead to reverse the slowing growth in the year-over-year change. There’s still a relatively wide divergence between the growth rates of income and spending, as the chart below shows. Even worse, both series are slowing vs. their respective year-earlier figures. The downshift is especially severe for DPI. Today’s news on income takes the worries down a notch, but it remains to be seen if the revival can withstand the blowback from the deepening euro crisis and the budget wrangling in Washington.

Krugman Interview: ‘No one’s safe’ in this economic crisis - FT -

  • Which of the following global risks is the worst: first inflationary pressure?  --I think that is extremely remote now in many countries. With lots of excess supply out there it’s just not going to happen. You can get pressures in the commodities markets, but they are not going to spread into a broader inflation.
  • Japanese-style deflation?   - I’m a little surprised of how slowly we are getting there. We are drifting towards that but it turns out that nominal rigidity is pretty significant and the research suggests that even a very extended period of a depressed economy normally squeezes you towards zero but it is hard to get below zero. The Japanese are somewhat of an outlier in that respect. So I’m not actually expecting actual deflation. If this goes on, three or four years from now it could be a real possibility for the US at any rate, but it’s not something that is imminent.
  • How significant would a slowing Chinese economy be?  - I hate that whole issue because I don’t understand China. You can’t trust their economic numbers. All economic numbers are science fiction, but the Chinese more than most. I don’t have much China expertise – I try to talk to people who have expertise but they tell you different stories. Should I believe the stories of ghost cities or an imminent crash? Or whether China has the resources to smooth it out? I have no idea.

Perfect Storm the Most Likely Scenario  - Panic is spreading says Steen Jakobsen, chief economist at Saxo Bank. Steen eyes the perfect storm including a potential "Chapter 11" call for European banks. Via Email This morning there is too much bad news. US Super Committee failed to find the 1.2 trillion US Dollar needed to stop the automatic spending cuts being initiated from 2012, but the more acute problem being the expiration of the payroll tax and the emergency benefits by year-end 2011. It now looks less likely a deal can be struck as Congress now have even less incentive to find common ground ahead of next year US election. The immediate impact could be a full one percent slower growth in the US – Goldman Sachs provided this excellent graph detailing the potential negative impact: The number could be -2.0% to -0.5% in first two quarter of 2012 – again underlining our believe in an economic perfect storm as the most likely scenario: The debt crisis is taking a new negative turn – as seen in prior liquidity crisis’ the EMG Europe bloc comes under attack and this morning there are two extreme worrisome news pieces out:

If true we are doomed - Paul Krugman points us to a very important, very recent paper by Hyun Song Shin (pdf), excerpt: As we will see shortly, foreign banks’ US branches and subsdiiaries drive the gross capital outflows through the banking sector by raising wholesale funding in the US through money market funds (MMFs) and then shipping it to headquarters. Remember that foreign banks’ branches and subsidiaries in the US are treated as US banks in the balance of payments, as the balance of payments accounts are based on residence, not nationality. The gross capital inflows to the United States represent lending by foreign (mainly European) banks via the shadow banking system through the purchase of private label mortgage-backed securities and structured products generated by the securitization of claims on US borrowers. In this way, European banks may have played a pivotal role in influencing credit conditions in the United States by providing US dollar intermediation capacity. However, since the eurozone has a roughly balanced current account while the UK is actually a deficit country, their collective net capital flows vis-a-vis the United States do not reflect the influence of their banks in setting overall credit conditions in the US..

European Banks in the United States - This paper by Hyun Song Shing, Global Bank Glut and Loan Risk Premium, has already been flagged by Paul Krugman and Tyler Cowen a couple of days back, but with rather brief commentary.  I found the paper absolutely eye-opening and wanted to alert my readers to it with more emphasis - if you hadn't already gotten this perspective somewhere else it's very important to take it on board in thinking about the world. The graph up above shows the amount of assets (above the x-axis) and liabilities (below) of "foreign" banks with respect to different currencies.  As you can see, the US dollar is far and away the most important currency for international bank holdings, with the Euro a distant second.  But note the scale here - non-US banks peaked at over ten trillion in dollar-denominated assets/liabilities, and still today have around nine trillion dollars in assets/liabilities.  Recall, for comparison that US GDP is currently running around $15 trillion/year.  So foreign bank assets/liabilities in dollars are of the same order of magnitude as the entire US economy. To get another sense of the scale, here is Figure 6: This shows the total assets of US commercial banks (ie BofA, Citibank, Wells Fargo, etc) as compared to the dollar denominated assets of non-US banks.  The two are of roughly equal magnitude. 

How Deleveraging in Europe Might Doom the U.S. - Both Paul Krugman and Tyler Cowen recommend a new paper from Hyun Song Shin called "Global Banking Glut and Loan Risk Premium." If both of those guys say a paper is important, then it's probably pretty important. So I took a look. I'll confess up front that I had a hard time plowing through it, which means my summary might be off base a bit here and there, but here we go anyway. Roughly speaking, Shin says the following things:

  • Credit expands when banks lever up their balance sheets by piling up lots of debt.
  • Thanks to Basel II, European banks levered up even more than U.S. banks.
  • Some of this was intra-European debt, but lots of it was U.S. debt denominated in dollars. In total, European banks had about $5 trillion in claims on U.S. counterparties in the peak year of 2007,
  • In other words, the European segment of the shadow banking system was indirectly providing about $5 trillion in credit to U.S. borrowers. 
  • Conclusion: the European banking sector provides about as much credit to the U.S. as the American banking sector does. So when the European banking sector deleverages, as it must, it will have a very substantial effect on credit conditions in the U.S.

U.S. Economic Conditions Are “Terrifying” - U.S. economic conditions are “terrifying” Mohamed El-Erian said yesterday. El-Erian, as you may know, is Bill Gross’ right-hand man at Pimco, the world’s largest bond fund. He gives the U.S. a 50/50 chance at a renewed recession. “What’s most terrifying?” El-Erian asked rhetorically in a Bloomberg TV interview. “We are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9% and at a time when interest rates are at zero. “The big concern is the U.S. getting tipped over by Europe. Things in Europe are getting worse, not better.” Indeed, they are. A plan to bail out the French-Belgian banking mongrel known as Dexia is falling apart, according to a Belgian newspaper. That’s fueled talk of France having to dig deeper into its bailout fund... which, in turn, prompted Fitch to say it might have to revisit France’s AAA rating.

Thought Of The Day - Krugman - From David Rosenberg’s Breakfast with Dave (no link): “Is Italy another Lehman event? It’s not the same but it sure is similar … The difference is Lehman had $150 billion in bonds outstanding, while Italy has $2.5 trillion.” In fairness, Lehman’s bust called everything into question; everyone wondered whether there were 10, 20 Lehmans out there. We sort of know how many Italys there are. Also, until a few months ago I would have said that policy makers had learned a lesson, and would not repeat the pig-headedness that allowed Lehman to do so much damage. But at this point …

The Big Drag - Krugman - The CBO has released the latest assessment of the American Recovery and Reconstruction Act, aka Obama stimulus. What it tells us is that the US federal government has been practicing destructive fiscal austerity since the middle of 2010 (and that’s not even talking about what’s happening at the state and local level). Here’s the average of CBO’s high and low estimates of the impact of the ARRA on the level (not the rate of growth) of GDP by quarter: And you wonder why the economy isn’t recovering strongly?

Balancing the Budget, for Real - On Friday, the House of Representatives voted on a balanced budget amendment to the Constitution. At the last minute, the leadership substituted a straightforward version, H.J. Res. 2, in lieu of the spending limitation amendment reported by the House Judiciary Committee that I criticized last week.While I’d like to think that Republican leaders realized the folly of writing an inexact concept like gross domestic product into the Constitution, more likely the reason was that they hoped to attract the votes of “blue dog” Democrats by offering a less radical proposal. In the end, the Republican ploy didn’t work, and the balanced budget amendment was unable to attract the necessary two-thirds vote. Only 25 Democrats joined almost every Republican in supporting the amendment. Interestingly, four Republicans opposed the amendment, and one of them was Representative David Dreier of California, chairman of the powerful House Rules Committee. Mr. Dreier is not a Republican dissident, but someone whose position requires that he be among the most loyal and dependable supporters of whatever his party favors.

Satyajit Das: The Main Game Looms – The Problem of US Debt - Greece and the other debt burdened European countries are merely the first carriages in the derailment of the “Sovereign Debt” Express train service to nowhere. The big carriage has ‘USA’ painted in red on it. To understand the US financial position, just remove 8 zeros and pretend it’s a household budget:

  • Annual family income: $21,700
  • Money the family spent: $38,200
  • New debt on the credit card: $16,500
  • Outstanding balance on the credit card: $142,710

The US is trying to bring their budget under control. This year they implemented total budget cuts of $385. Assuming they don’t spend more than they raise in taxes, it will take them 370 years to pay back this debt. The bi-partisan US Super Committee is currently discussing proposals to cut spending by $12,000 over 10 years. At $1,200 in saving per year and assuming they balance the budget, it will then take them a mere 119 year to pay back the debt.That should clarify the position.

US debt: how big is it and who owns it? guardian#data: Who owns US debt around the world - and how big is it? Find out how China got to own over $1.4 trillion - and see which other countries have a slice. Is the US economy going to avoid a $14tn debt meltdown? Barack Obama stepped up pressure on Republicans to sign up to a deficit reduction deal on Monday, warning that he will deploy his presidential veto to prevent them blocking billions of dollars in automatic spending cuts that are now scheduled to start in 2013. The cuts to military and domestic spending were triggged by the collapse of the congressional supercommittee set up to reach a compromise on reducing the national deficit. How big is the national debt? So, how does the US borrow money? Treasury bonds are how the US - and all governments for that matter - borrow hard cash: they issue government securities, which other countries and institutions buy. So, the US national debt is owned mostly in the US - and the $4tn foreign-owned debt is owned predominantly by Asian economies.

Satyajit Das: Extortionate Privilege – America’s FMD - Yves Smith - Yves here. I’m putting myself in the rather peculiar position of taking exception to a guest post. One might argue as to why I’m featuring it. Das gives an articulate but nevertheless fairly conventional reading of views of market professionals about the US debt levels. For instance as you’ll see, it conflates state government deficits (which do need to be funded in now skeptical markets) with the Federal deficit. And this sort of thinking, due to fear of the Bond Gods, is driving policy right now.  In addition, he posits that depreciation of the US dollar continues apace. I’m always leery of what amount to trend projections. Complex systems often have unexpected feedback loops. There is an interesting question of whether markets have over-anticipated QE3. In addition, the dollar has fallen to the point where it is becoming attractive for manufacturers to repatriate activities. But given the loss of managerial “talent” (and here I mean people who know how to run operations, not executives) and infrastructure, there will be a marked lag before the weakened dollar produces the next leg up of domestic production.

As the Debt Machine Grinds to a Halt, Job Creation Falls Off a Cliff - What is the future of work in a debt-dependent economy that no longer responds to more debt? In a word: bleak. Given the "recovery’s" stagnant job market and the economy’s slide toward renewed contraction, it’s a timely question. To answer it, we must first ask, What is the future of the U.S. economy? In broad brush, the Powers That Be have gone "all in" on a bet that this recession is no different than past post-war recessions. All we need to do to get through this “rough patch” is borrow and spend money at the Federal level, and the household and business sectors will soon recover their desire and ability to borrow more and spend it all on one thing or another. We don’t really care what or how, because all spending adds up into gross domestic product (GDP). In other words, we're going to “grow our way” out of stagnation and over-indebtedness, just as we’ve done for the past fifty years. Unfortunately, this diagnosis is flat-out wrong. This is not just another post-war recession, and so the treatment—lowering interest rates to zero and flooding the economy with borrowed money and liquidity—isn’t working. In fact, it’s making the patient sicker by the day.

If Governments Are To Spend Less, Everyone Else Needs To Spend More - The way a nation’s bookeeping works is that if the government is running a deficit, then someone else has to be running a surplus of the same amount.  The problem can become that those who are running those surpluses simply don’t want to spend or invest their savings.  But in order to reduce government deficits, they have to spend or invest an equal amount–whether they want to or not. Our response to this hoarding of money (and it is hoarding) is to tax it if it isn’t spent or invested.   ‘Use it or lose it,’ should be the government policy when idle, hoarded cash cannot otherwise be dislodged so that the government can reduce it’s spending and thus it’s deficit. Martin Wolf explains this very well in a recent Financial Times article. If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea…..Net lending – the difference between savings and investment – of all sectors of an economy must add up to zero. If the government is running a huge financial deficit – that is, spending vastly more than its revenue – then other sectors must be spending much less than their income. And so, indeed, they are.

U.S. sells 5-year debt at record-low yield -- The Treasury Department sold $35 billion in 5-year notes on Tuesday at a yield of 0.937%, the lowest level on record and below where traders expected the sale to come. Bidders offered to buy 3.15 times the amount of debt sold, the highest since May and above the average of 2.82 times at the last four auctions. Indirect bidders, a group which includes foreign central banks, bought 45.3%, versus an average of 43.5% of recent sales. Direct bidders, a class which includes domestic money managers, purchased another 9.6% compared to 13.2% on average. After the auction, the broader bond market erased losses. Yields on 10-year notes, which moves inversely to prices, were little changed at 1.96% after trading near 1.98% before the auction.

"Solving America’s Debt Crisis" - That's the title of a piece my colleague Andrew Reschovsky has in the Fall La Follette Policy Report. With the admission of failure by the Supercommittee, it's important to recall the basic choices facing the Nation. In principle, solving the nation’s debt problems is easy. Almost all experts agree that a combination of reduced spending and increased tax revenues is needed. Cuts in spending and increases in tax revenues equal to about 5 percent of GDP are required to prevent an increase in the debt-to-GDP ratio. If a constant debt-to-GDP ratio were achieved with spending cuts alone, annual non-interest government spending would have to be reduced by about 20 percent. Alternatively, if a constant debt-to-GDP ratio were achieved by relying solely on increased tax revenues, taxes would have to be raised by about 33 percent. It is impossible to imagine that Congress would ever adopt spending cuts or tax increases of these magnitudes.  The logical conclusion is that only a balanced approach to solving our debt crisis, one that includes both spending cuts and increased taxes, is feasible. That being said, neither spending cuts nor tax increases will be politically easy to enact.

Can a society reduce its debt without a recession?... Sure, if you are talking about gross debt. If I owe you a dollar and you owe me a dollar, we can pay each other back without changing output at all. Nothing changes except our balance sheets. Net debt is unchanged, but the total net debt of any closed economy (e.g. planet Earth) is zero anyway. Which is why I think David Cameron is making a big mistake when he tries to use the "balance sheet recession" idea as an excuse for austerity. In a recent speech, Cameron said: "[H]igh levels of public and private debt are proving to be a drag on growth, which in turn makes it more difficult to deal with those debts." But he's confusing the government's net debt with the private sector's gross debt.  The idea of balance sheet recessions is that gross private-sector debt matters for spending. In a perfect world, this shouldn't be the case; if I owe you a dollar and you owe me a dollar, why should it make any difference if we cancel out our debts? But it does, or at least many people believe it does, which is why you hear a lot about "private-sector deleveraging" holding down spending (which reduces GDP via the Paradox of Thrift). Government debt is a different animal. Government debt is a net value; it is the amount owed by one group of people (taxpayers) to another, not identical group of people (bondholders).  Government debt may (or may not) be bad for an economy, but if it is, it's not for the same reason that gross private-sector debt is bad. There is no reason why reducing net government debt will mechanically reduce total gross debt, since the amount of gross debt owed directly by households to other households is not fixed.

Solving all our problems before lunch (U.S. edition) - Okay, okay. It’s time to solve the deficit problem, in one paragraph. Here goes: restore Clinton’s tax rates, save for capital gains (raise it to 45 percent), and the marginal rate on top earners (those making 500 thousand or more), which should slide between 50 and 70 percent. Shrink defense expenditures in total to 100 billion dollars a year. Stir, wait a decade, bingo.  Of course, many would disagree with this course of action – including myself. I think EITC should be raised to 50,000 per year, thus pretty much knocking out the lower 50 percent from any income tax, and I think all corporate loopholes should be closed and the corporate income tax should remain the same. In the meantime, I think the U.S. should transform the post office into a post office bank, with which people could open up tax free savings accounts for retirement, education and health that would take the place of 401ks. And I think the money so generated could be used, for one thing, to buy U.S. T notes. In the end, we should work to take sovereign debt out of the hands of the private financial institutions. Now that all this is clear, let’s discuss the real deficit we should be attacking.

Mainstream Economic Media Cry Wolf - I’ve been saying the following to friends and colleagues for months now: In all my many years as a business and economics reporter, I have never seen a greater cognitive dissonance than in the current coverage of the U.S. bond market. Even Chicken Little and the Boy Who Cried Wolf would have by now taken early retirement had their warnings proved as lame as those of the MSEM (mainstream economic media). “S&P Downgrades!” “Bond Vigilantes Poised to Strike!” “America is Greece!” One-liners meant to catch the eye, freeze the heart. But flat-out irresponsible. … And, checking with NYU’s celebrated economic historian Richard Sylla, we find that today’s rates are astonishingly close to the lowest in the entire history of the United States: 1.85 percent, the nadir reached in late 1941. That was the record, I should say — until September 22, when the 10-year U.S. interest rate plunged briefly to 1.695 percent. So what’s going on? Well, rather obviously, investors are a lot more worried about the credit of Greece — or Spain or Italy — than ours.  Investors also seem pretty sure that U.S. inflation is not going to be a problem anytime soon. If inflation scared them, they’d hardly let the United States lock in an interest rate of less than 2 percent for an entire decade. So then why isn’t it plausible to draw the following conclusion: that U.S. interest rates have been going in the “wrong” direction because investors are scared that the U.S. is going to reduce its debt and deficits, and such a reduction might horse-collar the world economy?

Not enough U.S. debt? - One way to measure the ability to service debt is to compute a debt-to-income ratio. Suppose, for example, that your income is $50K per year, that your home is worth $200K, and that you have a $150K mortgage. Then your debt-to-income ratio is 150/50 = 3; or 300%. Similarly, one way to measure the ability of a country to service its national debt is to compute debt-to-GDP (a measure of domestic income) ratio. The ratio of U.S. federal debt to GDP is currently close to 100%.  Clearly, the debt-to-GDP ratio cannot rise forever. No, but on the other hand, there is some evidence to suggest that it can feasibly go much higher. Before I go on, I want to clear up a misguided analogy that I frequently hear repeated. The misguided analogy is the idea of the government behaving like a household running up a massive amount of credit card debt. If this is the way you like to think about things, let me ask you this: Which of your credit cards charge you 0% interest? I ask because that is the interest rate creditors around the world are willing to lend to the U.S. federal government.  In fact, the terms are even much better than 0%. . As the following figure shows, the U.S. government can now borrow funds for 10 years at close to zero real interest. It can borrow funds for 5 years at a negative real interest.

Deal or No Deal? (video) Deal or no deal? Mark Zandi handicaps the chances of a deficit agreement, and discusses the consequences of the super committee's failure.

Let US Debt Supercommittee Finish Off America - It's hilarious that some delusional Americans think they're getting the better of things by putting off fiscal adjustments Europeans have either voluntarily undergone or are being forced to undergo. (Ditto with the EU itself.) In many ways, it's the same kind of deficits-don't-matter happy-go-lucky attitude they've exuded right before the global financial crisis they literally financially engineered and afflicted the Eurozone with for good measure. Trot out all the old reasons for good measure: the dollar remains the world's standard currency, the US makes problems for everyone else and not the other way around, we can still borrow so cheaply despite an S&P downgrade, etc. Well, for those waiting for the United States to get its (much-deserved and long overdue) comeuppance, there is a worthwhile event on the horizon: the imminent failure of the so-called debt supercommittee. The latest word is that it has not only failed to meet its $1.2 reduction target over a 10-year period, but that it failed to agree on an amount which already falls well short of that amount:A high-profile congressional effort to trim stubborn budget deficits appeared near collapse on Friday as Democrats rejected a scaled-back proposal from Republicans that contained few tax increases.

Report: Not so Super committee to admit defeat as soon as Monday - From the WaPo: Supercommittee likely to admit defeat on debt deal The congressional committee tasked with reducing the federal deficit is poised to admit defeat as soon as Monday ...... many economists consider particularly urgent the need to extend jobless benefits and the one-year payroll tax cut. ... the payroll tax cut, enacted last December, allows most American workers to keep an additional 2 percent of their earnings, a boon to tight household budgets as well as the economic recovery. Economists at J.P. Morgan Chase recently estimated that if Congress does not extend the two measures, economic growth next year could take a hit of as much as two percentage points — enough to revive fears of a recession. Just about everyone expected the committee to fail. The key is how much fiscal tightening happens next year - as I've noted before, the two most significant downside risks to the U.S. economy in 2012 are the European financial crisis and more fiscal tightening.  As Goldman Sachs economist noted on November 11th, the impact from not extending the payroll tax cut would be significant: "Our forecast assumes that the payroll tax cut is extended for another year; if that failed to happen, the fiscal drag in early 2012 would rise significantly." And their forecast for Q1 2012 is for 0.5% GDP growth

'Super committee' headed for failure, aides concede --- Members of the congressional "super committee" -- the bipartisan panel tasked with finding at least $1.2 trillion in budget savings over the next decade -- will likely announce Monday that they have failed, according to both Democratic and Republican aides. "No decisions or agreement has been reached concerning any announcement or how this will end," one senior Democratic aide said. "But, yes, the likely outcome is no agreement will be reached." Markets dropped as news spread of the panel's apparent failure. The Dow Jones Industrial Average had declined over 300 points by noon Monday. Legally, a majority of the 12-member committee has until midnight Wednesday to reach an agreement, but any deal needs to be announced for legislative reasons by the end of Monday. The failure of the committee -- evenly split between six Democrats and six Republicans -- sets in motion an alternative timetable for $1.2 trillion in spending reductions starting in January 2013. Leaders on both sides of the aisle are unhappy with the nature of the fallback plan, which cuts evenly from domestic and defense programs.

Lawmakers Trade Blame as Deficit Talks Crumble — With the hours ticking away toward a self-imposed deadline, Congressional leaders conceded Sunday that talks on a sweeping deficit agreement were near failure and braced for recriminations over their inability to reach a deal.  The stalemate was the latest sign of partisan deadlock in Washington, which members of both parties do not expect to lift until the 2012 election has clarified which party has the upper hand.  Barring an unexpected turnaround before Monday’s deadline, the failure of the special Congressional deficit committee will be the third high-profile effort to fall short of a deal in the last 12 months, including a bipartisan deficit commission and talks last summer between President Obama and Speaker John A. Boehner.  By law, the special Congressional committee1’s inability to reach an agreement will trigger $1.2 trillion in automatic spending cuts over 10 years to the military and domestic programs, to start in 2013.

Supercommittee Democrats Insist on Not Giving Republicans Everything, by Dean Baker: In much of the media it is the rule that both parties are equally to blame regardless of what the facts of the situation are. Hence the lead sentence in the Post's article on the supercommittee's deadlock tells readers: "Congressional negotiators made a yet another push Friday to carve $1.2 trillion in savings from the federal debt, but remained stuck in their entrenched positions on tax policy even as the clock was running down on their efforts to reach a deal." It would be interesting to know how the Post decided that the Democrats have an entrenched position. They have offered dozens of plans, many of which would not involve having the rates return to their pre-Bush level, as is specified in current law. By contrast, the Republicans have consistently put forward proposals that would keep the taxes on the wealthy at their current level or lower them further. Even though the Democrats have shown every willingness to cave, the Post refuses to give them credit for it.

Fairy Tales - Krugman - One repeated gripe I’ve had about news coverage in the Lesser Depression is the way deficit-hawk myths about markets are often reported as facts. Again and again, slight upticks in interest rates have been attributed — in news stories, not opinion pieces — to debt fears, despite the complete absence of any actual evidence to that effect. Bloomberg today has an interesting twist: U.S. Futures Decline on Concern Supercommittee Won’t Agree on Budget Cuts. In reality, US rates are down, suggesting no increase in debt concerns whatsoever. But if you read the Bloomberg piece carefully, what it actually says is that market players fear that the absence of a debt deal means no stimulus. So the actual fear is not that spending won’t be cut enough, it is that it will be cut too much — which actually makes sense, and is consistent with the action in stock and bond markets. But how many readers will get that? The way it’s presented reinforces the false notion that the deficit is the problem.

Super Committee Deadline Looms: Failure Would Pose Crummy Choice: -- If the deficit-cutting supercommittee fails, Congress will face a crummy choice. Lawmakers can allow payroll tax cuts and jobless aid for millions to expire or they extend them and increase the nation's $15 trillion debt by at least $160 billion. President Barack Obama and Democrats on the deficit panel want to use the committee's product to carry their jobs agenda. That includes cutting in half the 6.2 percent Social Security payroll tax and extending jobless benefits for people who have been unemployed for more than six months. Also caught up in what promises to be a chaotic legislative dash for the exits next month is the need to pass legislation to prevent an almost 30 percent cut in Medicare payments to doctors. Several popular business tax breaks and relief from the alternative minimum tax also expire at year's end. A debt plan from the supercommittee, it was hoped, would have served as a sturdy, filibuster-proof vehicle to tow all of these expiring provisions into law. But after months of negotiations, Republicans and Democrats were far apart on any possible compromise, and there was no indication of progress Saturday. Failure by the committee would leave lawmakers little time to pick up the pieces. And there's no guarantee it all can get done, especially given the impact of those measures on the spiraling debt. Instead of cutting the deficit with a tough, bipartisan budget deal, Congress could pivot to spending enormous sums on expiring big-ticket policies.

The Supercommittee Should Go Really Big and Turn Against the 1 Percent - It looks the supercommittee is about to throw in the towel. Since the potential deals that had been discussed would have meant large cuts to Social Security, Medicare and other programs that the 99 percent depend upon, we should all be thankful. In the world of the one percent that the supercommittee types inhabit, the big villains in the US economy are not the rich who are pulling down an ever larger share of national income, but, rather, the country's older workers. Whenever the Washington one percenters raised the cry of "go big," it invariably meant large cuts to Social Security and Medicare, the country's two largest social programs which provide essential security for the elderly. Most of the near-retirees who would be the primary targets of supercommittee cuts to these programs struggled with stagnant wages over most of their working lifetimes. Few have defined benefit pensions, meaning that they have only the little amount they have been able to save in 401(k)s and other retirement accounts, plus the equity in their homes to support themselves in retirement. The latter was largely destroyed by the collapse of the housing bubble.  And people in this group would then be entirely dependent on Social Security checks (which average $13,000 a year) to support them in retirement.

The Supercommittee of the One Percent Goes Down in Flames - Congress gave us a wonderful Thanksgiving present when we got word that the supercommitee was hanging up its capes. While many in the media were pushing the story of a dysfunctional Congress that could not get anything done, the exact opposite was true. The supercommittee was about finding a backdoor way to cut Social Security and Medicare, and create enough cover that Congress could get away with it. It is important to remember the basic facts about the budget and the economy. Contrary to the conventional wisdom in Washington, it is easy to show (by looking at the website of the Congressional Budget Office) that we do not have a chronic deficit problem. In 2007, prior to the collapse of the housing bubble and the resulting economic downturn, the deficit was just 1.2 percent of GDP. The deficit was projected to remain near this level for the immediate future, even if the Bush tax cuts did not expire as scheduled in 2011. If the tax cuts were allowed to expire than the budget was projected to turn to surplus. All this changed when the collapse of the housing bubble wrecked the economy. Those who want lower deficits now, want higher unemployment. They may not know this, but that is the reality since employers are not going to hire people because the government has cuts its spending or fires government employees. The world does not work that way.

No Deficit Deal as Focus Turns to 2012 - Lawmakers on a special debt- reduction committee are poised to announce they failed to reach agreement and dissolve congressional gridlock, kicking tax and spending issues into the 2012 election year.  Senator Jon Kyl of Arizona, a Republican on the 12-member panel, said on CNBC the Republican and Democratic committee co- chairmen, Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington, would make a formal announcement “toward the end of the day.” They are expected to say the panel can’t agree on deficit reduction of at least $1.2 trillion, triggering across-the-board cuts of the same amount starting in 2013.  “The next election certainly will have a big bearing on the question of what’s the scope and size of the federal government, and do we want to try to tax our way out of this or grow our way out,” Kyl said. There will be efforts to “ameliorate” effects of the cuts over the next year, he said.  Today is the panel’s deadline to receive a Congressional Budget Office analysis of the effects of any proposal on the deficit. The law requires that the estimates be available for 48 hours before the panel votes, and the supercommittee has a Nov. 23 target date for reaching a deal.

Deficit Committee’s Failure: Thanks and No Thanks - Reactions to the congressional deficit committee’s failure to reach agreement have been pouring into Washington Wire’s inbox. Some are thoughtful, some are angry and most don’t deviate much from the Republican or Democratic party lines. Despite the failure to come together, the co-chairmen of the 12-member committee, formally the Joint Select Committee on Deficit Reduction, tried to strike a balance in a joint statement. Rep. Jeb Hensarling (R., Texas) and Sen. Patty Murray (D., Wash) said they “end this process united in our belief that the nation’s fiscal crisis must be addressed and that we cannot leave it for the next generation to solve.  We remain hopeful that Congress can build on this committee’s work and can find a way to tackle this issue in a way that works for the American people and our economy.” And citing Thanksgiving, they expressed their thanks to members of the panel, the committee staff and all the rest of us. House Speaker John Boehner (R., Ohio) , for his part, praised Rep. Hensarling and Sen. Murray “for the dignified and statesmanlike manner in which the committee carried out its difficult negotiations” and looked ahead:  “I am confident the work done by this committee will play a role in the solution we must eventually find as a nation.” Others weren’t so thankful.

Supercommittee #FAIL: Why Won't America Learn the Lessons of Italy? - Well, there it is: the super-committee has failed.  Supposedly, this means that $1.2 trillion worth of automatic "sequesters" will kick in.  But as PJ O'Rourke remarked about a similar budget-balancing attempt, the storied Gramm-Rudman-Hollings act, "this is like trying to quick smoking by hiding your cigarettes from yourself--and leaving a note in your pocket reminding you where you hid them."  What Congress did, Congress can undo, any time it wants.  And indeed, rumor has it that they're already looking for ways "around" the sequester.  We're obviously nowhere near Italian levels of debt.  But the inability to make even quite small changes in our levels of taxes or spending should worry the hell out of everyone.  Yes, yes, I know--the other side is evil and intransigent and you don't trust them anyway.  The fact remains that we're married to those jerks in the other party, and there's no prospect of divorce.  "Stick to your guns, dammit!" is not a workable policy agenda for either side . . . and no, I don't really care how much better things could be if we were more like Europe/19th century America.  Given events in Europe, this doesn't really seem like a good time to be talking up the virtues of larger welfare states or a weak central bank.

A Failure Is Absorbed With Disgust and Fear, but Little Surprise - Does the American political system even work anymore? Variations on that question kept coming up on Monday as Americans — at least those paying attention — absorbed the news that the Congressional committee charged with reducing the deficit had failed to even meet very often, let alone come up with a plan to get the country back in the black. From shoppers in Los Angeles to tourists in Atlanta to traders taking cigarette breaks outside the Chicago Board of Trade, the eye-rolling that often accompanies doings in Washington gave way to something bordering on dismay. “My reaction when I heard they failed was more emotional than anything,” . “I’m not even sure what that means in the grand scheme. But it was a bum-out.” The failure of the committee — which had been dubbed, with typical inside-the-Beltway grandiosity, the “supercommittee”1 — led to predictable, if bitter, kryptonite jokes. But it also prompted wrenching questions about whether Congress can be trusted to do its job: the committee, after all, was supposed to do the hard work that lawmakers had put off in August when they eventually agreed to avert default by raising the nation’s debt limit2, waiting so long to do so that Standard & Poor’s lowered the United States’s credit rating.

Super Committee Has Failed, Now What? - The group tasked with finding a plan to cut the debt by $1.5 trillion or more has failed to come to an agreement. If you’ll recall, two of the the ratings agencies, Moody’s and Fitch, recently reaffirmed the AAA status of U.S. debt, while S&P downgraded them one notch to AA+. Will the Super Committee’s failure lead to more downgrades? Well nobody is downgrading immediately, but this certainly doesn’t help the odds of preserving AAA status. S&P has already announced that they will not downgrade as a result of the Super Committee failure, which is not a surprise. In their original downgrade statement S&P cited the debt panel failure part oftheir down-side scenario that they would regard as “consistent with a possible further downgrade to a ‘AA’ long-term rating”. However, that down-side scenario also included other bad things occurring, like higher nominal interest rates for U.S. Treasuries, which have not surfaced. However, it’s hard not to see the failure of this committee as reaffirming one of S&P’s chief concerns, which is essentially that politicians can’t come to agreement.

The Budget Control Act: A Primer - Now that it looks like the Congressional Debt/Deficit/Boondoggle Super Committee is not about to meet its obligations, it is entirely possible that the Budget Control Act of 2011 will kick in.  Here are some of the high points of the bill, a copy of which is located here in case you are suffering from insomnia:

  • 1.) As we all know, the Joint Select Committee on Deficit Reduction (the so-called Super Committee) must produce debt reduction legislation by November 23, 2011 that would be immune from both amendments (which have already taken place on the bill itself) and filibusters.  The legislation that was to be proposed aimed to cut at least $1.5 trillion over the next 10 years and be passed into law by December 23rd, 2011.
  • 2.) If Congress fails to cut at least $1.2 trillion, it can grant a $1.2 trillion increase in the debt ceiling, however, this will trigger cuts in spending split equally between security and non-security programs.  These cuts would be in an amount equal to the $1.2 trillion less the deficit reductions agreed upon by the Committee.
  • 3.) Congress is to establish a Committee that is charged with reducing the deficit by $1.8 trillion over the 2012 to 2021 period.  I'd suggest that if they are having this much trouble cutting $1.2 trillion, they are NEVER going to cut $1.8 trillion!
  • 3.) Caps on discretionary spending would be established for the period through to 2021.
  • 4.) Procedures would be established that would allow Congress to change the Constitution by adding a balanced budget amendment.

A Super Failure, But Not a Super Surprise - Ezra Klein puts it well: The “supercommittee,” it turned out, wasn’t so super. By the end, it hardly mattered whether the Joint Select Committee on Deficit Reduction came to a deal. The 12 members had long since decided against “going big.” They were just trying to eke out $1.2 trillion in savings so they could avoid the $1.2 trillion in deep, automatic cuts to defense and domestic spending that would come if they failed. If that happens, the ratings agencies could decide that, far from simply failing to make any deals, we’re backsliding. And that could lead to another round of downgrades and, eventually, a loss of market confidence in our ability to pay our debts more broadly. As a recent Goldman Sachs analysis concluded, Moody’s and Standard & Poor’s “have indicated that while a stalemate in the super committee would be negative, they expect $1.2 trillion in planned deficit reduction to materialize through automatic cuts if not through the super committee, so their fiscal outlook should remain unchanged.”  And apparently, Jon Stewart agrees that the scary-sounding “sequestration” is not nearly as scary as it sounds, for the “trigger” can be simply “de-triggered.”   The super committee didn’t have to come up with all the policy solutions and certainly didn’t have time to figure all that out.  But they could have at least acknowledged their own dysfunction by recommending some rules and processes–which could have been voted on and adopted as law even before any fiscal policy options were considered–to help break this endless cycle of promises and disappointments.

Super Duper Failure - As many of us have been hoping and praying, the Super Committee fell of its own weight, making room for a much better debate about where budget cutting fits into a recovery strategy (if at all), and how to raise taxes progressively in order to finance the investments and jobs that America needs. President Barack Obama was unwise to make this devil’s bargain in the first place; he has since moved on to emphasizing jobs and recovery. The Super Committee crack-up should be the last gasp of the “bipartisan” folly about deficit reduction as key to recovery—which the president himself gave a big boost with his appointment of the late Bowles-Simpson Commission. Much of the mainstream media, however, is still treating the committee’s failure as (a) tragic, (b) symmetrical, and (c) hazardous for the recovery—all mistaken premises. Paul Krugman had a fine column on this last week, making fun of centrist pundits who call for Obama to make more compromises to appease Republicans who won’t compromise at all. But, true to form, John Harwood’s analysis in The New York Times this morning imagined a happy world of bipartisan compromise, in which Republicans bravely agreed to raise taxes and Democrats bit the bullet and cut cherished social programs. He then quoted several third-way types, bemoaning the deadlock.

Super Tuesday Committee Failure - So What? - Long live the Debt!  In case you are voting in the next election - here are 12 people to get rid of.  Much as I may blame one party over another for this failure, they all deserve what's coming to them for A) Pretending they were going to accomplish something and B) For not now getting up and making very strong statements denouncing the corruption in politics that make it impossible for Congress to do the Nation's business anymore.   In case you happen to be a Fox News viewer, I will try to keep this VERY simple because, as it turns out, we now have definitive studies that prove Fox News MAKES YOU STUPID.  Of course, it is possible that only stupid people watch Fox News but I know many people who think they are smart and watch Fox News so I have to blame Fox News here as do researchers at Farleigh Dickenson University who found "The results show us that there is something about watching Fox News that leads people to do worse on these questions than those who don’t watch any news at all."   As I can tell you from raising my own children to be good citizens: 

As Time Ran Out, Super Committee Watched Football, Hung Around in Bars - Now that there's nothing left to be secretive about, Super Committee Democrats and Republicans are sharing details about the deficit-reduction panel's fabulous collapse with members of the press. In short: the committee's failure to come up with $1.2 trillion in deficit savings was not for lack of food, beer, changes of scenery or sideshow entertainment. In a behind-the-scenes account, Politico's Jake Sherman, Manu Raju and John Bresnahan show how Republicans had checked out from negotiations, acknowledging that the two sides were not going to come to an agreement on taxing and spending. "On Thursday night, wearing a baseball cap and jeans, Camp retreated to Penn Quarter Sports Tavern with Rep. Ander Crenshaw (R-Fla.), where they watched the New York Jets play the Denver Broncos on TV. His tax expertise wasn’t needed because no compromise was close," they report. "On Sunday, a day before the panel’s deadline, Rep. Fred Upton (R-Mich.) was at the Washington Redskins game. While at FedEx Field, Upton jumped on a conference call with supercommittee colleagues who had left D.C. for the Thanksgiving holiday." Republicans weren't the only ones enjoying the pro-football seasons as the committee's deadline drew nearer.

More Time Won't Produce A Super Committee deal. - I had a report yesterday that a high Treasury official recently told some foreign central bankers not to worry and that the Super Committee could still reach a deal after November 23.  I would point out that the Committee had plenty of time from it's appointment in mid-August until its failure to agree on any recommendations yesterday, and it had the benefit of the detailed recommendations of the Bowles-Simpson Fiscal Commission, the Bipartisan Policy Center, the Committee for a Responsible Federal Budget, and others.  The Super Committee's failure did not occur because it ran out of time; it occurred because House Speaker John Boehner (R-OH), House Minority Leader Nancy Pelosi (D-CA), Senate Majority Leader Harry Reid (D-NV), and Senate Minority Leader Mitch McConnell (R-KY) decided no deal was better than a deal which risked electoral defeat in 2012 and which offended their partisans with tax increases and entitlement cuts.

Treasury potatoes - Treasury bond yields fell today as the supercommittee failed to agree on a deficit reduction plan. Paul Krugman says this means the market can’t be worried about long-term deficits. More likely, they are worried about near-term austerity (since the super committee’s failure makes an extension of the payroll tax cut less likely). Ezra Klein makes a similar point here about the stock market's drop. I don't really know why bond yields fell today, though I'd guess it has more to do with what’s going on in Europe than America. Still, I wouldn't dismiss the possibility that fears of deficits and default lead to lower, not higher, bond yields. In a liquidity trap, government bonds behave increasingly like money and will reflect not just the usual drivers of expected inflation and deficits, but the demand for liquidity and safety. Some events could easily generate offsetting reactions through these two channels. If America’s credit rating is cut, that would both raise the perceived risk of default and concerns about the overall stability of the economy and financial system. The first reaction pushes yields up, the second pushes them down.  On Monday, CDS on US Treasurys rose to 53 basis points from 48, suggesting slightly greater fear of default.

Mark Ames: Libertarian Liars: Top Reagan Adviser, Cato Institute Chairman William Niskanen: “Deficits Don’t Matter” - Another Monday, another “deficit crisis” panic. If you haven’t got the feeling yet that you’re being played like a sucker over this alleged “deficit crisis,” then let me help you cross that cognitive bridge to dissonance. It comes in the figure of the recently-deceased William Niskanen, the embodiment of how Reaganomics and the Koch brothers’ libertarian movement were joined at the hip. Niskanen was an advisor to Ronald Reagan throughout the 1970s; a board director for the Koch-founded Reason Foundation; a member and chairman of Reagan’s Council on Economic Advisers from 1981-85; and he moved directly from Reagan’s side back to the Koch brothers’ side, as chairman of the libertarian Cato Institute from 1985 until 2008.  This is a brief story about how the 1% transformed this country into a failing oligarchy, and their useful tools, starting with A-list libertarian economist William Niskanen, Chicago School disciple of Milton Friedman, advocate of the rancid “public choice theory.”

Supercommittee Failure is a Great Thing for Democrats - The failure of the supercommittee has been cause for much weeping and gnashing of teeth among Beltway pundits, but the important thing to remember about the current budgetary baseline is that absent any further action from Congress, we can expect around $7.1 trillion in deficit reduction over the next decade. The Center for Budget and Policy Priorities has the numbers: $3.3 trillion from allowing the Bush tax cuts to expire, $0.8 trillion from allowing other tax cuts to expire, $0.3 trillion from allowing Medicare provider cuts to happen on schedule, $0.7 trillion from allowing relief from the Alternative Minimum Tax to expire, $1.2 trillion from the supercommittee “trigger”, and $0.9 trillion from lower interest payments are a result of the above. Of course, now is a terrible moment for deficit reduction— austerity is useless when the economy is sputtering along with low consumer demand. But for those Democrats concerned with the deficit, there’s nothing the GOP could offer — short of a strong public option — that would make a deal sweeter than the “do-nothing” option.

How Occupy stopped the supercommittee – Dean Baker - Congress gave us a wonderful Thanksgiving present when we got word that the supercommittee "superheroes" were hanging up their capes. While many in the media were pushing the story of a dysfunctional Congress that could not get anything done, the exact opposite was true. The supercommittee was about finding a backdoor way to cut social security and Medicare, and create enough cover that Congress could get away with it.   Contrary to the conventional wisdom in Washington, it is easy to show (by looking at the website of the Congressional Budget Office) that we do not have a chronic deficit problem. In 2007, prior to the collapse of the housing bubble and the resulting economic downturn, the deficit was just 1.2% of GDP. The deficit was projected to remain near this level for the immediate future, even if the Bush tax cuts did not expire, as originally scheduled in 2011. If the tax cuts were allowed to expire, then the budget was projected to turn to surplus. All this changed when the collapse of the housing bubble wrecked the economy.  This is what created the large deficits that we are now seeing. The $1tn-plus deficits are replacing lost private-sector demand. Those who want lower deficits now also want higher unemployment. The world does not work that way.

Super Committee's Failure Leaves Orphaned Programs Behind…-- Throughout the super committee's deliberations, impending "automatic, across-the-board cuts" were routinely cited as a driving motivation for its members to come to a compromise, even though the cuts won't take effect until 2013 and Congress is already showing signs of wanting to undo them. But the failure of the panel, formally known as the Joint Select Committee on Deficit Reduction, has left behind a separate house full of orphans that Congress must find a way to deal with before January 1, or else taxes will soar on the middle class, jobless benefits will expire and doctors will see their reimbursement rate slashed by nearly a third, threatening elderly access to health care. "After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline," the committee's co-chairs, Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Texas) said in a statement on Monday. Congressional leaders haven't said what exactly they plan to do now that the committee has failed, but lawmakers might be able to save these policies by attaching them to a new "continuing resolution" to fund government operations when the current CR expires on Dec. 16.

Inside the Corporate Plan to Occupy the Pentagon - With time fast running out for the so-called deficit supercommittee, the mammoth amount of government money spent on the military has become a prime target in Washington. But the main focus isn't on big-ticket weapons projects or expensive wars—it's on retirement benefits for the roughly 17 percent of soldiers, Marines, sailors, and airmen who have served 20 years or more in uniform. Currently the total cost of their benefits is about $50 billion a year. Cuts to military pensions are "the kind of thing you have to consider," Defense Secretary Leon Panetta said in September. When President Obama unveiled his $3 trillion debt reduction plan the same month, it called GIs' benefits "out of line" with private employee retirement plans, saying the system was "designed for a different era of work." When Congress held a hearing on military retirements in October, Rep. Austin Scott (R-Ga.) promoted a cheaper 401(k)-style plan that would slash existing benefits for many troops. "I see nothing wrong with them being able to choose a different retirement plan," he said.

The defense cuts aren’t the biggest problem with the trigger - Now that the supercommittee is set to pull the “fail” lever, there’s no shortage of panic in Congress about the constraints on future military spending that will kick in as a result — saving $454 billion over 10 years. “This is not an outcome we can live with,” Sens. John McCain (R-Ariz.) and Lindsey Graham(R-S.C.) warned earlier this month. Yet there’s nowhere near the same anxiety about the cuts to domestic discretionary spending that will also bite down once the supercommittee chucks in the towel. Arguably, there should be. Budget experts are already warning that these cuts to domestic spending — totaling $294 billion over 10 years, starting with a 7.8 percent cut in 2013, and coming on top of the spending caps in August’s debt-ceiling deal — could have even harsher consequences, both for everyday Americans and for the ability of the United States to maintain a thriving, competitive economy in the years ahead. “This isn’t just a bunch of bureaucrats in Washington who are going to have fewer jobs,” says Isabel Sawhill, a former associate director of the Office of Management and Budget now at Brookings, of the cuts. “This is going to affect public safety, it’s going to affect low-income people, it’s going to affect veterans’ health care. We can’t just wave our arms and pretend it won’t have an impact on people’s lives.”

Defense Cuts - Another Big Lie - If you follow the headlines, and believe them, you would probably think that defense spending is about to be slashed to the bone following the collapse of the “super committee”. Defense secretary Leon Panetta is warning of a “doomsday” scenario for national security spending. Congressman Buck McKeon, the chairman of the House Armed Services Committee, warns that automatic cuts will end up “crippling our military.”  There’s just one problem. It’s total nonsense. What Washington calls a “cut” is really just a more modest increase than you were expecting.  Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, says that under these alleged post-committee “cuts” defense spending is actually forecast to rise from 2012 to 2021 by 16%, from $695 billion to $818 billion. Boy, that’s some cut! The Pentagon had been expecting a 23% rise, and in Washington a slow increase is called a “cut.” But even if we get some inflation ahead, she says, the worst case scenario under the current plans is to a see “a freeze in real terms.” Yes, Congress in the future may decide to cut defense spending. Credit Suisse analysts are penciling in reductions down the road. But nobody knows. And I think they are giving our political system too much credit.

Behind Deficit Panel’s Failure, a Surprising Outcome - The latest Congressional failure to agree on a plan for balancing the government’s books could yield a surprising result: a sharp reduction in annual federal deficits, larger than anything contemplated by the special panel that reached its fruitless finale on Monday.  But the absence of an agreement also threatens to tilt the nation back into recession by raising taxes on almost everyone while reducing government spending on almost everything.  Tax cuts passed in the Bush administration will expire at the end of 2012. By law, the panel’s failure triggers new caps on spending, cutting $1.2 trillion from the military, education, health care and other priorities over 10 years beginning next fall. The combined impact of higher tax rates and less spending would reverse the growth of annual deficits beginning in 2013, reducing by more than half the current $1.3 trillion gap between annual revenue and spending.  That has inverted the normal reality, in which spending rises inexorably unless Congress musters the political will to impose cuts. Now, although both parties say they are committed to more gradual approaches, an agreement is required to avoid the fiscal equivalent of shock therapy.

For Deficit Panel, Failure Cuts Two Ways —The latest Congressional failure to agree on a plan for balancing the government’s books could yield a surprising result: a sharp reduction in annual federal deficits, larger than anything contemplated by the special panel that reached its fruitless finale on Monday. But the absence of an agreement also threatens to significantly slow growth in an already ailing economy by raising taxes on almost everyone while reducing government spending on almost everything. Tax cuts passed in the Bush administration will expire at the end of 2012. By law, the panel’s failure triggers new caps on spending, cutting $1.2 trillion from the military, education, health care and other priorities over 10 years beginning next fall. The combined impact of higher tax rates and less spending would reverse the growth of annual deficits beginning in 2013, reducing by more than half the current $1.3 trillion gap between annual revenue and spending. That has inverted the normal reality, in which spending rises inexorably unless Congress musters the political will to impose cuts. Now, although both parties say they are committed to more gradual approaches, an agreement is required to avoid the fiscal equivalent of shock therapy. 

After the Super Committee, What? -- The congressional panel's failure to agree sets up a potential showdown for the economy. Mark Zandi discusses with Bloomberg TV.

Obama Threatens Veto on Undoing Trigger Cuts - President Obama positioned himself well politically in his statement on the demise of the Super Committee yesterday, particularly with this passage: One way or another, we will be trimming the deficit by a total of at least $2.2 trillion over the next 10 years. That’s going to happen, one way or another. We’ve got $1 trillion locked in, and either Congress comes up with $1.2 trillion, which so far they’ve failed to do, or the sequester kicks in and these automatic spending cuts will occur that bring in an additional $1.2 trillion in deficit reduction. Now, the question right now is whether we can reduce the deficit in a way that helps the economy grow, that operates with a scalpel, not with a hatchet, and if not, whether Congress is willing to stick to the painful deal that we made in August for the automatic cuts. Already, some in Congress are trying to undo these automatic spending cuts.  My message to them is simple: No. I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending. There will be no easy off ramps on this one. If you read on, however, you find that Obama has no problem with changing the trigger cuts, as long as it’s a “balanced” plan of the same value. In other words, those who want to avert the defense trigger are going to have to raise taxes. And, as Obama says, “they’ve still got a year to figure it out.”

Where’s the Super Committee for Job Creation? -  The bipartisan Super Committee trying to forge a politically acceptable path for deficit reduction ended in a super fail, and one of the big reasons appears to be disagreement over the extension of the Bush tax cuts for high income households.  I don’t expect Republicans to put the unemployed at the forefront of their policy agenda. It comes as no surprise that they would insist on tax cuts for the wealthy despite their purported concern for the deficit, and then sing a different tune for the working class. For example, Sen. Jeff Sessions (Ala.), the ranking Republican on the Senate Budget Committee, said he was uneasy about extending the payroll tax holiday, calling the national debt ‘a greater threat to us’ than the weak economy. But I do expect Democrats to be the champions of the poor, the underprivileged, and the unemployed. When and how did the need for deficit reduction – particularly through cuts to social programs – come to be more important than the needs of households struggling with the recession? Why aren’t Democrats talking about the need to help the unemployed at every possible opportunity? Where’s the Super Committee for Job Creation?

Fate of 2012 Unemployment Extension Gets Cloudier - Jobless Americans are once again at risk of losing their extended unemployment benefits. The super-committee’s failure to reach a plan to cut the deficit makes it more challenging to find a vehicle to renew the payroll tax cut and re-up on extended unemployment benefits, both items on President Barack Obama’s wish list that had the potential to be included in a larger deal. Congressional Republicans haven’t been enthused by either proposal, and have been insistent that new programs be paid for, which makes it more difficult to fashion a compromise.That means after nine rounds of extended unemployment benefits, it’s possible there won’t be a 10th. Extending the benefits costs about $50 billion; without an extension some 2.2 million Americans will lose their jobless benefits by mid-February. Next year unemployed workers would be able to draw benefits for a maximum of 26 weeks in most states, a sharp drop from up to 99 weeks currently offered.

Failure to agree spending cuts could see Fitch slash US rating - Ratings agency Fitch today warned it may slash the US's triple-A sovereign rating after the Senate "super-committee" charged with finding $1.2 trillion (£767 billion) in cuts broke up in rancorous disagreement. It has been at work since August trying to agree spending cuts, but Democrats and Republicans on the committee split on political lines. Republicans refuse to countenance any tax rises for the rich, but Democrats will not sanction spending cuts on healthcare without them. Fitch signalled in August that a failure to agree cuts would be likely to result in putting the US on a "negative" outlook - implying a bigger than 50% chance of a downgrade over a two-year horizon. Larger rival Standard & Poor's cut its AAA rating on the US in the summer. Automatic spending cuts will now kick in from 2013 following the failure to reach agreement.

U.S. may lose second triple-A rating within months — The failure of the supercommittee to reach a compromise on a debt-reduction plan exposes the U.S. sovereign rating to more downgrades, with ratings agencies expected to fire their first salvo by the year’s end. “It is just a matter of time before the government’s rating is cut,” Steve Ricchiuto, Mizuho Securities’ chief economist, said in a report. “I would not be surprised if S&P puts the Treasury on watch for another downgrade in the weeks ahead and that Moody’s or Fitch move before the Dec. 23 date when the legislation implementing the Super Deficit Committee’s recommendations were scheduled to be enacted,” he added. The scope and the severity of the actions will depend on how the politicians handle sequesters, or the automatic cuts scheduled for 2013, as well as payroll taxes and extended benefits.

Moody's warns US not to back off deficit cuts — Moody's Investors Services warns it could downgrade the U.S. government's top credit rating if Congress backs off $1.2 trillion in automatic deficit cuts scheduled over the next decade. The credit rating agency says it will not lower the nation's rating on long-term debt after a special congressional panel failed this week to reach agreement on alternative cuts to the deficit. The impasse triggered the automatic cuts, which are scheduled to kick in beginning in 2013. Moody's said any effort to reduce those cuts could force the agency to downgrade its rating. Moody's currently has U.S. government debt with a top rating of Aaa but with a negative outlook.

Deficit Deals Weren't Always So Antitax - I had an article over the weekend about how previous deficit-reduction deals were much more tax-heavy than anything on the table today — until, that is, 1997. Here’s a breakdown of the deficit reductions that came from higher tax revenue versus spending cuts in the deals passed in the last 30 years: As you can see, the five major deals of the 1980s and early 1990s relied much more heavily on tax increases to do the dirty work of deficit reduction. On average, tax increases accounted for 61 percent of deficit reductions (and much more during the early Reagan years, despite President Ronald Reagan’s reputation as the taxpayer’s friend). But by 1997, tax increases were wholly ruled out as a source of deficit reduction. In fact, Congress — finally with a Republican majority by that point — decided to cut taxes, which meant spending cuts had to be even greater to make up for the loss in tax revenue. That’s why the chart above shows that tax changes subtracted from total deficit reductions by 71 percent. The compromise proposal offered by one of the Republicans on the deficit “supercommittee” was significantly less reliant on tax increases than the ’82-’93 deals, offering 24 cents in tax increases for every dollar the deficit was reduced. But still, there was some sense that deficit reductions should come from both sides of the ledger.

China media says US sitting on debt 'bomb' - China's state media Tuesday blasted the United States over its "ticking debt bomb" and urged American lawmakers to be more responsible after they failed to agree on deficit-cutting measures. China is the world's largest foreign holder of US Treasuries with a portfolio of around $1.15 trillion, prompting Beijing's keen interest in the state of the US economy. "Washington's political elites... are obligated to muster the courage to defuse the ticking debt bomb and start to show the world they have the wisdom and determination not to further jeopardise the fragile global economic recovery," Xinhua news agency said in a commentary. A US Congress "supercommittee" Monday failed to reach a deal to rein in the government's galloping deficits due to angry partisan battles over how best to revive the nation's sluggish economy. The move confirmed widespread expectations that the 12-member committee would miss its goal to cut US deficits by $1.2 trillion over 10 years amid political feuds over tax hikes on the rich and cuts to social spending. Xinhua, a mouthpiece for the Chinese government, blamed partisan in-fighting, saying both Democrats and Republicans were ignoring the impact of a possible US default on the global economy.

How Other Countries Do Deficit Reduction - As noted in my previous post, today’s (failing) deficit “supercommittee” discussions are hardly the first time Congress has engaged in efforts to reduce the deficit. In most of the deals of the last 30 years, tax increases have accounted for a significant portion of deficit reductions. The same is true across the developed world. Researchers at the International Monetary Fund have recently put together a comprehensive report on how developed countries have tried to cut deficits in the last three decades. The study looked only at tax and revenue changes that were passed explicitly to reduce budget deficits, and calculated the total tax increases, spending cuts or both made in each year, as a share of a given country’s gross domestic product. It found that the typical year that a deficit-reduction plan was in effect, tax increases accounted for reductions equal to about 0.37 percent of a country’s gross domestic product. Spending cuts accounted for reductions amounting to 0.62 percent of a country’s economy. That means spending cuts were about twice as big as tax increases in this group of 17 rich countries.

The lesson from Canada on cutting deficits - Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.  “Everyone wants to know how we did it,” But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.  It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.  Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.  For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

Obama Focuses on Europe’s Debt Problems, Not So Much America’s - Mr. Obama submitted a deficit reduction plan in September to the now-defunct congressional supercommittee tasked with crafting a $1.2 trillion deficit reduction plan by Monday night. After that, according to the White House, he placed one phone call to each of the committee’s co-chairmen. By contrast Mr. Obama has held multiple calls with European leaders and spent time with them in person. He held a offered his counsel as they tried to reach a debt deal during the Group of 20 Summit in France. On Monday, when the supercommittee announced it had failed to reach a deal, Mr. Obama made a public statement about his disappointment. But the White House didn’t release any statement saying he’d made any calls to persuade lawmakers or talk about next steps. But the White House did issue statements saying the ;president had called Italian Prime Minister Mario Monti and Greek Prime Minster Lukas Papademos to discuss the European debt crisis. Those calls followed one Mr. Obama made last week to Mr. Papademos’s predecessor.

Do-nothing Congress may find a way to raise taxes - THE supercommittee has failed. This failure is leading some to wonder whether debt worries might hamstring a struggling American economy. Eventually, perhaps, but not yet; for now, crisis is sending international investors rushing into the arms of the Treasury, and the yield on 10-year American debt is back below 2%. A bigger concern is the rising possibility that Congress will be unable to prevent a big fiscal tightening from occurring at the end of the year. Last year, as part of the deal to extend the expiring Bush tax cuts, Congress approved a stimulative payroll tax cut and an extension of federal emergency unemployment benefits. Both are scheduled to expire at the end of the year. Should they do so, the economy may face a fiscal hit next year equivalent to about 2 percentage points of growth.  A tightening of that magnitude would push America uncomfortably close to the threshold of recession, and that's assuming no new headwinds, as from a euro-zone collapse. Until recently, it had been assumed that whatever their differences, Republicans and Democrats could come together to protect a tax cut for working people amid an extremely fragile recovery. The failure to reach any supercommittee deal may have poisoned the water sufficiently to cast even that into doubt.

Supercommittee’s failure pushes Bush tax cuts to forefront of 2012 - The imminent failure of the congressional deficit “supercommittee,” which had a chance to settle the nation’s tax policy for the next decade, would thrust the much-contested Bush tax cuts into the forefront of next year’s presidential campaign. Those tax changes have repeatedly provoked fiery partisan debate since they were enacted during President George W. Bush’s first term. Now, with the cuts due to expire at the end of 2012 and their fate left unresolved by the supercommittee, both parties are already positioning themselves to exploit the issue for maximum electoral advantage. President Obama, who campaigned on repealing the breaks for the wealthy, angered his base last year when he agreed to extend all the tax cuts beyond their original expiration, at the end of 2010. This time, the president has vowed to veto any effort to extend the tax breaks on upper-income Americans. Democratic lawmakers had hoped that the potential loss of these breaks in a little more than a year would prompt Republicans to offer larger concessions on the supercommittee, but a deal has remained elusive.

Jackson Lee: The Bush tax cuts are dead - Democrats will ensure that the Bush-era tax cuts expire once and for all at the end of 2012, Texas progressive Rep. Sheila Jackson Lee pledged on Tuesday."There is no future for the Bush tax cuts to continue indefinitely or to continue at all," the Democrat told a local radio show, Politic365, on Tuesday. "Frankly … two wars in Iraq and Afghanistan combined with the Bush tax cuts have driven us where we are today, " she continued, referring to the nation's $15 trillion deficit.  Jackson Lee's comments come in the wake of the congressional supercommittee’s failure on Monday to reach a deal to slash $1.2 trillion in spending over the decade. Several of the proposals put forth by Republicans in negotiations included an extension of the Bush tax cuts, which are set to expire at the end of 2012. Democrats, however, rejected those proposals.

Supercommittee’s failure puts payroll tax cut at risk - The failure of the “supercommittee”1 raises the chance that working Americans will see their paychecks cut in January, and many economists say that could weaken an already vulnerable U.S. economy. Last year’s payroll tax cut saved the average U.S. household more than $900, according to the Tax Policy Center2. But because the supercommittee could not agree on a budget plan, the tax cut, as well as unemployment benefits, could expire at the end of the year. “This is an immediate problem,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities. “There will be damage if this isn’t extended.” Economists at the country’s biggest banks have been concerned for months about damage to the economy if Congress didn’t act. In August, the authors of a Goldman Sachs report3 said that a failure to extend the payroll tax cut and benefits for the unemployed ranked among their three biggest worries for the U.S. economy, alongside Europe’s debt crisis. Without the short-term stimulus, the analysts said, “fiscal drag will be intense in 2012,” raising the probability that the country will fall back into a recession.

Congress prepares for payroll tax battle - The congressional "super committee" officially admitted failure, but even as it did so, Congress plunged toward a new budget battle that carried an immediate punch: A year-end fight could bring a tax increase of nearly $1,000 to the average American worker. The current payroll tax holiday for workers expires Dec. 31, and unemployment benefits run out for some 2 million Americans shortly after that. Economists warn that a tax increase on Jan. 1 combined with an end to the jobless benefits could cut the economy's already weak growth almost in half. Many members of Congress had hoped that the super committee, which was trying to produce a $1.5-trillion deficit reduction plan, could include an extension of the payroll tax holiday in whatever deal it reached. Those hopes came to an end Monday when the committee's co-leaders issued a statement, after the financial markets had closed for the day, that conceded defeat in their three-month effort to craft a budget-cutting plan.

Obama reopens debate on US stimulus  -Barack Obama sought to reignite the debate over an ­economic stimulus package on Tuesday, demanding that a bitterly divided Congress pass an extension of payroll tax cuts before the end of the year.“We still have to give the economy the jolt that it needs,” the US president said on the campaign trail in New Hampshire, a day after a bipartisan committee failed to agree on a $1,200bn deficit reduction package. He added he would do “everything in his power, with or without Congress”. Mr Obama’s drive to extend payroll tax cuts came as the US Federal Reserve indicated it was unlikely to ease monetary policy and the Bureau of Economic Analysis revised its estimate of third-quarter growth down from 2.5 per cent to 2 per cent. Only “a few members” of the rate-setting Federal Open ­Market Committee thought the sluggish economic outlook “might warrant further accommodation”, suggesting that any move towards a new round of quantitative easing – or QE3 – was still some way off. “

Austerity on auto pilot: Cliff diving | The Economist - The collapse of the super committee has many mourning the last chance at a "grand bargain," a sweeping reform of taxes and spending that puts the deficit on a convincing, downward path. Over at At RealClearPolitics, Alexis Simendinger helpfully reminds us: In truth, current law has accomplished a “grand bargain” in deficit reduction over the next decade ... Washington’s default governance could deliver more than $7 trillion in deficit reduction in the next decade if Congress and the president do nothing but campaign next year. The problem, of course, is that this grand bargain is perversely structured to do maximum damage for minimum benefit. I've tried to compile  the various tax increases and spending cuts scheduled to kick in over the next 14 months. The results are in the table at the right and they illustrate that America faces two fiscal cliffs in the next 14 months. The stuff that expires or takes effect in coming months  adds up to $359 billion, or 2.4% of GDP.  The stuff that expires or takes effect a year later is another $385 billion, or 2.6% of GDP. There's a decent chance the payroll tax cut and extended unemployment insurance benefits, now scheduled to expire at the end of this year, will be extended one more year. But that still leaves 1.6% of tightening baked in for 2012, and an eye-watering  3.4% for 2013.  That is a dangerously large  serving of fiscal austerity at a time when the Federal Reserve anticipates unemployment will still be over 8% and growth below 3%.

The do-nothing plan: now worth $7.1 trillion - In the past, I’ve talked about the “do-nothing plan” for deficit reduction: Congress heads home to spend more time with their campaign contributors, and the Bush tax cuts automatically expire, the 1997 Balanced Budget Act’s scheduled Medicare cuts kick in, the Affordable Care Act is implemented, and the budget moves roughly into balance. It’s not an ideal way to balance the budget, but it helps clarify that the deficit is the result of votes Congress expects to cast over the next few years. If, instead of casting those votes, they do nothing, or pay for the things they choose to do, the deficit mostly disappears. Here’s how it breaks down:

    • — $3.3 trillion from letting temporary income and estate tax cuts enacted in 2001, 2003, 2009, and 2010 expire on schedule at the end of 2012 (presuming Congress also lets relief from the Alternative Minimum Tax expire, as noted below);
    • — $0.8 trillion from allowing other temporary tax cuts (the “extenders” that Congress has regularly extended on a “temporary” basis) expire on schedule;
    • — $0.3 trillion from letting cuts in Medicare physician reimbursements scheduled under current law (required under the Medicare Sustainable Growth Rate formula enacted in 1997, but which have been postponed since 2003) take effect;
    • — $0.7 trillion from letting the temporary increase in the exemption amount under the Alternative Minimum Tax expire, thereby returning the exemption to the level in effect in 2001;
    • — $1.2 trillion from letting the sequestration of spending required if the Joint Committee does not produce $1.2 trillion in deficit reduction take effect; and
    • — $0.9 trillion in lower interest payments on the debt as a result of the deficit reduction achieved from not extending these current policies.

How We Can Succeed Through Supercommittee’s ‘Failure’ - Here is a surefire way to cut $7.1 trillion from the deficit over the next decade. Do nothing. That’s right. If Congress simply fails to act between now and Jan. 1, 2013, the tax cuts passed under President George W. Bush expire, $1.2 trillion in additional budget cuts go through under the terms of last summer’s debt-ceiling deal, and a variety of other tax cuts also go away. Knowing this, are you still sure that a “failure” by the congressional supercommittee to reach a deal would be such a disaster? In an ideal world, of course, reasonable members of Congress could agree to a balanced package of long-term spending cuts and tax increases to begin bringing the deficit down, coupled with short-term measures to boost the economy. But genuine compromise can’t happen because Republicans refuse to accept any significant tax increases. This is not a partisan statement. It is just a description of the facts. It is maddening that the media are so desperate to avoid being attacked as “liberal” that they cannot describe the situation as it is.

The "Do Nothing" Solution to America's Fiscal Crisis - As is well-known, America’s most serious budgetary problem is Medicare, the national health programme for the elderly.   Back in 1997 Republicans and Democrats joined together to implement a programme that would permanently restrain the growth of Medicare spending. The key provision limited payments to doctors to those established by a formula called “the sustainable growth rate”. The SGR formula worked fine for a few years, but as soon as it began to bite in 2003, Congress intervened to prevent doctors’ fees from being cut. It has continued to do so every year since. This annual exercise is known in Washington as the “doc-fix”.  If it were simply allowed to take effect without congressional interference, payment to doctors for Medicare services would be cut by 30 per cent on January 1. That is not likely to happen. But if Congress would just rebase the SGR formula to this year, and allow it to operate from now on, it would save about $300bn over the next 10 years, plus another $50bn in debt service. On the revenue side, a large number of tax cuts enacted since 2001 are scheduled to expire at the end of this year and next year. There is also a tax provision called “the alternative minimum tax” that has also been subject to an annual congressional fix to keep it from affecting too many taxpayers.

How Newt Gingrich Added $16 trillion to the Debt - - Newt Gingrich - November 20, 2003-  Every conservative member of Congress should vote for this Medicare bill. It is the most important reorganization of our nation's healthcare system since the original Medicare Bill of 1965 and the largest and most positive change in direction for the health system in 60 years for people over 65. In a bold and unexpected move, the new Medicare bill includes a decisive shift to health savings accounts, which will allow every American to accumulate tax-free health dollars. HSAs allow account-owners to build savings and earn tax-free interest on their HSA contributions. HSA account owners can use their savings for tax-free spending on qualified health expenses, including health insurance premiums and deductibles, prescription drugs, and long-term care services including long-term care insurance. If you are a fiscal conservative who cares about balancing the federal budget, there may be no more important vote in your career than one in support of this bill.

Will 50% Cuts “Hollow Out” The Military? - Yves Smith - Despite the collapse of the supercommittee deficit talks on Monday, both parties are almost certain to keep trying to come up with some sort of deal, if for no other reason as to keep their views in the spotlight. This segment on the Real News Network provides a useful discussion of the politics and practicalities of cutting military budgets.

Next Act In DC’s Kabuki Theater: House GOP Lays Trap For Obama On Jobs Plan - The House GOP has hit upon a way to undercut President Obama’s attacks on them and advance conservative policy goals all at once. This week, they’ll pass legislation that includes perhaps the least stimulative measure in President Obama’s jobs bill and pay for it with perhaps the most regressive measure in a recent package of deficit reducing proposals he submitted to the joint deficit super committee. It’s a case study in the perils of offering concessions to your opponents before negotiations have begun. And it will force Democrats in both chambers, but particularly in the Senate, to decide whether to pass a proposal comprised of measures Obama’s backed in the past, even though they’ve been cherry picked to essentially constitute a Republican piece of legislation. If Senate Dems block the measure, Republicans will accuse them of wanting to pick political fights instead of passing Obama jobs legislation. If Dems pass the measure, and Obama signs it, the GOP can cite it as evidence that they’re not simply standing in the way of action on the economy. The piece of the jobs bill Republicans will pass would end a requirement that the government withhold three percent of the cost of projects contracted out to private companies, to assure tax compliance. It’s a rule that Congress adopted during the Bush administration to cut down on tax cheating by government contractors. The near-term stimulative value of repeal is questionable, according to critics, and it’s a permanent repeal — not a holiday. The Joint Committee on Taxation concluded that the requirement saves the federal government over $10 billion over 10 years that would otherwise be lost to major contractors.

Gerrymandering the Jobs Bill -"The piece of the jobs bill Republicans will pass would end a requirement that the government withhold three percent of the cost of projects contracted out to private companies, to assure tax compliance. It’s a rule that Congress adopted during the Bush administration to cut down on tax cheating by government contractors." The proposals would incorporate a permanent repeal of the withholding which today saves $10 billion in lost taxes. To counter the revenue loss the Republicans have a solution (as paid for by Medicaid/SS recipients): "all legislation other than permanent tax cuts for wealthy people must be paid for — typically with cuts to federal programs. So Republicans have selected a provision from Obama’s deficit reduction recommendations that would limit Medicaid eligibility for people who also receive Social Security benefits. A concept called Modified Adjusted Gross Income is used to determine Medicaid eligibility. Currently, it only incorporates the taxable portion of Social Security income in that calculation. Under t a new proposal, it would factor in all Social Security benefits. That means some seniors who currently qualify for Medicaid would no longer be eligible. Doing this would save about $14.6 billion over 10 years — more than the cost of repealing the 3 percent withholding compliance measure."

Does Smaller Government Create More Jobs? - Yves Smith - (video) This Real News Network interview with economist Bob Pollin of the Political Economy Research Institute in Amherst, Massachusetts focuses on the deficit cutting impasse in Washington and what measures could create more jobs.

Estimates of ARRA’s Impact in the Third Quarter of 2011 - CBO Director's Blog - As required by law, CBO prepares regular reports on its estimate of the number of jobs created by the American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in response to significant weakness in the economy at that time. In its latest report, issued this afternoon, CBO provides estimates of ARRA’s overall impact on employment and economic output in the third quarter of calendar year 2011, as well as over the entire period since February 2009. CBO estimates that ARRA’s policies had the following effects in the third quarter of calendar year 2011 compared with what would have occurred otherwise:

  • They raised real (inflation-adjusted) gross domestic product (GDP) by between 0.3 percent and 1.9 percent,
  • They lowered the unemployment rate by between 0.2 percentage points and 1.3 percentage  points,
  • They increased the number of people employed by between 0.4 million and 2.4 million, and
  • They increased the number of full-time-equivalent (FTE) jobs by 0.5 million to 3.3 million. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

December Forecast: Bitter Spending Fights in Congress - When Congress’s supercommittee’s fell apart this week, it did more than kill hopes for a deficit-cutting deal. It also set the stage for a contentious December that could see a host of ugly spending battles. Lawmakers hoped the panel would find a way to extend the current payroll tax holiday and special unemployment benefits, among other things. Now Congress must tackle those issues before year’s end, deciding how to fund them amid the sour partisan atmosphere left over from the supercommittee battles.Congress also faces an array of expiring tax provisions, and the measure currently funding the government runs out on Dec. 16. The last spending extension passed with 101 Republicans defecting, reflecting growing dissatisfaction by conservatives over current spending levels. The question is whether Congress can navigate these volatile issues and bring December to a close without the sort of pitched partisan battles over spending that have repeatedly enveloped Washington, and alienated voters, over the past year. The provisions affect millions of Americans, including Medicare beneficiaries and virtually every wage-earner in the country.

Taxing Job Creators – Krugman - Mark Thoma sends us to the new Journal of Economic Perspectives paper (pdf) on optimal taxes by Peter Diamond and Emmanuel Saez. It’s a tough read (I’m still working on it myself), but there’s one discussion that I think helps make a useful point about current political debate. In the first part of the paper, D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners — full stop. Why? Because if you’re trying to maximize any sort of aggregate welfare measure, it’s clear that a marginal dollar of income makes very little difference to the welfare of the wealthy, as compared with the difference it makes to the welfare of the poor and middle class. So to a first approximation policy should soak the rich for the maximum amount — not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes. Now, this doesn’t imply a 100% tax rate, because there are going to be behavioral responses – high earners will generate at least somewhat less taxable income in the face of a high tax rate, either by actually working less or by pushing their earnings underground. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%.

It’s Time Stop Squabbling about the Bush Tax Cuts - As long as politicians keep squabbling about what to do about the Bush era tax cuts, we are doomed. There will be no serious deficit reduction. There will be no tax reform. There will be nothing but the same old partisan arguments. Don’t believe me? Just listen to the chatter coming out of the failed deficit super committee.   That’s why it is time to reframe this debate. Rather than bickering endlessly about whether what they are doing is a tax cut or a tax increase compared to a law first passed a decade ago, lawmakers should start talking about what a fair and economically efficient tax code should look like. They ought to just decide how much tax revenue they need and then figure out how to raise it.    Much as I’d love to take credit for this brilliant new insight, it is hardly original. The chairmen of the 2010 White House deficit reduction commission, Erskine Bowles and Alan Simpson, proposed rewriting the entire tax code from scratch and fixed a revenue target for the new law of 21 percent of Gross Domestic Product.  House Budget Committee Chairman Paul Ryan (R-WI) did much the same thing when he called for a bottom’s-up tax reform that produces 18 or 19 percent of GDP in federal taxes.

Taxing the 1% - Trying to prevent an increase in tax rates on the richest 1% of Americans looks to me like a losing strategy for the Republicans. Let me begin with what should be an indisputable fact: income inequality in the United States has been significantly increasing over the last generation. The new report from the Congressional Budget Office recently highlighted by Menzie has a lot of evidence in support of that statement. Here is some more evidence of the trend. In 1987, 106 million Americans filed tax returns reporting a positive value for adjusted gross income (AGI). The total income for the 53 million households in the bottom half of the distribution sums to $440 billion, which was 15.6% of the total of $2.8 trillion for all 106 million returns-- half the filers had less than 16% of the income. That percentage is plotted as the yellow line in the graph below. It has been trending down over the last 15 years, with the bottom 50% only having 12.8% of the income in 2009.

The Average Bush Tax Cut For The 1 Percent This Year Will Be Greater Than The Average Income Of The Other 99 Percent - As Occupy Wall Street protestors continue to demonstrate across the country, congress’ fiscal super committee failed to craft a deficit reduction package due to Republican refusal to consider tax increases on the super wealthy. In fact, the only package that the GOP officially submitted to the committee included lowering the top tax rate from 35 percent to 28 percent, even as new research shows that the optimal top tax rate is closer to 70 percent. Sen. Patty Murray (D-WA), who co-chaired the super committee, explained that the major sticking point during negotiations with the GOP was what to do with the Bush tax cuts. With that in mind, the National Priorities Project points out that those tax cuts this year will give the richest 1 percent of Americans a bigger tax cut than the other 99 percent will receive in average income: The average Bush tax cut in 2011 for a taxpayer in the richest one percent is greater than the average income of the other 99 percent ($66,384 compared to $58,506).

Defending 90% of the top 1% - Paul Krugman has elevated his “job creators don’t matter” blog post to an op-ed with some changes that I think strengthen his argument and also implicitly acknowledge the correctness of the criticisms I made.First, he substantially narrows the focus of his point from the top 1% to the top .1%: If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population. Having narrowed his focus, he makes the “job creators don’t matter argument from his blog post: the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment. Then acknowledges and agrees with the argument I made that marginal product is likely to be higher than compensation for many top earners: But, having narrowed his focus to the top .1% rather than the top 1%, he argues that the contributions here are largely CEOs and financiers who do not create more value than they are paid.

Where The Money Is - Krugman - I’ve been getting the predictable hysterical reactions to today’s column. But one thing actually worth reacting to is the assertion I keep getting that this is all a distraction, that even if we seized all the money of the top 0.1% it would make no difference to the fiscal outlook. Here’s a piece of advice nobody will take: before you make assertions about numbers, look at the numbers. So, what we learn from IRS data is that in 2007, before the Great Recession depressed everyone’s income, the top 0.1% had around $1 trillion in taxable income. Now, even confiscating that whole sum wouldn’t eliminate our current deficit, especially since the top 0.1% already paid something like a third of that total in taxes. But then, no single action would close our current budget gap — not even the complete elimination of Social Security or Medicare. What you want to ask is how much higher taxes on the super-elite might contribute to deficit reduction, as compared with the kinds of things politicians are actually proposing. So let’s suppose that it was possible to collect an additional 10 percent of that super-elite’s income in taxes, to the tune of $100 billion a year. How would this stack up against the kinds of things on the table right now?Well, consider the idea of raising the Medicare eligibility age — a move that would create vast hardship -- would save … $42 billion a year.

Billionaires Use Tax Loophole to Lower Their Tax Rates to One Percent - In 2009, 1,470 households reported income of more than $1 million but paid no federal income tax on it, through their use of various tax loopholes and shelters. Tax rates for millionaires have fallen by 25 percent since the mid-’90s, while one quarter of millionaires currently pay lower tax rates than the average middle-class household. Numbers like these are the driving force behind the Buffett rule, the administration’s proposal aimed at ensuring that millionaires can’t pay lower tax rates than middle-class families. To add to the pile of evidence that such a rule is necessary, Bloomberg News ran a segment today on billionaires who manipulate the tax code to lower their tax rate all the way down to one percent: Warren Buffett became the de facto face of the effort to increase taxes for the nation’s wealthiest when he proclaimed his secretary had a higher tax rate than he does, his being 17 percent. But the real figure for billionaires is often a lot smaller than that. Sometimes they even have a tax rate as low as 1 percent. Watch it:

Defining Rich IV: Corporate vs Personal Tax collection patterns 1934 to present - When I left this series in September, I had introduced the idea of looking at past tax tables as a means of understand how We the People define rich. One specific note from history was a surcharge on top of the marginal tax rates to pay for the Great One (WWII). Obviously, that aspect of our moral character has gone right out the window. Also for a brief period (1936 to 1943, on 6 occasions) business paid more of the income tax revenue collected than did people. I also noted that 1983 and 2009 the corporate share of income tax revenue was just over 6% of the total revenues (FICA included). Its lowest points. Reagan/Bush II. However, interestingly enough, Bush II did manage to get the corporate tax collections as a percentage of personal collections (excluding FICA) up to 33.9%! Clinton only managed 26.6% in 1995. The last time we saw a ratio where corporate collections were in the 30% range was 1979. In 1959 it was 47.1%. 1980 heralded the new standard of the mid to low 20% range. Of course Reagan wins this personal verses corporate relationship with a corporate total that is only 12.8% of the personal in 1983. Starting in 2001, the decline in revenue collections for both personal and corporate last for 3 years running; 2001 to 2003 and 2008 to 2010. Someone threw a double pole switch here. We'll have to wait to see for 2011.

The Golden Age of Republican Deficit Hawks - I’ve written a few pieces in the last several days about the history of deficit reduction packages, and how Republicans used to be on board for tax increases. In the 1950s and 1960s, federal deficits were relatively small compared to the size of the economy, but even during those flush years, Republican leadership was reluctant to advocate tax cuts. In 1953, for example, Dwight Eisenhower said the country “cannot afford to reduce taxes, reduce income, until we have in sight a program of expenditures that shows that the factors of income and of outgo will be balanced.” And when his successor, John F. Kennedy, proposed sharp tax cuts in 1963, the more conservative Republicans in Congress initially opposed them because the cuts would expand the deficit. The legislation eventually passed (after Kennedy’s assassination), but over the objections of about a third of the Republicans voting. Here’s the House vote, and here’s the Senate vote.

Buffett-Ducking Billionaires Avoid Reporting Cash Gains to IRS - When billionaire Billy Joe “Red” McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.  After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.  McCombs’s fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation’s wealthiest. Billionaires -- from McCombs to Philip Anschutz to Ronald S. Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.  “The 800-pound gorilla is unrealized appreciation,” While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary -- about 17 percent -- the real figure is often smaller,

Warren Buffet Hates The IRS, Loves Corporate Jets -- As reported by AceOfSpadesHQ, a division of Warren Buffet’s behemoth Berkshire Hathaway is suing the Internal Revenue Service over what it is referring to as an “illegal” tax assessment of $643 million. NetJets is a division of Berkshire Hathaway that provides people an easy way to own a private jet.  Like a time-share of sorts, you buy a membership to have access to a fleet of private planes, then pay for the usage of that plane.  You know, for everyday folks.This isn’t Buffet’s first run in with the IRS.  Berkshire Hathaway is reported to owe $1 billion (yes, with a “B!”) to the IRS.

The Top 0.1% Of The Nation Earn Half Of All Capital Gains - Capital gains are the key ingredient of income disparity in the US-- and the force behind the winner takes all mantra of our economic system. If you want even out earning power in the U.S, you have to raise the 15% capital gains tax. Income and wealth disparities become even more absurd if we look at the top 0.1% of the nation's earners-- rather than the more common 1%. The top 0.1%-- about 315,000 individuals out of 315 million-- are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400. It's crystal clear that the Bush tax reduction on capital gains and dividend income in 2003 was the cutting edge policy that has created the immense increase in net worth of corporate executives, Wall St. professionals and other entrepreneurs. The reduction in the tax from 20% to 15% continued the step-by-step tradition of cutting this tax to create more wealth. It had first been reduced from 35% in 1978 at a time of stock market and economic stagnation to 28% . Again 1981, at the start of the Reagan era, it was reduced again to 20%-- raised back to 28% in 1987, on the eve of the October 19 232% crash in the market. In 1997 Clinton agreed to reduce it back to 20%, which move was an inducement for the explosion of hedge funds and private equity firms-- the most "rapidly rising cohort within the top 1 per cent."

How much does the corporate income tax matter? -  Yesterday, Ezra noted two charts from Felix Salmon showing that the corporate income tax has been declining dramatically since the 1950s — both as a share of profits and as a share of GDP. Over at Modeled Behavior, meanwhile, economist Karl Smith takes things a step further and wonders whether corporate tax rates have had much effect on either corporate profitability or investment in the United States.  His answer? They don’t seem to be hugely significant. Or, at the very least, a clear impact is difficult to detect. Here’s a graph of the corporate tax rate (in blue) compared with non-residential investment as a fraction of GDP (in red) since the 1950s. Not an obvious pattern here: There’s a correlation in the 1950s and 1970s — lower corporate taxes went hand in hand with more corporate investment — but since then, the relationship has become more tenuous. That’s hardly conclusive evidence that the corporate tax rate is meaningless, since other factors could be at play, but it suggests that the tax doesn’t matter nearly as much as many people think.

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. - Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue

The 57,000 Page Tax Return - The NYTimes reported earlier this year that through an extraordinary use of tax breaks and clever accounting: [General Electric] reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion. The Times highlighted the skill of GE’s dream team: G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm.  The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress. Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue.

Rethinking the U.S. Taxation of Overseas Operations - Today we released a new Special Report, analyzing the rules U.S. corporations are subject to when it comes to reporting and paying taxes on profits earned abroad. Some of the most complicated and outdated provisions are contained in a section of the code called "Subpart F," which dates from the Kennedy administration. Our Vice President Joseph Henchman takes readers through the rules and makes recommendations for how the system could be improved. From today's press release: U.S. corporations operating overseas face a unique combination of burdens not borne by their international competitors: taxes owed to the United States, taxes owed to the country where the operating activity takes place, and a complex tax system that attempts to reduce the resultant economic harm but involves an array of credits and definitions, primarily the Internal Revenue Code's "Subpart F."

Ideoloogical Bias and Antitrust Law - Apparently some judges refuse to enforce antritrust law because "Such judges just do not like antitrust laws for ideological reasons." That attitude -- which is not confined to judges -- explains a lot about detrimental the rise of economic and political power in recent decades. This is Shane Greenstein discussing the proposed merger between AT&T and T-Mobile: Lawyers invariably ... launch into comments about the uncertain state of antitrust law in the United States, observing that many judges today do not think there is any valid reason to enforce any antitrust law, irrespective of the facts of the case. Such judges just do not like antitrust laws for ideological reasons. Recently such friends have gotten more specific, commenting on the odds of getting past the particular judge assigned to hear the from Department of Justice, as it tries to block the merger. Political analysts, in contrast,... invariably launch into comments about AT&T’s enormous powerful presence in Washington, observing that AT&T has gotten whatever it has wanted from the Obama and Bush administrations. Recently such friends have gotten very specific, about which representatives and senators were most likely to act on AT&T’s behalf.

Some Modest Proposals for Reforming the U.S. Financial and Tax System - The basic problem today is that nearly everyone is in debt. This is the problem in Europe too. There are Occupy Berlin meetings, the Greek and Icelandic protest, Spain’s “Indignant” demonstrations and similar ones throughout the world. When debts reach today’s proportions, a basic economic principle is at work: Debts that can’t be paid; won’t be. The question is, just how are they not going to be paid?  People with student loans are not permitted to declare bankruptcy to get a fresh start. The government or collection agencies dock their salaries and go after whatever property they have. Many people’s revenue over and above basic needs is earmarked to pay the bankers. Typical American wage earners pay about 40 percent of their wages on housing whose price is bid up by easy mortgage credit, and another 10 to 15 percent for credit cards and other debt service. FICA takes over 13 percent, and federal, local and sales taxes another 15 percent or so. All this leaves only about a quarter of many peoples’ paychecks available for spending on goods and services. This is what is causing today’s debt deflation. And Wall Street is supporting it, because it extracts income from the bottom 99% to pay the top 1%.

The Easy Question in Financial Regulation - Many questions in the field of financial regulation are hard to answer:    Would the separation of commercial banking and investment banking help prevent crises?   To what extent should individual consumers be protected against foolishly borrowing too much?  Should Credit Default Swaps be regulated out of existence?    What should regulators do about patterns of high executive compensation that is evidently not a reward for performance?  I have views on these questions, just as other observers do.  But in these cases I see the arguments on both sides. The question of funding the U.S. financial regulators, the Securities and Exchange Commission or the Commodity Futures Trading Commission, is easy to answer, however.  I do not see the argument for cutting funding  of the SEC and CFTC or for the other ways that Republicans in Congress are finding to make it difficult for these agencies to do their jobs.   They are also deliberately impeding two new agencies set up in response to the 2008 financial crisis — the Consumer Financial Protection Bureau, lodged at the Fed, and the Office of Financial Research at the Treasury — from doing their respective jobs.

Frankel on Financial Regulation Funding and the Left - Jeff Frankel has a recent blog post, The Easy Question in Financial Regulation (h/t Mark Thoma).  There are two points I want to address in it, the first I agree with completely: The question of funding the U.S. financial regulators, the Securities and Exchange Commission or the Commodity Futures Trading Commission, is easy to answer, however.  I do not see the argument for cutting funding  of the SEC and CFTC or for the other ways that Republicans in Congress are finding to make it difficult for these agencies to do their jobs.   They are also deliberately impeding two new agencies set up in response to the 2008 financial crisis — the Consumer Financial Protection Bureau, lodged at the Fed, and the Office of Financial Research at the Treasury — from doing their respective jobs. The CFTC “requested a $308.0 million budget for fiscal year 2012, but the House approved $171.9 million — or 44% less than what the CFTC requested, and 15% below 2011 levels.” The SEC doesn’t get enough funding to implement Dodd-Frank.  ”The SEC requested $1.407 billion for fiscal year 2012, but the House denied the 19% budget increase and allocated $1.185 billion — the 2011 funding level.”  Terrible, given the wreckage that we just went through and the serious reforms that need to be brought online.

Fed outlines new bank supervisory stress test - From the WSJ: Fed Outlines Plans for New Bank Stress Tests The Federal Reserve on Tuesday outlined plans for annual tests of the financial strength of the largest U.S. banks and said some of the results would be made public.   Banks must submit their plans to the Fed by Jan. 9 for the "stress tests," which apply to 19 firms that participated in similar tests earlier this year and 12 more with at least $50 billion in assets that have not participated in similar tests before ... When the stress tests are complete, the Fed said it will publicly disclose its estimates of bank revenue and losses and estimates of bank capital ratios for the 19 largest firms. Here is the press release from the Federal Reserve. The stress test scenario is outlined here. The stress tests assume the unemployment rate will rise to 13% in 2013, that the Dow Jones will decline by more than 50% from the current level. The scenario assumes that house prices will fall another 20%+.

The Fed Stress Tests While Europe Starts to Burn - Yves Smith - Our headline at odds with the media reports on the newest confidence-bolstering ploy by the Federal Reserve, that of new, improved stress tests for the six banks at the apex of the US financial services industry looting operation: Bank of America, Citi, Goldman, J.P. Morgan, Morgan Stanley and Wells.  The current stress scenario is a Eurozone crisis, with unemployment to reach 13% in the US (versus a 2009 stress test peak in the “adverse scenario” of just over 10%), a European GDP contraction of 6.9%, and (supposedly) “market price movements seen during the second half of 2008.”  Per the Financial Times, the benchmark will be whether core “tier one common” equity stays higher than 5 per cent in the face of these projected conditions. Banks that fall short (and everyone sees Bank of America as the likely problem child) may be forced to raise equity. Firms that plan to issue dividends in excess of 30% of net income can expect further scrutiny by the central bank. The Wall Street Journal reports that the subjects are grousing about how badly they are being treated, including that staffers will have to work over the holidays (banks are to submit information by January 9, with the results due in March). Not surprisingly, per the Journal, this is yet another confidence ploy:

The Fed's Black Sky Scenario Revealed - The dark clouds in the Federal Reserve's 2012 annual stress test are keeping bankers up at night, as banks are being asked to imagine their balance sheet situation under some horrible economic scenarios.  Under the Fed's bleakest black sky scenario, financial institutions will have to weather 13.1% unemployment, the Dow at 5,600, and Europe in severe recession. The test, known as the Comprehensive Capital Analysis and Review, includes 12 other metrics for the U.S. market including GDP and inflation, with another 11 points for global economies. Here are some of the key metrics, complete with headline numbers, for what would happen in the Fed's worst scenario:

The Mark-To-Market Amplification Of Financial Distress -- Krugman - A nice phrase from my colleague Hyun Song Shin (pdf), describing what’s happening in Europe right now. The paper covers much more ground than that, of course. This is the latest in a series of papers arguing that the U.S. shadow banking system consists in large part of … European banks. This suggests that the creation of the euro had large implications even in US capital markets; and of course it suggests that the financial fallout of the euromess could be very large here as well. In short, the ECB could be in the process of destroying not just the euro, but the world.

Johnson: Deutsche Bank Could Transfer Contagion - You’ve probably never heard of Taunus Corp., but according to the Federal Reserve, it’s the U.S.’s eighth-largest bank holding company. Taunus, it turns out, is the North American subsidiary of Germany’s Deutsche Bank AG (DBK), with assets of just over $380 billion. Deutsche Bank holds a large amount of European government and bank debt; it also has considerable exposure to lingering real estate problems in the U.S. The bank, therefore, could become a conduit for risk between the two economies. But which way is Deutsche Bank more likely to transmit danger -- to or from the U.S.? By any measure, Deutsche Bank is a giant. Its assets at the end of September totaled 2.28 trillion euros (according to the bank’s own website), or $3.08 trillion. In the latest ranking from The Banker, which uses 2010 data, Deutsche was the second- largest bank in the world by assets, behind only BNP Paribas SA. The German bank, however, is thinly capitalized. Its total equity at the end of the third quarter was only 51.9 billion euros, implying a leverage ratio (total assets divided by equity) of almost 44. This is up from the second quarter, when leverage was about 36 (assets were 1.849 trillion euros and capital was 51.678 euros.)

Measuring Financial Contagion - Simon Johnson - In an interview with The New York Times in July, Sheila Bair, the departing chairwoman of the Federal Deposit Insurance Corporation, said of her experience over the last few years: “They would say, ‘You have to do this, or the system will go down.’ If I heard that once, I heard it a thousand times.” No responsible official wants the entire financial system to crash; this would be incredibly disruptive to all Americans and potentially lead to a worldwide depression. Knowing this, many people who want bailouts on generous terms use “contagion fear” as part of their sales pitch.  How are we to know if a particular event, like deciding not to bail out a big bank, will lead to contagion that spreads to other financial markets? Contagion is the key issue. In Europe, the failure of just one large bank can do macroeconomic damage; governments there have let individual banks build balance sheets that are bigger than the country’s gross domestic product. In the United States, we too should fear megabanks; the big six bank-holding companies have become much bigger in recent years and now have combined assets worth more than 65 percent of G.D.P.

New Currency Controls in US at Currency Online; Capital Flight and Forced Repatriation in Europe - A securities analyst sent a note this morning "I just received this today from a company I have used for 3 years." He was referring to a memo from Currency Online regarding Restriction of our service to USA based clients Regrettably I write to inform you that, due to changes in legislation, we will be unable to continue to offer our international money transfer services to clients located in the United States of America (USA). As a result, any existing transactions that you have outstanding with Currency Online will be completed in the normal way, however you will be unable to undertake any new transfers. Below we have anticipated some of the questions you may ask. Should you have any further questions please email us at or call us on our free phone number 1866 420 7697.

How Might Increased Transparency Affect the CDS Market? - NY Fed - The credit default swap (CDS) market has grown rapidly since the asset class was developed in the 1990s. In recent years, and especially since the onset of the financial crisis, policymakers both in the United States and abroad have begun to strengthen regulations governing derivatives trading, with a particular focus on the decentralized and opaque nature of current trading arrangements. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their CDS trades. In this post, we discuss the possible impact of increased transparency in the CDS market, based on our recent analysis of new and detailed data on the trading activity of major dealers. (See also new video coverage of our findings.)

A Gigantic Scam - Krugman - That’s pretty much what Andrew Haldane, the executive director for financial stability at the Bank of England, is calling a large part of modern finance: In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities. In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not. Basically, Haldane argues that finance fooled investors into believing that it had found a way to earn higher returns, whereas all it was really doing was piling on hidden risk. And he suggests that much if not all of the rise in the share of finance in GDP reflected this deception; in effect, Wall Street and the City were con artists extracting huge rents from an unwary public (and eventually dumping much of the cost, when things went bad, on taxpayers).

We Speak on PBS Newshour About Why No Bank Executives Have Gone to Jail -  Yves Smith - The cynic in me has to note that PBS Newshour decided to cover the issue of why no banksters have gone to jail on what has to be one of their lowest traffic days of the year. And I have a sneaking suspicion I got the call to go on the show because it was not exactly easy to find people willing to be taped late in the afternoon on the day before Thanksgiving (they did have to go to the trouble not only of arranging for a studio in Alabama, but also finding a makeup person, since I’m not in the habit of taking my TV warpaint with me when I travel). I hope you like this segment. PBS prefers a format which keeps the guests from interacting directly. On the one hand, they do allow each speaker to make fairly long, uninterrupted comments, which is refreshing (at least on American TV). But on the other hand, the lack of back and forth can allow speakers to talk past each other and also tends to reduce the vigor and incisiveness of the remarks.

Jefferies: lies, damned lies and the anonymous hedge fund who tells them - Another stridently penned letter from Jefferies that seeks to reassure the markets about its exposure to Europe and worries about access to short-term funding: The note rehashes a few points the broker had already made in prior statements, but it does give new detail on its repo and reverse repo activity, something we’d wondered about previously. The note also alleges that an anonymous hedge fund has been spreading false rumours, and it takes a crack at credit rating agency Egan-Jones (without naming them) over a report in which the CRA downgraded Jefferies based on its Giips debt exposure.

Anger mounts as MF Global clients see $3 billion still stuck (Reuters) - Three weeks after MF Global's collapsed, furious former customers are still fighting for access to billions of dollars as they question why as much as two-thirds of their money is still stuck. While authorities have touted the fact that they are returning 60 percent of the collateral and cash that had been frozen in the wake of the broker's October 31 bankruptcy, a closer look shows that in fact only about 40 percent of customers' total funds have been authorized for release so far. The remainder, more than $3 billion, ostensibly remains on hand to cover a shortfall originally estimated by MF Global to regulators at just $600 million. Because the bankruptcy trustee, regulators and exchanges have made no comment on the missing funds in weeks -- and have given no information as to how much cash they are retaining -- customers are left guessing exactly how much might end up in the creditors' process of the bankruptcy. After weeks of intense lobbying by customers and exchanges, trustee James Giddens last week won court approval to release another $520 million in funds from MF Global accounts that contained only cash as of October 31.

MF Global shortfall doubles to $1.2bn - The estimated hole in MF Global’s customer accounts has doubled in size to $1.2bn, astonishing traders as the investigation into the broker’s failure enters its fourth week.  The new figure, from the bankruptcy trustee for MF Global’s US brokerage, is equivalent to almost a quarter of the $5.45bn in client funds that the company was required to hold separately from its own funds.  The shortfall has blemished futures markets and left thousands of traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law.

A Spurious Motion on Behalf of the MF Global Trustee - The court received a motion today by lawyers of Hughes Hubbard and Reed, opposing an official commodity customer and broker committee. In a strangely constructed argument, attorneys for the Trustee open with that within “Within hours of his appointment on October 31, 2011, and against a backdrop of shortfalls in segregated funds and records that are far from wholly reliable, the Trustee moved and has already affected the transfer of three million open positions associated with over 14,500 commodity customer accounts.” But this is NOT what happened. Customer funds were immediately frozen in violation of segregation of customer funds. Neither customers nor customer brokers were given instruction by the Trustees, other than a single number where positions may be liquidated. The orders given by the Trustee to demonstrated a grievious lack of understanding of the industry in which MFGI operated. What happened is this: the following week (not in a few days) those positions that were not liquidated, were then liquidated under order of the Trustee, and new positions at a new basis were opened.  No accounts were moved. To represent that is intentionally misleading to the public. Instead we had a disruptive and costly procedure with no basis in the established workings of futures markets and account management.

BofA Warned to Get Stronger - Bank of America Corp.'s board has been told that the company could face a public enforcement action if regulators aren't satisfied with recent steps taken to strengthen the bank, said people familiar with the situation.  The nation's second-largest lender has been operating under a memorandum of understanding since May 2009, following repeated tussles with regulators over the purchase of securities firm Merrill Lynch & Co. and a downgrade of the company's confidential supervisory rating. The memorandum, which isn't public, identified governance, risk and liquidity management as problems that had to be fixed, according to people familiar with the document.

Bank of America, Kafka, and I - A Continuing Relationship - A year and a half ago I wrote a post about how Countrywide, by then a division of Bank of America, had filed to foreclose on our home, apparently on the basis that someone with a similar name to the previous owner of the home owed them money. Needless to say, we were surprised given that a) we had no relationship with B of A, b) we had made a point to always pay more than was due on our mortgage each month, c) nobody with the name of the person they were trying to collect from had ever owned the home (I've seen the property records going back to when the house was built) and d) as surreal and the whole thing was, we had to hire an attorney to make the whole mess go away. In part because of that experience, some time after that my wife and I closed out all of our B of A accounts. Or so I thought. In the process of closing out my account, our account balance by definition became zero. This is important because when one's balance is below $2,500, one is charged a monthly service fee. Apparently, we have been assessing monthly service fees since the point where we thought we closed our accounts. It seems that now we are carrying a negative balance that happens to equal a multiple of the service fee on an account that I closed a while ago.  In general, a human being behaving this way would face consequences.  B of A, on the other hand, truly has no constraints on its behavior. No matter how unprofitable its behavior, it has been deemed too big to fail. And society, having made the decision to privilege some sociopaths, also implicitly made the decision that everyone else qualifies as prey.

When Business Can’t Foresee Consumer Outrage - A GOOD rule of thumb for companies and politicians is to avoid becoming the butt of jokes on late-night TV. While most business executives understand this principle, they evidently don’t know how to act on it.  Consider Bank of America's move to charge customers $5 a month to use their debit cards. The bank eventually decided against the fee, but not before helping to create a storm big enough to induce many people to move their business away from large banks to credit unions.  For late-night comedians, the brouhaha was irresistible. On Halloween, Jay Leno chimed in. “One kid wanted to charge me five bucks to give him candy,” Mr. Leno began. “I said, ‘Who are you supposed to be?’ He said, ‘Bank of America.’ ”

Department of Justice Watching Banks’ Debit-Card Fees - The U.S. Department of Justice says it’s keeping a close eye on banks’ debit-card fees, a warning that comes as banks are expected to hike fees on checking accounts and other banking services in order to recoup lost revenue. “Please be assured that if it finds that individuals, banks or other parties may have violated the antitrust laws, the department will take appropriate action,” the department wrote in a letter to Rep. Peter Welch of Vermont and other Democratic lawmakers. The department said it is reviewing actions by banks and trade associations regarding possible increases in debit card fees. The letter, made public Tuesday, is a response to one the lawmakers sent Attorney General Eric Holder in October. They asked him to investigate whether banks are working together on fee hikes in violation of federal anti-trust laws. They sent the letter amid consumer concerns’ about Bank of America Corp.’s initial plan to charge customers a $5 monthly fee for debit card use. Amid consumer outrage, the bank scrapped the plan.

Retailers Push Fed for Yet Lower Debit Fees - Retailers won a big victory last summer when the Federal Reserve halved the fees that banks and credit card companies were charging them to process debit card transactions. For some retailers, however, that was not enough. This week, trade groups representing retailers, convenience stores and grocers filed a lawsuit against the Fed, asserting that the board’s debit fee rules still allowed banks to capture too much money from debit card purchases. The lawsuit was filed in United States District Court here. The rule, which went into effect in October, was the subject of fierce lobbying by banks and retailers over what has grown to $20 billion in annual debit card transaction fees. Consumers do not pay the fees directly, but merchants have complained that rising fees in recent years have forced them to raise prices. In a sort of Solomonic decision, the Fed approved a cap of 21 to 24 cents a transaction, down from an average of 44 cents that had been being charged. But the new fee cap was roughly double the 12 cents initially proposed by the Fed before banks and credit card companies pushed to raise it.

Former AIG CEO Suing Treasury and Fed Over AIG Bailout - Yves Smith - Hubris knows no bounds. AIG’s former CEO Hank Greenberg, who was a significant shareholder of AIG stock via C.W. Starr (which was basically an executive enrichment vehicle) is suing the Treasury and Fed over its rescue of AIG. He has hired litigation heavyweight David Boies, who famously made Microsoft CEO Bill Gates squirm when he put him on the stand in the Microsoft antitrust case. based on the report from Gretchen Morgenson, the argument seems to be that AIG got less good terms that Citigroup did, ergo the bailout “discriminated” against AIG. While the public might similarly enjoy the spectacle of Timothy Geithner, Hank Paulson, and Ben Bernanke through the wringer, and I’m looking forward to reading the actual claim, but this reads like a stretch. The government stepped into a rescue when private sector rescue efforts failed. A team headed by Bob Scully of Morgan Stanley had put together a term sheet and tried raising funds for the floundering insurer, but they could not secure enough money. If my recollection is correct, the Fed and Treasury used the same termsheet as the private sector deal. Note also that the AIG CEO came to the government, provided the collateral for the initial loan, and AIG proved to be in worse shape than it initially told the authorities. It’s hard to argue either coercion or unjust enrichment. As we wrote, it was outrageous that the deal was retraded repeatedly, with the terms becoming more favorable each time.

Greenberg is entitled to nothing - There are various words, many unprintable, that could be used to describe Hank Greenberg’s $25bn suit launched this week against the US government and the New York Federal Reserve over the rescue of American International Group in 2008. I’ll settle for ludicrous. Mr Greenberg’s argument is that, as the largest shareholder in AIG through Starr International, the Panamanian-registered, Swiss-based investment vehicle he controls, he was unconstitutionally singled out to be stripped of 80 per cent of his equity in order to bail out a group of “foreign entities”. He would like his dollars back, right now. The minor detail that he ignores is that if the New York Fed had stood aside in September 2008, AIG would have collapsed and its shareholders would have been left with nothing, rather than retaining 20 per cent of their equity. Instead, the Fed stepped in with a $85bn loan and went on, with Treasury support, to provide billions more in backing.

What’s underneath the $470 billion TARP? - The Office of Financial Stability is the Guardian of the TARP. OFS is the U.S. Treasury office that oversees the $470 billion bailout programs  passed in those terrible days of 2008 and 2009.  The Emergency Economic Stabilization Act of 2008 requires that the Government Accountability Office perform yearly audits of the OFS and the bailout programs it oversees. Last week the GAO published its report on OFS’ 2010 and 2011 fiscal years. Which of the GAO’s following three overall findings is not like the other?

  1. The OFS’ financial statements were materially accurate.
  2. The OFS was in compliance with the selection of laws and regulations against which the GAO tested.
  3. The OFS has significant internal control issues

Financial Finger-Pointing Turns to Regulators - In the whodunit of the financial crisis, Wall Street executives have pointed the blame at all kinds of parties — consumers who lied on their mortgage applications, investors who demanded access to risky mortgage bonds, and policy makers who kept interest rates low and failed to predict a housing market collapse.  But a new defense has been mounted by a bank executive: my regulator told me to do it.  This unusual rationale is presented by the bank executive in one of the few fraud suits brought against a mortgage banking official in the aftermath of the financial crisis — the one filed by the Securities and Exchange Commission against Michael W. Perry, former chief executive of IndyMac Bancorp, which failed spectacularly in mid-2008. After being accused of fraud and misleading investors about his company’s financial health just before it collapsed, Mr. Perry set up a Web site this fall to defend himself. In a document on the site, he said that a top official at the federal Office of Thrift Supervision, IndyMac’s overseer, directed and approved an action related to the S.E.C.’s allegations. “It was O.T.S. who had the final say regarding IndyMac Bank’s capital levels,”

Who takes risks? - One of my readers sent me a link to this blogpost by James Wimberley, which talks intelligently about safety nets and their secondary effects (it also has a nifty link to the history of bankruptcy laws in the U.S.). I want to hone in on one aspect he describes, namely how, in spite of people in the U.S. considering themselves entrepreneurial, we are not so much. His theory is that it’s because of a lack of safety net: people are worried about losing their health insurance so they don’t leave the safety of their job. Here’s Wimberley’s chart of entry density, defined as the rate of registration of new limited liability companies per thousand adults of working age, by country: The question of who takes risks is interesting to me, and made me think about my experiences in my various jobs. In fact this dovetails quite well with another subject I want to post on soon, namely who learns from mistakes; I have a theory that people who don’t take risks also don’t learn from mistakes well. But back to risktakers.

Closing Wall Street’s casino - A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.Not so long ago — before casinos, currency and commodities speculation, and credit default swaps became big business — U.S. courts would not enforce gambling debts. Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street. Professor Lynn Stout, a deeply principled Republican capitalist who teaches corporate law at the University of California, Los Angeles, raised this issue at a conference where we both spoke about the 2008 Wall Street meltdown. “Derivatives are gambling,” she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. “They are a zero-sum game in which one side loses the bet and one side wins,” Stout said.Actually they are worse than that, since the hefty fees Wall Street pockets for arranging the bets result in a less-than-zero-sum game.

God bless income disparity - We celebrate income disparity and we applaud the growing margins between the bottom 20% of American society and the upper 20% for it is evidence of what has made America a great country. It is the chance to have a huge income… to make something of one’s self; to begin a business and become a millionaire legally and on one’s own that separates the US from most other nations of the world. Do we feel bad for the growing gap between the rich and the poor in the US? Of course not; we celebrate it, for we were poor once and we are reasonably wealthy now. We did it on our own, by the sheet dint of will, tenacity, street smarts and the like. That is why immigrants come to the US: to join the disparate income earners at the upper levels of society and to leave poverty behind. Income inequality? Give us a break? God bless income disparity and those who have succeeded, and shame upon the OWS crowd who take us to task for our success and wallow in their own failure. Income disparity? Feh! What we despise is government that imposes rules that prohibit or make it difficult to make even more money; to employ even more people; to give even more sums to the charities of our choice. That is what we despise…

The Rich Get Richer Off the Backs of the Poor - The boys in the suspenders figure out a new way to manufacture money. The world appears to have come through another harrowing episode of skyrocketing commodities prices, with analysts forecasting that at least in the short run, they are likely to moderate if not actually fall, which should be a relief – some, but not much -- to the hundreds of millions of the world’s starving.  “The long-term commodity rally is losing steam, indeed it may already have peaked though we do not rule out last hurrahs,” according to a report last week by Research-Works, a Shanghai-based research firm that specializes in commodities. ”What we can say is that annual commodity prices look much closer to their tops than to their averages.”  Behind the story is a series of disparate elements including long-term decisions in the Eurozone and the US to produce biofuels as well as food from corn, driving grains prices to skyrocketing levels; climate change, which is cutting into some annual harvest yields while increasing them elsewhere; and finally the Malthusian proposition that population appears to be increasing faster than available food supplies.  But in discussions of the factors that drive prices, consultants and other largely don’t mention a relatively new one. That is “financialization,” an unwieldy word for the discovery by the boys in yellow suspenders -- investment bankers, hedge fund and money market managers -- of the profit to be made in commodities trading. Over the past decade a flood of speculative money has overwhelmed the quantity of goods for sale, with the result that prices have gyrated.

Billionaire Howard Marks On 'The Ultimate Worry: Tyranny Of The Majority': Billionaire Howard Marks says "there are no easy answers" to America's debt crisis, but he leaves little doubt as to what answer is unacceptable. Here's an excerpt from the Oaktree Capital investor letter: The elements that contributed importantly to America's success included economic aspiration, upward mobility and a tax system that encouraged labor and risk-taking. In short, we all could get rich. As a result, both those with money and those hoping to make money were attracted to the idea of low taxes. This made tax reduction a very popular theme over the last few decades. But when people without money start to believe they can't make money, there's little to keep them from taking it from those who have it. This represents a threat to our way of life. Here's how he sees the crisis resolving Whatever action is taken now, it will not be pain-free. The unpayable debts run up in the past will have to be dealt with. And as for the future, there are only three possibilities: the promises will have to be scaled back, the tax burden will have to grow, and/or the deficits will have to be permitted to increase. If nations are to limit deficits—and it seems they may be forced to—there is no alternative to the first two of these. This fundamental truth will constitute a major portion of the public debate in coming years.

How Wall Street really views the protesters - MSNBC’s Chris Hayes just aired an exclusive that provides an interesting look at how some of those being targeted by Occupy Wall Street may really view the protests. He reported that a memo from a prominent corporate lobbying firm to the American Bankers Association proposed an extensive public relations campaign — including opposition research into key movement figures and an elaborate media strategy — designed to discredit the movement, and Dems who embrace it.The memo was authored by lobbyists at the firm Clark Lytle Geduldig Cranford — and there are two key takeaways. The first is that some allies of Wall Street firms see Occupy Wall Street as a potential long term political threat. The second is that they see the Democratic strategy of embracing the populist message of the protests as something that could work, rather than something that is an automatic negative for Dems, as conservatives keep proclaiming is the case.

The Villain Occupy Wall Street Has Been Waiting For - In the pantheon of billionaires without shame, Michael Bloomberg, the Wall Street banker-turned-business-press-lord-turned-mayor, is now secure at the top. What is so offensive is that someone who abetted Wall Street greed, and benefited as much as anyone from it, has no compunction about ruthlessly repressing those who dare exercise their constitutional ‘right of the people peaceably to assemble, and to petition the Government for a redress of grievances’ that he helped to create.

The First Amendment Upside Down - Robert Reich - You’ve been seeing this across the country … Americans assaulted, clubbed, dragged, pepper-sprayed … Why? For exercising their right to free speech and assembly — protesting the increasing concentration of income, wealth, and political power at the top. And what’s Washington’s response? Nothing. In fact, Congress’s so-called “supercommittee” just disbanded because Republicans refuse to raise a penny of taxes on the rich.  Meanwhile, the Supreme Court says money is speech and corporations are people. The Supreme Court’s Citizens United decision last year ended all limits on political spending. Millions of dollars are being funneled to politicians without a trace. And a revolving door has developed between official Washington and Wall Street – with bank executives becoming public officials who make rules that benefit the banks before heading back to the Street to make money off the rules they created.  Other top officials, including an increasing proportion of former members of congress, are cashing in by joining lobbying power houses and pressuring their former colleagues to do whatever their clients want.  Why else do you suppose tax rates on the super rich are now lower than they’ve been in three decades, and why – even though the long-term budget deficit is horrendous – those rates aren’t rising? Why else do the 400 richest Americans (whose wealth is larger than the combined wealth of the bottom 150 million Americans) now pay an average tax rate of only 17 percent?

Has the Occupy movement considered subverting global finance from within? - This week's global occupation movements, including the occupation of the London Stock Exchange, are an important step in the protest against our flawed financial system's excesses. However, bringing pressure to bear on the system from the outside is but one way to engage in financial activism. Many individuals within the Occupy movement are daunted by the seemingly intractable, impenetrable and arcane financial structures around them. They lack both the confidence, and the inclination, to engage with the sector on its own terms. As a result, they often misunderstand concepts and stereotype individuals. The reason I feel I can make these comments is that I have experience of both worlds. In 2008 I left the world of radical leftwing academia and went to London on an unlikely mission. My objective was to break into one of the world's most powerful financial centres, and to see first-hand how it worked. I wanted to shatter my intellectual comfort zone: I thought of it as an experiment in lived critical thought that might lead to me gaining access to circles of power. I ended up in the midst of the subsequent financial crisis, trying to pitch esoteric derivatives aboard a gung-ho raft with an oddball crew, fighting against the odds to stay afloat.

Haldane/Madouros: What is the Contribution of the Financial Sector? - Yves here. Andrew Haldane is the most important thinker, bar none, on the financial services industry today. This piece by Haldane and Vasileios Madouros, a fellow member of the Financial Stability team at the Bank of England. contains a key statement that needs to be drummed into policy makers and commentators: “Bearing risk is not, by itself, a productive activity.” Cross posted from VoxEU Whilst few would argue that the financial crisis has not brought the real economy down with it, there is considerably less clarity about what the positive contribution of the financial sector is during normal times. This lead commentary in the current Vox debate on the issue focuses on the value-added of risk and government subsidies in national accounting, and makes an important distinction between risk-taking and risk management.

Does America need Wall Street? - How nice it would be if the 99 percent had never heard of Wall Street — perhaps if it didn’t exist at all. There would be no need to be jealous of your college classmates’ $10 million paydays while you majored in sociology. No egg on your face if, as a hot-shot investment manager, you had poured $100 million of widows’ and orphans’ money into securities called collateralized debt obligations that you didn’t understand. There would be no collapse in the value of the home you bought in 2005. Several million people who lost their houses to foreclosure might still be proudly mowing their lawns. And your retirement savings would not be shattered because of all those high-flying technology firms that your mutual funds bought back in the 1990s. Most gratifying of all, you might not be scrambling for a job that doesn’t exist, as up to 25 million Americans now are.   Alfred Chandler, the respected business historian, argued persuasively that most investment during the nation’s industrialization came from corporate profits, not money raised by Wall Street bankers. There were exceptions, of course. In the 1920s and the ’90s, for example, countless initial public offerings for young, innovative companies came to market through Wall Street firms. But many, if not most, fledgling businesses were burned up by fevered speculation and disappeared in spectacular crashes within a few years.

A Public Option for Banking? - In the course of an interview by Alan Minsky from a couple of weeks ago, Michael Hudson discussed a proposal for setting up a public option for banking (following the “Chicago Plan” of the 1930s and, says Hudson, Dennis Kucinich’s recent NEED Act): Instead of relying on Bank of America or Citibank for credit cards, the government would set up a bank and offer credit cards, check clearing and bank transfers at cost. … Providing a public option would limit the ability of banks to charge monopoly prices for credit cards and loans. It also would not engage in the kind of gambling that has made today’s financial system so unstable and put depositors’ money at risk. … The guiding idea is to take away the banks’ privilege of creating credit electronically on their computer keyboards. You make banks do what textbooks say they are supposed to do: take deposits and lend them out in a productive way. If there are not enough deposits in the economy, the Treasury can create money on its own computer keyboards and supply it to the banks to lend out. Hudson also argues that distortions in our tax system that encourage debt leveraging are contributing to the fragility of the financial system and worsening inequality:

Wall Street Unoccupied as 200,000 Job Cuts Bring ‘Darkest Days’ - A week later the firm led by former Goldman Sachs Group Inc. co-Chief Executive Officer Jon Corzine collapsed. Brady and 1,065 colleagues joined a wave of firings that has washed away more than 200,000 jobs in the global financial-services industry this year, eclipsing 174,000 in 2009, data compiled by Bloomberg show. BNP Paribas SA and UniCredit SpA announced cuts last week, and the carnage likely will worsen as Europe’s sovereign-debt crisis roils markets. “This is something very different,” “This is a structural change. The industry is shrinking.” Wall Street rebounded from the financial crisis of 2008 with the help of unprecedented government support, including loans from the U.S. Federal Reserve. Goldman Sachs posted record profit the following year, and bonuses paid to securities-firm employees in New York City rose 17 percent to $20.3 billion, according to New York State Comptroller Thomas DiNapoli. Now, faced with higher capital requirements, the failure of exotic financial products and diminished proprietary trading, the industry is undergoing what Steven Eckhaus, chairman of the executive-employment practice at Katten Muchin Rosenman LLP, called “a paradigm shift.”

Wall St. Layoffs Take Heavy Toll on Younger Workers - Being young on Wall Street once meant having it all: style, smarts and too much money to spend wisely. Now, twenty-somethings in the finance industry are losing both cash and cachet. Three years after the global financial crisis nearly brought Wall Street firms to the brink, the nation’s largest banks are again struggling. As profits wane, layoffs have claimed thousands of jobs and those still employed have watched their compensation shrink. These problems are set against the morale-crushing backdrop of the Occupy Wall Street movement, which has made a villain of a once-lionized industry. Much of the burden of Wall Street’s latest retrenchment has fallen on young financiers. The number of investment bank and brokerage firm employees between the ages 20 and 34 fell by 25 percent from the third quarter of 2008 to the same period of 2011, a loss of 110,000 jobs from layoffs, attrition and voluntary departures. By comparison, industry headcount dropped by 17 percent in the same period, according to an analysis by The New York Times of data for New York City provided by the Bureau of Labor Statistics. The number of staff members over the age of 55 decreased by only 11 percent.

How to stop the bogus bonus - It used to be so easy to “earn” a performance bonus in financial services. Step one: agree a contract whereby you are paid if you exceed a modest benchmark with the funds you are managing. Step two: borrow money and invest it in risky assets. Step three: profit! Step three does not follow automatically, of course, if the risky asset does not pay off. But from the point of view of the fund manager and his bonus, it’s a case of “heads I win, tails the investor loses”. It’s fairly trivial to show that such bonus schemes, if implemented naively, offer disproportionately larger bonuses for ever larger risks. We might hope that investors are too sophisticated to fall for such obvious tricks. Yet Dean Foster, a statistician at the University of Pennsylvania, and Peyton Young, of Oxford University and the Brookings Institution, were warning in the early days of the financial crisis that fund managers could hide risks in far more sophisticated ways. The problem is, as Foster and Young show, that it is possible for an unskilled fund manager to mimic a genuinely skilled one, in the same way that an insect might mimic a leaf, or a harmless creature mimic a poisonous one.

Unofficial Problem Bank list increases to 980 institutions -  Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 25, 2011. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  The FDIC did not deliver a "Black Friday" to any bank today as they let their closing teams enjoy a long weekend off. Still, there were a number of changes to the Unofficial Problem Bank List as the OCC and FDIC released their enforcement actions for the past month this week. As a result, there were seven additions and four removals, which leave the list with 980 institutions with assets of $400.5 billion. A year ago, there were 919 institutions with assets of $410 billion. During this month, the list fell by a net five institutions with changes including eight additions, four failures, two unassisted mergers, and seven cures. Positively, it is the fifth consecutive monthly decline; however, the list has only declined by a net 21 institutions with failure causing 40 removals over this span.

Commercial Real Estate Prices declined 1.4% in September - From Dow Jones: Moody's: Commercial Real-Estate Prices Fell In September: U.S. commercial real-estate prices fell 1.4% in September, ending a four-month growth streak ... Moody's expects "multi-family and hotel properties to lead the price recovery," said Nick Levidy, Moody's managing director. "Office and retail will lag mostly because of a very high number of vacancies and the burn-off of above-market rent leases." Below is a graph of the Moodys/REAL Commercial Property Price Index (CPPI) - Beware of the "Real" in the title - this index is not inflation adjusted. According to Moody's, CRE prices are up 1.3% from a year ago, and down about 42% from the peak in 2007. This index is very volatile because there are relatively few transactions - but it does appear to be mostly moving sideways.

States win right to block $8.5bn BofA settlement -  The states of New York and Delaware won the right to intervene in a proposed $8.5bn settlement agreement over soured mortgage bonds between Bank of America and a group of aggrieved investors.New York attorney-general Eric Schneiderman and Delaware’s Beau Biden say the deal is inadequate to investors and that the trustee for the investors, Bank of New York Mellon, broke state laws. Mr Schneiderman asked the judge overseeing the agreement to reject it. Bank of America struck the June accord with 22 institutional investors, including the Federal Reserve Bank of New York and bond group Pimco, to settle claims that the bank repurchase home loans bundled into 530 securities with an original loan balance of $424bn. BNY Mellon agreed to the deal on behalf of all investors in the securities. The potential settlement has since come under criticism from a variety of investors and government agencies, including the insurer AIG and the Federal Deposit Insurance Corporation, which have either asked for the deal to be rejected or for more information so they can evaluate its merits. US Judge William Pauley granted Mr Schneiderman and Mr Biden’s request to intervene in the case, arguing that their actions “will protect the interests of absent investors”. “The action concerns far more than the financial interests of a few sophisticated investors,” Judge Pauley wrote in his November 18 order, rejecting claims by BNY Mellon, which argued that the states lacked the standing to intervene.

States moving on smaller U.S. mortgage probe deal (Reuters) - States are crafting a scaled-back mortgage abuses settlement with top U.S. banks that would exclude California, one of the states hardest hit by foreclosures and falling home prices. The smaller settlement would mean that the big banks would pay less in fines. The proposed $25 billion deal could come down by as much as a quarter without California, according to people familiar with the discussions. But it would also keep the banks exposed to legal claims in that state's large, distressed market. For homeowners, it could mean that California residents do not get relief as quickly, as the state tries to strike its own deal. These sources cautioned that there is no deal yet, and expressed some hope that they could still lure California, which left the talks in September, back to the table. But they are planning for an alternative settlement without the state. California Attorney General Kamala Harris withdrew from negotiations saying the deal under discussion failed to provide enough relief for her state's homeowners and released the banks from too many claims.The remaining state and federal negotiators met last week in part to hash out the terms of a settlement that did not include California.

Foreclosure Talks Push Ahead Absent California - Bank representatives and government officials are working on a broad settlement of most state and federal foreclosure-practices investigations that could move forward without the participation of California, long considered a key to any deal, people familiar with the negotiations said. The terms of the deal remain fluid. Banks have proposed a deal excluding California that would carry a value of $18.5 billion, though the final outcome remains uncertain, people familiar with the discussion said.  Negotiators are continuing to make a push to persuade California to join a settlement valued at $25 billion among federal officials, state attorneys general and the nation's five largest mortgage servicers. The talks center on the banks' use of "robo-signing," in which employees approved legal documents without proper review, and other questionable foreclosure practices. The dollar value would include the value of principal write-downs, interest-rate reductions and other benefits to homeowners as well as cash penalties. But negotiators now are discussing how to structure an agreement if California remains on the sidelines. Until recently, it seemed unlikely that a settlement would be possible without the participation of California Attorney General Kamala D. Harris. She left the discussions in late September, calling the deal then on the table inadequate.

Time needed to sell all Md.'s foreclosures: 21 years - At the rate homes are going on the foreclosure block in Maryland these days, it would take 21 years -- yes, years -- before the current "pipeline" of homes in danger of foreclosure are all sold. That's according to industry consultant LPS Applied Analytics, which shows a dramatic drop in the number of Maryland foreclosure sales (repossessions or other involuntary transfers) after the robo-signing revelations last fall. That's pushed the state's time-to-sell figure skyward to the fourth-highest nationwide. This seems poised to change, with warnings of impending Maryland foreclosure cases spiking in November. But here's how things stood as of September: LPS Applied Analytics says the owners of about 105,000 Maryland homes were at least 90 days behind on their payments, including those with foreclosure cases filed against them. That number hadn't grown much over the year. But foreclosure sales dropped 80 percent -- from an average of about 2,000 a month statewide to about 400.   Perhaps some state-specific reactions to robo-signing made mortgage servicers more cautious about filing cases:  Maryland's highest court, appalled that local attorneys were counted among the "sign all this for me" group, passed emergency rules last fall designed to allow for large-scale document checks and to send the message that judges should feel free to haul offenders in to explain themselves.

Federal Judge Refuses to Dismiss Bank Break-In Case Against JP Morgan, Lender Processing Services -- Yves Smith - In the sordid underworld of foreclosure-related reporting, certain stories have started to develop a prototypical feel. Bank Forecloses on Wrong Home. Bank Forecloses on Home with No Mortgage. Bank Refuses Even to Talk About Short Sale. Bank Sends Borrower into HAMP-Created Hall of Mirrors and Forecloses Anyhow. The problem with stories becoming cliched is that the force of the recognition of the injustice loses some of its punch with repetition. But one type of story still seems to trigger well warranted outrage in the public: Bank Breaks Into House.  It still seems incredible to most citizens that banks can break locks, go into houses, remove property, and the police don’t consider it to be a crime, even when a bank agent breaks into the wrong home. Since banks routinely force their way into houses during foreclosures, the police apparently can’t wrap their minds around the fact that servicers might be going into houses they aren’t entitled to invade. One case that got national attention was that of Nancy Jacobini. A company hired by JP Morgan to manage properties broke into her home while she was inside even though the property was not in foreclosure: And to add insult to injury, the bank broke in a second time, after Jacobini had filed suit in Federal court. The lame excuses made, that she was not paying her utilities and had abandoned the house, were simply untrue. Jacobini’s attorney Matt Weidner obtained a favorable ruling today on the bank’s actions. If you read the order, the judge clearly does not buy the bank’s position that it had a broad right to enter the house. The logic of the ruling suggests this case is not looking good for the bank side.

NY foreclosure firm that threw Halloween party mocking homeless says it is closing - A New York law firm that specializes in foreclosures and was criticized for a Halloween party that mocked the homeless will close, a spokesman said Monday. Steven J. Baum P.C., one of the largest-volume mortgage foreclosure firms in New York, filed notice of mass layoffs with the state Department of Labor and local officials, indicating at least a third of its employees would lose their jobs. On Monday, spokesman Earl Wells III confirmed the law firm would close altogether. While it had been on the radar of federal and state investigators for some time, the Baum firm became the target of widespread public ire last month after The New York Times published pictures from its 2010 Halloween party, which showed people dressed to look homeless and part of the office decorated to resemble a row of foreclosed homes.

Schadenfreude: Law Firm Behind "Homeless Halloween Party" Goes Under - Normally, in this economy, the notion of more jobs lost would be a bad thing. But in this case, I think a good laugh might be in order. A quick reminder. Last month, New York Times columnist Joe Nocera wrote this column about New York state law firm and "foreclosure mill" Steven J. Baum (so named because they specialize in evicting people) and the charming Halloween bash they threw last year. The "foreclosure" themed bash featured such ugly sights as employees dressing up as homeless people, mocked-up displays meant to represent rows of foreclosed houses and a crude coffin-based set-up referring to lawyer Susan Chana Lask, who had filed a class-action lawsuit against the firm and posted a Youtube video denouncing their foreclosure practices. (For a look at the photos, go here.) In any situation, let alone the current economic climate, it was a truly callous and disgraceful display. The firm has a long line of unsavory activity, including being investigated by New York AG Eric Schneiderman and being forced to cough up $2 million to resolve a DOJ investigation. And this previous Nocera column gives a pretty good idea of the firm's mentality and operating procedures. So such a tasteless and appalling Halloween party seems quite normal for the likes of them.

US banks scale back mortgage collection - Many large US banks are scaling back their mortgage-collection operations, once-lucrative businesses that face heightened scrutiny as the new consumer finance regulator vows to step up its oversight of the industry. The Consumer Financial Protection Bureau, created last year as part of the Dodd-Frank overhaul of US financial regulation, will make the supervision of mortgage servicers, which collect payments and handle foreclosures, one of its top priorities, said Raj Date, a CFPB official. The increased oversight is likely to lead to higher compliance costs, experts said, as the agency seeks to prevent abuses, such as lenders’ use of “robosigners”, agents who process foreclosure filings en masse without examining the underlying paperwork. “The mortgage servicing market has been bogged down by widespread reports of pervasive and profound consumer protection problems,” Mr Date said. “We are going to take a close and measured look at whether servicers are following the law.” Bank earnings reports last month showed that three of the four biggest home loan servicers by volume had reduced the number of contracts they handled, which also reflects the increasing cost of collecting payments from distressed borrowers and pursuing foreclosures. Bank of America cut its portfolio by 8 per cent year on year and promised to shed more home loans. JPMorgan decreased the number of contracts it handles for investors by 9 per cent, while Citigroup reduced its portfolio of third-party mortgages by 19 per cent. Only Wells Fargo increased the number of mortgage contracts it services for others.

Big Banks Flee Reverse Mortgages, Leaving Industry Void - Big banks are fleeing the reverse mortgage industry, leaving specialty lenders with more business than they know what to do with. Wells Fargo & Co., Bank of America Corp. and other large lenders have long dominated the corner of the mortgage industry that specializes in lending to elderly persons based on the equity in their home. But this year, faced with rising losses, declining house prices and increased regulatory scrutiny of these loans, those companies are walking away. Wells Fargo, the largest reverse-mortgage lender, said in June that it was ">pulling out of the business after reaching a standoff with federal officials over how to handle delinquent customers. Other top reverse lenders B of A and Financial Freedom Acquisition LLC, a unit of OneWest Bank Group LLC, had said earlier this year that they were pulling out of the market (here and here). MetLife, the third-largest reverse-mortgage lender in 2010, is currently one major holdout. But in recent months the insurance giant has backtracked on its other banking ambitions and is now trying to sell most of its other banking and mortgage operations — leaving industry members wondering if MetLife's reverse-mortgage business will be the next domino to fall.

FDIC-insured institutions’ 1-4 Family Real Estate Owned (REO) decreased in Q3 - The FDIC released the Quarterly Banking Profile today for Q3. The report showed that 1-4 family Real Estate Owned (REO) by FDIC insured institutions declined to $11.9 billion in Q3, from $12.1 billion in Q2 - and from a record $14.76 billion in Q3 2010. FDIC does not collect data on the number of properties held by FDIC-insured institutions, instead they aggregate the carrying value of 1-4 family residential REO on FDIC-insured institutions’ balance sheets.Using an average of $150,000 per unit would suggest the number of 1-4 family REOs declined from 80,597 in Q2 to 79,335 in Q3. Here is a graph of the 1-4 family REO carrying value for FDIC insured institutions since Q1 2003. The left scale is the dollars reported in the FDIC Quarterly Banking Profile, and the right scale is an estimate of REOs using an average of $150,000 per unit. Using this estimate for the average per REO gives 79.3 thousand REO at the end of Q3.  Note: FDIC insured institutions have other REO and this is just the 1-4 family residential REO. Of course this is just a small portion of the total 1-4 family REO. Here is a graph showing REO inventory for Fannie, Freddie, FHA1, Private Label Securities (PLS), and FDIC insured institutions. The Fannie, Freddie, FHA, PLS, FDIC REO decreased to about 460,000 in Q3 from just under 500,000 in Q2.

Real House Prices using Fed Reserve Stress Test Scenario - Yesterday the Federal Reserve outlined the annual bank supervisory stress tests. The Fed included a stress test scenario for house prices and inflation, so we can calculate the impact on real house prices. The stress test scenario is outlined here. The stress tests assume the unemployment rate will rise to 13% in 2013, that the Dow Jones Total Stock Market Index will decline by more than 50% from the current level. The scenario also assumes that nominal house prices will fall another 20%+.Note: The Federal Reserve uses the CoreLogic House Price Index (Blue). This graph shows real house prices through August 2011 (September for CoreLogic), and the Federal Reserves stress test scenario (blue after Q3 2011).This scenario would take real house prices back to about mid-1984 prices in real terms (adjusted for inflation).

Zillow Forecast for Case-Shiller House Price Index -  Zillow chief economist Stan Humphries put out a forecast for the Case-Shiller HPI yesterday: Zillow Forecast: September Case-Shiller Composite-20 Expected to Show 3.2% Decline from One Year Ago Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted, NSA) will decline by 3.2% on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will show a year-over-year decline of 2.8%. The seasonally adjusted (SA) month-over-month change from August to September will be -0.2% and 0.0% for the 20 and 10-City Composite Home Price Index (SA), respectively. On an NSA basis, this would leave the 10-city composite about 3.9% above the post bubble low, and the 20-city composite about 3.5% above the post bubble low. The CoreLogic (used by the Fed) index (NSA) for September was about 3.6% above the post bubble low.However this would put the seasonally adjusted 20-City composite index at a new post-bubble low (and the 10-city would be just above a new low). Because the seasonal factor has been impacted by the high percentage of foreclosures, most people just report the NSA numbers - and the NSA numbers will probably not be at new lows until early next year.

Existing Home Sales in October: 4.97 million SAAR, 8.0 months of supply - The NAR reports: October Existing-Home Sales Rise, Unsold Inventory Continues to Decline Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 1.4 percent to a seasonally adjusted annual rate of 4.97 million in October from a downwardly revised 4.90 million in September, and are 13.5 percent above the 4.38 million unit level in October 2010. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in October 2011 (4.97 million SAAR) were 1.4% higher than last month, and were 13.5% above the October 2010 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.33 million in October from 3.41 million in September. The last 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 decreased 13.8% year-over-year in October from October 2010. This is the ninth consecutive month with a YoY decrease in inventory. Months of supply decreased to 8.0 months in October, down from 8.3 months in September.

Existing Home Sales: More on Inventory and NSA Sales Graph - Yesterday I discussed the expected downward revisions to the NAR estimates for sales and inventory. The NAR didn't provide any update on the benchmark revision process in the release today. I expect sales and inventory estimates to be revised down by 10% to 15% for the current year - and less in earlier years - probably about 2% or so in 2006 or 2007. The NAR reported inventory fell to 3.33 million in October, but if my guess is correct, inventory will be adjusted to something in the 2.85 to 3.0 million range after the benchmark revision. This is close to the same level as in October 2005 (with listed inventory at 2.87 million units).  This graph shows inventory by month since 2004. In 2004 (black line), inventory was fairly flat and declined at the end of the year. In 2005 (dark blue line), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red) inventory is at the lowest level since 2005. The following graph shows existing home sales Not Seasonally Adjusted (NSA).The red columns are for 2011.  Sales NSA are above last October when sales declined sharply following the expiration of the tax credit in June 2010. Sales are close to the October 2008 level, but will be lower after the benchmark revision is released.

CA October Home Sales: Adjusted for Inflation, Typical Mortgage Payment Now Lowest On Record - From DQ News on California October Home Sales:  "An estimated 34,087 new and resale houses and condos were sold in California last month. That was down 3.7 percent from 35,404 in September, and up 4.3 percent from 32,669 for October 2010. California sales for the month of October have varied from a low of 25,832 in 2007 to a high of 70,152 in 2003, while the average is 43,528. DataQuick's statistics go back to 1988.  The median price paid for a home last month was $240,000, down 3.6 percent from $249,000 in September, and down 6.3 percent from $256,000 for October a year ago. . The typical mortgage payment that home buyers committed themselves to paying last month was $924, the lowest since early 1999. That was down from $964 in September, and down from $1,005 in October 2010. It was 58.8 percent below the spring 1989 peak of the prior real estate cycle. It was 66.6 percent below the current cycle's peak in June 2006. Adjusted for inflation, last month's mortgage payment was the lowest on record.

Soaring Contract Failures Torpedo Sales - A higher than normal rate of contract failures is stifling a recovery in home sales as home sellers and buyers are losing deals at an extraordinary rate. One out of every three purchase contracts (33 percent) washed out in October, according to the National association of Realtors, up from 18 percent in September. Contract failures were only 8 percent a year ago. “Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales such as job creation, rising rents and high affordability conditions. Many people who are attempting to buy homes are thwarted in the process,” said NAR Chief Economist Lawrence Yun. Contract failures are cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses. “Other recent factors include disruption in the National Flood Insurance Program, and lower loan limits for conventional mortgages, which paradoxically force some of the most creditworthy consumers to pay unnecessarily higher interest rates,” Yun said.

A few comments on the expected NAR existing home sales revisions - "In the near future", the NAR is expected to revise down their estimates of existing home sales for the last few years. The most important aspect of this revision is the "improved measurement methodology" so that we will have more accurate information in the future. The next most important part of the revision is the level of "visible" inventory. According to the NAR release, inventory will be revised down for the last several years by the same amount as sales, keeping the months of supply the same as originally released. With the NAR revisions, I expect listed inventory to be at the lowest level since late 2005. That means we can estimate the downward revisions to sales by looking at other sources of inventory data. I've been using the monthly inventory data from deptofnumbers (aka housingtracker) for 54 metro areas. This graph adjusts the reported NAR inventory by the HousingTracker changes, using 2006 as the starting point. The gap between the NAR reported inventory and the HousingTracker inventory steadily increased over the last 5 years. The "drift" was fairly gradual, but cumulative over the last 5 years or so.

Lawler: Household Growth by Age Group: 2010 – 2015 “Conservative” Forecasts - The tables below assume continued low immigration and two scenarios for headship rates: 1) an average of Census 2000 and 2010 headship rates, and 2) just Census 2010 headship rates. Under both scenarios - the average of Census 2000 and 2010 headship rates and just using the 2010 headship rates - there will be a fairly strong increase in younger households over the next few years (the apartment analysts have been making this argument).  Even with a 50%+ increase in multi-family starts in 2011, the builders will have only started around 150,000 to 160,000 units this year. Based on these projections, multi-family starts will increase further over the next few years. And look at the projected increase in 55 to 74 year old households. That will probably be a key segment of growth for households. Of course headships rates could fall further (the older people could move in with their kids), but this suggests positive demographics for housing over the next several years.

Uptick in Household Income: Trend or Hiccup? - American households saw their income edge up in September from August, according to a new report out Monday, but it isn’t clear whether the uptick , if sustained, would make a difference amid a tepid economic recovery vulnerable to risks at home and abroad. Seasonally adjusted median U.S. household income — the level at the middle of the middle — rose 1.1% in September from the previous month, according to Census data crunched by Sentier Research. That is a change from the downward trend in real median annual household income that has persisted since before the recession. According to Sentier’s latest report, U.S. median household income declined 9.6% between December 2007, the start of the most recent downturn, and September 2011. In a report last month also based on Census data, Sentier found that real median household income had declined both since the start of the recession and during the two years of post-recession recovery.

Personal Income increased 0.4% in October, Spending increased 0.1% - The BEA released the Personal Income and Outlays report for September: Personal income increased $48.1 billion, or 0.4 percent in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $8.2 billion, or 0.1 percent. ... Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in October, compared with an increase of 0.5 percent in September. The price index for PCE decreased 0.1 percent in October, in contrast to an increase of 0.2 percent in September. The following graph shows real Personal Consumption Expenditures (PCE) through August (2005 dollars). Note that the y-axis doesn't start at zero to better show the change. . PCE increased 0.1% in October, and real PCE increased 0.1%. Note: The PCE price index, excluding food and energy, increased 0.1 percent. The personal saving rate was at 3.5% in October. Personal saving -- DPI less personal outlays -- was $400.2 billion in October, compared with $376.9 billion in September. Personal saving as a percentage of disposable personal income was 3.5 percent in October, compared with 3.3 percent in September. This graph shows the saving rate starting in 1959 through the October Personal Income report. In October, income increased faster than spending - reversing a recent trend - and the saving rate increased slightly.

Consumers May Be Spending More, but They’re Not Happy About - Consumers are spending more this year, but that doesn’t mean they’re happy about it. One of the enduring mysteries in the U.S. economy in recent months has been the apparent disconnect between how consumers feel and how they actually behave. Each month brings new reports of Americans’ gloom — the major consumer sentiment indexes have been mired in recessionary territory for months — and yet actual spending has continued to rise. New data from Gallup helps illustrate, if not necessarily explain, what’s going on. According to weekly polling data, consumers’ senses of their own financial stability took a sharp turn for the worse over the summer. It’s stabilized since then, but it hasn’t really improved. In February, for example, 56% of respondents said they were “feeling better” about their financial situation. By the end of the summer, that number had plummeted to 48%. It’s been more or less stuck there ever since, coming in at 49% in the most recent survey.

November UMich consumer sentiment hits 64.1 -  A gauge of consumer sentiment reached 64.1 in the final reading for November -- the highest reading since June -- compared with 60.9 in October, according to Wednesday reports on the data from the University of Michigan and Thomson Reuters. A preliminary reading for November pegged the gauge at 64.2. Economists polled by MarketWatch had expected a final November result of 65, with consumers somewhat cheered by lower gas prices, but concerned about stock volatility. The sentiment gauge, which covers how consumers view their personal finances as well as business and buying conditions, averaged about 87 in the year before the start of the most recent recession. Economists watch sentiment data to get a feel for the direction of consumer spending. A separate report from the government on Wednesday showed that personal consumption spending slowed down in October.

Final November Consumer Sentiment at 64.1 - The final November Reuters / University of Michigan consumer sentiment index declined to 64.1 from the preliminary reading of 64.2, up from the October reading of 60.9, and up from 55.7 in August. From MarketWatch: November UMich consumer sentiment hits 64.1 A gauge of consumer sentiment reached 64.1 in the final reading for November -- the highest reading since June -- compared with 60.9 in October, according to Wednesday reports on the data from the University of Michigan and Thomson Reuters. A preliminary reading for November pegged the gauge at 64.2 Consumer sentiment is usually impacted by employment (and the unemployment rate) and gasoline prices. But right now the European financial crisis is probably also impacting sentiment. Although sentiment is up from October, this is still very weak, and slightly below the consensus forecast of 64.6.

Could Every Day Be Black Friday? - Black Friday, the day after Thanksgiving, is the single most manic, delirious shopping day of the year and, of course, the official beginning of the holiday-buying frenzy. Holiday binge-buying has deep roots in American culture: department stores have been associating turkey gluttony with its spending equivalent since they began sponsoring Thanksgiving Day parades in the early 20th century. And to goose the numbers, they’ve always offered huge promotions too.  Black Friday relies on a few simple retail strategies that, with tons of customer data and forecasting software, have become fairly precise. One method is to sell everything as cheaply as possible and magnify a tiny profit through volume. Other stores mark down only a few high-profile items — even selling them at a loss — in hopes that customers will also throw a few full-priced items in their carts. Regardless, Black Friday is essentially a one-day economic-­stimulus plan and job-creation program. Retailers use TV commercials and deep discounts, rather than tax breaks and infrastructure spending, but the effect is the same: billions of dollars, which would otherwise never be spent, make their way into circulation.

ATA Trucking Index increased 0.5% in October - From ATA: ATA Truck Tonnage Index Rose 0.5% in October The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 0.5% in October after rising a revised 1.5% in September 2011. September’s increase was slightly less than the 1.6% gain ATA reported on October 25, 2011. The latest gain put the SA index at 116.3 (2000=100) in October, up from the September level of 115.8. Compared with October 2010, SA tonnage was up 5.7%. In September, the tonnage index was 5.8% above a year earlier. Further, October’s tonnage reading was just 4.4% below the index’s all-time high in January 2005. 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. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

DOT: Vehicle Miles Driven declined 1.5% in September - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by -1.5% (-3.7 billion vehicle miles) for September 2011 as compared with September 2010. • Travel for the month is estimated to be 244.2 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 46 months - so this is a new record for longest period below the previous peak - and still counting! The second graph shows the year-over-year change from the same month in the previous year. The current decline is not as a severe as in 2008, but this is significant. The year-over-year decline in September wasn't as severe as in July and August, but was still negative for the seventh straight month.

Misc: Kansas City Fed manufacturing index shows sluggish growth, Auto sales expected to increase - From the Kansas City Fed: Growth in Manufacturing Activity Eased Slightly The Federal Reserve Bank of Kansas City released the November Manufacturing Survey today; the survey revealed that growth in Tenth District manufacturing activity eased slightly in November, but expectations for future months remained relatively solid. The month-over-month composite index was 4 in November, down from 8 in October and 6 in September ... The production and shipments indexes decreased to 0, and the new orders and order backlog indexes were negative. The employment index dropped to its lowest level of the year but remained slightly positive, and the new orders for exports index moderated slightly. In general the regional manufacturing surveys have indicated sluggish growth in November.  From Highest SAAR for New Vehicle Sales Since Cash for Clunkers For November 2011, new light vehicle sales in the U.S. (including fleet) is expected to be 972,712 units, up 11.5 percent from November 2010 and down 4.7 percent from October 2011 The November 2011 forecast translates into a Seasonally Adjusted Annualized Rate (SAAR) of 13.3 million new car sales, up from 13.2 million in October 2011 and up from 12.3 million in November 2010.

Richmond Fed: Manufacturing activity stabilized in November - From the Richmond Fed: Manufacturing Activity Steadied in November; Expectations Were Upbeat Manufacturing activity in the central Atlantic region stabilized in November following four months of contraction, according to the Richmond Fed's latest survey ... In November, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — increased six points to 0 from October's reading of −6. Among the index's components, shipments gained seven points to 1, while new orders edged up three points to finish at −2 and the jobs index steadied, moving up seven points to 0. Labor market conditions changed little at District plants in November. Both the manufacturing employment and average workweek indexes registered a reading of 0, moving up seven points and one point, respectively. Wage growth doubled, picking up five points to finish at 10.

American Workers Worse Off During Recovery  - Between the last quarter of the U.S. recession, Q2 2009 and Q3 2011 nominal national income has increased 11.6%. Given the 4.7% increase in the domestic purchases price deflator that translates into a 6.6% gain, which is 2.9% at an annualized rate. A very weak recovery compared to those after the 1973-75 and particularly the 1981-82 recessions, but still clearly a recovery.  However, as the population has increased by 1.9%, per capita national income is up only 4.6%. And for the vast majority of Americans who rely primarily on income from their jobs, it gets worse. Because while real corporate profits rose as much as 49.6%, real labor income ("compensation of employees) rose only 0.9%. Given the 1.9% population increase, this means that real per capita labor income has fallen by 1% during the recovery. It is normal for corporate profits to increase more than labor income during recoveries, just as it is normal for them to drop more than labor income during slumps. However, the divergence has been larger than normal this time, and more importantly economic growth has been much lower, creating the unusual situation where workers are worse off during a recovery. And since most Americans depend almost entirely on labor income, this means that most Americans are worse off during the recovery.

An Uneven Recovery: The Chicago and Milwaukee Labor Markets - Chicago Fed - The Midwest has benefitted from the recent rebound in manufacturing. Over the past year, total employment in the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin has increased by just over 145,000 jobs, 40% of which has been due solely to manufacturing.[1] The heavy concentration of job gains in manufacturing and related industries has led labor markets in some areas of the Seventh District to benefit more than others.  Consider the metropolitan areas of Chicago and Milwaukee.[2] Looking at figure 1, one can see that employment levels in the two cities have tended to move in parallel over the past two decades. This is as one might expect for two cities that are so close geographically. However, this correlation has recently faltered. Although the data indicate that the two cities entered the most recent recession in a similar fashion, Milwaukee has seen a much bigger increase in employment during the recovery.  In fact, the Milwaukee metropolitan area’s job growth over the past year stands out as one of the highest in the nation.[4]

Vital Signs: Start-Up Job Creation Stalled - A key driver of U.S. jobs growth has stalled. Companies less than a year old employed 2.5 million people as of March. That was up fractionally from a year earlier, but still well below the 3.5 million people such start-ups employed in March 2007. Funding remains difficult for many new companies and some traditional sources of cash, including home-equity loans, have dried up.

Checking in on the Unemployment by Duration Numbers, Fall 2011 Edition - Looks like there is going to be a debate on whether or not to extend unemployment insurance.  Time to start sharpening the weapons for the ideological and numbers-based part of these arguments. One key argument you hear is that unemployment is really just about the long-term unemployed.  The market is split into a healthy, normal labor market of people who have only been unemployed a short period of time and a pool of long-term unemployed who are unproductive and disconnected to the point where traditional monetary and fiscal stimulus won’t help them.  This is behind much of the “zero marginal product” arguments on the structural unemployment discussion.  If this is the case, the argument for extending unemployment insurance is going to be a different one than if the labor market is weak overall. Last month, Joe Weisenthal examined a Fed Governor speech by Daniel K. Tarullo delivered at Columbia which mentioned this debate.  Weisenthal noted that “Unfortunately, in the footnotes to Tarullo’s speech he doesn’t offer a citation for this fact, so we had to go hunting, and found this post by Mike Konczal  on the exact question…”Yup.  I addressed this argument in May of this year in that post.  One of the graphs I put together in that post, which shows what Tarullo is referencing, is this one:

Services without Tears - – A famous claim in economics is that the cost of services (such as health care and education) tends to increase relative to the cost of goods (such as food, oil, and machinery). This seems right: people around the world can barely afford the rising health-care and school-tuition costs they currently face – costs that seem to increase each year faster than overall inflation. But a sharp decline in the costs of health care, education, and other services is now possible, thanks to the ongoing information and communications technology (ICT) revolution. The cost of services compared to the cost of goods depends on productivity. If farmers become much better at growing food while teachers become little better at teaching kids, the cost of food will tend to fall relative to the cost of education. Moreover, the proportion of the population engaged in farming will tend to fall, since fewer farmers are needed to feed the entire country.This is the long-term pattern that we’ve seen: the share of the workforce in goods production has declined over time, while the cost of goods has fallen relative to that of services. But a productivity revolution in service-sector delivery is now possible.

The Non-Green Jobs Boom - The Bureau of Labor Statistics reported recently that the U.S. jobless rate remains a dreadful 9%. But look more closely at the data and you can see which industries are bucking the jobless trend. One is oil and gas production, which now employs some 440,000 workers, an 80% increase, or 200,000 more jobs, since 2003. Oil and gas jobs account for more than one in five of all net new private jobs in that period. The ironies here are richer than the shale deposits in North Dakota's Bakken formation. While Washington has tried to force-feed renewable energy with tens of billions in special subsidies, oil and gas production has boomed thanks to private investment. And while renewable technology breakthroughs never seem to arrive, horizontal drilling and hydraulic fracturing have revolutionized oil and gas extraction—with no Energy Department loan guarantees needed. The oil and gas rush has led to a jobs boom. North Dakota has the nation's lowest jobless rate, at 3.5%, and the state now has some 200 rigs pumping 440,000 barrels of oil a day, four times the amount in 2006. The state reports more than 16,000 current job openings, and places like Williston have become meccas for workers seeking jobs that often pay more than $100,000 a year.

Redefining the Union Boss —NOT long ago, truckers pulled off highways across America and tuned in to someone whose CB handle was “Troublemaker.”  “I’m barely hanging on,” one driver lamented. His employer, the U.P.S. freight unit, was turning to nonunion drivers — people outside the International Brotherhood of Teamsters1, he said. “We need to start enforcing our contracts!” Troublemaker replied.  Troublemaker, better known as Sandy Pope, is the first woman to run for the presidency2 of the Teamsters, against the powerful, three-term incumbent, James P. Hoffa.  Yes, Hoffa.  Odds are that Ms. Pope will lose — final results are due today. But whatever the outcome, Ms. Pope represents a new face of labor, one that increasingly is female. In this “We are the 99 percent” moment, when corporate profits are up and wages flat, a handful of women are challenging the old, mostly male world of union bosses.

Corporations Pushing Bill to Take Away Overtime from Computer and Web Workers - Apparently unsatisfied by the enormous profits they’ve made while average Americans suffer in a difficult economy, corporations are pushing Congress to enact a new law that would exempt a large class of workers from receiving overtime pay. And they’re receiving support from members of both parties on Capitol Hill. Dubbed the Computer Professionals Update Act (CPU Act), Senate bill 1747 would change the Fair Labor Standards Act (FLSA) to remove overtime protection and compensation from “almost everyone working primarily in information technology” who earns either a salary, or an hourly rate of $27.63, Information technology companies are focused on cutting pay for the people who work for them. If their effort succeeds, however, it will suggest to every other industry that the time is now to gut FLSA for every covered private-sector worker.

Occupied Media: Interview With Larry Mishel  - Our most recent Occupied Media virtual teach-in is with EPI economist Larry Mishel. EPI is celebrating its 25th year fighting for the 99%. EPI was recently recognized by the Washington Post and Paul Krugman. Krugman had this to say about EPI and Larry Mishel: At this point EPI is the single best source for analysis of labor issues, one of the best sources of macroeconomic analysis, and in general a bastion of humane clarity. The institute’s success demonstrates just how powerful it is when you combine intellectual integrity with commitment, when you make a point of doing the math right, but also never forget that you stand for something.... Put it this way: I’ve had a number of meetings with senior officials along with other progressive economists, and I always feel that of the group, Larry Mishel is talking the most sense — and, whaddya know, agreeing with me.

When economic growth benefits the working class - That’s the title of a report (here) I’ve prepared for the Resolution Foundation’s Commission on Living Standards. The Resolution Foundation is a UK think tank that’s been doing some very interesting work on living standards of households below the median but above the bottom ten percent. The report was released today in conjunction with this event in London.

Job Polarization in the United States: A Widening Gap and Shrinking Middle - NY Fed - Over recent decades, the U.S. workforce has undergone a dramatic restructuring in response to changes in technology, trade, and consumption patterns. Some sectors, such as health care, have expanded, while others, such as manufacturing, have contracted. These changes have altered the composition of the workforce, leading to a phenomenon often referred to as “job polarization,” an important factor contributing to economic inequality in the nation. In this post, we show that the wage gap between high- and low-paid occupations has widened over the past three decades. Further, we show that the share of jobs in both high- and low-paying occupations has grown, leaving a shrinking middle.

The earnings impact of a job loss - Atlanta Fed's macroblog - Princeton University Professor Henry Farber recently spoke with the Atlanta Fed's Center for Human Capital Studies. Farber discussed some of his current research, including a paper titled "Job Loss in the Great Recession: Historical Perspective from the Displaced Workers Survey, 1984–2010." This paper explores the experience of those who lost a job as measured by the biennial Displaced Workers Survey conducted by the U.S. Bureau of Labor Statistics. The January 2010 version of the survey asked the question:  "During the last 3 calendar years, that is, January 2007 through December 2009, did (name/you) lose a job or leave one because: (your/his/her) plant or company closed or moved, (your/his/her) position or shift was abolished, insufficient work or another similar reason?"  I will focus here on Farber's estimates of the proportionate change in average real weekly earnings for workers who lost a full-time job in the last three years but had a job at the time of the survey. The time series of various cuts of these estimates are shown in the following chart.

Looking Beyond Election Day - Robert Reich - Not to depress you, but our economic troubles are likely to continue for many years — a decade or more. At the current rate of job growth (averaging 90,000 new jobs per month over the last six months), 14 million Americans will remain permanently unemployed. The consensus estimate is that at least 90,000 new jobs are needed just to keep up with the growth of the labor force. Even if we get back to a normal rate of 200,000 new jobs per month, unemployment will stay high for at least ten years. Years of high unemployment will likely result in a vicious cycle, as relatively lower spending by the middle-class further slows job growth. This, in turn, could make political compromise even more elusive than it is now, as remarkable as that may seem. In past years, politics has been greased by the expectation of better times to come – not only more personal consumption but also upward mobility through good schools, access to college, better jobs, improved infrastructure. Now the grease is gone. Fully two-thirds of Americans recently polled by the Wall Street Journal say they aren’t confident life for their children’s generation will be better than it’s been for them. The last time our hopes for a better life were dashed so profoundly was during the Great Depression.

We’re going to see a lot more part-time employment - This is from a few weeks’ back and I had been meaning to cover it: Wal-Mart will drop health insurance benefits for its part-time workers, the New York Times reports this morning.  Sarah Kliff offers related comment:The [ACA] law, however, is largely silent on the subject of part-time workers, and there are no penalties for not offering them coverage. That makes the divide between “full time” and “part time” a key distinction for the health-care law, and one the Obama administration is fine-tuning. It will not be an easy fine tune.

The Age of the Superfluous Worker - AMERICA, like other modern countries, has always had some surplus workers.  However, the current jobless recovery, and the concurrent failure to create enough new jobs, is breeding a new and growing surplus pool. And some in this pool are in danger of becoming superfluous, likely never to work again.  In the old days — before Social Security, welfare and Medicaid — poverty-caused illnesses killed off or incapacitated some of the people who could not find jobs. Even earlier, some nations sold their surplus workers as slaves, while the European countries could send them to the colonies.  In addition, wars were once labor-intensive enterprises that absorbed the surplus temporarily, and sufficient numbers of those serving in the infantry and on warships were killed or seriously enough injured so that they could not add to the peacetime labor surplus.  The old ways of reducing surplus labor are, however, disappearing. Decades of medical and public health advances, as well as Medicare and Medicaid, have reduced the number of poverty-related deaths. The Iraq and Afghanistan wars have left many more service members injured than killed.  Over the past quarter-century, one very costly way of decreasing the surplus has been the imprisonment of people, mostly dark-skinned men, for actual and invented offenses. As incarceration becomes less affordable for financially strapped states, inmates will reach surplus or superfluous status at a younger age.  Meanwhile, new ways of increasing surplus labor have appeared. One is the continued outsourcing of jobs to low-wage countries; the other is the continuing computerization and mechanization of manufacturing and of services not requiring hands-on human contact.

The Left-Behinds - Movie director George Romero made his first films in the pitted and rusting landscape around this fabled steel town back in the 1960s and ’70s. It was fantasy then. But today, Braddock truly is the land of the living dead. U.S. Steel’s Edgar Thomson Steel Works chugs on, as it has since 1875, but it’s a sprawling corrugated-metal relic of its former self. Its parking lot is almost empty at midday, and it employs several hundred workers rather than the more than 10,000 who labored here at its peak. The rest of Braddock, meanwhile, is a ragged reminder of the nearly forgotten era when western Pennsylvania’s Monongahela Valley rolled a century’s worth of steel for gleaming new American cities and factories. This area used to be legendary for hard work; its progeny includes iron-tough football heroes such as Johnny Unitas, Joe Namath, and Joe Montana. Today, Braddock is a black hole of apathy where the gravitational pull of despair is often too powerful to resist. Unemployment is chronically in the double digits, not so much because of displaced steelworkers—most of those jobs disappeared in the 1980s—but because of their children and grandchildren. These are the second and third generations of a lost tribe.

Economic Insecurity - With the Census Bureau fine-tuning its definition of poverty, a group of “near poor” has emerged — those who are not officially poor but are perilously close to it. Another way of putting that is to look at “economic security,” the amount of income necessary to cover basic expenses without relying on public subsidies. A new report from Wider Opportunities for Women, a nonprofit group that previously produced an index of what it takes to do more than survive while working, shows that 45 percent of United States residents live without economic security. That means they are not earning enough income to cover basic expenses, plan for important life events like college or save for emergencies like unexpected health bills. “What does it take for households in this country to get by and be able to plan for their own futures based on the work that they do?” . “We’re really looking at not just the lowest of the lowest income households but that slice of households that live somewhere above the poverty line but are constantly in danger of being thrown into financial catastrophe, and that’s a much larger slice of the American public than we are currently talking about.”

Fatalism and the American Dream - One finding of the Pew Research Center report on American exceptionalism that received little attention was about cultural attitudes toward success. Of the five nationalities polled, Americans were least likely to believe that success in life was determined by forces outside our control. Just 36 percent of Americans believe in this fatalistic statement, while the vast majority of their compatriots are greater believers in self-determination. Americans with less education are more fatalistic, however. The study found that 22 percent of college graduates believe they have little control over their fate, compared to 41 percent of Americans without a college degree. Even so, American nongraduates still seem to think they have more control over their destinies than the average German, Frenchman or Spaniard does. Almost three-quarters of Germans, for example, believe that success is determined by factors outside our control. These findings are particularly interesting when juxtaposed with a separate report from the Pew Economic Mobility project. That report, which examined economic and social mobility in 10 Western countries, found that Americans actually appear to have less control over their success in life than their counterparts do.

We Are the 99.9%, by Paul Krugman - “We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general. If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.  The recent Congressional Budget Office report on inequality didn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, did. According to that report, between 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent.  For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

Their Own Facts - Krugman - David Frum of “Axis of Evil” fame has an excellent piece in New York explaining his apostasy from the modern GOP. Best line: Backed by their own wing of the book-publishing industry and supported by think tanks that increasingly function as public-relations agencies, conservatives have built a whole alternative knowledge system, with its own facts, its own history, its own laws of economics. Outside this alternative reality, the United States is a country dominated by a strong Christian religiosity. Within it, Christians are a persecuted minority. Outside the system, President Obama—whatever his policy ­errors—is a figure of imposing intellect and dignity. Within the system, he’s a pitiful nothing, unable to speak without a teleprompter, an affirmative-action ­phony doomed to inevitable defeat. Outside the system, social scientists worry that the U.S. is hardening into one of the most rigid class societies in the Western world, in which the children of the poor have less chance of escape than in France, Germany, or even England. Inside the system, the U.S. remains (to borrow the words of Senator Marco Rubio) “the only place in the world where it doesn’t matter who your parents were or where you came from.”

We have to do better on inequality, by Larry Summers - The principal problem facing the US and Europe for the next few years is an output shortfall caused by a lack of demand. ... It would, however, be a serious mistake to suppose that our problems are only cyclical. According to a recent Congressional Budget Office study, the incomes of the top 1 per cent of the US population, after adjusting for inflation, rose by 275 per cent from 1979 to 2007. At the same time, the income for the middle class grew by only 40 per cent. Even this dismal figure overstates the case of typical Americans. What then is the right response to rising inequality? First, government must be careful that it does not facilitate increases in inequality by rewarding the wealthy with special concessions. Second, there is scope for pro-fairness, pro-growth tax reform. ...Third, the ability of the children of middle-class families to attend college has been seriously compromised by increasing tuition. At the same time, a gap has opened between the quality of the private school education offered to the children of the rich and the public school educations enjoyed by everyone else. Most alarming is the near doubling over the last generation in the gap between the life expectancy of the affluent and the ordinary. Neither the politics of polarization nor those of noblesse oblige will serve to protect the interests of the middle class in the post-industrial economy. We will have to find ways to do better.

IQ and Income Inequality - A recent Business Insider commentary and NYT op-ed seek to debunk Malcolm Gladwell’s thesis that anyone can become great at anything given 10,000 hours of practice. Malcolm Gladwell observes that practice isn’t “the thing you do once you’re good” but “the thing you do that makes you good.” He adds that intellectual ability — the trait that an I.Q. score reflects — turns out not to be that important. “Once someone has reached an I.Q. of somewhere around 120,” he writes, “having additional I.Q. points doesn’t seem to translate into any measureable real-world advantage.” But this isn’t quite the story that science tells. Research has shown that intellectual ability matters for success in many fields — and not just up to a point.  Dave Schuler, whose IQ is almost surely upwards of the 99.9 percentile, says So what? The highest paid nuclear physicist, whose IQ is almost undoubtedly four standard deviations above normal, probably earns less than the median cardiac surgeon who almost certainly isn’t even above the second standard deviation above normal. The supply of nuclear physicists may be low but the demand is pretty low, too.

Race and American inequalities - Douglas Massey is a leading US social scientist who has worked on issues of inequality in America throughout his career.  His 2008 book (Categorically Unequal: The American Stratification System) is a huge contribution to our understanding of the mechanisms producing inequalities in American society, and it amounts to a stunning indictment of racism and anti-poor public policies over a seventy-five year period. And, unlike other interpretations that attribute current racial inequalities to past patterns of overt discrimination, Massey argues that these inequalities can be traced to current discrimination by individuals and institutions alike. Massey is interested in a specific kind of inequality -- what he refers to as "categorical" inequality.  "All human societies have a social structure that divides people into categories based on a combination of achieved and ascribed traits" (1).  The kinds of categories he cites include gender, race, age, and membership in exclusive social organizations.  Categorical inequality, then, is defined as inequalities of income, wealth, or influence that vary systematically with membership in social categories.

How Inequality Hurts the Economy -The public discussion about the widening gap between rich and poor hasn’t been this loud since the Great Depression. Warren Buffett has condemned the disparity, Occupy Wall Street has inveighed against it, President Barack Obama cites it to justify higher taxes on the wealthy. Much of the debate, though, has focused on inequality’s moral dimension. Somehow it just doesn’t seem right that so many Americans struggle while a handful prospers. What many are missing is the actual impact rising inequality is having on the U.S. economy. Hint: It isn’t good. Since 1980 about 5 percent of annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data The typical U.S. household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remains a shade below the level reached in 1997, adjusted for inflation. “Income inequality in this country is just getting worse and worse and worse,” says James Chanos, president and founder of money managers Kynikos Associates. “And that is not a recipe for stable growth.”

America's Poor: Why a New Measure Shows More People are Living in Poverty Than we Thought - In this week's magazine story on poverty in the U.S., I briefly mention that the way we typically count the poor is far from ideal. The official U.S. poverty line dates back to the 1960s, when Mollie Orshansky, an economist at the Social Security Administration, came up with a measure based on how much money a family had to spend on food in order to eat nutritiously.  Over the past 40+ years, a lot has changed with how families make ends meet—as well as with social scientists' ability to measure it— and since the mid-1990s, the National Academy of Sciences has been recommending that the U.S. update how it measures poverty. Earlier this month, the Census Bureau released its new “supplemental poverty measure,” which takes into account not just cash income, but also expenses in major categories like child and medical care, as well as income from tax breaks and non-cash benefits like food stamps. The new measure also adjusts for the fact that it's more expensive to live in certain parts of the country than in others—a family in rural Ohio can get by on a lot less than can a family in San Francisco. The goal is to better understand both who is poor and the success or failure of anti-poverty efforts. The effects of many major programs—such as the earned-income tax credit—aren't picked up in the traditional way of measuring poverty.

Voices of the Near Poor - When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. The new method, called the Supplemental Poverty Measure, was designed to add in many of the things the old measure ignored, like the hundreds of billions the needy receive in food stamps and tax credits. At the same time, it subtracted the similarly large sums lost to taxes, medical care and work expenses. One surprising difference with the new measure, outlined in an article today, was the 51 million people with incomes less than 50 percent above the poverty line. That category, sometimes called “near poor,” was 76 percent higher than the official account, which was published in September. (The portion of people under the poverty line, meanwhile, increased by just 5 percent in the new measure.) About a fifth of the people who appear near poor in the new measure are lifted out of poverty by benefits the old measure ignores, like food stamps and tax credits. But more than half were pulled down into near poverty from higher income levels by taxes, medical costs and work expenses like child care and gas. Taken together with people under the poverty line, a full third of Americans – or about 100 million people – live in poverty or in the economically vulnerable area just above it.

Older, Suburban and Struggling, ‘Near Poor’ Startle the Census - They drive cars, but seldom new ones. They earn paychecks, but not big ones. Many own homes. Most pay taxes. Half are married, and nearly half live in the suburbs. None are poor, but many describe themselves as barely scraping by. Down but not quite out, these Americans form a diverse group sometimes called “near poor” and sometimes simply overlooked — and a new count suggests they are far more numerous than previously understood. When the Census Bureau1 this month released a new measure of poverty2, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data the government has not yet published, showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account, published in September. All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it. After a lost decade of flat wages and the worst downturn since the Great Depression3, the findings can be thought of as putting numbers to the bleak national mood — quantifying the expressions of unease erupting in protests and political swings. They convey levels of economic stress sharply felt but until now hard to measure.

45 percent in US struggle to make ends meet -  Nearly half of all Americans lack economic security, meaning they live above the federal poverty threshold but still do not have enough money to cover housing, food, healthcare and other basic expenses, according to a survey of government and industry data.  The survey, released on Tuesday by the advocacy group Wider Opportunities for Women (WOW), found that 45 percent of U.S. residents live in households that struggle to make ends meet. That breaks down to 39 percent of all adults and 55 percent of all children, the group found. "This is a wake-up call for Congress, for our state policy-makers, really for all of us," said Donna Addkison, President and CEO of WOW. "Nearly half of our nation's families cannot cover the costs of basic expenses even when they do have a job. Under these conditions, cuts to unemployment insurance ... and other programs families are relying on right now would push them from crisis to catastrophe." The WOW survey compared 2009 pre-tax incomes to a budget of basic and essential monthly expenses for various families that it developed along with researchers at Washington University with funding from the Ford Foundation and W.K. Kellogg Foundation.

More on Poverty and Its Impact - Here’s an insightful editorial from this AMs NYT amplifying many of the same poverty points I made here yesterday.  Based on new analysis of comprehensive poverty data—data that takes account of taxes, transfers, and costs associated with work and health care spending—one-third of the nation—100 million of us–is poor or near poor. What’s important here—something I’ve tried to underscore—is not just the hit on contemporary living standards.  It’s the way in which these economic conditions block poverty’s exit ramp—the way they diminish upward mobility: A good education is also increasingly out of reach. A study by Martha Bailey, an economics professor at the University of Michigan, showed that the difference in college-graduation rates between the rich and poor has widened by more than 50 percent since the 1990s.There is also a growing out-of-sight-out-of-mind problem. A study, by Sean Reardon, a sociologist at Stanford, shows that Americans are increasingly living in areas that are either poor or affluent. The isolation of the prosperous, he said, threatens their support for public schools, parks, mass transit and other investments that benefit broader society.

Shock: 100 Million Americans In Poverty or Right on the Edge - We can play these “recovery” games in the media all we want, but the truth is starkly different from what our benevolent leadership would have us believe. If the abhorrent unemployment numbers, the nearly 50 million on government food assistance, dwindling savings accounts, collapsing real estate values, and negative economic growth (when adjusted for inflation) are not enough to convince you that we are in a long-term depressionary cycle, then maybe these latest statistics of “near poor” Americans will: Down but not quite out, these Americans form a diverse group sometimes called “near poor” and sometimes simply overlooked — and a new count suggests they are far more numerous than previously understood. When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data the government has not yet published, showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account, published in September. All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.

Many above U.S. poverty line struggle to make ends meet - (Reuters) - Nearly half of all Americans lack economic security, meaning they live above the federal poverty threshold but still do not have enough money to cover housing, food, healthcare and other basic expenses, according to a survey of government and industry data. The survey, released on Tuesday by the advocacy group Wider Opportunities for Women (WOW), found that 45 percent of U.S. residents live in households that struggle to make ends meet. That breaks down to 39 percent of all adults and 55 percent of all children, the group found. "This is a wake-up call for Congress, for our state policy-makers, really for all of us," said Donna Addkison, President and CEO of WOW. "Nearly half of our nation's families cannot cover the costs of basic expenses even when they do have a job. Under these conditions, cuts to unemployment insurance ... and other programs families are relying on right now would push them from crisis to catastrophe."

TANF Benefits Fell Further in 2011 and Are Worth Much Less Than in 1996 in Most States - Cash assistance benefits for the nation's poorest families with children fell again in purchasing power in 2011 and are now at least 20 percent below their 1996 levels in 34 states, after adjusting for inflation.  While most states froze benefit levels in 2011, six states and the District of Columbia cut them, reducing assistance for more than 700,000 low-income families that represent over one-third of all low-income families receiving such assistance nationwide.[1] The benefits are provided through the Temporary Assistance for Needy Families (TANF) program which was established by the 1996 welfare law.  The data cited here are for state fiscal year 2011 (July 2010 to June 2011 in most states).  In all but two states, benefit levels are now below 1996 levels, after adjusting for inflation, and these declines came on top of even larger declines over the previous quarter century; between 1970 and 1996, cash assistance benefit levels for poor families with children fell by more than 40 percent in real terms in two-thirds of the states.  Benefits fall below 50 percent of the poverty line in all states.  They fall below 30 percent of the poverty line in the majority of states.

Report: 1 in 5 U.S. children at risk of hunger - The number of families that struggle to get enough food has increased in recent years. The U.S. Department of Agriculture reported that in 2010, 14.5% of households in the United States -- about 17.2 million -- lacked the resources to provide enough food for everybody. Among those, about 6.4 million households saw normal eating patterns disrupted or reduced because there wasn't enough food. Food insecurity -- uncertainty about where the next meal will come from -- is particularly hard on one group: children. The nonprofit Feeding America, a network of more than 200 food banks around the United States, reports one in five children are at risk of hunger. For children in African-American or Latino households, it's closer to one in three. They're likely to have trouble focusing in school. They might experience illness or poor health as a result. They're also likely to struggle with stress at home or in class. While many are eligible for free or reduced-price food at school, those programs don't provide food at night, on weekends or during breaks from school. Hunger is still a more frequent problem for homes headed by single parents and for homes below the federal poverty line, the USDA reports, but it has also crept into homes that have never experienced it before.

Local food pantries adjust to growing demands by cutting back -The holidays have begun with Thanksgiving as the traditional time when family and friends share a meal to thank for the year that is about to end. But for many, the economic recession is forcing them to get food in pantries. Unfortunately, pantries depend on the generosity of others to stock their shelves and assist neighbors. And with the economic downturn, donations have decreased as demand increases. The number of people receiving assistance from the pantry of the Community Association for Progressive Dominicans (ACDP as they are known in Spanish) in Upper Manhattan has decreased. So has the Jewish Community Council of Washington Heights and Inwood pantry’s assistance. It’s not because less people are hungry or in need of their service, but because in recent months, the pantry at the JCC has had no option but to close its doors because they have not been able to stock their shelves.

Our F— You System of Government - Governments are supposed to fulfill the basic needs of their citizens. Ours doesn’t pretend to try. Sick? Too bad. Can’t find a job? Tough. Broke? Can’t afford rent? We don’t give a crap. Forget “e pluribus unum.” We need a more accurate motto. We live under a f— you system. Got a problem? The U.S. government has an all-purpose response to whatever ails you: f— you. During the ’80s I drove a yellow taxi in New York. Then, as now, there were no public restrooms in the city. At 4 in the morning, with few restaurants or bars open, the coffee I drank to stay awake posed a significant challenge. It was—it is—insane. People pee. People poop. As basic needs go, toilets are as basic as it gets. Yet the City of New York, with the biggest tax base of any municipality in the United States, didn’t provide any. So I did what all taxi drivers did. What they still do. . It went OK until a cop caught me peeing under the old elevated West Side Highway, which later collapsed due to lack of maintenance. Perhaps decades of taxi driver urine corroded the support beams. “You can’t do that here,” said the policeman. “Where am I supposed to go?” I asked him. “There’s aren’t any restrooms anywhere in town.” “I know,” he replied before going to get his summons book from his cruiser.

Debtor Arrests Criticized -The top state law-enforcement official in Illinois said she plans to fight the use of arrest warrants by debt collectors pursuing money they are owed on credit cards, auto loans and other bills. Illinois Attorney General Lisa Madigan, in an interview, vowed to push state-court judges to quash arrest-warrant requests by lawyers representing the fast-growing debt-collection industry. Ms. Madigan also said she will file enforcement actions against companies that "abuse" their power to seek arrest warrants under Illinois law. "We can no longer allow debt collectors to pervert the courts," More than one-third of U.S. states allow borrowers who can't or won't pay to be jailed. Nationwide statistics aren't known because many courts don't keep track of warrants by alleged offense, but a tally by The Wall Street Journal earlier this year of court filings in nine counties across the U.S. showed that judges signed off on more than 5,000 such warrants since the start of 2010. In Illinois, the practice is "flourishing statewide," Ms. Madigan said, though exact numbers aren't available.

State Unemployment Rates "little changed or slightly lower" in October -  From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed or slightly lower in October. Thirty-six states and the District of Columbia recorded unemployment rate decreases, five states posted rate increases, and nine states had no rate change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to record the highest unemployment rate among the states, 13.4 percent in October. California posted the next highest rate, 11.7 percent. North Dakota registered the lowest jobless rate, 3.5 percent, followed by Nebraska, 4.2 percent.The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state finally has some blue - indicating no state is currently at the maximum during the recession.

A Decade of State and Local Gov’t Stagnation -This chart shows that real state and local government output, as measured by the BEA, has been effectively flat since 2001. To put it a different way, the stagnation at the state and local government level started way before the 2007 recession. What do I make of this? State and local governments are the only large economic entities in the U.S. economy who are not allowed to borrow to meet operating expenses. Households can borrow, companies can borrow, the federal government can borrow–but state and local governments cannot.  Therefore they have been forced to match their size to the carrying capacity of the individual state and local economies. Hence we see the epic struggle of states such as California to trim their budgets and labor force.  In other words, the state and local fiscal crisis is less a failure of governance (though such obviously exists) and more a sign of weakness in the individual state and local economies going back a decade.

Some States Are Facing Revenue Shortfall—Again - Revenues for U.S. states may be getting better, but generally they are still not good enough.  The early part of 2011 may have lured some states into a false sense of comfort. Most began their fiscal years on July 1, using revenue projections made earlier, when the outlook for the rest of the year looked solid.  Then came the European debt crisis, the stock market's declines, and other macro-economic troubles. In big states such as New York and California, estimates made less than a year ago now look overly optimistic.  California, the nation's most populous state, and others such as Washington are now considering dramatic cuts in areas where they have already hacked away at spending for years now, including education and healthcare. After the recession  began in 2007, states made mid-year emergency budget changes as revenues cratered. Since all states except Vermont must balance their budgets, they hiked taxes and slashed spending. Worse yet, many reduced revenue forecasts only for collections not to meet the lower projections, which in turn forced more spending cuts.

The Proposed "Pay-Per-Mile" Tax is a Shockingly Dumb Idea - I've written on this blog before that one of the biggest problems with our complex modern industrial society is that a substantial portion of the population is fundamentally incompetent, even in areas in which they are supposedly expert. Case in point is a recent suggestion put forth by so-called transportation "experts" as to how to solve the severe underfunding of the nation's federal highway fund, as reported the other day by CNN: Drivers often forget that they pay for highway construction and maintenance through federal fuel taxes: 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel.  As tax revenue falls, so does the nation's ability to pay for road construction and maintenance. The solution, say many transportation experts, is to replace -- or supplement -- fuel taxes with a per-mile tax on every vehicle in America. Okay, so how exactly would such a harebrained scheme work, anyway? Imagine 254 million vehicles. Some proposals call for using GPS satellites to gather mileage data on each vehicle.

Friday Rant: Yes, Virginia, Our State Will Suffer Most from Defense Spending Cuts - I'm a 20-year resident of the Old Dominion, but I don't expect anyone to play the world's smallest violin for my state upon reading this recent article from Virginia, Hawaii and Alaska may suffer the most economic harm from defense cuts of as much as $1 trillion during the next decade, a Bloomberg Government study shows. Those three states are the most dependent on U.S. military spending, the study found. Virginia, home of the Pentagon and the Norfolk naval base, tops the list with 13.9 percent of its gross domestic product derived from defense spending. Hawaii ranks second, at 13.5 percent, and Alaska is third with 10.7 percent. All other states are in single digits, the study showed. Bloomberg Government examined military spending by state as Congress considers budget cuts that might threaten the economies of states such as Virginia, where the Defense Department spent $56.9 billion in fiscal 2009, the last year for which comprehensive data were available. The spending came in the form of payroll, contracts and grants.

Wash. governor proposes temp sales tax increase - Gov. Chris Gregoire proposed $1.7 billion in cuts to state government Monday but said she wants voters to approve a temporary sales tax increase to prevent some of the more severe reductions, including a shortened school year. Gregoire's plan to address a projected deficit of $1.4 billion also includes reductions in university support and the elimination of medical programs for 55,000 low-income residents. The Democrat, entering her final year in office, suggested up to $835 million in revenue to buy back some of the cuts. She said the priority is a voter-approved temporary half-cent tax increase that would bring in $494 million through 2013. That tax increase would expire in 2015. Gregoire said that under the bill she will present to the Legislature, she wants a special election to vote on the tax to take place in March. The majority of the money raised by the sales tax would go to education to put back into higher education and ensuring the school year isn't shortened. It would also restore money to public safety. "I have seen the ramifications of the cuts," Gregoire said. "I can't live with it." Gregoire said that she believes that if residents know there is a real need, and that if the money will go to specific programs, they will support it. She planned to start touring the state Tuesday to discuss her proposals, with stops in Vancouver, Yakima, Spokane and Seattle.

Jefferson County using capital funds to pay daily expenses-- The manager for bankrupt Jefferson County said the county is spending money meant for building repairs and maintenance on daily operations, a move he called "a recipe for disaster" that will lead to long-term consequences. Tony Petelos told the Birmingham News that the county is trying to stave off closing county departments by using money set aside for capital expenses instead. The county is in the red $40 million because of a defunct occupational tax, which was struck down in 2009. Petelos said the county needs a fix from Alabama lawmakers. The county filed for Chapter 9 bankruptcy earlier this month -- the biggest civic bankruptcy in U.S. history -- though the full impact on the county's 658,000 residents is not yet clear. "We're taking the capital money for daily operations," Petelos told the newspaper. "That's a recipe for disaster two, three, four years down the road when we are not replacing sheriff's cars, when we are not replacing roofs and air conditioners and making major improvements on our capital projects."

Detroit faces state takeover - In Detroit, battle lines are being drawn between the mayor and the city council over ways to keep the Motor City out of bankruptcy and what some fear will be a state financial takeover under a new provision in Michigan law. Since last week, when Mayor Dave Bing offered a tough-love prescription to fix the city’s mounting financial crisis, the backlash has been festering along with a impending reality that cuts will be deep and city services will be further slashed or privatized — if the city is to continue to manage itself out of a dire fiscal hole that could see it broke by summer or even sooner. “If we continue down the same path, we will lose the ability to control our own destiny,” Mr. Bing warned in an urgent speech last week. On Friday, 21 of 26 police officers from Detroit’s Northeastern District cut short their 4-8 p.m. shift in a symbolic “blue flu,” sending a message that they are a force to be reckoned with in any future negotiations, even as the mayor seeks a 10 percent cut in wages and benefits for police and firefighters.

Detroit City Council's plan: Increase income taxes, cut up to 2,300 jobs - From increasing income taxes to laying off more than 500 police officers and firefighters, the Detroit City Council rolled out an ambitious -- and painful -- plan Monday that it hopes will save the city from insolvency and an emergency manager. The plan calls for increasing income taxes for residents from 2.5% to 3% and nonresidents from 1.25% to 1.5%. Besides the income tax hike, the proposals include:

  • • Sharing health department services with a hospital or Wayne County.
  • • Cutting up to 2,300 workers.
  • • Eliminating subsidies to the Detroit Zoo, Detroit Economic Growth Corp., Eastern Market, the Detroit Institute of Arts and the Charles H. Wright Museum of African American History.
  • • Demanding the Detroit Public Schools pay its $15-million electricity bill to the city.
  • The rescue plan is a last-ditch effort to avoid an emergency manager as the city faces the prospect of running out of cash by April to deliver basic services and meet payroll.

Welcome To Austerityville - To get to city hall, you drive up I-75, past the empty Silverdome where the Detroit Lions used to play, and into a nondescript concrete municipal building. The city clerk was laid off a few days ago, but the door to her office hangs open. The mayor, Leon Jukowski, gives me a brief tour of the desks where people no longer work. Cubicles sit empty, little tchotkes and calendars left behind when their owners were laid off.  The unemployment rate in Pontiac is pegged at 25 percent. In 2009, as GM restructured under a government bailout, it shuttered its plant in Pontiac and ceased production on the line of cars named after the city, calling it a “damaged brand.” So what happens to the people that the city lays off? “Some of them go on unemployment,” says Jukowski. “Some of them, like the police, keep their jobs because they merge with the county. Most of them are out on the street.

Harrisburg School District sitting on 'severely high' bond debt - Debt owed by the Harrisburg School District has not captured headlines as the city’s incinerator debt fiasco has. Yet the amount of money the district will pay on construction bonds will dwarf the city’s debt and probably lead to higher real estate taxes, officials said. Bond debt makes up a significant amount of the school district’s annual budget, and it will continue to grow. This year, the district will pay just less than $15 million in bond debt payments, which account for 12 percent of its $124 million 2011-12 budget. In 2009, the district refinanced about $282 million it borrowed in the late 1990s to early 2000s to renovate almost all of the city’s deteriorating schools. By the time the district pays off the borrowing in 2034, it will have paid $588 million on the debt. “We’re going to get to the point where [the district’s] debt payments are going to be severely high, and that is going to have to be reflected in higher real estate taxes,” “The only thing that saves you is a refinancing, but what are they going to save because interest rates already are at historic lows?”

Education with a Twist—An Oliver Twist - Let’s let the newt speak for himself: You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising. I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors?  If the school was failing it wasn’t their fault.  According to Gingrich, it’s the teachers who can’t make the grade.  So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.?  There would be as much pride in this as in cleaning toilets.

Why tuition costs are rising - I’m late to Jim Surowiecki’s column on student loans, but I wanted to respond quantitatively to his theory about productivity growth at universities: Education costs, and student debt, are rising at what seem like unsustainable rates. But this isn’t the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity—they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. The real reason why tuition has been rising so much has nothing to do with Baumol, and everything to do with the government. Page 31 of the report is quite clear: “except for private research institutions,” it says, “tuitions were increasing almost exclusively to replace losses from state revenues or other private revenue sources.” In other words, tuition costs are going up just because state subsidies are going down. Every time there’s a state fiscal crisis, subsidies get cut; once cut, they never get reinstated.

Paying Students To Quit Law School - An unorthodox solution to the problem of too many graduates unable to repay their loans. A crisis is threatening legal education. In constant dollars, tuition at private law schools nearly tripled over the last quarter century. Many a graduate faces a six-figure debt and can’t find a job paying enough to service that debt. Especially troubling are allegations that some schools admit students they know are unlikely to repay their loans—leaving taxpayers (who guarantee some of these loans) holding the bag. Some of these problems are not unique to law schools—they apply to much of American higher education. But law schools are engaged in a specific program of instruction, with a specific goal—passing the bar—as its purpose. Measuring and even predicting this dimension of success is more straightforward. Besides, as law professors, we know law schools best. So we have a few ideas for dramatic reform.

I’m not saying we should do this! - Yet neither is it crazy: China’s Ministry of Education announced this week plans to phase out majors producing unemployable graduates, according to state-run media Xinhua. The government will soon start evaluating college majors by their employment rates, downsizing or cutting those studies in which less than 60% of graduates fail for two consecutive years to find work. The move is meant to solve a problem that has surfaced as the number of China’s university educated have jumped to 8,930 people per every 100,000 in 2010, up nearly 150% from 2000, according to China’s 2010 Census. The surge of college grads, while an accomplishment for the country, has contributed to an overflow of workers whose skillsets don’t match with the needs of the export-led, manufacturing-based economy. One of the targeted sectors might be biology, whose majors are not currently finding good jobs.  But is that the right decision for the future of China? 

Mark Ames: How UC Davis Chancellor Linda Katehi Brought Oppression Back To Greece’s Universities - Yves here. Reader sidelarge raised the issue yesterday in comments, of UC Davis chancellor Linda Katehi’s role in abolition of university asylum in Greece. The story is even uglier than the link he provided suggests. A friend of mine sent me this link claiming that UC Davis chancellor “Chemical” Linda Katehi, whose crackdown on peaceful university students shocked America, played a role in allowing Greece security forces to raid university campuses for the first time since the junta was overthrown in 1974. (H/T: Crooked Timber) I’ve checked this out with our friend in Athens, reporter Kostas Kallergis (who runs the local blog “When The Crisis Hits The Fan”), and he confirmed it–Linda Katehi really is the worst of all possible chancellors imaginable, the worst for us, and the worst for her native Greece. Today, thanks in part to UC Davis chancellor “Chemical” Linda Katehi, Greek university campuses are no longer protected from state security forces. She helped undo her native country’s “university asylum” laws just in time for the latest austerity measures to kick in. Incredibly, Katehi attacked university campus freedom despite the fact that she was once a student at the very center of Greece’s anti-junta, pro-democracy rebellion–although what she was doing there, if anything at all, no one really knows.

How Students Landed on the Front Lines of Class War- The de­lib­er­ate pep­per-spray­ing by cam­pus po­lice of non­vi­o­lent pro­test­ers at UC Davis on Fri­day has pro­voked na­tional out­rage. But the hor­rific in­ci­dent must not cloud the real ques­tion: What led com­fort­able, bright, mid­dle-class stu­dents to join the Oc­cupy protest move­ment against in­come in­equal­ity and big-money pol­i­tics in the first place? The Uni­ver­sity of Cal­i­for­nia sys­tem raised tu­ition by more than 9 per­cent this year, and the Cal­i­for­nia State Uni­ver­sity sys­tem upped tu­ition by 12 per­cent. The UC sys­tem is se­ri­ously con­tem­plat­ing a hu­mon­gous 16 per­cent tu­ition in­crease for fall 2012. This year, for the first time, the amount fam­i­lies pay in UC tu­ition will ex­ceed state con­tri­bu­tions to the uni­ver­sity sys­tem. Uni­ver­sity stu­dents, who face tu­ition hikes and state cuts to pub­lic ed­u­ca­tion, find them­selves vic­tim­ized by the same ne­olib­eral agenda that has cre­ated the cur­rent eco­nomic cri­sis, and which pro­foundly en­dan­gers de­mo­c­ra­tic val­ues. The ideal that Cal­i­for­nia em­braced in its 1960 mas­ter plan for higher ed­u­ca­tion, that it should be in­ex­pen­sive and open to all Cal­i­for­ni­ans, is being jet­ti­soned with­out much de­bate. 

How Colleges Condemn Students to Indebtedness and Constrain Their Life Choices - Behind the horrific images of a UC Davis policeman nonchalantly pepper spraying a peaceful group of seated students is the reason why they’re seated. What’s forced them out of their classrooms and dorms and into tents on the quad? A lot of issues, certainly, as the Occupy movement is taking a stand against many dysfunctional aspects of our society. But as one of the students who was sprayed put it, “The #OWS movement is global, but it’s expressed locally in ways that are relevant to each city. People who are in NYC go to Wall Street. Oakland takes the port. At Davis, we have a university.” University students have a right to be pissed off. Beyond the fact that they’ll be graduating into a world where Wall Street dominates the economy but gives little value back, corporations have more say in our political system than citizens, and neither is held accountable, they’re facing the short-term constraints of gargantuan student debt loads, set to hit a total of $1 trillion this year — more than all credit card debt combined. The graduates of 2010 who had student loans owed an average $25,250; compare that to the average graduate in 1993, who only owed $8,462. Those numbers are daunting, but what do they mean for students’ futures?

Occupy Student Debt Campaign Announces Nationwide Loan Refusal Pledge -- Early Monday afternoon, a group of faculty and student organizers unveiled the Occupy Student Debt campaign from the southeast corner of lower Manhattan's Zuccotti Park. As part of the Occupy Wall Street movement, the national Occupy Student Debt campaign asks that borrowers default on their student loan payments after one million individuals have similarly signed the debtors' pledge. "Since the first days of the Occupy movement, the agony of student debt has been a constant refrain," announced Andrew Ross, a professor at New York University, to a crowd of more than 100 assembled in Zuccotti Park. "We've heard the harrowing personal testimony about the suffering and humiliation of people who believe their debts will be unpayable in their lifetime." Ross, who teaches social and cultural analysis at NYU, helped to unveil the campaign on Monday. He is also an active member of the Occupy Wall Street education and empowerment working group, which is spearheading the student-debt refusal pledge. In addition to asking debtors to stop making their student loan payments after a million signers have made a similar pledge, the campaign hopes to draw attention to the connection between the increasing cost of college and rising student debt loads.

Rhode Island Set to Slash Pensions for Retired, Current State Workers Common Dreams: Rhode Island Gov. Lincoln Chafee is planning to sign a bill this week to slash pensions promised to retired and current state workers. The changes will impact 66,000 active and retired public workers. Local labor leader J. Michael Downey criticized the move saying, “Today our elected officials have unwisely chosen to steal the retirement security of Rhode Island’s public employees." Downey is president of Rhode Island Council 94, American Federation of State, County and Municipal Employees.

Retirement? Goodbye, Golden Years - Retirement seems out of the question for increasing numbers of Americans who are saddled with debt and whose savings evaporated during the recent bust. Today’s workers should expect to labor longer, and companies should expect to employ more older workers.  The numbers supply a vivid picture of America’s graying work force. Between 2007 and 2010, the number of working Americans over 65 years old jumped 16 percent; the number of under-65’s in the labor force shrank. The trend started before the current downturn: the number of Americans over 65 in the labor force increased from 10.8 percent in 1985 to 12.1 percent in 1995 to 15.1 percent in 2005 to 17.4 percent in 2010. Until 2001, most workers age 65 and older had part-time jobs; since 2001, full-time work has been far more common.  Consider the difference between today’s extended work life and the average American work life during the mid-20th century in the midst of what was, in retrospect, a retirement boom. Again, the numbers present a vivid picture: from the ’40s to the ’80s, the percentage of men who were 65 and older in the labor force fell precipitously — from 47 percent in 1949 to 15.6 percent in 1993. By the 1980s, retirement at age 65 was nearly universal for American workers. Today, however, 36.5 percent of 65- to 69-year-old men are still part of America’s labor force. (The number of working women in this demographic is slightly lower.)

Yes, Newt Gingrich Is Truly a Dangerous Clown » Newt Gingrich:The government guarantees that all workers with personal accounts will receive at least as much in retirement as they would under the current Social Security system. If someone with a personal account retires with benefits lower than those offered by the current system, the Treasury will send them a check to make up the difference. Thus, there is a legal government obligation that in a worst case scenario a retiree will be able to enjoy benefits at least as good as they would under th e traditional Social Security system.Pat Garofalo: Gingrich's Latest Social Security Scheme: Privatize The Program Then Bail Out Bad Investors: "As we pointed out when Sen. Rob Portman (R-OH) suggested a similar idea, promising to make investors whole again sets up a huge moral hazard problem. If investors know full well that the government is going to provide them with a minimum benefit, no matter what they do, then the incentive is to make risky investments and hope for a big payoff. After all, why not take the risk if the government has guaranteed that you can’t lose money?

Judge Brett Kavanaugh’s Strange Political Prediction—And Other Recent ACA-Litigation Events - Well, as you all probably know by now, there have been two major developments in the courts within the last two weeks on the litigation challenging the constitutionality of the Patient Protection and Affordable Care Act (the ACA, a.k.a., “Obamacare). On November 8, a three-judge panel of the federal appeals court for Washington, D.C. issued its ruling in a case challenging the constitutionality of the so-called individual mandate requiring everyone who can afford healthcare insurance to purchase it, upon penalty of payment of a regulatory fee. That, of course, is the issue that has gotten almost all of the news media attention, thanks to loud Tea Party/Republican-pol/rightwing-talk-show-personalities cries that the mandate unconstitutionally violates individual liberty and therefore is beyond Congress’s authority under the Constitution’s Commerce Clause. The Commerce Clause gives Congress the power to regulate interstate commerce and, under Supreme Court precedent, pretty much anything that affects interstate commerce. It is the “enumerated power” under which the ACA was enacted. As opposed to, say, the taxing “enumerated” power.

The Supreme Court and Health Care - For decades Americans have been served, in the print media and on television, with sorry vignettes of fellow Americans who have seen their health-insurance premiums increased or lost their insurance coverage altogether because illness struck or were denied coverage because of pre-existing medical conditions. As a result, these Americans may find themselves hounded by bill collectors on behalf of the doctors and hospitals who treated them. One major illness can wipe out their lifetime savings, house included. Sometime in 2012, probably just before its current term ends at the end of June, the Supreme Court will decide whether Americans will just have to live with that problem, or, alternatively, like citizens in virtually any other industrialized country, they will have the right to have this problem lifted off their shoulders. On Nov. 14, the Supreme Court, in legal jargon, granted a writ of certiorari in response to a petition to review a decision by the United States Court of Appeals for the 11th Circuit that had struck down a mandate in the Affordable Care Act. That mandate requires that every person have at least a minimally adequate health insurance policy, with the aid of federal subsidies where needed.Naturally, the justices will be making major health policy.

Will the Supreme Court Overturn Obamacare? - The Supreme Court has reinserted itself in the heart of domestic politics by agreeing to review the Patient Protection and Affordable Care Act (PPACA).  How is the Court likely to rule?  Consider two scenarios. The first scenario relies on a prominent theory of judicial decision-making called the attitudinal model.  It holds that justices are unconstrained policymakers.  To predict and explain Court actions we simply need to figure out the policy implications of the legislation and justices policy preferences.  The vote takes care of itself from that point. In our recently published book, The Constrained Court we use politicians’ positions on Court cases to “bridge” preference estimates making them comparable across Congress and the Supreme Court (see here for more details). Applying this technique to the PPACA we can estimate probability that each justice would vote to overturn the law if ideology were the only factor.  Based on preferences alone, 5 justices, including the “swing” justice Anthony Kennedy, are predicted to vote to overturn the PPACA—as depicted in the top graph below.  In the graph immediately below it, we calculate the probable vote margin. The most likely scenario is a 5-4 decision overturning the PPACA.  Under this scenario, the Court would be a lock to overturn. Goodbye Obamacare.

Immunise or lose benefits, parents told - Parents who do not have their children fully immunised will be stripped of family tax benefits under a scheme announced by the Federal Government.The Government says 11 per cent of five-year-olds are not immunised and has announced a shake-up of the system which will take effect from July 1 next year.Under the changes, families who refuse vaccinations face losing up to $2,100 per child in benefits. Families will need to have their children fully immunised to receive the Family Tax Benefit (FTB) Part A end-of-year supplement. A new immunisation check will be introduced for one-year-olds to supplement the existing immunisation checks at two and five years of age. The FTB supplement, worth $726 per child each year, will now only be paid once a child is fully immunised at these checks.

Peak Life Expectancy? - Yves Smith - This post from MacroBusiness points to a development that has (predictably) gone largely unreported in America, namely, that life expectancy is declining. The article discusses some of the probable causes and implications. It interestingly omits rising income disparity as a culprit. We quoted Michael Prowse on this topic in early 2007:  Those who would deny a link between health and inequality must first grapple with the following paradox. There is a strong relationship between income and health within countries. In any nation you will find that people on high incomes tend to live longer and have fewer chronic illnesses than people on low incomes. Yet, if you look for differences between countries, the relationship between income and health largely disintegrates. Rich Americans, for instance, are healthier on average than poor Americans, as measured by life expectancy. But, although the US is a much richer country than, say, Greece, Americans on average have a lower life expectancy than Greeks. More income, it seems, gives you a health advantage with respect to your fellow citizens, but not with respect to people living in other countries….

Going to seed - Nepali Times - In a USAID press release last month announcing a partnership between the Ministry of Agriculture and Cooperatives and Monsanto on a pilot maize production project in Nepal, we heard the same tired arguments of more nutritious food, increased yields and food security, and the requirement of less chemicals. As elsewhere, these arguments were used to justify the introduction of hybrid seeds and Genetically Modified Organisms (GMO). Throughout the world there is evidence to the contrary. Two years after the introduction of Monsanto seeds in Canada and the United States, for example, yields started to go down between 10-15 per cent. There has been a substantial increase in the use of chemicals resulting in the creation of "super weeds" requiring more highly toxic "super" chemicals, some containing agent orange. Canadian activists say Monsanto uses test plots to introduce GMOs into a country because the dominant gene in the new seeds spread through pollination, contaminating conventional and organic farms. Only four years after the introduction of Monsanto's seeds in Canada, no pure canola seeds and no pure soybean seeds remain.

Why Monsanto? - Nepali Times - A US-government supported pilot project to introduce into Nepal hybrid maize seeds produced by the multinational, Monsanto, has set off alarm bells over its potential harm.  USAID's Nepal Economic, Agriculture, and Trade Activity (NEAT) has got the Department of Agriculture and Monsanto to set up test plots to promote the new seeds in Chitwan, Nawalparasi and Kavre districts.  Nepal only grows half its current annual requirement of 270,000 tons of maize for human and animal consumption, the rest is imported. USAID says the project will help make Nepal self-sufficient and save Rs 200 million in imports. Not everyone is convinced. Activists are worried about Monsanto's history of being a "Trojan horse" to "infiltrate" agriculture in countries around the world and making them dependent on their seeds, agro-chemicals and other inputs. They are also apprehensive about Monsanto's interest in genetically-modified crops and suspect the company will use its test plots to propagate seeds that will contaminate the gene pool of local heirloom seeds.

Is U.S. farm boom sitting on an ethanol bubble? (Reuters) - Grain farmers in the Midwest may want to pinch themselves. In recent years they have been buoyed by a dream scenario. Record high prices. Record high profits. Record high farmland values. Near record production. Farm debts paid off. "Historically agriculture has been asset rich, cash flow poor, profit poor. This time we are asset rich and profit rich. That makes for a very combustible brew," said David Kohl, professor emeritus of agricultural economics at Virginia Tech. "It's a super cycle. It's only happened four times in the past 100 years," Kohl told U.S. agricultural bankers at their annual meeting this month. But can it last? Analysts often cite the rise of China and India as the main driver of the boom, with their hundreds of millions of hungry and wealthier consumers lining up at the table for grain from the United States, the largest food exporter in the world. But the single biggest consumer which has changed the game in farm country in recent years is closer to home: ethanol.

China’s Appetite for Wood Takes a Heavy Toll on Forests - While China’s stunning economic advances have come at significant environmental cost, the boom has been a plus in a few realms. The country is investing avidly in green technologies, such as solar energy and high-tech car batteries. It has also undertaken an ambitious national reforestation program, while cracking down on illegal forest clearing and logging inside its borders. According to the UN Food and Agricultural Organization, forest cover in China, including large areas of timber plantations, increased from 157 million hectares in 1990 to 197 million hectares in 2005. Counter-intuitively, the expansion of Chinese forests has occurred at the same time the country has been developing an immense export industry for In its fervor to secure timber, China is increasingly seen as a predator on the world’s forests.wood and paper products. China is now the “wood workshop for the world,” according to Forest Trends, a Washington, D.C.-based think tank, consuming more than 400 million cubic meters of timber annually to feed both its burgeoning exports and growing domestic demands. Production of paper products has also grown dramatically in China, doubling from 2002 to 2007.

Massive swathes of rainforest threatened by Brazilian bill - A bill before the Brazilian senate could see millions of acres of forest, equal in size to Germany, Italy and Austria combined, destroyed forever if it is approved.  Conservationists are warning that proposed changes to Brazil's Forest Code will exacerbate the problem of deforestation in the Amazon and beyond.  A change in the legislation, which will be voted on next week, will open up vast swathes of the world's biggest rainforest to uses such as cattle ranching and soy production.  Environmental groups, such as the World Wildlife Fund, say that this will not only destroy millions of acres of rainforest, but will also end hopes of replanting many illegally cleared areas.

Why Americans still breathe known hazards decades after ‘clean air’ law - The stumbling, two-decade-old war on hazardous air pollutants — declared on Nov. 15, 1990, the day President George H. W. Bush signed the Clean Air Act amendments into law — has stalled on bureaucratic dawdling, industry resistance, legal maneuvering, limited resources and politics. Untainted air for all Americans — promised by Bush — has proved elusive. As the Center for Public Integrity’s iWatch News and NPR have reported, the pollutants persist in hundreds of communities, the result of regulators’ failure to act on a mandate from Washington and the best consensus from scientists. Internal records show that Clean Air Act violations sometimes languish for years without sufficient scrutiny or enforcement. Ridding the nation’s air of nearly 200 dangerous chemicals has proved anything but easy. “It’s a little bit of a hit-or-miss approach,” said William K. Reilly, who led the U.S. Environmental Protection Agency during the first Bush administration and is now a senior advisor to TPG Capital LP, an international private equity fund. “It sometimes seems like it’s ‘toxic of the moment.’ And it takes a considerable amount of time to effect the removal of a toxic once it’s identified as a target.”

Suffolk Co. NY to hear proposal to ban chemtrails On Dec. 6, New York’s Suffolk County government will hold a public hearing on a proposal to ban aerial spraying of aluminum oxide, barium, sulfur, and other salts into the air over the county without first filing an Environmental Impact Statement with and receiving approval from the county’s Department of Health Services, Division of Environmental Quality. Exempted from the proposed ban are aerosol spraying operations for agriculture, and for lyme disease, Eastern equine encephalitis (EEE), West Nile virus (WNV), and other disease vector control operations. The hearing will be held at the Riverhead Legislative Auditorium, Evans K. Griffing Building, 300 Center Drive in Riverhead, NY at 2:30 pm. If the public is able to convince legislators of the risk from such geoengineering operations, the legislation will then be voted on at the Dec. 20th session. Otherwise, the proposed ban will be tabled indefinitely.

Anticipating The Costs of Drought Induced by Climate Change - I missed this piece by Joe Romm about future Dust Bowls caused by climate change.   Here is a dramatic quote from this subtle thinker; "Most pressingly, what will happen to global food security if dust-bowl conditions become the norm for both food-importing and food- exporting countries? Extreme, widespread droughts will be happening at the same time as sea level rise and salt-water intrusion threaten some of the richest agricultural deltas in the world, such as those of the Nile and the Ganges. Meanwhile, ocean acidification, warming and overfishing may severely deplete the food available from the sea…. Human adaptation to prolonged, extreme drought is difficult or impossible. Historically, the primary adaptation to dust-bowlification has been abandonment; the very word ‘desert’ comes from the Latin desertum for ‘an abandoned place’. During the relatively short-lived US Dust-Bowl era, hundreds of thousands of families fled the region. We need to plan how the world will deal with drought-spurred migrations (see page 447) and steadily growing areas of non- arable land in the heart of densely populated countries and global bread-baskets. Feeding some 9 billion people by mid-century in the face of a rapidly worsening climate may well be the greatest challenge the human race has ever faced."

Let's Fold Vegas - If US cities were poker hands, America's invisible hand would have folded Las Vegas long ago for there is nothing capitalist about gambling.  Aside from being an anti-capitalist theme park (about which, more later), Vegas, as it is affectionately known, competes with Southern California, wherein a large portion of US fruits and vegetables are grown, for Lake Mead's water.  Me, I'd take food over black jack any day. f I were a talk radio host I might authoritatively assert, "we should just shut Vegas down, move the people elsewhere in the country and be done with it- simple, really."  Fortunately (for both you and me) I'm not a talk radio host and thus, on occasion, take a moment to reflect on the practical difficulties of policy proposals. 

AlJazeera: In Pictures: Murderous monsoon - Months of heavy rains have killed hundreds of people and left millions of others homeless and helpless.

Climate Study Finds Mysterious Rise in Erratic Weather - The world isn't just warming, in parts of the planet the weather is becoming more erratic, new research indicates. By looking at measurements of sunlight striking the planet's surface as well as precipitation records, a study has found that in certain places, daily weather is increasingly flip-flopping between sunny and cloudy, and downpours and dry days. It's not yet clear why this is happening.This is the first global climate study to examine variation in day-to-day weather. So far, climate science has focused on extremes — record temperatures or intense storms, for example — or on averages, such as estimates that global temperatures have risen 0.7 degrees Celsius (1.3 degrees Fahrenheit) since the Industrial Revolution. "I think it turns out day-to-day variability is actually important and perhaps more attention should be paid to it," . This is because increases in weather fluctuations have important implications, particularly for plants — which currently pull about 25 percent of the greenhouse gas carbon dioxide emitted by humans out of the air.

How Much Can We Blame on Global Warming? - In the aftermath of hurricane Katrina in 2005, a vigorous debate raged as to whether it was a "normal" natural disaster or a consequence of global warming.  As the Intergovernmental Panel on Climate Change concluded in its most recent assessment report: "warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global average sea level." And as data continue to pile up, the evidence gets ever stronger that human-induced emissions of greenhouse gases are the main cause of the observed warming over the past century. But hurricanes are difficult. Climate models predict that they will become more intense. At the same time, considerable uncertainty remains. We have only about 40 years of reliable observational records, which precludes a clear determination of their variability. Given that different aspects of climate change could act to increase or decrease hurricane activity, whether or not Katrina can be ascribed to global warming is a challenge beset by difficulty. It is not surprising, then, that in the aftermath of Katrina many scientists were reluctant to make definitive statements about its links with climate change. The same has happened after many other extreme weather events such as floods and droughts.

Spiegel: UN Extreme Weather Report Triggers Storm of Protest - In mid-November, the UN's Intergovernmental Panel on Climate Change published a special report on extreme weather events, such as hurricanes, floods and heat waves. But its emphasis on the uncertainty of its predictions has enraged scientists and activists alike, just days before the UN Climage Change Conference in Durban. Storms -- and especially hurricanes, typhoons and cyclones -- are the most interesting weather systems for people dedicated to preventing climate change. Satellite photographs of these swirling storms are seen as a symbol of a world growing progressively warmer -- and of the considerable dangers that lurk in such a world. After years of combing through the data related to climate catastrophes, Pielke has concluded that: "Science cannot detect a clear trend. Some indicators even suggest that the number of hurricanes is more likely to decrease." Indeed, Pielke admits he's given up wondering why environments have ironically chosen hurricanes as their icons for climate change. But, he adds, the public perceives something quite different. "Most of them say: 'Of course there are going to be more hurricanes; that's what you climate researchers told us,'" he says.

Level of Heat-Trapping CO2 Reaches New High, Growth Rate Speeds Up, Methane Levels Are Rising Again - The World Meteorological Organization reported today that: The amount of greenhouse gases in the atmosphere reached a new high in 2010 since pre-industrial time and the rate of increase has accelerated, according to the World Meteorological Organization’s Greenhouse Gas Bulletin….Between 1990 and 2010, according to the report, there was a 29% increase in radiative forcing — the warming effect on our climate system — from greenhouse gases. Carbon dioxide accounted for 80% of this increase. The speed up in the growth rate of CO2 levels is obviously worrisome (although it was predicted by climate science): Between 2009 and 2010, its atmospheric abundance increased by 2.3 parts per million – higher than the average for both the 1990s (1.5 parts per million) and the past decade (2.0 parts per million). For about 10,000 years before the start of the industrial era in the mid-18th century, atmospheric carbon dioxide remained almost constant at around 280 parts per million. We are disrupting at an accelerating pace what had been a very stable climate system for the entirety of human civilization.  Not very bright.

Arctic sea ice loss unprecedented in 1,450 years - The recent loss of sea ice in the Arctic is greater than any natural variation in the past 1½ millennia, a Canadian study shows. Ice and sediment cores Direct information about sea ice coverage can be obtained by counting fossils of sea ice dwellers, such as microorganisms called dinoflagellates. When they die, their bodies become part of the sediment on the sea floor. By analyzing the ice for chemicals such as salt and methane sulfonic acid and comparing it to other data such as sediment cores and tree rings, the researchers were able to reconstruct the amount of sea ice across the Arctic in the past."The recent sea ice decline … appears to be unprecedented," said Christian Zdanowicz, a glaciologist at Natural Resources Canada, who co-led the study and is a co-author of the paper published Wednesday online in Nature. "We kind of have to conclude that there's a strong chance that there's a human influence embedded in that signal." In September, Germany's University of Bremen reported that sea ice had hit a record low, based on data from a Japanese sensor on NASA's Aqua satellite. The U.S. National Snow and Ice Data Center, using a different satellite data set, reported that the sea ice coverage in 2011 was the second-lowest on record, after the record set in 2007.

Sea-level rise may swamp Washington, D.C - Sea-level rise may swamp some Washington D.C., monuments by 2150, a study suggests, unless levees gird the nation's capital. "A (sea) level rise is an inevitable future for Washington, D.C.," says the Risk Analysis journal, adding, "that would impact the city even with a relatively small rise." So, the study analyzes the effects of sea level rise expected under various scenarios used in the 2007 Intergovernmental Panel on Climate Change report, from 2043 to 2150 for the nation's capital. Then the study overlaid the resultant sea-level rise on depth maps of the region, home to the Washington Monument, Lincoln Monument, White House and U.S. Capitol, among other attractions. Depending on the amount of greenhouse gases pumped into the atmosphere by burning fossil fuels, the atmosphere will warm enough to trigger anywhere from a 4-inch sea level rise by 2043, on the low end, to more than 16 feet by 2150, on the high end. "Even using a modest (sea-level rise) of 0.1 m (4 inches), the analysis of the data layers shows a relatively negative impact on the city. A total of 103 properties will be flooded," at a cost of $2.1 billion, says the study. "Above these levels, the numbers become staggering," it says next.

New global warming estimate: Rapidly escalating levels of atmospheric carbon dioxide may produce a slower rate of global warming than some scientists have feared, according to a new study in the prestigious journal Science. The authors of the study stressed that man-made global warming was real and warned that increase in atmospheric carbon dioxide was likely to cause serious damage. But, analysing paleoclimate data, they found the rate of warming was likely to be at the lower end of the projections of the United Nations' Intergovernmental Panel on Climate Change (IPCC). The IPCC found there was a 66 per cent probability that doubling the carbon dioxide in the atmosphere would lead to a temperature rise of between 2 and 4.5 degrees. The new study funded by the US National Science Foundation estimated the warming at this level of emissions was most likely to be 2.3 degrees, with a 66 per cent probability it would be between 1.7 and 2.6 degrees.

Rich Nations 'Give Up' on New Climate Treaty Until 2020 - Governments of the world's richest countries have given up on forging a new treaty on climate change to take effect this decade, with potentially disastrous consequences for the environment through global warming. Ahead of critical talks starting next week, most of the world's leading economies now privately admit that no new global climate agreement will be reached before 2016 at the earliest, and that even if it were negotiated by then, they would stipulate it could not come into force until 2020. The eight-year delay is the worst contemplated by world governments during 20 years of tortuous negotiations on greenhouse gas emissions, and comes despite intensifying warnings from scientists and economists about the rapidly increasing dangers of putting off prompt action. After the Copenhagen climate talks in 2009 ended amid scenes of chaos, governments pledged to try to sign a new treaty in 2012. The date is critical, because next year marks the expiry of the current provisions of the Kyoto protocol, the only legally binding international agreement to limit emissions. The UK, European Union, Japan, US and other rich nations are all now united in opting to put off an agreement and the United Nations also appears to accept this.

U.S. Sets High Bar for Post-2020 Climate Accord, Stern Says - Climate-change deals reached at a United Nations meeting starting this month may be “completely silent” about how to combat global warming after 2020, the U.S. climate envoy said. “It’s not self-evident that you need to talk about that at all,” Todd Stern, President Barack Obama’s lead climate negotiator, told reporters yesterday at a briefing in Arlington, Virginia. While the U.S. isn’t part of the 1997 emissions-cutting Kyoto Protocol, portions of which took effect in 2005 and expire next year, the nation’s view on how to forge a replacement treaty may affect whether the current accord is extended through 2020. UN negotiations on both fronts start Nov. 28 in Durban, South Africa, when more than 190 countries will debate how to proceed after failing in Copenhagen in 2009 to reach a legally binding agreement. Talks have stalled while rich and developing nations try to sort out their differences. Stern has said a binding climate accord “isn’t in the cards” in Durban because big emitters such as China and India won’t commit to it. The U.S. rejected Kyoto because it aligns major economies such as China with smaller developing nations in a group that isn’t required to cut emissions.

Renewable energy becoming cost competitive, IEA says - Renewable energy technology is becoming increasingly cost competitive and growth rates are in line to meet levels required of a sustainable energy future, the International Energy Agency (IEA) said in a report on Wednesday. The report also said subsidies in green energy technologies that were not yet competitive are justified in order to give an incentive to investing into technologies with clear environmental and energy security benefits. The renewable electricity sector has grown rapidly in the past five years and now provides nearly 20 percent of the world’s power generation, the IEA said during the presentation of the report titled Deploying Renewables 2011. The IEA’s report disagreed with claims that renewable energy technologies are only viable through costly subsidies and not able to produce energy reliably to meet demand. “A portfolio of renewable energy (RE) technologies is becoming cost-competitive in an increasingly broad range of circumstances, in some cases providing investment opportunities without the need for specific economic support,” the IEA said, and added that “cost reductions in critical technologies, such as wind and solar, are set to continue.”

Renewable power trumps fossil fuels for first time - Renewable energy is surpassing fossil fuels for the first time in new power-plant investments, shaking off setbacks from the financial crisis and an impasse at the United Nations global warming talks. Electricity from the wind, sun, waves and biomass drew $187 billion last year compared with $157 billion for natural gas, oil and coal, according to calculations by Bloomberg New Energy Finance using the latest data. Accelerating installations of solar- and wind-power plants led to lower equipment prices, making clean energy more competitive with coal."The progress of renewables has been nothing short of remarkable," United Nations Environment Program Executive Secretary Achim Steiner said in an interview. "You have record investment in the midst of an economic and financial crisis." The findings indicate the world is shifting toward consuming more renewable energy even without a global agreement on limiting greenhouse gases. Delegates from more than 190 nations converge in Durban, South Africa, on Nov. 28 to discuss new measures for limiting emissions damaging the climate.

Will Energy Storage Play a Big Role in the Electric Grid? - The good news is that the flywheels are still making money—not enough to keep Beacon in business but enough to potentially pay back the American taxpayer. The flywheels also represent a growing trend in electricity grids worldwide—storage. Sodium sulfur batteries have been used to store electricity from Japan's grid since 2002 and to back up Xcel Energy's wind farms in Minnesota since 2008. Molten salts help a power plant in Sicily store the sun's heat to turn into electricity at night and on cloudy days. Even water pumped uphill at various sites across the U.S. and air compressed into an underground cavern in Alabama, among other places, store electrical energy when it is cheap and give it back when it is expensive. Such storage is considered vital to help intermittent renewable resources, such as the wind and sun, play a bigger role in U.S.—and global—energy supply, but it may be that Beacon's flywheels are simply too expensive to compete with the other technologies on offer. "Flywheels don't typically hold as much energy as batteries," notes Haresh Kamath, strategic program manager at the Electric Power Research Institute's Technology Innovation Program—an industry-funded research group. "But they last a very long time and that makes them attractive in some applications, especially where the system is cycled very often—that is, where it is discharged and charged repeatedly across a short time period."

Can Anything be Done to Avoid the Coming Clean Energy Crisis in the U.S.?  "The clean energy industry in the United States is indeed poised for crisis, as the bulk of the nation's major federal clean energy support programs are now scheduled to expire. The lapse of the Section 1705 DOE Loan Guarantee Program, which provided the now-infamous Solyndra loan guarantee, is just the beginning. Over 2011-2014, the federal government will sunset the Production Tax Credit and the Section 1603 Treasury Grants supporting wind and other renewable electricity sources, the Volumetric Ethanol Excise Tax Credit, and the remaining clean energy investments under the Recovery Act. In total, nearly 70% of federal clean energy policies and programs will expire by 2014, according to a forthcoming report from the Breakthrough Institute. Absent timely action by federal policymakers, the coming mass-expiration of federal clean energy policies and investments virtually guarantees that the boom-times of recent years will give way to an industry bust. In the perilous and challenging journey from basic research to full commercial deployment of nascent energy technologies, several pervasive market barriers require limited but direct public policies to accelerate advanced energy innovation and commercialization. Faced with the collapse of current federal clean energy policies, however imperfect they currently are, private investors will be left largely incapable of picking up the slack on their own.

TheBulletinofAtomicScientists: The myth of renewable energy "Clean." "Green." What do those words mean? When President Obama talks about "clean energy," some people think of "clean coal" and low-carbon nuclear power, while others envision shiny solar panels and wind turbines. And when politicians tout "green jobs," they might just as easily be talking about employment at General Motors as at Greenpeace. "Clean" and "green" are wide open to interpretation and misappropriation; that's why they're so often mentioned in quotation marks. Not so for renewable energy, however. Somehow, people across the entire enviro-political spectrum seem to have reached a tacit, near-unanimous agreement about what renewable means: It's an energy category that includes solar, wind, water, biomass, and geothermal power. As the US Energy Department explains it to kids: "Renewable energy comes from things that won't run out -- wind, water, sunlight, plants, and more. These are things we can reuse over and over again. … Non-renewable energy comes from things that will run out one day -- oil, coal, natural gas, and uranium."

Robert Rapier: The Scientific Challenges To Replacing Oil with Renewables - So, assuming the Peak Oil camp is on to something, what's the likelihood for a disruption-free transition to another energy source that can replace the energy output we currently enjoy from oil? There's no shortage of promising claims from new laboratory experiments, and there is a lot of optimism in political and entrepreneurial circles that renewable, alternative forms of energy (wind, solar, biofuels, etc) may be able to fill the "energy gap" in time. How realistic are these hopes? Not very, says Robert Rapier, energy specialist and Chief Technology Officer of Merica International. When you think about what oil is then you understand why these biofuels companies have a tough time of making it work. I mean, oil is accumulation of millions of years of biomass that has accumulated. Nature has applied the pressure, it’s applied the heat and it has cooked these into very energy-dense hydrocarbons. Now, what we are trying to do in real time is speed all this up. Somebody has to plant the biomass, somebody has to grow the biomass where nature did it in the first place. We have to transport it, we have to bring it into a factory, we have to get it in that form, we have to convert it from biomass into some fuel. We are adding energy and labor inputs all along and then finally we get a fuel out of the back end.

Fukushima: "China Syndrome Is Inevitable" ... "Huge Steam Explosions", or "Nuclear Bomb-Type Explosions" May Occur -  I've repeatedly noted that we may experience a "China syndrome" type of accident at Fukushima. For example, I pointed out in September: Mainichi Dailly News notes: As a radiation meteorology and nuclear safety expert at Kyoto University's Research Reactor Institute, Hiroaki Koide [says]: The nuclear disaster is ongoing. *** At present, I believe that there is a possibility that massive amounts of radioactive materials will be released into the environment again. At the No. 1 reactor, there's a chance that melted fuel has burned through the bottom of the pressure vessel, the containment vessel and the floor of the reactor building, and has sunk into the ground. From there, radioactive materials may be seeping into the ocean and groundwater.

Cold fusion 101 is being offered to MIT students next year.

In Northwest Town, A Local Fight Against Global Coal - Plans are afoot to build giant new coal terminals on the West Coast to ship this lucrative commodity to China. But activists want to stop this, in part because coal produces huge amounts of carbon dioxide when it’s burned. Federal climate policy is silent on this potentially large source of emissions, so the debate is happening at the local level. One fight is taking place over a proposed terminal near Bellingham, Wash. And if you want to get a sense of what the proposed coal terminal there would be like, visit the Westshore Terminal just across the border in Vancouver, British Columbia. Trains a mile-and-a-half long rumble into this port, day and night, snaking through a large building. There, the trains roll onto a device that tips the coal cars over, two at a time, with the ease of a 5-year-old playing with a toy train. Most of the trains haul Canadian coal, but increasingly the trains are arriving from Wyoming and Montana, loaded with coal that will be burned in Asia to make electricity.

Fracking Gas = Climate Crash - For years, governments, industry, and TV ads told us natural gas is the safe bridge fuel while we move away from dirty coal and oil. Cornell University scientist Robert Howarth wondered "Is that true?". When Howarth found no science to back up big claims for the gas industry, he and a team from Cornell went to work. Program includes 27 minute speech by Professor Robert Howarth of Cornell at ASPO USA 2011, November 2nd in Washington D.C. Recorded by Carl Etnier of Equal Time Radio, Vermont. My thanks to ASPO USA for this fine presentation. Then a follow-up interview this week with Robert Howarth, to fill in his hurried climax of the speech - that methane emissions, when calculated over 20 years, using the new higher rate discovered by Drew Shindell - could add up to at least 44% of all greenhouse gas emissions in the United States! We discuss this, and the importance of a 2006 paper by Dr. James Hansen of NASA, on the importance of controlling methane emissions.

Compressed Natural Gas - A Realistic Alternative to Gasoline? - When considering a direction in clean energy, five basic requirements must be satisfied in order to ensure a low-risk and a rapid return on investment. These criteria include:

• Environmentally Clean or Cleaner
• Commercially Available,
• Domestic Resource Base,
• Positive and Immediate Impact on Domestic Economy
• Affordability

While there is a vast array of technologies that claim to support these goals, few technologies can actually meet these requirements, today.  In terms of what renewable energy technologies make the most sense, it must be understood that in the U.S., electric power generation, transportation and industry are the big three contributors of greenhouse-gas emissions with each generating 2.4, 2.0 and 1.4 billion metric tons in 2007, respectively. Of the total energy consumed in the U.S., 40% comes from petroleum products, 23% from coal and 22% from natural gas. Nuclear power (8%), biomass (3%), hydro-electric (3%) and geothermal, solar/PV and wind (1%) plays a minor but conceivable growing role. The Energy Information Administration sites use of natural gas in the U.S. economy includes industrial (35%), electric generation (29%), residential (20%), commercial (13%) and transportation (3%).

The Fracturing of Pennsylvania -  From some views, this diamond-shaped cut of land looks like the hardscrabble farmland it has been since the 18th century, when English and Scottish settlers successfully drove away the members of a Native American village called Annawanna, or “the path of the water.” Arrowheads still line the streambeds. Hickory trees march out along its high, dry ridges. Box elders ring the lower, wetter gullies. The air smells of sweet grass. Cows moo. Horses whinny.  From other vantages, it looks like an American natural-gas field, home to 10 gas wells, a compressor station — which feeds fresh gas into pipelines leading to homes hundreds of miles away — and what was, until late this summer, an open five-acre water-impoundment chemical pond. Trucks rev engines over fresh earth. Backhoes grind stubborn stones. Pipeline snakes beneath clear-cut hillsides. The township sits atop the Marcellus Shale Deposit, one of the largest fields of natural gas1 in the world, a formation that stretches beneath 575 miles of West Virginia, Pennsylvania, Ohio and New York. Shale gas, even its fiercest critics concede, presents an opportunity for the United States to be less dependent on foreign oil2. According to Wood Mackenzie, an energy-consulting firm, the Marcellus formation will supply 6 percent of America’s gas this year, a figure expected to more than double by 2020.

Charts of the Day: Oil vs. Natural Gas Prices; On An Energy-Equivalent Basis Gas is 79% Cheaper vs. Oil - I featured a post yesterday about oil prices vs. natural gas prices with charts from Scott Grannis and Nathan Slaughter, and have two new charts to present above inspired by some charts in the NY Times last February (thanks to Ed Dolan for the link). The top chart compares oil prices ($ per barrels) to natural gas prices back to 1994 for the energy equivalent of one barrel of oil, with natural gas prices converted at the ratio of 5.8 million BTUs per barrel of oil.  The bottom chart shows the percentage price difference between oil and natural gas, on an energy equivalent basis, from January 1994 to November 2011. The bottom chart shows that over the last 18 years, natural gas has been cheaper than oil on an energy-equivalent basis most of the time except for fairly short periods in 1996 (1 month), 2001 (5 months), 2003-2004 (7 months), and 2005 (4 months).  For the last 33 months starting in March 2009, natural gas has been more than 50% cheaper than oil, and in November gas was cheaper by a record 79% ($95 per barrel for oil vs. $19.82 for gas). 

Taking It To The Streets -- Last spring, months before Wall Street was Occupied, civil disobedience of the kind sweeping the Arab world was hard to imagine happening here. But at Middlebury College, in Vermont, Bill McKibben, a scholar-in-residence, was leading a class discussion about Taylor Branch’s trilogy on Martin Luther King, Jr., and he began to wonder if the tactics that had won the civil-rights battle could work in this country again. McKibben, who is an author and an environmental activist (and a former New Yorker staff writer), had been alarmed by a conversation he had had about the proposed Keystone XL oil pipeline with James Hansen, the head of NASA’s Goddard Institute for Space Studies, and one of the country’s foremost climate scientists. If the pipeline was built, it would hasten the extraction of exceptionally dirty crude oil, using huge amounts of water and heat, from the tar sands of Alberta, Canada, which would then be piped across the United States, where it would be refined and burned as fuel, releasing a vast new volume of greenhouse gas into the atmosphere. “What would the effect be on the climate?” McKibben asked. Hansen replied, “Essentially, it’s game over for the planet.”

Keystone XL's demise wouldn't be the end of the world, according to this view - The endless creativity of the market may make Keystone XL unnecessary. That was the unstated yet clear message delivered Tuesday to the New York Energy Forum by Martin Tallett, president of ENSYS, a research firm that worked for both the Department of Energy and the Department of State on TransCanada's Keystone XL application. A final decision on the project, which needs State Dept. approval to cross the border from Canada to the US, has been deferred to 2013 by the Obama Administration. Tallett traversed thousands of miles in showing just how product from the oil sands might make it out of Canada and into the market, even if Keystone XL didn't go through. Another prospect Tallett raised: the Northern Gateway pipeline to bring Canadian crude to that country's west coast for export to Asia also might not go through. But even at that point, there won't be any shortage of ways to get crude to market. "There is a commercial need for XL," Tallett said. "The commitments are there. But it's not essential. The industry won't collapse and keel over and die if it isn't approved." Projects that are only in people's imaginations were discussed. One of the more intriguing: building a pipeline from the oil sands to a Canadian port on Lake Superior, putting the oil on tankers (which would be international trade, so no Jones Act jurisdiction), and accessing what Tallett said would be roughly 2 million b/d of refining capacity on or near the Great Lakes.

Tar Sands Oil Producers Eye California - The Obama Administration’s recent decision to delay the approval process for the controversial Keystone XL pipeline has shifted attention to alternate routes for bringing a glut of tar sands oil in Canada to refineries and ports abroad. Last week, Canadian firms bought up thousands of miles of existing pipeline in the U.S. Midwest, intending to reverse oil flows southward to Gulf Coast refineries – a “workaround” that would get oil flowing in the right direction, but still not enough to accommodate the volume of crude being produced. A second – lesser known -- alternative involves piping tar sands oil westward across Canada to Vancouver, where it would reach West Coast refineries by tanker. California, which up until now has remained out of the fray in the fight over tar sands oil, would be key to such a northern pacific route. “California is the prize,” “It’s where the [Canadian tar sands] industry is going. They have this gigantic reserve of fundamentally dirtier oil that they want to exploit, sitting above the best refining country in the world.” The Golden State is well-positioned to take in tar sands oil, a heavier, lower quality crude that requires intensive processing. Its oil refineries, in the last few years, have undergone upgrades to process heavier crude, and the state’s ports provide an easy gateway to Asia.

Oilsands output apt to triple by 2035, NEB reports - Oilsands production in Canada will likely triple by 2035, making it the overwhelming source of Canadian crude oil and opening doors to additional energy exports, says a new report from the National Energy Board. The NEB says the massive growth in oilsands development, coupled with a moderate increase in Canadian energy demand, means the amount of net crude oil available for export will more than triple over the next 25 years — good news for a federal government eyeing new energy export markets in the Asia-Pacific region. Indeed, unconventional energy production — including development of the Alberta oilsands and shale gas — will emerge as the "dominant source of supply growth" over the next quarter-century, according to the NEB, Canada's energy regulator. As conventional crude production continues to decline in Canada over the next quarter century, oilsands production will triple during that time to 5.1 million barrels per day, from the current 1.7 million, the board predicts. The ramping up of bitumen production will see the oilsands increase its share of Canada's total oil supply to 85 per cent by 2035, up significantly from the current 54 per cent, says the regulator's report.

More Pipelines Needed to Carry Crude to U.S. Gulf - —Plans to reverse the Seaway pipeline may significantly cut the glut of oil inventories in the U.S. interior, but that will only whet the appetite of thirsty Gulf Coast refiners. Experts say more pipelines will be needed along the same route to bring North America's growing oil bounty to where the continent's biggest fuel makers are. But those 400,000 extra daily barrels that the Seaway pipeline is slated to provide will only be a drop in the bucket. Gulf Coast refineries process 7.5 million barrels of oil a day, two-third of which comes from imports, according to the U.S. Energy Information Administration. That's a huge gap for new production from oil fields in North Dakota, West Texas, Colorado and Alberta to fill, and more pipelines will be needed to move all that production, said Sarah Emerson, principal at energy consultancy ESAI Inc. U.S. oil production is expected to grow from to 6.4 million barrels a day by 2016 from 4.2 million barrels a day today, according to data provided by Bentek Energy, a consultancy. And oil producers in western Canada are expected to ratchet up production to 3.5 million barrels a day by 2015 from 2.8 million in 2010, according to the Canadian Association of Petroleum Producers.

Gasoline Prices and Brent WTI Spread - According to Bloomberg, Brent Crude is down to $106.40 per barrel, while WTI is up to $96.77. The spread has been narrowing for over a month, especially following the recent announcement of a partial reversal of the Seaway pipeline to transport crude oil from Cushing, Oklahoma, to the Gulf Coast. If the global economy really slows, oil and gasoline prices will probably fall - and probably offset some of the impact from lower exports. There hasn't been a sharp decline in world oil prices yet. This graphs shows the prices for Brent and WTI over the last few years. Usually the prices track pretty closely, but the "glut" of oil at Cushing pushed down WTI prices relative to Brent. Now the gap is closing (the pipeline is scheduled to be reversed in Q2 2012). And here is a graph of gasoline prices. Gasoline prices have been slowly moving down since peaking in early May as the shown on the graph below. Note: The graph below shows oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices.

Net Oil Imports Only 45.6% of U.S. Consumption, Dependence on Foreign Oil Lowest Since 1995 - The good news is that the United States is at the center of a global energy revolution. Our development of innovative shale-gas technology offers the prospect of a huge bonanza of natural gas (and some oil as well). It's the most positive event in the country's energy outlook in 50 years. Let's celebrate the achievement before looking at what needs to be done to bring it to fruition.This kind of seismic shift in the energy landscape is rare. It could bring us back to the time when the U.S. and its neighbors in the hemisphere were self-sufficient and even a major world source of energy. Energy companies have become exporters, as the U.S. has surpassed Russia as the world's leading gas producer. America's soaring natural-gas production has already helped cut our share of oil consumption met by imports to 47% last year from 60% in 2005, according to the Energy Information Administration. Actually, based on the most recent EIA data through October 2011, net oil imports now account for only 45.6% of U.S. oil consumption, the lowest annual average in 16 years, since the 44.5% share in 1995 (see chart above). 

Implications of the recent rise in oil prices - The price of West Texas Intermediate has risen almost $10 a barrel since the start of September, and briefly bumped back above $100 a barrel this week. Here's why I think that development may not be as worrisome for the U.S. economy as it might sound. The first point to be clear about is what we mean by the price of oil. Two of the most popular benchmarks are West Texas Intermediate, which is a light sweet crude whose price is quoted for delivery in Cushing, Oklahoma, and Brent, which comes from the North Sea. The crudes are similar in terms of quality, and historically traded for a very similar price. But a year ago the two prices began to diverge, differing by as much as $28 a barrel at the beginning of September.  That divergence resulted from a surge in production from Canada and the northern United States, coupled with a lack of transportation infrastructure necessary to move the oil from where it is now being produced to refiners on the U.S. coasts...this week Enbridge announced it had entered into an agreement to pay $1.15 billion to buy out Conoco's interest in the Seaway Pipeline, and further announced its intention to make pump station additions and modifications necessary to use the pipeline to transport oil from Cushing to the coast.

Oil Prices - I wanted to catch up on oil price trends this morning (very quickly).  The above graph shows both WTI and Brent prices.  As I've articulated elsewhere, I believe Brent is the line to focus on as reflecting global trends while WTI is currently influenced materially by regional factors in the US midwest. I continue to be bearish on oil prices - Europe is getting worse rapidly and now appears to be entering outright recession.  It appears likely that there will be some measure of financial contagion to the US (though it's not visible in US economic numbers yet).  Under these circumstances I cannot but believe that oil prices will fall at least somewhat further.  Note that this is a minority opinion.  Reuters reports: Many analysts see the chance of modest falls in oil prices if economic activity in Europe is hit hard by the euro zone debt crisis, but even the lowest forecasts are relatively high.In the most recent Reuters oil price poll, only two of 35 analysts predicted Brent would slip below $90 per barrel next year and the average forecast was that prices would be close to where they are now, around $106 per barrel.  Goldman Sachs, the most accurate oil price forecaster over the last year, now sees Brent at $125 per barrel in 12 months.

America is Entering a New Age of Plenty - Forget Al Gore’s “planet in peril.” Forget also Mr. Obama’s promise that future generations would look back on his nomination as “the day the oceans stopped rising.” Embrace instead the language of tar sands, shale gas, fracking and tight oil. Without quite knowing whether they were new boondoggles or potential game-changers, the debate in Washington until recently largely ignored these escalating supply shocks. Yet together, they have transformed America’s energy outlook. Because of better technology, notably breakthroughs in drilling, the U.S. all of a sudden realizes it is sitting on a century’s worth of gas supply (see chart above of domestic production). When Mr. Obama came to office, the country faced projections of rising natural gas imports from places like Qatar. The same technology has unlocked ever-growing estimates of once inaccessible “tight” oil lurking beneath America’s rocks. In its immediate neighborhood, Alberta’s huge expanse of “tar sands” contains oil reserves that rank Canada second only to Saudi Arabia. In Brazil, recent advances in offshore oil drilling will relegate Venezuela into second place in the region. Without any real input from Washington, windfalls just keep dropping into America’s lap. Welcome to a new age of plenty."

Peak oil gets pepper sprayed - It's hard to keep up these days with claims by oil and gas drillers about how many Saudi Arabias of tar sands oil/shale oil/deepwater oil/hydrofracked gas that North America is now allegedly able to access due to the smarts of petroleum geologists and the tenacity of oilmen. "Because of better technology, notably breakthroughs in drilling, the US all of a sudden realizes it is sitting on a century’s worth of gas supply," writes Edward Luce in the Financial Times. "When Mr Obama came to office, the country faced projections of rising natural gas imports from places like Qatar." But now, if you believe what the industry says, the picture's really brightening up: The same technology has unlocked ever-growing estimates of once inaccessible “tight” oil lurking beneath America’s rocks. In its immediate neighborhood, Alberta’s huge expanse of “tar sands” contains oil reserves that rank Canada second only to Saudi Arabia. In Brazil, recent advances in offshore oil drilling will relegate Venezuela into second place in the region.  Without any real input from Washington, windfalls just keep dropping into America’s lap. Welcome to a new age of plenty. This is nothing we haven't already heard from Daniel Yergin. Or from the American Petroleum Institute. Or from numerous industry front groups in Washington calling on the Obama Administration to get the EPA out of the way and let the drilling begin.

Brazil Officials Criticize Chevron Over Oil Spill - Chevron came under intense scrutiny in Brazil on Friday over an oil spill at an offshore field the company operates, with federal investigators here threatening fines for Chevron and potential prison terms for its officials if they are found guilty of violating environmental contamination laws.  The response to the spill, which Chevron said it was notified of on Nov. 8 and which left an oil sheen near Brazil’s southeast coast, is an important test for the authorities as Brazil moves to tap oil from its large recent offshore discoveries. If Brazil meets its ambitious production goals, it may emerge by the 2020s as the world’s fourth-largest oil producer after Russia, Saudi Arabia and the United States.  While the spill, from an appraisal well in the Campos Basin, is thought to be much smaller than BP’s oil spill last year in the Gulf of Mexico and is said by Chevron to have almost dissipated, it also presents an additional challenge for Chevron in Latin America. In nearby Ecuador, Chevron has faced seething resentment and a protracted legal battle over oil contamination in the country’s rain forest.

Brazil suspends Chevron's drilling rights (Reuters) - Brazil's government suspended Chevron Corp's drilling rights until Chevron clarifies the causes of an offshore oil spill, the latest twist in a political firestorm threatening the U.S. company's role in Brazil's oil bonanza. The decision on Wednesday came as the head of Chevron's Brazilian unit testified before Brazil's Congress, where he apologized for the Nov. 8 spill that leaked about 2,400 barrels of oil into the ocean off the coast of Rio de Janeiro. Brazil's National Petroleum Agency said it decided to halt Chevron's drilling rights after determining there was evidence that the company had been "negligent" in its study of data needed to drill and in contingency planning for abandoning the well in the event of accident. The agency, known as ANP, also rejected a request from Chevron made before the leak to drill wells in the deeper subsalt areas in the Frade field where the spill occurred. The field is located in the oil-rich Campos Basin and is the only block in Brazil where Chevron produces oil as the operator. The Campos Basin is currently the source of more than 80 percent of Brazil's oil output.

The Paris-Berlin-Moscow Axis Back Again- To minimal serious coverage in the media and on the internet, the Nord Stream was inaugurated in Lubmin on Germany’s Baltic Coast on Nov. 8 in the presence of Pres. Medvedev of Russia and the prime ministers of Germany, France, and the Netherlands, plus the director of Gazprom, Russia’s gas exporter, and the European Union’s Energy Commissioner. This is a geopolitical game-changer, unlike all the widely discussed non-events that are not going to happen.What is Nord Stream? Very simply, it is a gas pipeline that has been laid in the Baltic Sea, going from Vyborg near St. Petersburg in Russia to Lubmin near the Polish border in Germany without passing through any other country. From Germany, it can proceed to France, the Netherlands, Denmark, Great Britain, and other eager buyers of Russia’s gas. Nord Stream is an arrangement between private enterprises with the blessing of their respective governments. Russia’s Gazprom owns 51%, two German companies 31%, and 9% each for one French and one Dutch company. The proportional investments (and the potential profits) are all private. The key element in this arrangement is that the pipeline does not pass through Poland or any Baltic state or Belorussia or Ukraine. So, all these countries not only lose whatever transit fees they could charge but cannot use their intermediary location to hold up supplies of gas to western Europe while they negotiate deals with Russia.

For Big Oil, a Cautionary Kazakh Tale - After 11 years and $39 billion of investment, ExxonMobil, Royal Dutch Shell, Total, and their partners have yet to sell a drop of oil from what was once hyped as the biggest discovery in four decades. Centered on a man-made island in the northern Caspian Sea 70 kilometers (44 miles) from Kazakhstan’s coast, the Kashagan project is still 12 months from pumping its “first oil”—$15 billion over budget and eight years behind schedule. The Kazakh government, a partner in the field, now wants the group to commit to an even bigger second phase, a project the companies are undecided on. (Big oil and gas projects are generally done in stages, since it takes decades to fully develop a large field.) “The biggest worry is whether the project can ever be profitable, given the huge cost escalation and delays,” says Julian Lee, a senior analyst for the Centre for Global Energy Studies in London. Julia Nanay, a senior director at PFC Energy, says the first phase should generate profits if current oil prices hold.  Kashagan, which may hold enough oil to supply the world for six months, is a warning to oil companies, which expect to spend $20 trillion through 2035 finding crude in ever more inaccessible places. The partners in the project, which include ConocoPhillips (COP) and ENI (E), underestimated the complexity of drilling in this part of the Caspian.

Kazakhstan Now World's Largest Uranium Miner - Kazakhstan’s international energy image is now that of one of the world’s rising oil exporters, an extraordinary feat given that, two decades ago its hydrocarbon output was beyond insignificant when the USSR collapsed. The vast Central Asian nation, larger than Western Europe,  has now quietly passed another energy milestone. Kazakhstan produces 33 percent of world’s mined uranium, followed by Canada at 18 percent and Australia, with 11 percent of global output. Kazakhstan contains the world's second-largest uranium reserves, estimated at 1.5 million tons. Until two years ago Kazakhstan was the world's No. 3 uranium miner, following Australia and Canada. Together the trio is responsible for about 62 percent of the world's production of mined uranium. According to Kazakhstan’s State Corporation for Atomic Energy, Kazatomprom, during January-September, the country mined 13,957 tons of uranium. To put Kazakhstan’s accomplishment in context, a mere five years ago Kazakhstan produced 5,279 tons of uranium.

Decline in Commodities Is 'Artificial': Jim Rogers - The recent decline in commodity prices has little to do with fundamentals and everything to do with the collapse of brokerage firm MF Global, says renowned investor Jim Rogers, who described the sell-off as artificial. "With MF Global going bankrupt – which was a gigantic commodities firm – there was a lot of artificial forced liquidation of commodities. People have to sell whether they like it or not. It's artificial selling right now," Rogers told CNBC on Wednesday. The CRB Jefferies Index – which serves as a measure of the broad commodities complex – has fallen 4 percent since MF Global declared bankruptcy nearly 4 weeks ago. Agricultural commodities have been the hardest hit, with rice futures falling more than 14 percent and wheat futures down 9 percent in the period. Rogers says the drop isn’t surprising. "This happened before in 2008, when Lehman and AIG went bankrupt, they were both huge in commodities and everybody had to sell," he said, referring to the onset of the global financial crisis in late 2008, when the CRB Index fell by half in a matter of months. Prices have rebounded since, climbing nearly 60 percent from March 2009 to May this year, when the sector took a hit again on concerns over the headwinds facing the global economy.

Big green bills on the sidewalk - A NEW report published on Tuesday by the McKinsey Global Institute and the McKinsey Sustainability and Resource Productivity practice claims we can save as much as $2.9 trillion by extracting and using the world’s resources more productively. About 70% of these savings come from 15 areas—ranging from reducing food waste to improving the energy efficiency of buildings. With carbon dioxide emissions priced at $30 a tonne these saving rises to $3.7 trillion. But these big numbers beg the question—if these savings can be identified by McKinsey, why aren’t businesses, countries and individuals making them? McKinsey preface their report of 130 individual "opportunities" with a Malthusian tract explaining that the flat or falling resource prices of the last century cannot last into the next. Though the world population quadrupled and GDP increased by roughly 20 times in the 20th century, larger resource needs were satisfied by new discoveries and technological advances which made better use of existing supply without driving prices upwards. But the index of commodity prices (at right) shows that this balance and the era of low commodity prices may be well over and the report cites some reasons why the next twenty years don’t look all that bright either.

Goldfinger eats Congo - Greg Palast - I'm hoping that Peter Grossman, a Wall Street star, will pop out of his posh brownstone for a jog or a cup of joe. Then I can jump him. He's on the look-out for me because I'd already jumped his crony, Goldfinger, the man who's making Grossman stunningly rich. Grossman's riches, nearly $100 million for his firm, FG Management, come from the Congo. I was just there in Congo, two days before this stake-out, at a cholera quarantine center in the capital, Kinshasa. Besides lots of cholera, Congo has lots of cobalt. Grossman has, through a crazy legal loophole in British law, waylaid a payment of $80 million to the African government for a shipment of cobalt from a government-owned mine. Grossman is a "vulture," the name Wall Street gives, with an affectionate smile, to those who somehow can get their hands on old, forgotten debts of desperately poor nations––Congo, Zambia, Peru, and Liberia are cases I've investigated––which they pick up for pennies on the dollar of face value.

Alberta now projecting $3.1 billion deficit -- After a rosy spring for provincial finances, weakening resource revenue and poor investment income during the summer have combined to put the province further in the red. Delivering its second-quarter fiscal update on Monday, the government is projecting a $3.1-billion deficit at the end of its 2011-12 fiscal year. While that’s still ahead of initial budget estimates of a $3.4-billion deficit, it’s considerably worse than the $1.3-billion deficit predicted after the first quarter than ended June 30. One main reason for the change is a decline in resource revenue. Conventional oil royalties are now projected to be $462 million less than they were at the end of the first-quarter. This due to a drop in oil prices and a less favourable exchange rate with the U.S. dollar. Bitumen royalties are expected to be nearly $1 billion lower than the first-quarter estimates, due to higher operating costs that has led to lower-than-expected production in the oilsands.

Afghanistan will need $7 billion a year over next decade: WB - Afghanistan is likely to need around $7 billion a year from the international community to help pay its security and other bills long after foreign troops leave, even if two large mines start production as planned, the World Bank said on Tuesday. That annual spending, projected for the decade to 2021, does not include the cost of thousands of foreign troops expected to stay in Afghanistan to support and train Afghan forces after 2014, the deadline for NATO-led combat soldiers to return home.

The Future is Gray - Years ago I got involved with financing a Titanium Dioxide plant in Brazil. I’ve had an eye on this commodity ever since. What I find interesting about TiO2 (“TD”) is that everything that you look at that is white has this stuff in it. From pills to food to paper to paint, if it’s white, it’s TD. Demand for this stuff has been on a tear; rising at ~20% a year. World consumption is 2 pounds of ‘white’ per person. That’s the average for all 7 billion of us. The western countries consume about 8 pounds per person. China is just up to 1 pound. That’s where the demand is coming from. (The US uses the most TD, about 9 pounds per person) Prices are going through the roof; up 38% this year. The raw material, rutile, has seen its price rise by a whopping 77%. Demand is projected to increase another 50% in 2012 (Link). The price has nowhere to go but up (Blame China for everything). There are some similarities between the TD story and RE minerals. Neither of them are rare (there’s 100Xs more titanium on the earth than copper). The problem is that making the stuff (REs or TiO2) is a nasty process (both have to be boiled in sulfuric acid). Is this a big deal? Here's another example of a “scarce” commodity that everyone uses. It’s another one that China is driving the supply and the pricing. I don’t think it will move the needle much on the broader inflation numbers. As the price keeps rising they will just put less TD in things.

Trends in Chinese Petroleum Production, Consumption and Imports -  In this post, I summarize my export land model analysis of China using the published petroleum production and consumption data from the BP Statistical Review for 2011. China’s enormous economic expansion over the past 15 to 20 years has been fueled by a large increase in petroleum consumption, making China increasingly dependent upon the global export pool. This trend is likely to increase in the future as China becomes more and more dependent on petroleum imports until the global export pool declines. My approach to data analysis is the same as what I have done in the past in my multi-part global regional survey. In that survey, China was part of, and dominated the numbers and trends, for the Asia-Pacific region, accounting for roughly half of both production and consumption. (In retrospect, I regret not having separated out China from the rest of the Asia-Pacific in that analysis—but may be next time next time.)

Honest Jian's Used Cars: China's Next Auto Market - In 2009, China ended the United States nearly century-long reign as the world's largest auto market. But, we probably should add a qualifier--that's the new car market. Also, although the Chinese make some nifty products, let's just say that mostly homegrown products may not yet have similar stature with Western brands. In cultural anthropology, there is a phenomenon of "colonial mentality" that may be at work of colonized countries displaying an inferiority complex towards the products or even the culture of the former colonizer. The reasoning is that they must be superior since they managed to occupy us for some time.  Given the long-term memory of many Chinese compared to the zero-planning horizon of most Americans for example, this history may also play out in consumer attitudes towards the superiority of foreign brands to domestic makes. Accordingly, the WSJ has an interesting new article on how this longstanding preference for foreign brands may be advantageous for the same at this point in time. You see, the Chinese used car (pre-owned, if you prefer that euphemism) market is dwarfed by the new car one. Foreign brands introducing used car sales with official warranties and other guarantees may be fuelling a trend of "colonial mentality" in motion by eating into Chinese brand new automobile sales by offering more car for less via used vehicles. That is, the "lemon" issue is solved by clever marketing via backing from established foreign brands which command a premium in the PRC:

Real money in China; Money illusion in America - Are the Chinese prone to money illusion? This column uses a unique Chinese dataset and finds that, unlike their American counterparts, Chinese people are more likely to base decisions on the real value and not be fooled by inflation.

Obama-Wen talks overshadowed by disputes - Wen Jiabao, the Chinese premier, held talks with Barack Obama, US president, on Saturday on the sidelines of a regional summit which raised disputes in the South China Sea and contentious plans for a US military base in Australia. Officials said Washington’s announcement that it would station 2,500 marines in Australia, along with tensions in the South China Sea, were the major themes discussed behind closed doors by 18 heads of state at the East Asia Summit which included China Russia and the US for the first time.

Proposed sale of Taiwan raises no laughs - A recent New York Times op-ed article by Paul Kane, a former international security fellow at the Harvard Kennedy School, has hit a raw nerve. Kane called on United States President Barack Obama to end military support for Taiwan in exchange for China forgiving the US$1.14 trillion of American debt it currently holds. "With a single bold act, President Obama could correct the country's course, help assure his re-election, and preserve our children's future," Kane baffled his readers. As absurd the plea appears, and although the author has since declared his op-ed a satire, it seems the idea was not as fanciful as it seemed. In recent months, the pros of abandoning Taiwan for the sake of better US-China relations have been increasingly and frankly addressed in US academic circles, while moves by the Obama administration have also taken that direction. The actual "selling" of long-time ally Taiwan to China remains a bizarre thought, but a different wind has been blowing from Washington towards Taipei recently.

What next for the WTO: Challenges for the WTO's eighth ministerial conference - Next month the World Trade Organisation holds its eighth ministerial conference. This column by a veteran of trade negotiations sets the scene – documenting the WTO’s achievements and the challenges ahead.

China keen to avoid domestic backlash -  Ask anyone standing around in the crowded corridors of Beijing’s Affiliated Children’s Hospital whether they think China should contribute to a bail-out for debt-ridden European countries and they will respond with scornful disbelief. Here in the dirty, overcrowded wards, visitors can glimpse why there is little enthusiasm in this country for bailing out rich Europeans while most Chinese lack access to even basic social services.  With the Eurozone debt crisis spreading from Greece to Italy, Europe’s embattled leaders have been looking to China and other emerging markets to contribute to a bail-out fund they hope will stop the contagion. On the surface, contributing to this fund makes sense for China.  Europe is China’s biggest trade partner and the country has $3,200bn in foreign exchange reserves that it wants to diversify away from the US dollar. Why not help out and buy a few extra bonds from the Europeans to help them through their hour of need? But Beijing is confronted by a dilemma not normally associated with one-party autocracies. It has to worry about a backlash in public opinion that could result from rescuing what they perceive to be coddled, lazy Europeans so they can continue retiring early and enjoying the world’s best health and social welfare systems.

HSBC China Manufacturing Gauge Falls Sharply - —A preliminary gauge of China's manufacturing activity dropped surprisingly sharply in November, raising the prospect that Beijing may be forced to ease monetary policy sooner than expected to offset the impact of a slowing global economy. The HSBC China Manufacturing Purchasing Managers' Index slid to 48 in November, marking a contraction in manufacturing activity, compared with a final reading of 51 in October, HSBC Holdings PLC said Wednesday. While not a final reading, Wednesday's figure is the lowest since March 2009.  Initially focused on fighting inflation, China has already taken steps to ease its tightened monetary stance by providing selective aid to sectors of the economy. It has allowed some rural banks to lend a higher percentage of their deposits and has announced changes in the tax system designed as targeted easing. But inflation has been in retreat, and the preliminary gauge of manufacturing—if confirmed in the final number and in the government's own measurement—could force Beijing to shift its stance more dramatically.

Chinese Manufacturing Contracts, Gauge Hits 32-Month Low; Soft-Landing Nonsense; Global Recession is Here - The global recession has begun. Europe is undeniably in recession, the US is on the way, and Chinese manufacturing just entered contraction. MarketWatch reports China manufacturing gauge shows contraction HSBC’s preliminary China manufacturing survey fell to a 32-month low in November, well below analysts’ forecasts, with the reading signaling the sector is now contracting. The Purchasing Managers Index printed at 48.0 on a 100 point scale, reversing from a mildly expansionary reading of 51.0 in October, HSBC reported Wednesday. Consensus forecasts for had called for a 50.1 result, just above the 50 level that separates expansion from contraction, according to CNBC.  “As inflation is likely to decelerate at a faster-than-expected pace, it will leave more room for Beijing to step up selective easing measures, which should gradually filter through to keep China on track for a soft landing,” HSBC economist Hongbin Qu said in comments accompanying the flash PMI release.  Everyone is looking for the Fed, the ECB, and the Chinese Central Bank to steer the global economy to the proverbial "soft-landing". Yet the fact remains, trillions of dollars have been spent already, hoping to forestall another recession.

Economic Trouble in the West Shows Signs of Catching Up With Asia - Asia’s ability to stay resilient amid the West’s economic troubles is slowly waning.  For much of this year, the economies of the Asia-Pacific region appeared to be blissfully isolated from the turmoil in other parts of the world. Asian stock markets fell along with those in the rest of the world, but the region’s economies continued to power ahead. Within the last few weeks, however, cracks have emerged in the region’s mighty economies, and analysts and policy makers have become more concerned about the painful disruption that could spill into Asia as the situation in Europe continues to deteriorate and the United States’ growth remains subdued.  Exports from Asia have been softening for months as demand in Europe, in particular, has slowed. Although many countries depend less on exports than they once did, the sector remains crucial for economies like those of Taiwan and South Korea and for the small, open economies of Hong Kong and Singapore, economists say.  The spreading economic troubles were underscored Wednesday when a closely watched gauge showed Chinese manufacturing contracting. The reading, published by HSBC, dropped from 51 in October to 48 in November, the lowest level in nearly three years and much lower than economists had expected. A reading of 50 is the line between expansion and contraction.

China vice premier sees chronic global recession - A long-term global recession is certain to happen and China must focus on domestic problems, Chinese Vice Premier Wang Qishan has said. "The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend. Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy, and Beijing's worry about a worsening global environment could translate into an impetus for pro-growth policies at home.

Japan Exports Fall as China Sees Prolonged World Slump: Economy -- Japanese exports dropped more than forecast in October, Singapore said its growth may slow to 1 percent next year and China signaled the global economy faces an extended slide. The reports may raise pressure on policy makers in export- reliant Asia to implement further stimulus measures. A record of the Bank of Japan's Oct. 27 meeting today showed one board member favored adding 10 trillion yen ($130 billion) in asset purchases, and Chinese Vice Premier Wang Qishan said his nation must adopt more "forward looking" and flexible monetary policy. "Things are going to get worse before they get better," "Export growth will slow across Asia and we may see financial shocks coming through. Asian policy makers are going to become stimulatory all over again." Japan's finance ministry reported today that shipments abroad fell 3.7 percent in October from a year before, the first drop in three months and an indication the nation's rebound from the record March earthquake will slow. Singapore's trade ministry said the nation's gross domestic product may rise 1 percent to 3 percent in 2012, after a 5 percent gain this year, in a projection that didn't incorporate a European recession.

Japan’s Former Finance Chief Says Nation May Be Next Europe - Japan risks falling into a similar sovereign-debt crisis as Europe if it doesn’t get the world’s “worst” public debt situation in order, a former finance minister said. “What’s happening in Europe could take place someday in Japan,” Hirohisa Fujii, chairman of the ruling Democratic Party of Japan’s tax commission, said at the Foreign Correspondents’ Club of Japan in Tokyo today. “Politicians must understand Japan has the world’s worst debt situation.” Japan’s public debt is projected to reach 228 percent of gross domestic product in 2013, around double the average forecast for Group of 20 nations, the Organization for Economic Cooperation and Development said in a report released Oct. 31. Vice Finance Minister Fumihiko Igarashi said today the nation would need to eventually raise its sales tax to 17 percent from the current 5 percent to pay for growing welfare costs as the country’s population ages. “A tax rate of 10 percent will be needed for some time, but the social security system can’t be managed unless it becomes about 17 percent,”

IMF Warns on Japanese Debt - The International Monetary Fund warned in a new report that market concerns over fiscal sustainability could trigger a "sudden spike" in Japanese government bond yields that could "quickly" render the nation's debt unsustainable as well as shake the global economy. The fund's Japan Sustainability Report, released on its website Nov. 23, serves as a fresh reminder to Tokyo policy makers that the international community is already worried about fallouts from Japan's potential fiscal problems, after debt problems in some European economies evolved into a continent-wide crisis. Japan's public liabilities amount to roughly twice annual economic output--a ratio worse than any other industrialized economies,' including a turmoil-hit Spain or Italy.

Europe debt crisis poses grave risk to Japan, says Furukawa - THE Japanese government today said it is prepared for any contingencies that may result from the widening sovereign debt crisis in Europe, and is in lockstep with the Bank of Japan in dealing with potential contagion risks. "The recent spread of credit woes to Italy poses a grave risk to the Japanese economy," said economic and fiscal policy minister Motohisa Furukawa in a press conference. "The government and the Bank of Japan share strong concerns and have agreed to work closely with each other."

Japan Consumer Prices Fall on World Slowdown - Japan’s consumer prices fell for the first time since June, casting doubt on central bank forecasts for the world’s third-biggest economy to emerge from more than a decade of deflation. Consumer prices excluding fresh food slid 0.1 percent in October from a year earlier, the statistics bureau said in Tokyo today. Barclays Capital and Morgan Stanley MUFG Securities Co. say declines may persist for two years even as the Bank of Japan forecasts gains of 0.1 percent for the year starting April and 0.5 percent in the following 12 months. Commodity prices are sinking on the risk of another global slump, while a yen trading near postwar highs has cut the cost of imports. As Japan struggles to recover from the March earthquake and tsunami that left about 19,000 people dead or missing, declining prices may weigh on consumer spending and erode company profits. Government bond yields are poised for the biggest weekly gain since January. “It’s highly probable that consumer prices will keep falling at a moderate pace as the effect of oil prices and the strong yen gradually surface,”

S&P may reduce Japanese sovereign debt rating - Standard and Poor's said Japanese Prime Minister Yoshihiko Noda's administration hasn't made progress in tackling the public debt burden, an indication it may be preparing to lower the nation's sovereign grade. "Japan's finances are getting worse and worse every day, every second," Takahira Ogawa, director of sovereign ratings at S&P in Singapore, said in an interview. Asked if that means he's closer to cutting Japan, he said it "may be right in saying that we're closer to a downgrade. But the deterioration has been gradual so far, and it's not like we're going to move today". A reduction in S&P's AA- rating would be a setback for Noda, who took office in September and has pledged to both steady Japan's finances and implement reconstruction from the nation's record earthquake in March. It's unrealistic for Japan to think it can escape the debt woes that have engulfed nations overseas unless it can control its finances, according to Ogawa. While Japan has enjoyed borrowing costs at global lows for its debt, the International Monetary Fund (IMF) said on Wednesday that there's a risk of a "sudden spike" in yields that could make the debt level unsustainable. Developed economies are struggling to retain investor confidence in their bonds after borrowing deepened with the global recession and financial crisis.

GM to assemble China-made autos in Egypt - Wuling, a General Motors Co. joint venture, plans to assemble autos in Egypt from kits made in China, competing in the same markets targeted by Chinese domestic car exporters. GM said Tuesday that production at General Motors Egypt from Chevrolet Move vehicle kits produced by SAIC-GM-Wuling would begin by the third quarter of 2012. Introducing the Chevrolet Move, a van, in Egypt will help expand its market there, while also allowing SAIC-GM-Wuling to increase output and improve its competitiveness. GM Egypt plans to produce about 5,000 Moves a year. GM also sells an imported van, the Chevrolet N200, in Egypt and other African markets. China's auto exports are mainly buses, trucks and knockdown kits for assembly overseas, sold by domestic manufacturers to developing countries. Exports of made-in-China vehicles by foreign joint ventures have been limited until recently, largely due to the struggle to keep up with surging local demand.

China to probe US clean energy subsidies - China has launched a trade probe into US subsidies for renewable energy, the latest volley in a quickly escalating trade dispute over clean energy policies between the world’s top two energy users. China’s Ministry of Commerce announced on Friday that it would investigate US government support for clean energy and could file a case with the World Trade Organisation, depending on its findings. The global clean energy sector, a $240bn a year industry, has been facing headwinds this year as supplies of wind turbines and solar panels have outstripped demand in some key markets. Trade tensions have been rising between the US and China ever since the office of the US Trade Representative initiated an investigation into Chinese wind subsidies last year. Trade barriers in clean energy were high on the agenda at the Asia Pacific Economic Cooperation Summit in Hawaii earlier this month, where Apec members agreed in principle to reduce barriers on clean energy goods and services by 2015. The trade probe from Beijing follows a US trade investigation into Chinese solar cells and panels initiated earlier this month. The case could result in penalty tariffs of 50 to 250 per cent on imports of Chinese cells and panels if it concludes that anti-dumping tariffs or countervailing duties are merited.

The Entire Iranian Banking Sector - US Treasury Notes - As part of a series of actions announced by Secretary Geithner and Secretary Clinton to ratchet up pressure on Iran, Treasury yesterday issued a finding under Section 311 of the USA PATRIOT Act that identified Iran as a jurisdiction of “primary money laundering concern” and proposed in a rulemaking process the strengthening of the rules prohibiting Iran from accessing the U.S. financial system. What is most significant about yesterday’s action is that for the first time, Treasury is calling out the entire Iranian banking sector, including the Central Bank of Iran, as posing terrorist financing, proliferation financing, and money laundering risks for the global financial system. We have assembled a thick dossier of evidence detailing Iran’s illicit activities and the threat that Iran’s banking sector poses to the international financial system. Dealing with Iran’s financial sector has become such a serious risk that an action against the entire jurisdiction was necessary.  As Secretary Geithner said, “Any and every financial transaction with Iran poses grave risk of supporting those activities,” and we believe that the best way for the international community to protect itself from that risk is to disassociate from the Iranian banking sector, including the Central Bank of Iran.

Has the Global Banking System Become More Fragile Over Time? The last decade has seen a tremendous transformation in the global financial sector. Globalization, innovations in communications technology and de-regulation have lead to significant growth of financial institutions around the world. These trends had positive economic benefits in the form of increased productivity, increased capital flows, lower borrowing costs, and better price discovery and risk diversification. But the same trends have also lead to greater linkages across financial institutions around the world as well as an increase in exposure of these institutions to common sources of risk.  In a recent paper my co-author Deniz Anginer and I examine whether the global trends described above have led to an increase in co-dependence in default risk of commercial banks around the world. The growing expansion of financial institutions beyond national boundaries over the past decade has resulted in these institutions competing in increasingly similar markets, exposing them to common sources of market and credit risk. During the same period, rapid development of new financial instruments has created new channels of inter-dependency across these institutions. Both increased interconnections and common exposure to risk makes the banking sector more vulnerable to economic, liquidity and information shocks.

Asian powers spurn German debt on EMU chaos - Asian investors and central banks have begun to sell German bonds and pull out of the eurozone altogether for the first time since the debt crisis began, deeming EU leaders incapable of agreeing on any coherent policy.  Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region.  "The question on everybody's mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are there yet," he said.  Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. "I think the level of German debt is worrying. Germany has higher debts than Spain," he said.  "It is comforting to pretend that southerners are lazy and Germans hardworking, but that is not the case," he said, slamming France and Germany for their "disastrous" handling of the crisis.

European Union (video) European Parliament, Strasbourg - 17 November 2011

Budget 'leak' in Berlin sparks complaint by Government - The Irish Times - THE GOVERNMENT has complained to the European Commission over the release in Germany of a document disclosing confidential details about new taxes to be introduced in Ireland over the next two years. In a deeply embarrassing development the document – identifying austerity measures of €3.8 billion in next month’s budget and €3.5 billion in budget 2013 – was made public after being shown to the finance committee of the German Bundestag yesterday. The document, seen by The Irish Times , confirms the Government plans to raise VAT by 2 percentage points to 23 per cent, which would generate €670 million. Next month’s budget would also contain a €100 a year household charge, yielding €160 million, it says. A further €100 million would be raised from a reform of capital gains tax. Turning to budget 2013, to be presented next year, the Government says it plans to broaden the income tax base, restructure motor taxation and increase excise duty. This budget would generate an extra €1.25 billion in tax and cuts of €2.25 billion, according to the proposals, submitted by the Government to the EU-IMF troika.

European Democracies Effectively Dwindle - It appears that people finally understand that the situation in Ireland (and in Greece and Portugal, perhaps Italy as well) is one in which the people have lost sovereignty to the troika. These countries cannot be counted as democracies anymore, since the representatives of the people cannot determine the government budget – the troika can veto anything they want. A recent article in the Irish Times made clear where Irish domestic policy is set now: THE GOVERNMENT has complained to the European Commission over the release in Germany of a document disclosing confidential details about new taxes to be introduced in Ireland over the next two years. In a deeply embarrassing development the document – identifying austerity measures of €3.8 billion in next month’s budget and €3.5 billion in budget 2013 – was made public after being shown to the finance committee of the German Bundestag yesterday. All of this wouldn’t be that bad if at least at the European level we had democracy. However, we haven’t. The European Commission is not a government elected by the representatives people, but by the heads of state of the member countries. The parliament itself is seriously short on rights, like that to of starting a vote of no confidence in order to get rid of the government. Also, there is some serious misrepresentation of different nationalities. The way Europe is administered now, with financial markets pressuring countries until they submit to control of the troika, is leading to a form of government which we haven’t seen in Western Europe for a long time. And this is not a coincidence, since the way things happen could be stopped by relatively easily to implement changes of the rules. It is just that those in power don’t want to change the rules, as the recent ‘reform’ plans on ratings and the equalization of purchasing government bonds with a deadly sin show.

What price the new democracy? Goldman Sachs conquers Europe - The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic. This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

The Complete And Annotated Guide To The European Bank Run (Or The Final Phase Of Goldman's World Domination Plan) - "Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral. Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations. " So begins an article not in some hyperventilating fringe blog, but a cover article in the venerable New York Times titled "Europe Fears a Credit Squeeze as Investors Sell Bond Holdings." Said otherwise, Europe's continental bank run in which virtually, but not quite, all banks are dumping any peripheral exposure with reckless abandon is now on. Granted, considering the epic collapse in bond prices of Italian, French, Austrian, Hungarian, Spanish and Belgian bonds which all hit record wide yields and spreads in the past week, and furthermore following last week's "Sold To You": European Banks Quietly Dumping €300 Billion In Italian Debt" which predicted precisely this outcome, the news is not much of a surprise. However, learning that everyone (with two exceptions) has given up on Europe's financial system should send a shudder through the back of everyone who still is capable of independent thought - because said otherwise, the world's largest economic block is becoming unglued, and its entire financial system is on the edge of a complete meltdown. And just to make sure that various fringe bloggers who warned this would happen over a year ago no longer lead to the hyperventilation of the venerable NYT, below, with the help of Goldman's Jernej Omahan, we bring to our readers the complete annotated and abbreviated beginner's guide to the pan-European bank run.

Blogging the Zombies: Austerity - The zombie ideas I criticized continue to walk the earth and do immense damage. Worse still, the long-buried corpse of an idea discredited ever since the Great Depression have re-emerged. The zombie economics of ‘austerity’ now threatens to turn what is already the worst slump to afflict North American and Europe since 1945 into a new, and global, Great Depression. The central claim of austerity is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity. Just as zombies are grim and distorted versions of their living selves, so the ideology of austerity is a grim and menacing version of the ideology of market liberalism. In the triumphalist 1990s, Thomas Friedman’s metaphor du jour was the ‘Golden Straitjacket’. The idea was that, while governments now had no choice but to adhere to the dictates of market liberalism, their citizens would be richly rewarded when they did so.

Farage: The Euro is a Failure - It looks like UK Independence Party MEP Nigel Farage took an opportunity to speak truth to power in a way that the Occupy protesters can only dream of: (video) Okay, so it's a little over the top. And yet . . . this euro doesn't seem to be working out, does it?  Obviously, I've been skeptical for a long while.  But of course, it was always possible that I was missing something, so I hesitated to make an excessively confident prediction. At this point, though, the roads to salvation seem pretty rocky.  A eurobond might do the trick--but a really credible eurobond, with serious guarantees for large portions of the outstanding sovereign debt, would require a treaty modification that they don't have time to do.

Money in a Post-Apocalyptic Society - A couple of Market Monetarists seem to be suggesting that the ECB should forget about standing as Lender of Last Resort and instead simply focus on a Nominal GDP level target of perhaps 4% or so. There is a part of me that is twisted enough to want them to do this just to see what would happen. Off the cuff I can see a couple of possibilities

Scenario One: The market believes the target and concludes that this means the periphery countries will be able to self-finance. Spreads collapse, the money supply expands rapidly and Europe emerges from its current double-dip in six to nine months.
Scenario Two: The market believes the target, but concludes that the result will be extremely rapid near term real growth and inflation in Germany, with matching stagnation in the periphery. Spreads on sovereign debt continue to expand, there is wide spread default and we enter Post-Apocalyptic Nominalism.
Scenario Three: The market doesn’t believe the target, spreads continue to rise, there is default and we enter Post-Apocalyptic Nominalism.

The Serpent’s Egg hatchlings in Greece’s postmodern Great Depression - It will prove George Papandreou’s ugliest legacy: that his last-minute childish maneuvering to maximise his waning hold on power (while negotiating his eviction from the PM’s job), has brought into the new ‘national unity’ government four self-declared racists (some of whom are neo-Fascists and one a neo-Nazi of some renown). It is also wildly ironic: for Mr Papandreou’s best quality has traditionally been his ardent cosmopolitanism, his demonstrated anti-nationalism, a genuine commitment to minorities and a deep seated intolerance of racism. Alas, such is the lure of power, it seems, that the entry into the new government of one minister and three junior ministers representing LAOS (a small ultra-right wing party) was cynically judged as a smaller price to pay than handing more control of the new regime to Mr Papandreou’s political opponents in the two major parties – his own PASOK and New Democracy, the conservative opposition. To non-Greeks watching breathlessly the swearing into government of the serpent’s egg latest hatchlings, these news from Greece will surely resonate terribly. As they should! For yet again a Great Depression has given fascism another twirl. And while Greece is small and ought to be irrelevant, its past has spawned great perils for the world at large.

Troika back in town - Athens News - The interim government took a first step on Friday towards meeting terms of an international bailout needed to avoid bankruptcy, submitting a budget bill that foresees no new austerity measures next year as long as reforms are enacted. But more importantly, however, was the rift between parties in technocrat Prime Minister Lucas Papademos's unity coalition caused by jockeying for position by the New Democracy party ahead of an election slated for February 19. Papademos must win pledges from the rival parties that they will do what it takes to meet bailout terms or Greece's lenders will withhold an 8bl euro aid tranche Athens needs to dodge default next month, plus longer-term financing later. Samaras said on Thursday said he wanted to win an outright majority in the snap election to reverse the austerity measures he disagrees with. Although publicly committed to coalition, he has distanced himself while still being seen to be taking part for the sake of keeping Greece's creditors on side. On Friday his party repeated an oft-made call to scrap the austerity measures prescribed under the bailout, known as the "Memorandum" in Greece, in favour of pro-growth policies. "The Memorandum needs to be renegotiated. A recipe that doesn't work needs to be changed," 

Samaras Won’t Sign Pledge Committing to EU’s Greek Debt Accord - Antonis Samaras, leader of Greece’s New Democracy Party, won’t sign a document pledging his commitment to the Oct. 26 European Union agreement for the nation, the Athens News Agency reported. Samaras, whose party is a member of the country’s unity government, told officials from the so-called troika of the European Union, the International Monetary Fund and the European Central Bank that he has already taken five actions that show his party’s full commitment to the agreement, the state-run news agency said. These actions, which include a letter to New Democracy’s fellow parties in Europe outlining his commitment to the bailout plan as well as his support for Greece’s 2012 budget, are adequate, the agency cited Samaras as telling troika officials.

Greece Rules Out Fresh Austerity - TIME — Greece predicted Friday that its budget deficit will fall sharply next year and insisted that no fresh austerity measures will be needed to plug a hole in this year's finances. Submitting the 2012 budget, Finance Minister Evangelos Venizelos said the deficit will shrink from an expected 9 percent of gross domestic product this year to 5.4 next year, largely thanks to a debt writedown that is part of Greece's second international bailout agreed on by European leaders last month. Without the bailout, Greece faces bankruptcy and a possible exit from the euro. (See photos of the protests in Greece.) "This budget comes during extremely hard international conditions ... the attack is now focusing on the hard core of the eurozone," the minister said. Venizelos, who kept his job in the new interim coalition government formed last week and led by technocrat Lucas Papademos, said the new debt deal will make the country's national debt "totally sustainable." The deal includes provisions for banks and other private holders of Greek bonds to write off 50 percent of their Greek debt holdings — potentially cutting the country's debt by euro100 billion and reducing the debt-to-GDP ratio to 120 percent by 2020 from an expected 161.7 percent this year . But the details have not yet been worked out, and negotiations have only just begun.

PM heads for Brussels to try to secure cash - Athens News - The prime minister headed to Brussels on Sunday to fight for the aid Athens needs to avoid bankruptcy, even as one of his coalition backers refused to give a written pledge to support reforms and a public sector union geared up for strikes. Meanwhile back in Athens, New Democracy (ND) leader Antonis Samaras, today warned party members to stop their bickering over "non-existent" problems, stressing that he will not tolerate this situation to continue and threatened expulsions. Lucas Papademos must convince the International Monetary Fund (IMF) and the European Union (EU) to give Greece the 8bl euros it needs to avoid a mid-December default, but ND party has refused to meet their most basic demand. Representatives from "troika" (the EU, IMF and European Central Bank) wrapped up initial talks with the conservative party and its partners, Pasok and the rightist Laos party. But during the visit, New Democracy head Antonis Samaras refused to give a written guarantee that he would continue to do whatever it took to meet the terms of the bailout no matter who wins an election tentatively set for February 19.

On Technical Barriers to Leaving the Euro and Learning from Others’ Experience -  When discussion turns to the possibility that some country might leave the euro, much is often made of the technical difficulties of introducing a new currency, especially of the months, even years, of planning that went into launching the euro in the first place. Sample: “Computers will have to be reprogrammed. Vending machines will have to be modified. Payment machines will have to be serviced to prevent motorists from being trapped in subterranean parking garages. Notes and coins will have to be positioned around the country.” (Joshua Chaffin in the Financial Times, quoting a 2007 paper by Barry Eichengreen.) Yes, there would be technical difficulties. Still, lots of countries have switched currencies in the past. Sometimes the process has been planned and orderly, sometimes messy and chaotic. One way or another, the job gets done. Anyone who thinks technical problems pose insurmountable barriers needs to look at the imaginative, pragmatic devices that other countries have used to ease the transition from one currency to another. Here are three lessons from other countries’ experiences  that would be relevant to anyone now making plans to leave the euro.

Chart of the week: Spanish unemployment - Spaniards vote today, with opinion polls pointing to a change of government. Incoming conservative Prime Minister Mariano Rajo faces unsustainably high sovereign bond yields, a depressed economy most likely sliding back into recession and, at 21.5%, the highest unemployment rate in the Eurozone. While the European Commission's autumn economic forecasts, published earlier this week, forecast tepid GDP growth for Spain of 0.7% in 2012, most market economists are more pessimistic. Without further austerity measures, JP Morgan economist Greg Fuzesi expects a decline of -0.7% next year. With further measures, he forecasts GDP to fall by -1.1%. What does this mean for jobs? In a research note published in the 18 November Global Data Watch (forthcoming), Fuzesi estimates what Okun's law - the relationship between GDP growth and unemployment - means for European labour markets. He forecasts that if the Spanish unemployment rate continues to move in line with its historic norm, it may reach a shocking 27% by end-2012. Why so high? First, in Spain, the pace of growth needed to keep unemployment stable was very high at 3%, likely reflecting high immigration and rising labor force participation. The responsiveness of the unemployment rate to growth was also extremely high in Spain at almost one-to-one, likely reflecting a low responsiveness of the workweek to economic conditions and the dual labor market with rapid firing of temporary workers. Due to these two features, the dramatic increase in Spanish unemployment since 2007 has not been that unusual.

Spanish voters oust ruling party:exit polls - Mariano Rajoy’s Popular Party had a commanding lead in Spain’s general elections on Sunday and appeared on its way to a comfortable majority in Parliament, according to media reports. With 43% of the ballots tallied, the Popular Party had 43% of the vote, which would give the conservatives a comfortable parliamentary majority of 185 seats, while Alfredo Pérez Rubalcaba’s Socialist Party had captured 29% of the vote, The Wall Street Journal reported.. Spanish voters were appearing to deal a sharp rebuke to a ruling Socialist Party that has been undermined by borrowing costs that hover near levels that triggered the international bailouts of several fiscally frail euro-zone peers. If the early-return trend holds, the Popular Party would appear to have a large-enough majority to form a new government without minority parties. Projected to win 185 seats, the party needs to secure at least 176 seats to elect a prime minister and pass legislation without help from allies. The election result may also represent the biggest defeat for the Socialists, who have ruled Spain for 21 of the past 29 years, according to the Journal.

Spain election: Rajoy's Popular Party declares victory - Spain's centre-right Popular Party (PP) has won a resounding victory in a parliamentary election dominated by the country's deep debt crisis. With almost all the votes counted, the PP, led by Mariano Rajoy, is assured of a clear majority in the lower chamber. The Socialist Party, which has governed Spain since 2004, has admitted defeat. Mr Rajoy, who is expected to tackle the country's debts amid slow growth and high unemployment, said he was aware of the "magnitude of the task ahead". He told supporters there would be "no miracle" to restore Spain to financial health, and that the country must unite to win back respect in Europe."Forty-six million Spaniards are going to wage a battle against the crisis," said the 56-year-old PP leader. The PP won about 44% of the votes and the Socialists 29% in Sunday's election, according to near-complete official results.

Spain election fails to soothe nervous debt markets - A resounding election victory by Spain's centre-right People's Party failed to calm nervous debt markets on Monday as concern over the deepening euro zone crisis and a lack of concrete proposals meant risk premiums continued to climb. The difference between Spanish and German bond yields rose to 472 basis points in early trade, up by around 28 bps from settlement on Friday and yields on its 10-year paper rose in line with troubled Italy. Spain is the fifth euro zone member to have kicked out its government over its handling of the crisis, after Italy, Greece, Portugal and Ireland, though individual efforts by new governments have done little buoy market sentiment. Italy's new technocrat government is working on austerity measures to balance the budget by 2013, while Ireland last week proposed a 2-percentage-point hike in value-added tax and is reportedly looking at cutting welfare to tame spending. "It's a little bit late in the day to be looking to austerity and certainly nothing we have seen from the Irish government has turned around sentiment significantly in the interim,"

Spanish conservatives win in landslide, promise more austerity…(Reuters) – The opposition People’s Party (PP) won a crushing victory in Spain’s election on Sunday as voters vented their rage on the ruling Socialists for the worst economic crisis in generations. The Socialists conceded a humiliating defeat as official results showed the PP projected to take an absolute majority of 187 seats in the 350-seat lower house, with 78 percent of votes counted. Spaniards voted in a grim mood against a background of soaring unemployment, cuts in public spending and a debt crisis that has put them in the front line of the euro zone’s fight for survival. Further hardship lies ahead, with PP leader Mariano Rajoy committed to bringing in even harsher austerity measures to appease financial markets. “We can choose the sauce they will cook us in, but we’re still going to be cooked,” said civil servant Jose Vasquez, 45, who was among the early voters in the capital Madrid. The Socialists under Prime Minister Jose Luis Rodriguez Zapatero led Spain from boom to bust in seven years in charge of the euro zone’s fourth-largest economy.

Spanish Right's Win Means Plan to Unleash Austerity - Spain's right stormed to its biggest election win ever, unleashing dancing in the street by voters desperate for an end to soaring unemployment and a eurozone debt storm.Mariano Rajoy, the bearded 56-year-old leader of the conservative Popular Party, gave a modest jump for joy as he proclaimed victory. "Forty-six million Spaniards are going to wage a battle against the crisis," he told a sea of cheering supporters from a balcony outside the party headquarters in Madrid. "The work that lies ahead us will not be easy, but I want you to know I am convinced that with the help of everyone we will move forward and Spain will be where we all want it to be -- at the head of Europe." Drivers blared car horns in the capital's streets as the scale of the victory became clear. Voters handed the ruling Socialists their biggest defeat in history, chasing them from seven years in office in which an economic boom went bust and the unemployment rate shot to 21.5 percent. 

Austerity alone can’t save the euro - On Friday, Mario Draghi said “no”. The president of the European Central Bank declared that the eurozone crisis was a crisis in need of a political solution and the ECB would not bail out anybody. To underline the message, the ECB’s governing council had earlier in the day put up a ceiling of €20bn on its weekly bond purchases.  The consequence of these statements and decisions is that the eurozone crisis could well get worse in the short term. There is no political solution in sight. Angela Merkel, the German chancellor, rejects a eurozone bond. The European financial stability facility is too small to handle countries the size of Italy or Spain, let alone both. Even a fully operational, leveraged EFSF would not be in a position to give a “whatever it takes” bond purchasing guarantee.  The consensus view in Brussels and Berlin is that the crisis can be solved by technocratic governments imposing structural reform and austerity. That proposition is, in my view, insane. In any case, it will be tested shortly. Mario Monti, Italy’s new prime minister, is about to introduce a programme of reform and austerity. I wish him luck, but I doubt the bond markets will change their view on the sustainability of Italy’s debt in the absence of outside intervention. We have gone way beyond the point at which this crisis is solvable by standard instruments of economic policy. The survival of the euro will now depend on whether Ms Merkel or Mr Draghi, or both, will blink.

Draghi Isn't Ready For His Closeup - Mario Draghi, the recently installed head of the European Central Bank, is in no mood for monetary salvation. Instead, it's price stability all the way—inflation fighting, in other words. “Gaining credibility is a long and laborious process,” he says. “But losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs.” The credibility to which he refers is the ECB's inflation-fighting credentials. But there are other types of credibility, and some are more pressing than others at certain junctures in history. To wit, the financial crisis that threatens to turn the eurozone into a macro morass. That, says Draghi, is a fiscal issue and one that only politicians can address. The notion of the ECB embracing its inner lender-of-last-resort muse is off the table, at least for now. As for Europe's suffering that has nothing to do with inflation, let them eat cake, is the ECB's effective response. Perhaps someone should explain to Mr. Draghi that the quixotic pursuit of inflation credibility won't mean much if the euro goes the way of the dodo. The currency—the entire edifice of the eurozone—is fighting for its life. Survival is a tricky affair in the wake of debt-deflation blowback. There are no easy solutions, but it's easy to make it worse, and the newly installed ECB chief seems to be moving down that path, and thumbing his nose at the lessons of economic history in the process.

Central Bankers - Stop Dithering. Do Something. - Posen - BOTH the American economy and the global economy are facing a familiar foe: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the United States in the 1930s, or in Japan in the 1990s, every major financial crisis has been followed by premature abandonment — if not reversal — of the stimulus policies that are necessary for sustained recovery. Sadly, the world appears to be repeating this mistake.  The right thing to do right now is for the Federal Reserve and the European Central Bank to engage in further monetary stimulus. Having lowered short-term interest rates, they should buy (or in the case of the Fed, resume buying) significant quantities of government securities to help push down long-term interest rates and encourage investment.  If anything, it is past time for the Fed and its European counterpart to act. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the cutbacks in government spending and the simultaneity of economic problems across the Western world. Sustained high inflation is not a threat in this environment.

Boring Cruel Romantics, by Paul Krugman - There’s a word I keep hearing lately: “technocrat.” Sometimes it’s used as a term of scorn — the creators of the euro, we’re told, were technocrats who failed to take human and cultural factors into account. Sometimes it’s a term of praise: the newly installed prime ministers of Greece and Italy are described as technocrats who will rise above politics and do what needs to be done.  I call foul. I know from technocrats; sometimes I even play one myself. And these people — the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity — aren’t technocrats. They are, instead, deeply impractical romantics.  They are, to be sure, a peculiarly boring breed of romantic, speaking in turgid prose rather than poetry. And the things they demand on behalf of their romantic visions are often cruel, involving huge sacrifices from ordinary workers and families. But the fact remains that those visions are driven by dreams about the way things should be rather than by a cool assessment of the way things really are.  And to save the world economy we must topple these dangerous romantics from their pedestals.

Europe Fears a Credit Squeeze as Investors Sell Bond Holdings - Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral.  Financial institutions are dumping their vast holdings of European government debt and spurning new bond issues by countries like Spain and Italy. And many have decided not to renew short-term loans to European banks, which are needed to finance day-to-day operations.  If this trend continues, it risks creating a vicious cycle of rising borrowing costs, deeper spending cuts and slowing growth, which is hard to get out of, especially as some European banks are having trouble meeting their financing needs.  “It’s a pretty terrible spiral,” said Peter R. Fisher, vice chairman of the asset manager BlackRock and a former senior Treasury official in the Clinton administration.  The pullback — which is increasing almost daily — is driven by worries that some European countries may not be able to fully repay their bond borrowings, which in turn would damage banks that own large amounts of those bonds. It also increases the already rising pressure on the European Central Bank to take more aggressive action.

Buyers Of Last Resort: As Dumping Accelerates, Here Is Who Is Stuck Buying Another €741 Billion In Italian Bonds- Spoiler alert: There will be no surprise "I see dead bondholders"-type ending here. Having suggested precisely what the BTP trading dynamics look like previously, we now get official confirmation. With everyone else dumping Italian bonds in the open market, there are only two parties on the bid side: the ECB, and Italian banks. That's it. The only question is "how much" in order to determine at what point the selling onslaught will overhwhelm both insolvent Italian banks whose Risk Weighted capital will soon become too high forcing them out of the market, as well as drag down Draghi's recently expanded bond buying desk (we would say trading, but that would imply a two way market). Here is Barclays with the full breakdown: "Italy’s government bonds, representing the largest bond market in Europe, or the third largest in the world, have been particularly unstable since the beginning of July. The sheer size of the €1.6trn outstanding stock, of which around €220bn of bonds and €120bn of bills are rolled over every year, begs the questions who will be the buyers going forward. We thus update the breakdown of Italian bond holders which we presented in July (see Who Owns Italy's Government Debt? July 29, 2011), and analysed who has been selling and buying between the beginning of July (when widening started) and end of September (as of the latest available data). ECB has been the main buyer since August 8th, and held 4% of the Italian bond market as of September. Domestic holders, mainly financial institutions (banks) have gradually increased their holdings, taking domestic holding from 55% to 56% of the total market. Foreign investors, consisting of European non-Italian banks and real money investors as well as international asset managers, have been the main seller of BTPs, reducing their holdings from 45% to 39%."

Print or Perish - Europe is again at center stage. At conferences and meetings and in private conversations, it is the topic of the hour. I have thought a lot this week about Europe and its impact, so once again we delve into what is an evolving situation. This time, we look at possible impacts on the markets, as we ponder the questions, “Are we back to 2008?” and “Is there a Lehman in our future?” Last week I attempted to give a short summary of the problems that face Europe. I called it “Where is the ECB Printing Press,” though I could have titled it “Print or Perish.” If you missed it, you can read it at Now let me summarize that letter in one paragraph. Europe has too much sovereign debt, which is on the books of its banks, which have too much debt; and there is a huge trade imbalance between core and peripheral Europe. All three problems must be solved in order to prevent the Eurozone from imploding. And while the debt is the “sore thumb” today, the trade imbalance is the biggest problem. As I outlined in Endgame, it is impossible for a country to balance its government and business deficits while running a trade deficit. This is an accounting identity and is true for all countries at all times. Greece and others are in a monster predicament. No amount of austerity will work until their labor costs drop (for both private and government workers) and their trade deficits are brought into alignment.

EU Paper Offers Options for Euro Bonds - As the euro zone's debt crisis threatens to draw in more victims and a plan agreed to expand the currency's bailout fund looks set to disappoint, the European Union's executive arm will this week float proposals for joint issues of bonds among the currency's 17 governments. Enlarge Image Close.The proposal to end the crisis from the European Commission calls for the euro zone to use its combined strength in the bond markets to replace some or all of the fund-raising currently being done by national governments. The proposals for common bond issues are unlikely to gain traction soon: Germany, the strongest economy in the common currency, remains resolutely opposed to the idea, fearing it would be stuck with the bill for other governments' spendthrift ways. But the commission's discussion document appears designed to trigger debate on one of the few ideas that economists think offers the prospect of ending the crisis. The commission's proposal to create euro bonds reflects how critical is the search for a lasting fix to the euro-zone debt crisis, given the failure of the bloc's temporary patches. Most critically, confidence is waning that the European Financial Stability Facility, the temporary fund set up in the wake of Greece's bailout, will ever achieve the heft needed to reassure investors financing weak euro-zone governments that their lending is safe.

How much time is left on the clock? - ANOTHER Monday, and the crisis in Europe continues to build. Euro-zone governments continue to tumble;  The crisis is beyond the power of individual governments to solve on their own; coordination is key. Which makes one piece of news out of Brussels today seem at least somewhat auspicious. The European Commission has put together a white paper, to be released this week, proposing the creation of euro bonds. It appears that three different options are discussed, moving along the spectrum of shared risk. In those least ambitious version, the combined governments of the euro zone would provide some guarantee for the newly issued bonds of national governments. In the most ambitious scheme, the euro zone would approve individual budgets, which would be financed through euro bonds.  The paper is best understood as just another step forward in the long process of tighter fiscal integration within the euro zone. The problem, of course, is that Europe wouldn't appear to have that much time to put together such a substantial move toward euro-wide risk sharing.

Roubini Global Economics: Italy Is Past The Point Of No Return --Italy is past the point of no return and will be forced into a managed sovereign debt restructuring as early as 2012, research firm Roubini Global Economics warned. RGE noted the recent surge in Italian 10-year government bond yields, which breached 7% for the first time on Nov. 9 since the introduction of the euro. "So far, no euro-zone country has managed to recover market confidence once bond yields have crossed the 7% mark, with Greece, Ireland and Portugal all requesting a financial bailout soon after," it warned in a research note Monday, noting that it is extremely difficult to regain market access once yields have risen this far. RGE cautioned that the size of the financial assistance needed to support Italy combined with the inadequacy of the euro zone's rescue strategy rules out a viable aid package and is likely to force the country into a managed debt restructuring as early as 2012. "We do not expect Italy to be able to react in time to tackle its debt problem with an adequate fiscal consolidation and structural reform plan,"

French bond yield rise risks AAA outlook: Moody's -- Rising French government borrowing costs and an uncertain economic outlook continue to pose a threat to the outlook for France's AAA credit rating, Moody's Investors Service said Monday. "Elevated borrowing costs persisting for an extended period would amplify the fiscal challenge the French government faces amid a deteriorating growth outlook, with negative credit implications," wrote Alexander Kockerbeck, senior credit officer, in the ratings firm's Weekly Credit Outlook. The yield on 10-year French government bonds rose 6 basis points to 3.51%, according to FactSet Research. A basis point is one-hundredth of a percentage point.

France Debt Insurance Costs Pass Record; Credit Wider -- The cost of insuring French debt against default Monday rose above its record close after a major ratings company warned that the country's elevated borrowing costs could aggravate its fiscal situation and weigh on its rating outlook. French credit default swaps were wider along with the rest of the European credit market, which was suffering from continued uncertainty amid the euro-zone sovereign debt crisis. France's five-year CDS--derivatives that function like a default insurance contract for debt--was 12 basis points wider at 234 basis points, above the record closing level of 231 basis points hit last week, according to data- provider Markit. This means it now costs an average of $234,000 a year to insure $10 million of debt issued by the country. While Moody's Investors Service said it doesn't yet see pressure on France's triple-A rating, it noted the country's stable outlook is less safe. Moody's said the outlook for economic growth and the euro-zone debt confidence crisis are "important risk factors" for France, and the comment from the International Monetary Fund that the global economy was slowing substantially didn't help sentiment either.

Why France will be forced out of the eurozone - Why is the eurozone in crisis? The short answer is that the introduction of the euro spurred the emergence of enormous macroeconomic imbalances that were unsustainable, and that the eurozone has proved institutionally ill-equipped to tackle. North European policy-makers have been reluctant to accept this interpretation. For them, the crisis is not one of the eurozone itself, but of individual behaviour within it. If the eurozone is in difficulty, it is because of a few ‘bad apples’ in its ranks. In this interpretation, neither the design of the eurozone nor the behaviour of the ‘virtuous’ in the core were at fault. Ever since the eurozone crisis broke out, the North European interpretation of it has prevailed. It essentially sees the crisis as a morality tale, pitting those who sinned against those who stuck to the path of virtue. The major sins of the periphery were government profligacy and losses of competitiveness. The way out of the crisis, it follows, is straightforward. It is to emulate the virtuous core by consolidating public finances and improving competitiveness (by raising productivity, reducing wages, or both). If the periphery can achieve this, then the eurozone debt crisis can be resolved without an institutional leap forward to fiscal union.

Germany's secret plans to derail a British referendum on the EU - Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose.  Angela Merkel, the German chancellor, is today expected to tell David Cameron that Britain does not need a referendum on EU treaty changes, despite demands from senior Conservatives for more powers to be repatriated to Britain. The leaked memo, written by the German foreign office, discloses radical plans for an intrusive new European body that will be able to take over the economies of beleaguered eurozone countries.  It discloses that the EU’s largest economy is also preparing for other European countries, which are too large to be bailed out, to default on their debts — effectively going bankrupt. It will prompt fears that German plans to deal with the eurozone crisis involve an erosion of national sovereignty that could pave the way for a European “super state” with its own tax and spending plans set in Brussels. Britain would be relegated to a new outer group of EU members who are not in the single currency. Mr Cameron will today travel to Brussels and Berlin for tense negotiations with Mrs Merkel amid growing disagreement between the leaders over how to deal with the eurozone.

Cameron warned his eurozone stance risks forcing two-speed Europe - David Cameron will be warned that he risks creating an unstoppable momentum behind a "two-speed Europe", which would be dominated by France and Germany, if Britain demands too many concessions during the eurozone crisis. In a series of meetings in Berlin and Brussels, the prime minister will be advised that Britain should table modest proposals next year when EU leaders embark on a small treaty revision to underpin the euro.  Merkel warned the prime minister at an emergency European council meeting in Brussels on 23 October that she would reluctantly have to side with France if Britain overplayed its hand in the negotiations. Nicolas Sarkozy, the French president, wants a treaty to be agreed among the 17 members of the eurozone, excluding Britain and the other nine EU members outside the single currency. This would be seen as a major step towards the formalisation of a "two-speed Europe" in which France, Germany and the four other triple A-rated eurozone members would form an inner core. Britain and Denmark, the only two members of the EU with a legal opt-out from the euro, would form the backbone of an outer core.

How much capital do European banks need? - The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.

EU Banks Struggle to Lure Deposits - An intensifying battle for deposits among European banks is putting pressure on the Continent's banking system, threatening to deprive lenders of a key source of funding as the cost of attracting customers rises. Individuals and businesses have pulled billions of euros of deposits out of banks in financially shaky countries such as Spain and Italy in recent months, according to bank disclosures and analyst research. Several large Italian and Spanish banks recently reported double-digit percentage declines in deposits from corporate and other institutional clients, although their overall deposit levels fell more modestly, as lenders hold a greater share of retail deposits...

Europe’s Banks Relying on Money From E.C.B. - Banks clamored for emergency funds from the European Central Bank1 on Tuesday, borrowing the most since mid-2009 in a clear sign of the damage the sovereign debt crisis2 is inflicting on financial institutions.  Lenders took out €247 billion, or $333 billion, in one-week loans, the E.C.B. said, the biggest amount since April 2009. When banks borrow from the E.C.B., it is usually a sign that they cannot get credit on the open market at reasonable rates. The sovereign debt crisis has undermined the flow of funds to banks in the euro3 area by raising doubts about the solvency of institutions with a large exposure to European government debt. In particular, U.S. money market funds have severely cut back lending to European banks in recent months, leading many institutions to turn to the E.C.B.  Compounding the problem, many euro area banks have also had trouble selling bonds as a way to raise money that they can lend to customers, raising the specter of a credit crunch that could amplify an impending economic slowdown. In addition, some banks may fail if they are unable to raise short-term cash.

Disaster Planning: Banks Ponder Euro-Zone Split - A key part of the world's foreign-exchange trading infrastructure is bracing itself for the possibility of a breakup of the euro zone, the latest sign investor concerns about the Continent's debt crisis are on the rise.  CLS Bank International, which operates a platform in which banks settle most of their currency trades, is running "stress tests" to prepare for the possible dissolution of the euro, according to people familiar with the situation.  Some of the 63 banks that co-own CLS are making similar plans. "We always plan for contingencies," said a senior executive at one of the largest currency-dealing banks.

Government Doubles Bank Guarantees - State guarantees to Greek commercial banks are to double from 30 billion to 60 billion euros in order to secure liquidity in the market, Finance Minister Evangelos Venizelos told lawmakers in Athens on Monday. Addressing Parliament’s Financial Affairs Committee, Venizelos said that ensuring the market’s cash flow continues will secure the liquidity of the banking system and safeguard bank deposits. “The Greek banking system is guaranteed with indefinite liquidity and there is no issue with the stability of the system. This is the case for all eurozone countries,” Venizelos said. These guarantees will come from the state to the Bank of Greece for the facilitation of providing credit to the banking system via the Emergency Liquidity Assistance (ELA) mechanism, as well as with the use of other securities. The guarantees will not be recorded in the Greek state’s deficit or public debt figures, the minister said.

Showdown in Greece; EU Gives Deadline on Signatures; Samaras Won't Sign, Sends Letter Instead, Seeks Policy Changes - European officials have had enough of the technocrat leadership in Greece. They have given a week for Antonis Samaras, the leader of New Democracy party, and member of the coalition to sign a document saying he will support the European Union debt plan. He says he will support the plan (with modifications). The EU wants a signature now, with no changes. Other than pigheadedness on behalf of the EU, does a signature even matter? Why? The next government can easily vote to undo whatever this government does. Will Samaras remain in power? Is his signature binding on the next parliament (or even this one)? I will have more questions in a moment but first consider a couple of articles. Ekathimerini reports EU sets deadline for signatures European officials insisted on Tuesday that party leaders in Greece’s coalition government must provide written guarantees expressing their commitment to a new European Union debt plan before a Eurogroup summit next Tuesday to unlock crucial rescue funding. But center-right New Democracy appeared unmoved and the right-wing Popular Orthodox Rally (LAOS) -- the third party in the coalition -- appeared to harden its stance against the country’s creditors.

Samaras won't sign, EPP letter published - As the pressure mounts on the major Greek party leaders to provide written support for the October 26/27 eurozone deal, New Democracy (ND) president Antonis Samaras has reiterated his stance that he will not sign such a statement. ND party spokesman Yiannis Mihelakis stressed on Tuesday that he has nothing further to add on the issue of Samaras' signature over commitments requested by the EC-ECB-IMF 'troika'. Mihelakis added that Samaras has made specific statements saying he backs the October 26 EU summit agreement, adding that no request has been made on behalf of the European Union as regards the ND leader’s signature.  In the letter, Samaras underlines the fact that he supports Prime Minister Lucas Papademos and the targets of fiscal adjustment but notes that “certain policies have to be modified”.

Eurozone Economies: Latitude - The economies of southern and northern Europe make strange bedfellows - SINCE bond investors began to discriminate between the euro-zone economies, pushing yields on Spanish, Irish, Greek, Italian and Portuguese government debt soaring, much of the talk in northern Europe has been of profligate governments in the south. As these indicators show, the euro zone's problems go rather deeper than that. A large chunk of the single-currency area has a chronic competitiveness problem, with a horrible mixture of high unemployment, low productivity and low investment. One unsolved mystery is why all this ought to have some correlation with latitude. Answers to the Bundesbank, please.

Marshall Auerback: The more you deflate, the bigger the debt problem gets (video) Marshall Auerback was on Fox Business last week talking about the European sovereign debt crisis. He said he is very concerned not just about the national solvency problem in the euro zone but also about the debt deflationary policy remedies now being implemented across the whole of the euro zone. He notes grimly, “the more you deflate these economies, the bigger the public debt problem is going to become.” The deflationary impact of fiscal tightening after the deficit ‘Supercommittee’ failure will only begin to hit the United States in a major way beginning in 2012.

An Italian exit scenario - One week ago today, I was running through Italian default scenarios because the policy choices in the sovereign debt crisis have narrowed with most of the risk being on the downside. At the time, I asked “Could Italy unilaterally exit the euro zone and redenominated euro debts at par into a new Lira currency to forestall the default? Perhaps. That is something to consider at a later date. For now, here’s what will happen if Italy defaults.”That later date is now. So let’s get cracking on what would bring about a unilateral Italian exit and how it could be accomplished.  Let me quote something as a jumping off point which applies here that I wrote nearly three years ago about Ireland and what I correctly predicted would be a banking crisis.

Mosler/Pilkington: A Credible Eurozone Exit Plan - The Eurozone has certainly seen better days. The mess – to paraphrase a dodgy Irish politician – is only getting messier. This is all avoidable, of course, and if the European authorities decided to take action and have the ECB backstop the sovereign debt of the periphery the whole crisis would come to an end. But the European authorities, for a variety of reasons, do not seem to want to do this. And even if they did there would be the issue of austerity: would they continue to force ridiculous austerity programs down the throats of the periphery governments? And if so, then for how long? Leaked documents from within the Troika show the austerity programs to be an abject failure and yet European officials continue to consider them the only game in town. So, we can only conclude at this stage that, given that European officials know that austerity programs do not work, they are pursuing them for political rather than economic reasons. So, we contend that the periphery governments should have a credible exit strategy on hand and it is to this that we now turn.

ECB Urged To Set Ceiling For Sovereign Bond Yields -The European Central Bank should impose a ceiling on euro-zone government bond yields to halt the current "run" on some states' sovereign debt, German government adviser Peter Bofinger and investor George Soros wrote in an article published Monday. "We are observing a bond-run: a self-fulfilling crisis of confidence" that endangers the stability of the single currency, Bofinger and Soros wrote in a joint comment piece published on the Financial Times's website. To stop this, the ECB must "impose a ceiling" on the yield of sovereign bonds that are "issued by governments that follow responsible fiscal policies and are not subject to adjustment programs," the pair wrote. The ceiling could be fixed initially at 5% and subsequently lowered as conditions permit, the pair said. To enforce the ceiling, the ECB should stand " ready to buy unlimited amounts" of euro-zone government debt. According to Soros and Bofinger--a member of the German government's council of economic advisers--Italian and Spanish government bonds "would be attractive to long-term investors in the current deflationary environment, at say 4%, as long as the excessive risk is removed by imposing a 5% ceiling" on interest rates. 

Italy banks face funding lockout as bonds trade at junk levels (Reuters) - Yields on bonds issued by Italian banks have reached levels normally indicative of "junk" status, threatening to continue keeping lenders out of wholesale funding markets as billions of euros worth of bonds come due in coming months. Italian lenders are vulnerable not just because of their exposure to rising bad debts in the economic slowdown but also due to their large holdings of government debt -- which the European Banking Authority said must be marked to market. Bonds are referred to as high-yield or "junk" when the issuers are rated below investment-grade -- which is not the case for any listed Italian bank at present, though traders said their bonds were already offering yields which suggested investors saw such ratings as being on the cards. "We are basically trading at 'high-yields' levels," one Milan-based trader said, declining to be named. "The market is very, very thin. But the situation took a turn for the worse in the past week. We saw plenty of sales from German and French investors and no buyers." Traders, who said short maturities were the worst hit, pointed to yields of around 7.8 percent on an Intesa Sanpaolo February 2013 bond and of more than 9 percent on a UniCredit issue with the same maturity .

Can Italy Be Saved? - As the economist Mario Monti’s new government takes office in Italy, much is at stake – for the country, for Europe, and for the global economy. If reforms falter, public finances collapse, and anemic growth persists, Italy’s commitment to the euro will diminish as the perceived costs of membership come to outweigh the benefits. And Italy’s defection from the common currency – unlike that of smaller countries, like Greece – would threaten the eurozone to the core. Italy is a large economy, with annual GDP of more than $2 trillion. Its public debt is 120% of GDP, or roughly $2.4 trillion, which does not include the liabilities of a pension system in need of significant adjustments to reflect an aging population and increased longevity. As a result, Italy has become the world’s third-largest sovereign-debt market. But rising interest rates are causing the debt-service burden to become onerous and politically unsustainable. Furthermore, Italy must refinance €275 billion ($372 billion) of its debt in the next six months, while investors, seeking to reduce their financial exposure to the country, are driving the yield on Italian ten-year bonds to prohibitively high levels – currently above 7%.

Italians want to cut debt, but without personal sacrifice - An AP-GfK poll shows that 93% of Italians consider cutting the country's huge public debt a top priority but few are willing to make personal sacrifices to do so. The poll released Tuesday shows only about a quarter of Italians favor reforming labor laws to make it easier to fire workers or approve of raising the retirement age to 67. Those reforms are considered critical to curbing Italy's public spending and boosting its economic growth. The poll shows that most Italians retain a favorable view of the European Union and 76% think Italy should stay in the 17-nation eurozone. Last week's poll came during the first days of economist Mario Monti's new government, brought in to tame Italy's 1.9 trillion-euro ($2.6 trillion) debt. Market turmoil and loss of confidence in Italy's ability to repay its debts forced Premier Silvio Berlusconi to resign Nov. 12, ending his 17-year domination of Italian politics. Italy's economy is hampered by high payroll costs, low productivity, fat government payrolls, excessive taxes, choking bureaucracy, and an educational system that produces one of the lowest levels of college graduates among rich countries.

Solvency or Liquidity? - As we continue seeing interest rate spreads increasing in the Euro area, we keep asking the question of whether this is a crisis of solvency or liquidity. The fact that interest rates keep increasing makes it more difficult for governments to meet interest payments, and solvency becomes more likely. If default happens we might never find out what type of crisis we had. Were governments insolvent? Or did the high interest rates and lack of funding pushed them into default? And if we cannot tell ex-post, how can we tell ex-ante (now!)? Let me look at some historical facts to understand the potential scenarios these countries are facing. After my previous post on Italy, let me look at Spain today, one of the countries that is also seeing spreads rapidly increasing. The way we normally look at the question of solvency is by asking what type of effort the government needs to do to keep the debt under control. The typical benchmark is to look at the current ratio of government debt to GDP and think of scenarios where this ratio remains constant. In the case of Spain, this ratio is 60-67% measured in gross terms and 48-56% in net terms. The range corresponds to the number for 2010 and the forecast by the end of 2011. Let's just use 65% as the relevant ratio.

The Wages of Economic Ignorance - Politicians are masters at “passing the buck.” Everything good that happens reflects their exceptional talents and efforts; everything bad is caused by someone or something else. Three years after the global economy’s near-collapse, the feeble recovery has already petered out in most developed countries, whose economic inertia will drag down the rest. Pundits decry a “double-dip” recession, but in some countries the first dip never ended. When we ask politicians to explain these deplorable results, they reply in unison: “It’s not our fault.” Recovery, goes the refrain, has been “derailed” by the eurozone crisis. But this is to turn the matter on its head. The eurozone crisis did not derail recovery; it is the result of a lack of recovery. It is the natural, predictable, and (by many) predicted result of the main European countries’ deliberate policy of repressing aggregate demand.  That policy was destined to produce a financial crisis, because it was bound to leave governments and banks with depleted assets and larger debts. Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame.

Barry Eichengreen: Europe's Never Ending Crisis (speech - video)

Banks Ponder Euro-Zone Split - A key part of the world's foreign-exchange trading infrastructure is bracing itself for the possibility of a breakup of the euro zone, the latest sign investor concerns about the Continent's debt crisis are on the rise. CLS Bank International, which operates a platform in which banks settle most of their currency trades, is running "stress tests" to prepare for the possible dissolution of the euro, according to people familiar with the situation.  Some of the 63 banks that co-own CLS are making similar plans. "We always plan for contingencies," said a senior executive at one of the largest currency-dealing banks. New York-based CLS is by far the biggest name in the currency market known to be making preparations for such a scenario. Analysts with Japanese bank Nomura Holdings said Friday that a euro breakup is a "very real risk," while HSBC Holdings analysts told clients on Tuesday that it's "not unimaginable" for countries to leave the euro zone.

EU staff to go on strike - EU staff unions have re-iterated their threat to go on strike after negotiations with the European Commission failed to produce an agreement on a new package of pay and pension changes. “If Sefcovic does not reopen the negotiations, we will go on strike,” said Felix Geradon, secretary-general of the Union Syndicale, the biggest of the eleven within the institutions. Earlier this month, the unions gave the commission a strike notice, giving warning that they are prepared to down tools for one day any time between 23 November and 17 December, a move that would practically shut down the European Commission.

Is Europe set to declare a Chapter 11 in early 2012? - Europe may need to pull a Chapter 11 – a US-style bankruptcy, which would permit a market shutdown and Euro Zone reorganization before reopening for business.The EU desperately needs a break from market pressures in order to allow the political apparatus to really gather its forces and finally move Europe and its debt crisis ahead of the curve. Here we are just a couple of weeks after the feeble attempt to apply an EFSF plaster on the problem and we’re already back to Square One: the EU debt crisis has reached the point at which none of the readily available tools or institutions are sufficient to match the magnitude of the crisis. This dictates the need for an out-of-the-box solution. EU policy makers played the extend and pretend game for as long as they could - but now the writing is on the wall: popular outrage is on the rise and putting increasing pressure on the political process - as we are seeing increased demonstrations and grass-root activity taking over both the political agenda and the media. And markets are now balking as empty promises and now a real lack of funds are seeing bond yields beginning to spike out of control. The self-reinforcing cycle of downgrades and austerity and recession are taking us to the very brink of a full scale Crisis 2.0.

Tracking the euro-zone economy in real time - THE short-term outlook for the world economy seems to hinge on whether a resolution to Europe's debt crisis can be found. A resolution, in turn, will be difficult to come by if the euro zone falls back into recession. If output is shrinking and unemployment rising, then austerity measures are likely to make economic conditions worse while raising very little new revenue. The euro zone is likely to fall ever deeper into a hole. That's an unnerving possibility given the outlook for the euro-zone economy. Growth in the fourth quarter is likely to be contractionary, according to an analysis of recent data points by Now-Casting, which publishes "real-time" economic forecasts. You can see the information that goes into their forecast in the interactive chart below. A negative fourth quarter has been a real possibility since July, but as recently as early October the economy appeared to be moderating. Since then, the outlook has quickly deteriorated thanks, mostly, to bad news from the core. Falling industrial orders in Germany is among the most worrisome signs, as are big declines in manufacturing purchasing manager's indexes, particularly a big drop in Italy.

France's AAA Status in Tatters as Yields Surge -- Investors aren't waiting for Standard & Poor's or Moody's Investors Service to strip France, Europe's second-biggest economy, of its top credit rating. The extra yield demanded to lend to AAA rated France for 10 years was 155 basis points more than the German rate at 9:12 a.m. today. The gap was 200 basis points on Nov. 17, the widest spread since 1990, up from 28 in April. The French 10-year yield was at 3.47 percent, about midway between top-rated Holland and Belgium, which is graded one level lower at Aa1 by Moody's. French borrowing costs are more than a percentage point above the AAA rated U.K. "France isn't trading like a AAA," "The market has made its judgment already." The debt crisis that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain is close to reaching France. Moody's said in a report published yesterday that any persistent increase in borrowing costs would amplify the French government's challenges as economic growth slows.

Austrian banks told to limit lending to the east- Austrian bank supervisors have instructed the country banks to limit future lending in their east European subsidiaries, a further sign of the potential knock-on effects of the euro zone crisis for economies around the world. The restrictions come as Austrian officials seek to defend the country AAA credit rating, amid concerns that the government might have to bail out its banks because of losses in central and eastern Europe, where they are the biggest lenders, and their exposure to Italy. The moves by Austria, which appear to be unilateral, show how even the euro zones strongest economies are feeling the pressure of the sovereign debt crisis.Neighboring Hungary on Monday officially requested precautionary financial help from the International Monetary Fund and the European Union, confirming a U-turn after it shunned further IMF support 18 months ago. The Austrian central bank said in a statement that Erste Group, Raiffeisen Bank International and Bank Austria, owned by UniCredit of Italy, would be prevented from loaning significantly more in CEE countries than what they raise in local deposits. Subsidiaries that are particularly exposed must ensure the ratio of new loans to local refinancing is not more than 110 percent.

Eastern Europe in the gun - The news flow out of Europe is vast and fast at present.  For those who follow my daily posts you may remember last Monday I spoke about  the ways in which European banks are attempting to avoid government control while re-capitalising themselves and how this would have a detrimental effect on Eastern Europe. I note today that the Austrian government  has been given explicit instructions to the country’s banks to limit the amount of credit available to those nations to protect its own ratings: Austrian banks will have to curb new loans in central and eastern Europe, where they are among the biggest lenders, under rules imposed by Austrian authorities seeking to protect the country’s AAA credit rating. Erste Group Bank AG (EBS), Raiffeisen Bank International AG (RBI)and UniCredit SpA (UCG)’s Bank Austria AG will be prevented from loaning significantly more than they raise in local deposits in countries such as Hungary, Romania and Ukraine starting next year, the Austrian central bank said in a statement today. That would limit their ability to fund credit growth with loans from the parent company. This  Hungary is one of the countries mentioned in that article, and they are already in trouble, but for slightly different reasons: Hungary has asked the International Monetary Fund (IMF) and the European Union (EU) for financial assistance. As the eurozone debt crisis has unfolded, official figures showed that the Hungarian governmment’s total debt had risen to 82% of its output, as its currency, the forint, has weakened.

Hungary turns to IMF as stress mounts in Eastern Europe - Hungary has returned cap in hand to the International Monetary Fund after kicking out inspectors last year, becoming the first country in Eastern Europe to succumb to contagion from eurozone debt stress.  Rising bond yields and a weakening forint has forced the country's Fidesz government to swallow its pride and request a "precautionary" credit from both the International Monetary Fund and Europe, reportedly of €4bn (£3.4bn).  The growing likelihood that Hungary's debt will be downgraded has accelerated capital flight, causing two-year debt yields to jump from 5.5pc to 7.5pc since September.  "Hungary is a warning sign," . "It is the country where the risks are most acute in the region, so this is where you would expect to trouble to start. We fear this may spread to Ukraine and the Balkans. Eastern Europe has enormous external financing needs for the banking system. They won't be able to roll over debts if there is a credit freeze in Western Europe." Mr Shearing said Hungary has to raise external finance equal to 18pc of GDP over the next year. The figures are 14pc for Croatia, and 13pc for Bulgaria.  Eastern Europe is dependent on eurozone lenders and their subsidiaries for about 80pc of its banking system. This leaves the region vulnerable to a credit crunch as foreign groups slash loan books – by €2 trillion over 18 months, according to a Deutsche Bank study – to meet the EU's requirement for 9pc core tier 1 capital.

Hungary seeks Aid from EU, IMF—The European Commission said Monday that it has received a formal request from Hungary to receive financial assistance from the European Union and the International Monetary Fund.  "The Commission will examine the authorities' request in close consultation with EU member states and the IMF," the commission, which has antitrust powers in the EU, said in a statement. In a separate statement, International Monetary Fund Managing Director Christine Lagarde also said it has "received a request from the Hungarian authorities for possible financial assistance."  "The authorities have sent a similar request to the European Commission and indicated that they plan to treat as precautionary any IMF and EC support that could be made available." The EU said Hungary didn't quantify its request for possible aid. KBC Bank, however, said a backstop credit line may reach €6 billion ($8.11 billion) to €12 billion over the next 12 months.

IMF is Lender of Last Resort to Sovereigns - Many observers are confused. They cry for the ECB to "man up" and "do what it is supposed to do" and be the lender of last resort. It does have that function for banks, not for sovereigns. The lender of last resort to sovereigns in the IMF. The IMF has been grasping for new facilities to address the current crisis. Today it announced new precautionary and liquidity facilities, providing funds for between six and 24 months. The likely candidates in the euro zone are Italy and Spain, while countries in eastern and central Europe would be other potential candidates. The shorter-term (6-months) could be as much as 5 times the country’s IMF quota, with few conditions. This "Precautionary and Liquidity Line" could also be used for longer periods (12-24 months) and would give a country access to 10 times their IMF quota. This would have more conditions attached and would be subject to IMF reviews.

IMF Revamps Credit Lines to Lure Nations - The Washington-based IMF today said the new instrument, the Precautionary and Liquidity Line, can be tapped by countries with strong economies currently facing short-term liquidity needs. Countries with potential needs can also apply, as they did in the past under the Precautionary Credit Line that the new instrument replaces.  “The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution,” IMF Managing Director Christine Lagarde said in an e-mailed statement. “This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.” The changes, which enable countries that pre-qualify to request IMF funds without having to make as many policy changes as with traditional loans, come as Europe’s crisis threatens to spread to Spain and France. The IMF is co-financing bailouts in Greece, Portugal and Ireland and is preparing to send a team to Italy for an unprecedented audit of the country’s efforts to cut its debt.

IMF Revamps Credit Lines to Lure Nations Facing Shocks -- The International Monetary Fund revamped its credit line program to encourage countries facing outside shocks to turn to the fund with few conditions attached, as European leaders fail to end their debt turmoil. The Washington-based IMF said today the new instrument, the Precautionary and Liquidity Line, can be tapped by countries with strong economies currently facing short-term liquidity needs. Funding available will be capped at a percentage of countries’ contributions to the fund, limiting the role the instrument can play in preventing the debt crisis from spreading in Europe. “The size is too small to be meaningful for Italy and Spain,” said Edwin M. Truman, a former U.S. assistant Treasury secretary who’s now a senior fellow with the Peterson Institute, a private, nonprofit, nonpartisan research organization in Washington. The countries’ economic policies may also prevent them from pre-qualifying for the credit line, he said.

Eurozone debt web: Who owes what to whom? BBC

Belgian chief government negotiator asks to quit - The lead negotiator in Belgium’s drawn-out government formation tendered his resignation on Monday after talks for a 2012 budget ground to a halt, a move which threatened to derail the country’s near 18-month search for a new administration. Elio Di Rupo, leader of the French-speaking Socialists, had attempted to form a government based on a six-party coalition of Dutch and French-speaking Socialists, Liberals and Christian Democrats but there was little common ground on how to make the budget cuts mandated by the European Union. Parties in the debt-heavy country had sought to save 11.3 billion euros and keep the country’s deficit below 2.8 percent of gross domestic product (GDP), in line with EU rules, but could not agree how to divide the deficit reduction between new taxes and savings.

Belgian bond yields jump on renewed political woes - Belgium saw its 10-year government bond yield jump 25 basis points to 5.03% Tuesday, a day after Elio di Rupo, who has been attempting to broker an end to a 17-month impasse that has left the country without a government, offered to resign. The developments don't bode well for Belgium's bond market and could result in pressure for a downgrade on the country's rating, warned strategists at Lloyds Bank in London. Moody's Investors Service in October warned that it may downgrade Belgium's Aa1 rating.

Fitch: French rating at risk if crisis worsens - Fitch Ratings said on Wednesday that France's triple-A credit rating would be at risk if a further intensification of the euro-zone crisis resulted in a much sharper economic downturn in France and a material increase in the risk of contingent liabilities. The ratings company also said that additional consolidation measures are likely to be necessary for France to achieve its 3% of gross domestic product deficit target by 2013, with Fitch projecting the deficit in 2013 to be around 4% of GDP. On the positive side, Fitch said that France's triple-A status is "underpinned by a high-value added and diverse economy, broad and stable tax base and its commitment to deficit reduction and stabilising, and eventually reducing, public debt."

Portugal may need 25 billion euros more in bailout: ex official - Portugal may need a further 20-25 billion euros in rescue funds to finance public companies that have had their access to market funding cut off, a former government official who negotiated the country's bailout earlier this year said on Tuesday. Carlos Pina, who as treasury secretary in the previous Socialist administration was a key official involved in negotiations for Portugal's 78-billion-euro bailout in April, said the loan from the European Union and IMF did not reckon with the closure of markets for public companies. "There is a risk that the 78 billion euros will not be sufficient," Pina told a conference. "There may be a shortfall of 20 to 25 billion euros." The former Socialist government collapsed in March as financing costs soared, forcing it to request a bailout, which was in place by the time a new center-right government took office in June. Some economists have said Portugal may need more money because of large debts at its public companies, which they may struggle to roll over after the euro zone debt crisis started spreading to larger countries like Italy and Spain.

Greece: High Flying Drachma - The worst-case scenario for Greece, should it be unable to secure further bailouts, might be that it would have to live within its means. Presently, spending only the money coming in is considered unbearably brutal. If Greece could only leave the euro, it could install its own printing press, inflating its sorrows away. Any economist will object: it’s complicated. But it isn’t: Greece could introduce a high-flying New Drachma, quite literally. First, please note that any country may default on its debt. The trouble is that the day after a default it might be difficult or impossible to obtain a loan at palatable terms. As such, any country considering a default must conduct a risk / benefit analysis. A country that has a primary deficit, i.e. a budget deficit before paying interest expenses, faces the challenge that such deficit would be eliminated overnight (because the deficit could no longer be funded), causing a massive shock to the economy as government spending would come to an abrupt holt. To mitigate such a shock, it is usually the lesser evil to beg for leniency from creditors, in return for austerity measures. It is in Greece’s interest to promise the stars to get yet another loan. In contrast, once a primary surplus has been achieved, Greece may well find a default attractive to cut its overall debt burden; the shock from being shunned from the credit markets would then mostly be a shock to the creditors.  

The Greece basis trade: What could go wrong? - Why did Gretchen Morgenson write that column on Sunday about Greek credit default swaps? The answer is that the irresistible lure of writing about CDS lured her into the very murky waters of the Greek basis trade — the trade where you own Greek bonds and then hedge them by buying credit protection on Greece. Now this trade is emphatically not a big deal even in the context of the Greek debt restructuring: it’s probably a couple of billion euros in total, and won’t make much difference either way. But the outcome of the trade is likely to set an important precedent for the sovereign CDS market more generally, so it’s worth looking in a bit of detail at exactly what’s going on here.Basis trades belong to a set which is relatively common in financial markets: things which are meant to be very safe but which, in fact, aren’t. Merrill Lynch reportedly lost somewhere in the region of $15 billion on basis trades, and at the height of the crisis I proposed that the US government should step in and start buying bond-and-CDS packages as a way to make money and get a bit of price discovery and liquidity into the fixed-income markets.

YIKES: Credit Risk Looks Even Worse Than Last Time Greece Almost Defaulted - The TED spread—a leading indicator of general credit risk in the economy—is blowing out, surpassing levels it saw last time Greece almost defaulted in 2010.The difference between the 3-month LIBOR (interest rates banks charge to borrow dollars in London) and the interest rates on U.S. treasury bills topped 49.08 basis points today, beating its 48.63 high in June 2010. These levels are nowhere near what we saw during the financial crisis, when the TED spread topped 450 as Lehman and Bear Stearns were collapsing. But it does suggests that credit risk is at its highest levels since the financial crisis started winding down in June 2009. Check out the TED spread over the last 3 years:

Samaras addresses letter to creditors - In the latest move in the power game over the written commitment that EU leaders have asked Pasok and New Democracy to cosign, Antonis Samaras on Wednesday sent a letter to the European Union and IMF reiterating his support for the new prime minister and for fiscal adjustment targets. He noted, however, that “certain policies have to be modified”. The New Democracy leader, who has been under heavy pressure for over a week to sign such a letter, sent the letter to the European Commission, the ECB, the IMF and the Eurogroup. The content of Samaras's letter largely resembles the one he sent to the leader of the European People's Party on November 13, the text of which was published on Tuesday.  It was not immediately clear whether the letter would satisfy the EU and IMF, who have demanded all Greek political parties sign a written commitment to back austerity measures beyond the term of the current national unity government.

Bank of Greece: Nation may be driven out of euro -- The Bank of Greece said on Wednesday that the nation is in "the most critical period" in its post-war history and could potentially be driven out of the euro zone. Greece must focus all efforts on meeting the targets set in an October agreement, the central bank said. Otherwise, the nation may face "an uncontrolled downward trajectory that would undermine many of the achievements that have been attained in recent decades, drive the country out of the euro area and set Greece's economy, standard of living, society and international standing back many decades," the Bank of Greece said.

Will Greece unravel by Christmas? - Pettis - In China economists are watching the spectacle in Europe, China’s largest export market, with rising dread. Might European deterioration affect Chinese growth? October and November tend to be very important months for Chinese exports, and so the prospect of a miserable Christmas in Europe is weighing heavily on Chinese exporters. By now, it seems to me, neither wisdom nor cooperation among world leaders is going to get us out of the debt and currency problems we face. Rather than try to prevent a major disruption the policy goal now should be to engineer as quickly as possible the least disorderly and disruptive unraveling of financial markets in the peripheral countries. And while it may help relieve frustration to excoriate European leaders for having made poor, we shouldn’t assume that there really is a set of “right decisions” that will lead us out of this mess. I think there isn’t. In Athens, the refusal by New Democracy yesterday to join Pasoc in a coalition government indicates just how difficult political cooperation is likely to become, and how drastically political horizons have shortened. What’s more, by forcing Papandreou to cancel the referendum just days after he announced it – in the face of white-knuckled threats from an enraged France and Germany – Athens has pretty much made clear just how desperate things are and how little room the leadership has to maneuver. Indeed the whole issue of sovereignty has become fuzzy. Since France and Germany have basically exercised direct power over Greek’s electoral politics without assuming responsibility for solving Greece’s domestic problems, I can’t imagine that this won’t stoke even more resentment in Greece. But it’s worse than just an issue of fuzzy sovereignty. Last week something new happened which cannot help but affect the near-term outlook. By openly speculating for the first time on Greece’s leaving the euro, Europe’s leaders have ensured that there is almost no chance now of preventing it from happening, and sooner even than most pessimists expected.

Papademos says Samaras letter 'satisfactory' - The standoff over Antonis Samaras’ refusal to sign a written commitment that he backs austerity measures seems to have come to an end, after Prime Minister Lucas Papademos told the cabinet on Thursday that international lenders had reacted positively to the letter that the New Democracy leader sent to the country’s lenders yesterday. "Papademos said the content of the letter was satisfactory.  Last night, a German government official had welcomed the letter. Speaking to Greek journalists in Berlin on condition of anonymity, the finance ministry official said: “We are pleased with the support of the opposition. I hear that Antonis Samaras sent a letter to the creditors. I think that we can move forward and convince the Eurogroup to decide on the release of the sixth tranche”. "The Eurogroup, on November 29, will decide whether the commitments included in the letter from the New Democracy leader are sufficient”, a spokesperson for Eurogroup chairman Jean-Claude Juncker told reporters in Brussels.

Portugal Hit by Downgrade and Strike - —Portugal suffered a double blow Thursday after Fitch Ratings downgraded its debt to junk, just as a nationwide strike shut public services amid growing discontent over austerity measures that are pushing the country into a deep recession.  Fitch, which matched Moody's Investors Service's move in July to place Portugal in junk territory, lowered its rating one notch, to double-B-plus from triple-B-minus, and warned further downgrades were possible because a recession in the country will increase challenges for the government to comply with its austerity plans. It maintained a negative outlook.  "The country's large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign's credit profile is no longer consistent with an investment-grade rating," Fitch said. "However, Fitch judges the government's commitment to the program to be strong."

Fitch cuts Portugal credit rating to junk status - Fitch Ratings on Thursday cut Portugal's sovereign credit rating to BB-plus from BBB-minus, putting the country's rating in junk status. The rating carries a negative outlook, which means a further cut is possible. "The country's large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign's credit profile is no longer consistent with an investment-grade rating," Fitch said in a news release. The ratings firm said recession will make the government's deficit-cutting plan more challenging and will hurt bank asset quality, but that the government's commitment to the plan was "strong." The Portugal PSI 20 index is up 0.2% to 5,241.26, underperforming other European stock markets.

Fitch Junk Downgrade, Anti-Austerity Strike Hit Portugal (Dow Jones)--Portugal suffered a double blow Thursday after Fitch Ratings downgraded its debt to junk, just as a nationwide strike shut public services due to growing discontent over austerity measures that are pushing the country into a deep recession.  Fitch, which matched Moody's Investors Service's move in July to place Portugal in junk territory, lowered its rating one notch, to BB+ from BBB-, and warned further downgrades were possible as a recession in the country will increase challenges for the government to comply with it's ...

Hungary 'Junked' By Moody's - Moody's Statement Summary: The key drivers for the downgrade and negative outlook are as follows:

    • 1.) The rising uncertainty surrounding the country's ability to meet its medium-term targets for fiscal consolidation and public sector debt reduction, particularly given Hungary's increasingly constrained medium-term growth prospects.
    • 2.) The increased susceptibility to event risk stemming from the government's high debt burden, heavy reliance on external investors and large financing needs as the country enters a period of heightened external market volatility.
    • Moody's believes that the combined impact of these factors will adversely impact the government's financial strength and erode its shock-absorption capacity. The rating agency's decision to maintain a negative outlook on Hungary's ratings is driven by the uncertainty surrounding the country's ability to withstand potential event risks emanating from the European sovereign debt crisis.

EU seeks new powers on euro-zone budgets: report - The European Commission on Wednesday will propose new rules that would require euro-zone members to submit their tax and spending plans to the European Union before being approved by their national parliaments, the Financial Times reported. The plans would also give the European Commission, which is the European Union's executive arm, the authority to send inspectors to euro-zone countries in cases where it determines a country is facing "severe difficulties," the report said. The proposals are expected to be presented alongside a report on options for creating euro bonds due to be released later Wednesday.

Ireland demands debt relief, warns on EU treaties - Europe's plans for treaty changes to enforce fiscal discipline in the eurozone may fall foul of popular anger in Ireland unless the EU creditor states agreee to share more of the pain. The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues. "We carried an undue burden for protecting the European banking system from contagion," said finance minister Michael Noonan. "We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks. Mr Noonan hinted that Dublin is asking for some of interested relief on a €31bn EU promissory noted linked to the Anglo Irish fiasco, among other matters. Mr Noonan said Ireland's public mood has turned very sour.

"Hard Times Ahead" Says RajoyHard times ahead! - Mariano Rajoy won the biggest majority in a Spanish election in almost 30 years, and told Spaniards to brace for hard times as the nation fights to avoid being overwhelmed by the debt crisis. Bonds continued to drop.  Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the Socialists’ candidate Alfredo Perez Rubalcaba. “Hard times lie ahead,” Rajoy, 56, told supporters outside the PP’s headquarters in Madrid, giving no new details of his plans. “We are going to govern in the most delicate situation Spain has faced in 30 years.” Spanish borrowing costs continued rising toward euro-era records (6.6% this morning) even as the PP won a mandate to slash the budget deficit, overhaul the stagnant economy and reduce the 23 percent jobless rate. Rajoy, who hasn’t given details of his proposals, won’t take over for a month, prompting him to say on Nov 18th he hoped Spain wouldn’t need a bailout before he’s sworn in. Miguel Arias Canete, head of the PP’s electoral committee and a former minister, said today markets need to give the party time, as ministers won’t be appointed until Dec. 21 and Spanish law doesn’t allow Parliament to resume any sooner than Dec. 13.

Spain Pays More to Borrow Than Greece as Rajoy Appeals to Europe -- Spain paid more than Greece and Portugal to sell three-month bills as the newly elected People’s Party called for a European agreement to “save” the nation’s debt, saying the country can’t afford 7 percent interest rates. Spain’s three-month borrowing costs doubled as it sold bills at an average yield of 5.11 percent, more than twice the rate at the previous auction a month ago. The Treasury paid more than the 4.63 percent for 13-week bills sold Nov. 15 by Greece, which received a European Union-led bailout last year. Portugal paid 4.895 percent on three-month bills the following day. Maria Dolores de Cospedal, the deputy leader of Spain’s People’s Party which ousted the ruling Socialists on Nov. 20, yesterday called for a euro-region accord to “save and guarantee the solvency” of Spain’s 650 billion-euro ($881 billion) debt. Spain can’t afford to “continue financing itself at 7 percent,” she said, referring to the yield on 10-year debt that led Greece, Portugal and Ireland to seek EU aid. Prime Minister-elect Mariano Rajoy told German Chancellor Angela Merkel in a phone call yesterday that “countries that meet their obligations and responsibilities must be helped by European institutions,” Cospedal said. The European Commission yesterday said it had no knowledge of any Spanish request for aid or plans to seek it. 

And the Global Economic Saga Continues - The last week has been a non-stop flood of news. And, quite honestly, none of it is encouraging. I imagine the sole exception to that rule is the relatively sanguine nature of the US data. That said, I remain unconvinced that the US can for much longer resist the downward pull of the rest of the globe. What more can we say about Europe that has not already been said? There has been no forward progress in the past week. To be sure, ECB bond buying has helped keep a lid on Italian bond yields. Yet, while ECB monetary policymakers focus on Italy, Spain and Belgium are slipping away. And France is clearly the next domino to fall. The "accidental" downgrade last week simply reveals that S&P has already prepared the report, clearly anticipating a deterioration in France's budget position as the Eurozone recession deepens. And to make matters worse, Zero Hedge points us to signs the Dexia bank rescue is faltering, and the Belgians realize they need to shift more of that burden of that rescue onto France. Meanwhile, the situation in Eastern Europe is rapidly deteriorating - Yves Smith directs us to the Telegraph for that story. And in Greece, the opposition party still insists they will not sign any pledge to commit to the October deal. Was any deal really reached last month?

EA Balance of Payments: the Current Account - Rebecca Wilder -  I’ve been doing quite a bit of research on the balance of payments flows within the Euro Area (EA). Given the complexity of the balance of payments, there are too many angles to tackle in one post. Therefore, spanning the next week I will dedicate my commentary to the EA balance of payments. In this post, we start with square one: the current account. Often times I hear comparison of the EA sovereign debt crisis to past emerging market balance of payments crises. This is not correct, since the EA runs only mild current account deficits, -0.9% of total EA GDP as of Q2 2011 (Q3 data reported in December). There’s no need for a sharp revaluation of the euro to drive the balance of payments to its identity – remember, the current account (CA) + capital account (KA) + official reserves + errors/ommissions = 0. The EA initial condition for a balance of payments crisis is just not there: the current account is, well, rather ‘balanced’. Within the EA, country-level current accounts are well out of balance. This is the central theme associated with the EA sovereign debt crisis: debtor countries are reliant on foreign inflows of capital from the credit countries to support current spending.

EA BoP Guide: CA and KA – EA too Dependent on Portfolio Inflows? - Rebecca Wilder - This is part two of my multi-post commentary on the Euro area Balance of Payments (BoP). Yesterday, in part one, I compared the EA current account balance to its country-level cross section. Today’s post will be more instructive in nature, as I dig into the components of the EA current account (CA) and capital account (KA) balances. My general conclusion is that the EA is highly dependent on foreign demand for EA assets in the identity of its international accounts. As a note: remember the standard international finance identity: CA + KA + errors and omissions = 0, where CA + KA is generally referred to as the Balance of Payments. An international guide to the BoP can be found at the IMF website . Generally, the EA BoP statistics adhere to the IMF definitions.The chart below illustrates the 3-month accumulated current account balance as the sum of its components: the goods balance (exports minus imports of goods), the service balance (exports minus imports of services), net foreign income, and unilateral transfers. The goods, services, and income balance is € 16.2 for the three months ending in September, which is more than offset by the unilateral transfer balance, -€ 28.1 billion.

European Bank Borrowing From the ECB Hits Highest Level of the Year - Weekly borrowings by banks from the European Central Bank soared to their highest level this year while the cost of borrowing euros in the interbank market stayed at its highest in two weeks Tuesday despite plentiful cash in the system, highlighting strains in money markets as the debt crisis deepens. The ECB Tuesday allotted EUR247.175 billion in its seven-day funds at its weekly main refinancing operation at a fixed rate of 1.25%, up considerably from the previous 2011 high of EUR230.265 billion hit at last week’s tender. The number of bidders at the weekly operation rose to 178 from 161 a week earlier. The three-month Euro Interbank Offered Rate, or Euribor, was unchanged at 1.467%, having nudged higher for four days running. But that rate is still below the levels hit earlier this year. Distrust among banks is growing as fears mount that upheavals in the bond market will contaminate banks’ balance sheets. That is prompting some banks to hoard cash while forcing banks that are shut out of money markets to turn instead to the ECB for funds.

Dexia bailout plan looks unworkable: report  -- France and Belgium are reportedly in fresh talks over the rescue plan for troubled financial institution Dexia SA , according to a report in Belgian newspaper De Standaard on Wednesday. The newspaper says the Belgians want to renegotiate the bailout deal agreed with France and Luxembourg in October, and get the French to take on a bigger chunk of financing it. But with France's AAA credit rating already in question, media reports said such renegotiations could put that rating at risk further. The article quoted French Finance Minister Francois Baroin as saying the agreement was "in no way questioned." A spokesman for Dexia could not immediately be reached for comment.

On Bank Runs and Fighting the Folks Who Own a Printing Press - Tyler Cowen looks at the massive scale of ECB bond buying and asks "here is a longer discussion here.  One way to read this is: “That’s not yet a lot.”  Another is: “Oh my goodness, they’ve already been doing quite a bit.”  Another is: “Lots of buying without a credible signal of future intent isn’t worth a whole lot.” I would stress the point that credible long-run signals don’t exist for Europe right now.  No one knows what “the game” will be like a year now, or less.  That makes all possible solutions harder to pull off, since announcements can be shrugged off as idle chatter. My obvious position is that you can buy all the bonds you want and it means less than a promise to buy bonds. More importantly, such a promise cannot be dismissed as idle chatter. If the ECB stands ready to buy bonds at par for example, then how can it possibly be profit maximizing to sell bonds at below par? It doesn’t matter what the fundamentals are or what the long run is or any of that. So long as you are fully confident that tomorrow you can sell your bond to the ECB at par, it is not sensible to sell it below par today.

Merkel renews rejection of quick-fix crisis solution as EU pushes eurobonds - German Chancellor Angela Merkel is insisting there won't be an instant solution to the eurozone crisis, even as the European Commission renews a push for bonds issued jointly by the 17 euro nations. Merkel said Tuesday she believes investor confidence can't be "restored purely financially." She said Europe needs a "coherent political answer." The chancellor said many people seek a solution that will end the crisis immediately. She pointed to calls for big debt haircuts and for the European Central Bank to embark on a huge debt-buying drive, and noted so-called eurobonds "have just come very much back into fashion." She says of hopes of an immediate solution: "I say yet again: there won't be one." Merkel renewed her call for changes to EU treaties to strengthen the eurozone.

Neo-Calvinists and the Euro Crisis - Krugman - Ambrose Evans-Pritchard sends us to a very good essay (pdf) by the Centre for European Reform warning of the consequences of relying on the “North European interpretation” of the eurozone crisis, which essentially sees the crisis as a morality tale, pitting those who sinned against those who stuck to the path of virtue. The major sins of the periphery were government profligacy and losses of competitiveness. The way out of the crisis, it follows, is straightforward. It is to emulate the virtuous core by consolidating public finances and improving competitiveness (by raising productivity, reducing wages, or both). If the periphery can achieve this, then the eurozone debt crisis can be resolved without an institutional leap forward to fiscal union. Regular readers know that this theme is something I’ve been playing for a while now. My analysis is pretty close to the Centre’s; let me restate it.

Germany's Finances Not as Sound as Believed - Spiegel - The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany's budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU's limit. In some respects, Italy's finances are in much better shape. When it comes to fiscal stability, frugality and responsible economic management, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have only one role model: themselves. The chancellor praises herself and her team for having "a clear compass for reducing debt," and insists: "Getting our finances in order is good for our country." But it is debatable how much longer Germany can be seen as a refuge of stability and security. In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe.

If the Germans Were Serious About Stabilizing Aggregate Demand - Then they would be doing exactly what they are doing now, if their only concern were Germany.  Last week the Federal Statistics Office of Germany released third quarter nominal GDP data where we find relatively robust growth in aggregate demand: This above-trend growth is entirely consistent with the reluctance of the Germans to open up the ECB monetary spigot.  Doing so would only serve to further raise aggregate demand above trend growth.  The Germans are probably concerned that the additional nominal spending stimulus would raise inflation uncomfortably high and create a positive output gap.  Maybe the Germans are hardcore nominal GDP targeters.   But are the Germans really focusing on just their own aggregate demand growth?  It is a strange argument to make since the ongoing collapse in Eurozone aggregate demand (see figure below) will ultimately affect the German economy too.  Nonetheless, it is hard not to wonder these thoughts given the Eurozone seems to have been serving German interests all along and the recent reluctance of the Germans to meaningfully address the Eurozone crisis.  It is also not hard to think these thoughts when one comes across statements such as the rather cheery press release accompanying the third quarter GDP numbers (my bold):

European Industrial Orders Cliff Dive in Sep - Eurostat just released figures for industrial new orders for September.  The summary graph is above both for the Eurozone specifically (pink) and the whole EU (black). In September 2011 compared with August 2011, the euro area (EA17) industrial new orders index fell by 6.4%. In August the index rose by 1.4%. In the EU27 new orders decreased by 2.3% in September 2011, after a fall of 0.3% in August. Excluding ships, railway & aerospace equipment, for which changes tend to be more volatile, industrial new orders dropped by 4.3% in the euro area and by 2.1% in the EU27.  Clearly the September number is a very weak reading and suggests that Europe may now be entering a sharp contraction in the real economy. There have been indicators suggesting mild contraction for a while - eg retail trade.  But this is the first indicator I've seen that looks like the kind of sharp non-linear contraction characteristic of an out-and-out recession.  I guess there's always the possibility that October will be better.  However, given the financial news flow in the last six weeks, it's hard to imagine too many European executives getting all giddy and excited in approving new projects.

Euro zone factory orders tumble - Euro zone industrial new orders slumped in September from August, EU statistics showed on Wednesday, the deepest fall since December 2008 and far worse than economists had forecast, in the latest sign that Europe may be heading for a recession. New orders in the 17 countries sharing the euro tumbled 6.4 per cent, well below expectations of a 2.5 per cent fall, with Germany, France, Italy and Spain all registering sharp contractions, the EU’s Statistics Office Eurostat said. More related to this story Orders of capital goods, a measure of investment in new machinery, fell the most in September compared to the previous month, sliding 6.8 per cent and suggesting factory managers and companies made a clear call to pull back expansion plans. On an annual basis, industrial new orders in the euro zone rose 1.6 per cent in September, while economists polled by Reuters expected an 8.0-per-cent increase. The euro zone’s sovereign debt crisis that has now reached Italy and France has shattered business confidence. Manufacturing, which had powered a two-year recovery since the end of the global financialcrisis1 in 2009, has now stalled.

Belgian/German spreads hit euro-era highs on political deadlock (Reuters) - The yield premium of Belgian 10-year government bonds over German Bunds hit euro-era highs on Wednesday after a blow to prospects of forming a government left the country vulnerable to a fast-spreading debt crisis.The highly-indebted country, which has been without a government for 18 months, suffered a further blow on Tuesday when its lead negotiator in forming an administration resigned.Prospects of further political deadlock along with renewed talk about a bailout deal reached between Belgium and France on jointly-owned bank Dexia brought Belgium into focus. Reports the two countries were seeking fresh talks on the deal raised concerns that their fiscal burden will get heavier and that France may lose its triple-A rating. Belgian 10-year government bond yields rose 10 basis points on the day to 5.19 percent, pushing the spread over German benchmarks to a euro-era high of 330 bps. The equivalent French spread was 16 bps wider at 179 bps.

Belgium urges citizens to finance debt - The Belgian government urged citizens today to finance the country's debt by subscribing to a government bond as a record-breaking political crisis continues and Belgium's borrowing costs spike. After a day that saw Belgian borrowing costs soar to 5.423% on 10-year bonds, caretaker premier Yves Leterme issued a rare appeal in the press and on radio, saying: "Given the difficulties on the financial markets, we want to increasingly appeal to Belgian savings to finance the debt". To increase its appeal, the bond being launched today offers three, five and eight-year paper at 3.5%, 4% and 4.5%, one point above a previous offer. The plea comes as Belgium stands in the firing line of markets due to its record-breaking political crisis which took a turn for the worse this week when talks among six parties that agreed to form a coalition broke down over a future budget. With debt at almost 100% of GDP the founding-member of the European Union risks being sucked into the euro crisis. The European Commission yesterday repeated a warning to Belgium to bring its public deficit below 3% of GDP by 2012 - rather than the 4.6% forecast failing action - or face a fine running to over €0.5 billion.

German Bond Auction Fails - A year ago, Germany and France could probably have saved the euro--at least for a time--by stepping in to guarantee all the debts of the peripheral euro zone nations.  To be sure, this would have created quite a lot of other problems, but it would have saved their banks and their currency union.  At this point, however, with the panic in full flight, it's not entirely clear to me that even a 100% guarantee would staunch the bleeding for more than a short time.  Do the Germans really have enough to guarantee the debts of most of the rest of the euro zone? Before you answer that, ponder the lesson of this crisis (and the Great Depression): bank crises are ultimately sovereign debt crises.  Given the size of modern states, and the complexity of modern economies, a broad banking crisis forces the sovereign to step in. Effectively, Germany and France and a handful of other tiny countries have to guarantee both the sovereign debt and the bank liabilities of the whole eurozone.  Given the holes that recent events have exposed in these systems, can they credibly do that?   We may be getting an unhappy answer to that question: a German bond auction went rather badly today.  In fact, a lot of commentators are using words like "disastrous".  They sold just over half of the €6 billion they had put out to market, the worst such outcome anyone can remember. 

Debt crisis now at German doorstep - An auction of German government bonds technically failed Wednesday, underlining fears that Europe’s long-running sovereign debt crisis now threatens the core of the euro zone.  The sale of 6 billion euros ($8.1 billion) of 10-year government bonds, known as bunds, attracted bids totaling just €3.889 billion. The Bundesbank, which conducts auctions on behalf of the Germany’s federal debt agency, accepted €3.644 billion in bids.  That left the central bank to pick up the slack, retaining €2.356 billion of the supply, or 39% of the total amount on offer. Granted, it hasn’t been uncommon for German debt auctions to fall short as safe-haven demand has driven German yields to record lows in recent months. Six of the last eight bund auctions have required the Bundesbank to pick up some slack, noted strategists at RBC Capital Markets.  However, total bids in Thursday’s sale exceeded the amount sold to bidders just 1.07 times, the lowest ratio since 1999, according to RBC. Also, the amount retained by the Bundesbank was much higher than the euro-era average of 20%, analysts said.

German Bond Auction Adds to Investor Worries on Euro Zone - A German government debt auction drew some of the weakest demand since the introduction of the euro, signaling diminishing investor appetite for even the safest euro-zone assets amid Europe's worsening debt crisis.  The auction sent waves through markets as investors, battered by a spate of bad news out of Europe over the last few months, initially interpreted it as a sign of the crisis reaching the core of the euro zone.  The German government was able to sell only €3.644 billion ($4.92 billion) of the €6 billion in 10-year bunds on auction for an average yield of 1.98%.

Vatican Banker: ECB Should Act as Lender of Last Resort - The European Central Bank should act as the euro zone’s lender of last resort and the implementation of the euro-zone bonds proposal are both necessary in the bloc’s efforts to rein in the debt crisis, the head of the Vatican’s bank said Wednesday. The signal that these measures would send to investors would be so strong as to abate speculative attacks on some euro-zone countries, Ettore Gotti Tedeschi, chairman of the Vatican bank, known as the Institute of Religious Works, said at a conference in Rome on the debt crisis.

Has the ECB been so passive? - Consider this chart: There is a longer discussion here.  One way to read this is: “That’s not yet a lot.”  Another is: “Oh my goodness, they’ve already been doing quite a bit.”  Another is: “Lots of buying without a credible signal of future intent isn’t worth a whole lot.”  I would stress the point that credible long-run signals don’t exist for Europe right now.  No one knows what “the game” will be like a year now, or less.  That makes all possible solutions harder to pull off, since announcements can be shrugged off as idle chatter.

Faster toward the end - THE bad news out of Europe is coming fast and thick now. Markets were still digesting news of Spain's terrible bond auction yesterday, in which the yield on its 3-month debt more than doubled, from 2.3% to over 5%. That was but an appetizer, however; in an auction of 10-year debt today, Germany failed to place some 40% of the issuance. The lack of appetite for German debt has come as a shock to many, and the language being used to describe matters is increasingly apocalyptic. "It is a complete and utter disaster", Reuters has one strategist saying. Trouble at big European banks is growing; the euro-zone banking system is increasingly reliant on the European Central Bank for funding. The prospect of bank failures is a troubling one given the fiscal strain on European sovereigns; no one wants to find itself in Ireland's position, squarely in bond vigilantes' crosshairs having assumed the obligations of sinking banks.  Meanwhile, trouble is growing around the eastern periphery of the euro zone. Poland's zloty is under pressure, and there are signs of bank runs in the Baltics. Perhaps worst of all, the financial strain in the euro zone is increasingly apparent in the real economy. New data indicate that euro-zone industrial orders plummeted in September, falling 6.4%. Orders dropped 4.4% in Germany, 6.2% in France, and 9.2% in Italy.

The screw tightens -- ONE can almost hear the gates clanging: one after the other the sources of funding for Europe’s banks are being shut. It is a result of the highly visible run on Europe’s government bond markets, which today reached the heart of the euro zone: an auction of new German bonds failed to generate enough demand for the full amount, causing a drop in bond prices (and prompting the Bundesbank to buy 39% of the bonds offered, according to Reuters).Now another run—more hidden, but potentially more dangerous—is taking place: on the continents’ banks. People are not yet queuing up in front of bank branches (except in Latvia’s capital Riga where savers today were trying to withdraw money from Krajbanka, a mid-sized bank, pictured). But billions of euros are flooding out of Europe’s banking system through bond and money markets. At best, the result may be a credit crunch that leaves businesses unable to get loans and invest. At worst, some banks may fail—and trigger real bank runs in countries whose shaky public finances have left them ill equipped to prop up their financial institutions.

Bond Vigilantes Make Their Votes Known in Europe - They may have retired in the U.S., but the bond vigilantes are alive and well in Europe.The stunning lack of interest in Wednesday’s sale of 10-year German bonds shows the so-called fire walls incessantly talked about to contain the euro-zone sovereign debt crisis are nowhere to be found. Instead, the fire blazes out of control. As reported, Germany was only able to sell 3.6 billion euros of a planned 6 billion euros in 10-year bunds, among the safest debt on the planet. Yields had been declining in Germany as institutional investors already are ditching the IOUs of just about every other European country. Wednesday, German yields rose. If Germany, the strongest and safest European country, now has to struggle to finance itself, the two-year-old European sovereign debt crisis has reached a new and even more dangerous phase. Fast and significant action is needed, though the democratic systems in place in each of the affected European countries and in the still partial connection between those countries make swift and strong action extraordinarily unlikely.

Understanding Bond Yields: A Primer Against Fundamentalism - Martin Wolf has a better grasp on the Eurozone crisis than most nonetheless he still writes. So what is to be done? Last week, I moderated a discussion of this topic at a conference in honour of Paul de Grauwe of Leuven University in Belgium. I concluded that the eurozone confronts three interwoven challenges. The first is to manage the illiquidity in markets for public debt markets. The second is to reverse the divergence in competitiveness since its launch. The third is to create a regime capable of ensuring less unstable economic relationships among its members. Behind this list is a simple point: people have to believe that members will fare better in than out if they are to trust in the euro’s future. No, they do not. They need to believe two things:

  • 1) If they short Eurozone member bonds they will lose money
  • 2) If they hold Eurozone bonds to maturity they will receive the principle and interest that are listed on the bond.

This is the alpha and the omega, the beginning and the end of this issue. Nothing else matters, because as long as these conditions hold it is always profitable for Euro holders to buy bonds at the prevailing risk free yield.

German Bund Action Goes Badly; Bank of America CDS Spread Hit New High; EuroSovereign and US Bank Spreads Widen More. Will the Germans Finally Break Glass? - Yves Smith  - As our overly-long headline tells you, Wednesday was a really bad day in credit land. Not only has the reality of the severity and seeming intractability of the Eurozone mess started sinking in, but US investors seem finally to be facing up to the fact that a full blown crisis would not be contained and will engulf American banks. If you thought September-October 2008 events were nasty, they could look like a mere trial run for what may be in the offing.The Financial Times coverage on the failure of the Bund auction is suitably grim: The worst-received bond sale by Germany since the launch of the euro fuelled market fears that the continent’s debt crisis was now affecting Berlin… The bond auction only managed to raise two-thirds of the amount targeted..The euro, which has held up relatively well despite the turmoil in the bond markets, suffered one of its biggest one-day falls against the dollar this year, while eurozone government debt was sold off across the board…And on the US banks: Investors paid record amounts to protect themselves against the risk of default by Bank of America on Wednesday… “There is again broad risk-averse sentiment stemming from Europe,” . “We still don’t have a solution there.”…CDS protection on European financials also rose to fresh highs on Wednesday..Italian banks were among the hardest hit, with CDS levels reaching “stratospheric” levels, according to Markit..

France pushes hard on ECB intervention - When Nicolas Sarkozy welcomes Mario Monti, Italy’s freshly minted prime minister, and Angela Merkel, German chancellor, at a mini-summit in Strasbourg on Thursday, high on the French president’s list of issues will be the role of the European Central Bank in helping to resolve the eurozone debt crisis. The French government continues to argue in the face of strong German resistance that the ECB should be deployed urgently to help build a firewall against financial market attacks on big debtor countries such as Italy and Spain – and France itself. “We are stuck with a major difficulty – that is to convince Germany that we should arm the eurozone with an instrument of defence for our currency through a certain evolution of the role of the central bank,” François Fillon, the prime minister, said on Tuesday in what has become an almost daily incantation by French ministers. It has become clear in Paris that, far from giving up on the issue, Mr Sarkozy’s government is linking it to French willingness to meet Ms Merkel’s insistence on changes in European governing treaties to embed centrally-enforced budgetary discipline within the 17 member eurozone.

Germany unmoved by French pleas for more ECB action - French appeals for Germany to sanction extra powers for the European Central Bank have been firmly rejected, despite warnings from politicians, economists and even the Vatican that it is the only way of "averting a catastrophe".  Angela Merkel was unmoved by another roller-coaster day that saw Portuguese debt being downgraded to junk status, Italian bond yields pushed into the bail-out zone, and doubts cast over France's AAA rating: the German Chancellor refused to allow the ECB to become Europe's lender of last resort.  Ms Merkel instead used a three-way summit with France and Italy in Strasbourg to insist that new treaty powers to intervene and punish sinner states remained the key focus of Europe's rescue efforts. She said: "The countries who don't keep to the stability pact have to be punished – those who contravene it need to be penalised. We need to make sure this doesn't happen again."

ECB Considers Longer Bank Loans - The European Central Bank is considering offering longer-term loans to commercial banks that are having trouble securing funding in private markets, as officials scramble to keep the debt crisis from freezing new lending. The European Central Bank may extend loans to banks at maturities of two or three years, according to people familiar with the matter. The longest maturity at present is 13 months.

Germany, France to Propose Treaty Adjustments on Fiscal Rules -- Germany and France said they will make proposals to amend European treaties in coming days to impose greater fiscal discipline on euro-area countries as they struggle to win back investor confidence. The initiative announced today at a meeting in Strasbourg, France, involving German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti underscored their failure the past two years to stamp out the financial crisis. Just yesterday, concerns the euro was at risk undermined a bond auction in Germany, the biggest euro economy and until now an investor haven. The planned treaty changes prepared for a Dec. 9 European summit involve "the question of a fiscal union, that is a deepened political cooperation," Merkel told reporters after the meeting over lunch. "It's not about a quid pro quo. It's about overcoming the defects in the euro zone's construction, step by step." Merkel won backing on demanding changes to treaties as a prerequisite to discussing the issuance of common euro bonds. She also persuaded Sarkozy to refrain from demanding that the European Central Bank play a more active role.

The Apocalypse Trade - Krugman - I really wasn’t planning on blogging on Thanksgiving Day. But what’s going on in Europe deserves a mention. So, the big story: German bonds are now being priced as a risky asset — what the FT calls the “apocalypse trade“. The interest rate on bunds, at 2.21% as I write this, is still very low by historical standards. But it’s above the rate on UK bonds (2.17%) and way above the rate on US bonds (1.88%). The way to see this is that the market is in effect pricing in a real possibility of eurozone collapse. In particular, market expectations seem to assume that the ECB will remain utterly indifferent to its responsibilities. The German breakeven rate, an implicit forecast of inflation over the next 5 years, is just 1 percent. That’s a disaster level, implying severe deflation in the debtor nations — or, more likely, a euro breakup. Awesome all around.

Germany Buys Itself First-Class Ticket on Titanic - When the Titanic sank in 1912, even its first-class passengers ended up in the sea. Germany’s failure to attract bids for all the bonds it wanted to sell yesterday suggests investors are growing wary of lending to even the euro region’s most creditworthy nation.  Germany’s 10-year borrowing cost dropped to a record 1.64 percent on Sept. 23 as bunds offered a refuge from the debt crisis. The rate now exceeds 2 percent, driving the gap with U.S. Treasuries to a 30-month high, after bids at the sale of securities repayable in January 2022 fell 35 percent short of the 6 billion euros ($8 billion) offered yesterday.  Bunds are losing the haven status they share with Treasuries as Germany rules out common bond sales to solve the debt crisis, and argues against the European Central Bank becoming the lender of last resort. As recently as Nov. 10, bunds yielded 28 basis points less than the American debt. Ten- year yields advanced to a four-week high of 2.26 percent today in London.  “The Titanic and the single currency cannot continue in its current form,” . “Safety lies in another ship, RMS Political Union, which is just over the horizon. It remains to be seen whether the third-class passengers of the peripheral economies and the second-class passengers of the semi-core will be willing to decamp from their current luxury liner to this cramped tramp steamer.”

EFSF "Grand Leverage Plan" All But Dead - All the schemes and maneuverings by eurocrat clowns and misguided economists hoping to get 4-1 or even 8-1 leverage on the EFSF bailout fund while keeping the fund's AAA rating intact have officially died on the vine. Even the EFSF committee admits as such. The Financial Times reports Euro rescue fund’s impact in doubt European leaders hailed a scheme to offer insurance on losses for investors buying troubled eurozone bonds as a means of leveraging the €250bn spare capacity of the rescue fund four or five fold, to more than €1,000bn.  But the dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.  Klaus Regling, head of the EFSF, earlier this month said that overcoming investor concerns with improved guarantees would mean the fund was likely to have only three to four times the firepower. But three senior eurozone officials said even this lower target may be difficult to reach, and expect the eventual firepower to be between two and three times the remaining buying capacity of the fund. “It is falling well short of its billing,”

Darwin Awards, and other random thoughts on the Euro - Nick Rowe - Is the European Central Bank, or maybe the whole EU, a good candidate for a Darwin Award? There doesn't seem to be a category for institutions that bring about their own demise through their own self-destructive behaviour, but perhaps there should be. In the very long run we should perhaps be thankful for dysfunctional systems' destroying themselves. But in the short run they tend to take a lot of other people and institutions down with them.  . Is there really any difference between the fiscal policy of a Eurozone government and the budgetary policy of a household? I know it's heresy for a macroeconomist to entertain such a notion, but is there? Neither can print money, so that difference is out. Both seem to tighten their belts when interest rates rise and it gets harder to borrow, so no difference there either.. Are Eurozone governments, on average, any riskier than Eurozone banks, on average? If any significant fraction of the governments go bust, a much bigger fraction of the banks will go bust too, I think. So does it make sense for the ECB to lend to banks at 1.25%, on loans collateralised by government bonds, even with a haircut, and not lend to the governments at anything like those terms?

Run on the Eurozone has Started - Jose Manuel Barroso warned yesterday the euro would be “difficult or impossible” to sustain without further economic integration. German newspapers this morning produced a whole string of poisonous comments about the European Commission’s proposals for Eurobonds. The eurozone is now in a position where crisis resolution requires a much firmer political commitment than member states had expected to provide.   Taken at face value the German opposition against Eurobonds seems to be as strong as ever and most German papers such as Süddeutsche Zeitung and Handelsblatt report on the topic in these terms. Nevertheless, the resistance against the Commission is less categorical than it appears, Financial Times Deutschland writes. Angela Merkel did not rule out Eurobonds but rather said the timing of José Manuel Barroso’s proposal was “inappropriate”. Among the condition she enumerated were changes of the EU treaties and a much stronger commitment of member states to condolidate. Norbert Barthle, the budgetary spokesperson of Merkel’s CDU/CSU parliamentary group, told FTD: “We never say never. All we say is: no Eurobonds under current conditions”. As a result there is scope for a deal at the EU summit December 9.

Fiscal union is the only real solution - A headline says that an investment bank survey found almost half the respondents expect at least one country to drop out of the euro zone next year. This is twice the percentage of a couple of months ago. While such a scenario cannot be ruled out, cost/benefit analysis still argues against a country leaving. Greece is seen as the most likely candidate to leave, and some eminent minds argue it should. However, whatever benefits it may get by a devalued currency, assuming that it were to be accepted by businesses and consumers knowing full well it would not a store of value, would quickly be eroded by higher inflation, a deeper economic downturn, weaker export markets, a destruction of its banking system, not to mention escalating social tensions, which could undermine its political stability. Moreover, an exit by Greece, for example, would not solve the institutional challenges, including the role of the ECB and private sectors in any adjustment process. InThere is an alternative scenario, which does address the underlying institutional challenge and that is a fiscal union led by Germany. Many of those advocating the ECB be the lender of last resort do not offer a quid pro quo. A fiscal union led by Germany would in effect force debtor nations who want more German and ECB support to surrender more of their fiscal sovereignty, in a binding way, to EU Commissioners, who would have greater authority in shaping national budgets and fiscal policies.

Europe Can't Move Fast Enough to Halt Crisis - Today the leaders of Germany, France, and Italy came together, offering a commitment to work toward new fiscal rules in Europe while keeping a leash on the European Central Bank. From the Wall Street Journal: The leaders of the euro zone's three largest economies pledged Thursday to propose modifications to European Union treaties to further integrate economic policy and crack down on profligate spenders, but they played down suggestions that the European Central Bank have a greater crisis-busting role. It should be painfully evident at this point that any process toward greater fiscal integration will be a years-long process. Financial markets, however, move at something much closer to the speed of light - as fast as traders can hit the "sell" button. As such, the European political process is grossly incapable of addressing the fiscal crisis.  Seriously, who believes a breakthrough is coming? I imagine some thought the disastrous German bund auction would force Chancellor Angela Merkel's hands, but it appears to have only deepened her resolve. Obviously, one interpretation of the auction is that the crisis is spreading to Germany, making its debt more risky. But risky how? The specter of Eurobonds, in my opinion, argues for shying away from Eurobonds as investors need to price German debt at that of the eventual Eurobond, which will almost certainly be greater than current German prices. This would help explain Merkel's objection to Eurobonds:

Eurozone Too Big To Save? - “The debt crisis is burrowing ever deeper, like a worm, and is now reaching Germany,” says Free Democrat Party backbencher Frank Schaeffler, a member of Angela Merkel’s governing coalition. Indeed, the country that all are looking to to save the Eurozone from collapse is now in big trouble.Germany fell short in its attempt to sell off sovereign debt and the yield on German 10-year bonds fell to an all-time low and is now below the yield of similar bonds from the UK. Meanwhile, WSJ‘s Eyk Henning reports that “Germany’s banking associations sent a joint letter to the EBA on Wednesday, asking for permission to hand in recapitalization plans on Jan. 13 instead of by Dec. 25.” The Economist’s Ryan Avent notes that bad news is “coming fast and thick now” with new shocks coming before the last is digested. He notes that “trouble is growing around the eastern periphery of the euro zone. Poland’s zloty is under pressure, and there are signs of bank runs in the Baltics.” He continues, “Perhaps worst of all, the financial strain in the euro zone is increasingly apparent in the real economy. New data indicate that euro-zone industrial orders plummeted in September, falling by 6.4%. Orders dropped by 4.4% in Germany, 6.2% in France and 9.2% in Italy. Predictions that the euro zone will face little more than a shallow recession in 2012 increasingly seem to be wildly optimistic.”

Fear sweeps markets as Merkel rules out ECB intervention - Global investors headed for the eurozone exit on Thursday after leaders of the area's three biggest economies squashed residual market hopes for a huge intervention by the European Central Bank (ECB) to solve the sovereign debt crisis. Fears of an imminent banking crisis are expected to intensify on Friday as inter-bank lending freezes over again, billions of euros are withdrawn from "Club Med" banks and the ECB is forced to lend more to struggling institutions. The central bank could reportedly extend the term of its loans to two or even three years. UK borrowing costs fell below those of Germany briefly on Thursday as the yields on eurozone sovereign debt rose, the euro fell against the dollar and European equities suffered a ninth successive day of losses. Friday is expected to be no different. Angela Merkel again ruled out any expanded role for the ECB and stamped down proposals for single, eurozone-wide "eurobonds" to share the risk of sovereign debt. The ECB, she said, was only responsible for monetary policy.

71 Years After DeGaulle Chose Resistance, Sarkozy Sold Out to the Bundestag -This is not meant to imply that today's ultra democratic Germans have the same ambitions as their erstwhile evil Chancellor. Is it not ironic, however, to note that Sarkozy, whose UMP party claims to be the heir of le grand Charles, should cave so rapidly to to the Germans' misplaced demands for trans-European austerity? Methinks they've laid themselves wide open to scathing attacks from the far right and far left.  Isn't it even more ironic that 66 years after the victory of the Allies in Europe, the remnants of  a so-called Gaullist party, should docilely support the paranoid ideology of a reactionary majority in the German parliament? True, inflation once nearly ruined Germany, but that was 90 years ago. Why do they continue to fight the wrong battles against the advice of our greatest living macro economists: Paul Never-Wrong Krugman, Martin Wolf, Joe Stglitz, Dr. Doom Roubini and Paul De Grauwe, to name just a few? There is absolutely no danger of destructive inflation in Europe (or America for that matter) as long as resources remain so underutilized.

It is not inevitable that the EU – or democracy – will survive this mess - Are we all doomed? America's fiscal democracy this week collapsed in disarray. The Arab spring ran out of steam. Emergency regimes have taken power in Greece and Italy, while Germany could not sell a third of its bonds. Salvation, according to Europe's desperate "leader", José Manuel Barroso, can only lie in "stronger governance in the euro area, both in discipline and in convergence". He wants nation states to submit draft budgets of their taxing and spending to him for oversight, to be subject to Brussels' "enhanced surveillance". This is more than alarming. Today's European crisis was brought about by widespread popular revolt against the straitjacket of an unrealistic European monetary union. Barroso's solution is apparently an even tighter straitjacket, and no nonsense about popular elections or national referendums. He wants Europe ruled by Aristotle's aristocrats, by people like him. We know what smart politics says. Yes, we have been here before, in the 1900s and the 1930s, but then we were led by donkeys and drifted into war. There have been blips since then, in the 1970s and 1990s, but we survived. As the Economist magazine loftily commented this month of the present wreckage, "the EU … will muddle through … Europe will breathe a sigh of relief and continue down the path of genteel decline".

Pictures From A Latvian Bank Run As MF Global Commingling Comes To Town - anyone is wondering why the collapse of MF Global after the discovery of its commingling and theft of client funds was the single worst thing that could happen to market confidence, then look no further than the small Baltic country of Latvia where precisely what Jon Corzine's firm did to its clients, has happened at the bank level.  Businessweek reports: "Lithuanian prosecutors issued an arrest warrant for Vladimir Antonov and Raimondas Baranauskas who are former shareholders of Bankas Snoras AB. Both men are suspected of embezzlement and document forgery, the Prosecutor General said in a statement on its website today. Baranauskas is also suspected of accounting fraud and abuse of authority, it said." Kinda like Jon Corzine, if not by the actual authorities, then by everybody else. And just like in the US where the lack of confidence in the system following the MF filing, so in Latvia the people have decided to hit the ATMs first and ask questions later.

European Banks Frantically Trying To Dump $7 Trillion Of Crap Assets -- But No One Will Buy Them - The balance sheets of European banks are piled high with legacy assets -- mortgages, real-estate, and other loans--that are tying up precious capital and constricting the banks' ability to make new, more productive loans.  At the same time, the banks' traditional sources of funding--other banks and institutional investors--have begun drying up as the European crisis intensifies. This leaves the banks desperately needing to raise cash to survive. The first plan was to sell off the crap assets. But according to Gareth Gore in the International Financing Review, this plan has failed, because buyers won't pony up the prices the banks want them to pay. (The banks want to sell their assets near "par"--the value the banks are carrying the assets for on their books--because then the banks won't have to take losses that would further deplete their capital. The buyers, meanwhile, want deals, and they know that time is working in their favor.) So now that banks are moving to Plan B, says Gore, which is financial engineering. Specifically, the banks are packaging up bunches of crap assets, putting pretty bows on the packages, and then using the packages as "collateral" with which to obtain emergency loans from the ECB.

Portugal lowered to junk status as big strike hits - Portugal's efforts to climb out of its economic crisis suffered a double setback Thursday as its credit rating was downgraded to junk status and a major strike gave voice to broad public outrage over austerity measures that have squeezed living standards. Portugal's deepening plight underlined Europe's difficulties in finding a way out of the continent's sovereign debt crisis which has recently shown alarming signs of spreading to bigger nations, most notably Italy. Like others in the eurozone, Portugal has embarked on a big austerity program to make its debts sustainable. That was a requirement of a the euro78 billion ($104 billion) international bailout it received earlier this year. As in bailed-out Greece, though, the government's tough medicine is unpopular and the general strike had a huge turnoutmaking it possibly the biggest walkout in more than 20 years. Fitch, one of the three leading credit rating agencies, blamed Portugal's "large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook" for its decision to cut the country's rating by one notch to BB+. Rival Moody's already rates Portuguese bonds as junk but Standard & Poor's rates them one notch above.

European Bond Selloff Continues: Italy 2-Yr Yield 7.46%, Belgium 5.22%, Portugal 16.68%; Greek 1-Yr Yield 310% - The European bond selloff continues unabated, once again led by surging yields on 2-Year bonds pretty much across the board, especially Italy, Belgium, and Portugal. Note: these charts are all from 3:00AM central or so. At 5:30 AM central the two-year yield on Italy hit a whopping 7.90% At 5:30 AM central the two-year yield on Portugal hit a whopping 18.30%. I failed to mention previously that the yield on Greek 1-Year bonds soared over 300% on November 23. Here is the chart.

S&P downgrades Belgium's credit rating - Standard & Poor's said Friday it downgraded the long-term sovereign credit rating of Belgium to AA from AA+ because of renewed funding and market risk pressure. The outlook is negative. "We think the Belgian government's capacity to prevent an increase in general government debt, which we consider to be already at high levels, is being constrained by rapid private sector deleveraging both in Belgium and among many of Belgium's key trading partners," S&P said in a note.

Hungary yields soar after downgrade - Yields on Hungarian sovereign bonds soared and the forint dropped on Friday after Moody's downgraded Hungary's credit rating to non-investive status. Traders said that investors were shunning Hungarian bonds and that domestic players were also absent from the market. Yields on three-year, five-year and 10-year treasury bonds went up 0.6-0.8 percentage points to about 9.1-9.5 percent in late morning trading. Earlier, yields on the same bonds stood between 8.51 and 8.98 percent, according to analysts at Intesa Sanpaolo's Hungarian unit. Hungary's CDS spreads -- the cost of insurance against a default -- also rose 620 points from 510 in the beginning of November, coming close to all-time high of 640 points reached in October 2008, when Hungary first turned to international lenders for assistance to avert a default."

Italian Yields Jump After Poor Auction - Italian two-year and five-year government-bond yields soared to euro-era highs Friday as investors began giving up on the euro zone's ability to break the political gridlock that is blocking a more decisive response to the currency bloc's debt crisis. talian two-year and five-year yields climbed to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the key 7% mark to 7.3%. he slide accelerated after Italy was forced to pay extremely high yields to attract investors to its latest auction of treasury bills.The Italian treasury sold €8 billion ($10.67 billion) of six-month treasury bills and €2 billion of 24-month zero-coupon bonds. The six-month paper carried an average yield of 6.5%, sharply up from the 3.5% rate paid at its October auction.

Italian Short-Term Debt Sale Turns Drastically Expensive - Italy's Treasury was forced to pay the highest yields on record for the country, since the launch of the euro, to lure investors to its latest sale of short-term debt Friday, but it managed to garner enough demand to sell the amount targeted despite investors' growing distrust of euro-zone sovereign debt.  Friday's sale was seen as warm-up before next week's tougher government bond auctions.  Italy sold EUR8 billion of six-month Treasury bills at an average yield of 6.504%, up from 3.535% at the previous auction Oct. 26. This auction was supported by EUR8.8 billion redeeming Treasury bills. The offer received EUR11.735 billion in bids. Italy also sold the EUR2 billion it had planned to shift in September 2013-dated CTZ, or zero-coupon bonds, paying a yield of 7.814% to investors, up from 4.628% previously. The offer attracted EUR3.189 billion in bids.

"Awful" Italy debt sale heightens euro zone stress  - (Reuters) - Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome's new emergency government. The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures. Though Italy managed to raise the full planned amount of 10 billion euros, weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market. Yields on two-year BTP bonds soared to more than 8 percent in response, a euro lifetime high, despite reported purchases by the European Central Bank.  In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7 percent threshold, over which Italy is likely to need outside help if they do not subside.

Italian, Spanish Yield Curves Start Looking Greek: Euro Credit -- Spain and Italy face paying more to borrow for two years than for a decade, echoing shifts that presaged Greece and Portugal seeking aid and suggesting skepticism about their new governments avoiding contagion. Italian two-year bond yields rose to a record today and top those on 10-year debt, while the gap between Spain's two- and 10-year securities has halved in a month to a three-year low of just 70 basis points. Greek two-year notes started yielding more than 10-year bonds a month before the government sought its first bailout and Portugal's yield curve inverted a week before it asked for a rescue. "Once it's inverted it's a sign the market is expecting something quite profound in terms of haircuts or default risk," "It's another dynamic in the fact that these are very distressed markets."

From Bad to Worse - I awoke to this news, via the Wall Street Journal: Italian two-year and five-year government-bond yields soared to euro-era highs Friday as investors began giving up on the euro zone's ability to break the political gridlock that is blocking a more decisive response to the currency bloc's debt crisis. Italian two-year and five-year yields climbed to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the key 7% mark to 7.3%. This just a day after an apparently not-confidence boosting meeting of the leaders of Germany, France and Italy. Perhaps European policymakers need fewer summits, not more? Contrary to conventional wisdom, Ralph Atkins at the Financial Times views yesterday's European commitment to back off the ECB as a positive development: My reaction on hearing that Mr Sarkozy had agreed to keep silent was that it would actually increase the ECB’s room for manoeuvre.  Now, any steps it took would clearly be at its own initiative. I am sympathetic to this line of reasoning. That said, Atkins gets to the next problem:Of course, this does not mean the ECB will act...

Is the end near? - I am seeing reports of 7.7 on the Italian ten-year bond, over eight percent on the two-year bond, 6.5 percent on the six-month note, and so on.  Here is one account. Maybe these markets simply will shut down soon.  There is so much talk about what the Germans should do, but I don’t see the viable options.  With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries?  And is that inflation then followed by a subsequent deflation?  Or does it continue forever?  And would Germany have to move to a regime of wage flexibility for the professions too?  How politically feasible is that?  I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.  If you’re going to play the “who is in a formal political agreement?” card, note that the current EU agreement explicitly specifies that, fiscally speaking, countries are pretty much on their own. The motto “no monetary union without a fiscal union” isn’t wrong, but more to the point is “no fiscal union without a common electorate.”

German, French debt insurance costs hit record   -- The cost of insuring German, French and Belgian sovereign debt against default through credit default swaps, or CDS, rose to record levels Friday after Italy paid a yield of more than 6.5% in an auction of six-month bills. The spread on five-year Italian CDS widened to 560 basis points from 553 basis points on Thursday, according to data provider Markit. That means it would now cost $560,000 annually to insure $10 million of Italian government debt against default, up $7,000. The spread on Belgian CDS topped 400 basis points for the first time, rising 13 basis points to 407, Markit said. The French CDS spread widened 3 basis points to 251, while Germany's CDS spread widened 6 basis points to 115.

Monti Says Merkel, Sarkozy Agree Italy Default Would Lead to End of Euro - German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed with Prime Minister Mario Monti that Italy succumbing to the region’s debt crisis would lead to the end of the euro, Monti’s office said. Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers at a Cabinet meeting in Rome today, according to an e-mailed statement. That “would provoke a stalemate in the process of European integration with unpredictable consequences.” Italy had to pay today almost 7 percent to sell six-month bills at an auction as investors grew concerned that the world’s fourth-biggest borrower and holder of Europe’s second-biggest debt may struggle to control borrowing costs. Merkel said yesterday that Monti has outlined an impressive agenda for Italy that “will promote growth” and may reduce a debt of 1.9 trillion euros ($2.5 trillion). Merkel made her comments at a press conference with Monti and Sarkozy after a meeting in Strasbourg, France.

Deutsche Bank Exercises In MADness: "Crisis Likely To Get Worse Before It Can Get Better... If Indeed It Ever Does"  - Deutsche Bank's Jim Reid, who has taken etudes in Mutual Assured Destruction to a level not even Leopold Godowsky would be able to execute (which is expected: DB is the one bank in Europe that has the biggest disconnect between reality and where the market trades its securities) reminds us once again that without the ECB stepping in it is all lost: "We are fast running out of options. The great hopes of the last few weeks for Europe have fallen one by one. We first had China pulling back, then a Levered EFSF scheme that has stalled before it has taken off, a powerless IMF and now yesterday we had even more insistence from Mrs Merkel that Eurobonds are not the answer and neither is a more aggressive ECB. It leaves us scratching our heads as to what the answer is." Yet the ultimate step: the questionable integration of Europe's countries in a union whereby they abdicate their sovereignty to Germany in exchange for the issuance of Eurobonds, is not only extremely unlikely, it will also come too late: "Should we get excited ahead of the treaty changes? The answer is that we are undoubtedly slowly moving closer to the start of a path towards fiscal union. However this process, even if it runs smoothly, will likely be a long, drawn-out, arduous journey. Unfortunately markets are moving at a much, much faster pace and we probably don’t have the time for a slow measured path towards fiscal union."

Walk Thru For The Upcoming European Treaty Changes - Is A Redemption Fund The "Transitory" Hail Mary? - Once again today was marked by ongoing disagreements over the form of any and every solution (or non-solution) to the 'problem' that is the Euro-Zone. At every corner, the EU Treaties are dragged up as impediments to the free-and-easy save-us-with-your-printing-press argument (among others). Credit Suisse provides an excellent summary of the relevant sections and while their perspective is that the Treaties do provide some flexibility for the ECB to extend its operations (and the incumbent introduction of much stronger fiscal watchdog measures), Euro-bonds will (no matter what and certainly not a slam-dunk for success) require a full Treaty change - a process that could take years. There are currently three options being discussed for the Stabilittee bonds - all of which have more than short-term time horizons for any potential implementation and so we suspect, as CS mentions, that the talk of the Redemption Fund from the German Council of Economic Experts will grow louder as an interim step.

Euro leaders push for fiscal crackdown - The leaders of Germany, France and Italy, the eurozone’s three biggest powers, made tougher fiscal governance a top priority in their battle to stem the sovereign debt crisis but offered no immediate concessions to calls for intervention by the European Central Bank.  Their emphasis on structural change to stabilise economic performance left markets unimpressed. The euro fell from $1.338 against the dollar at the start of the leaders’ press conference to a low of $1.332, while stock markets across Europe gave up earlier gains. German chancellor Angela Merkel and Mario Monti, the new Italian prime minister welcomed eagerly into the fold, in contrast to the near shunning of his predecessor Silvio Berlusconi, spoke of creating a “fiscal union” to drive economic integration and enforce budgetary discipline. Ms Merkel made clear that she wanted ambitious steps enshrined in treaty before contemplating the issuance of commonly backed eurobonds, any early discussion of which she has dismissed as “inappropriate” in a crisis. “When we take a first step towards fiscal union, for example by reinforcing the Stability and Growth Pact via automatic sanctions, it will be a step forwards but it won’t be grounds for me to change the opinion I expressed yesterday,” she said. President Nicolas Sarkozy of France said he and Ms Merkel would shortly propose changes to European Union treaties to improve economic governance and deepen integration among the 17 eurozone members – although he did not use the phrase fiscal union.

Europe seeks power to place weak states in 'administration… THE EUROPEAN Commission wants the Brussels authorities to be given the power to place distressed euro zone countries in a form of EU “administration” as part of a new drive to toughen the fiscal rules behind the single currency. In a bid to intensify the battle against the worsening sovereign debt crisis, the EU executive will publish plans tomorrow for euro countries to issue debt with a common euro zone guarantee. The initiative, resisted for months by Germany, includes intrusive measures to radically expand the reach of budgetary oversight by the European authorities. While the objective is to minimise the increased risk that fiscally sound countries would bear in the “eurobond” or “stability bond” system, member states would have to yield significant new powers to Brussels. So that eurobonds are always repaid, the commission suggests mechanisms to ensure the servicing of such debt always takes priority over “any other spending in . . . national budgets”. Drafts seen by The Irish Times say a further option “would be to grant extensive intrusive power at EU level in cases of severe financial distress, including the possibility to put the failing member state under some form of ‘administration’ ”. This implies EU officials would be given power to intervene in the execution and supervision of key national policies.

Behold The New Anschluss: ECB's Paramo - "Prepare To Give Up Significant Sovereignty" - The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.

Foreign News: Eurobonds and contagion to Poland and Slovenia - I have already highlighted some of the issues being reported on Eurobonds. But I should point out that I believe the Germans are already considering Eurobonds despite official denials. The Germans want to explore all of the eventualities and will only discuss the palatable ones in public. The article in Der Standard from Austria points to this likelihood.  The other major story is contagion. The English-language press has had considerable coverage of downgrades in Portugal, France and Hungary. What they have not got a lot on is the contagion into eastern Europe. Poland’s currency is tanking as a result. Moreover, the halt of Austrian loans into central Europe is creating a credit crunch there which will negatively affect the economy irrespective of the macro fundamentals (which are poor due to real economy effects out of Euroland). Slovenia, a former model country in the east, is the other major target of contagion.

Central Bank’s Message to Europe - ‘No’ Means ‘No’ - To some people, the European Central Bank1 seems like a fire department that is letting the house burn down to teach the children not to play with matches.  The E.C.B. has a fire hose — its ability to print money. But the bank is refusing to train it on the euro zone’s debt crisis.  The flames climbed higher Friday after the Italian Treasury had to pay an interest rate of 6.5 percent on a new issue of six-month bills — more than three percentage points higher than a similar debt auction on Oct. 26. It was the highest interest rate Italy has had to pay to sell such debt since August 1997, according to Bloomberg News.  But there is no sign the E.C.B. plans a major response, like buying large quantities of the country’s bonds to bring down its borrowing costs. The E.C.B. “is not the fiscal lender of last resort to sovereigns,” José Manuel González-Páramo, a member of the executive board of the bank, told an audience on Thursday, a view that has been repeated by members of the bank’s governing council in recent weeks.  To many commentators, the E.C.B.’s attitude seems so incomprehensible that they assume the central bank is just putting pressure on politicians to make sure they keep their promises. But another possibility is that when the E.C.B. says “no,” it in fact means “no.”

Spanish Treasury Cancels New 3Y Auction - Given the recent market reaction to short- and mid-dated bond auctions in the European sovereign space, it seems the Spanish have blinked and decided to cancel the planned 3Y auction for next week. Reuters is reporting that instead of a single 3Y new issue, they are reopening 3 existing deals in the hope it will be easier to garner demand across several maturities and potentially more fungible for managers to add to existing positions than create new ones. Of course, it really doesn't matter too much as what we are concerned with is the secondary-trading 2015, 2016, and 2017 bonds will now be perfectly repriced at whatever is marginal demand for new risk positions - which we suspect will not be positive. The main reason for the shift to off-the-run, we suspect, is that the ECB is now allowed to 'buy' the bonds (not at re-issue but in the secondary pre-acution) as it is not allowed to buy primary issues. Once again - it smacks of desperation.

Another terrible day for Europe - Can Europe survive another day like yesterday?  The financial pages and the news wires carried an unrelenting series of bad news stories.

Portugal, from the BBC....Portugal has had its debt rating cut by Fitch to so-called "junk" status, and warned it could be cut again.
Belgium, from Bloomberg... Belgium’s credit rating was cut one step to AA by Standard & Poor’s, which said bank guarantees, lack of policy consensus and slowing growth will make it difficult to reduce the euro region’s fifth-highest debt load.
Hungary....The foreign- and local-currency bond ratings were cut one step to Ba1 from Baa3, the company said in a statement yesterday. Moody’s assigned a negative outlook. The country is rated the lowest investment grade at Standard & Poor’s and Fitch Ratings.
Italy, from the Telegraph...Italy had to pay record rates in a €10bn bond sale, despite reports that the European Central Bank was buying Italian debt in the secondary market to try to support the auction.Italy sold six-month debt for a yield of 6.504pc - nearly double the 3.5pc yield demanded by investors at an auction at the end of October.
Greece, from Reuters....Greece's budget deficit will not fall below a key euro zone ceiling in 2014 as planned, if the debt-laden country fails to decide additional austerity measures in June, a set of updated forecasts revealed on Friday.

Number of the Week: Germany, France Not Immune to Debt Problems - 37,700 euros: Euro zone debt per working-age person in 2011. Pressure has built on France and Germany to shore up the finances of their struggling partners in the euro zone, but the two countries have debt issues of their own that could limit the amount of help they can extend. Greece, Ireland and Italy have been at the forefront of the sovereign debt crisis in the euro zone and for good reason. They have the highest debt per working-age person in the common-currency region. According to data from the European Commission, Greece has some 47,000 euros of debt per capita, while Ireland and Italy have 55,000 euros and 48,000 euros, respectively. The euro zone average is 37,700 euros. France and Germany are better off than Greece, Ireland and Italy, but they’re still above the euro zone average. France has 40,000 euros in debt for each person in the country, while Germany is at 39,000 euros per capita. That puts both of them above Portugal and Spain, which are often lumped in with the struggling periphery. Portugal debt per capita is 25,000 euros, while Spain’s is 24,000 euros.

Euro zone may drop bondholder losses from ESM bailout - Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.  Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens. But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) - the permanent facility scheduled to start operating from July 2013 - could be withdrawn, with the majority of euro zone states now opposed to them.The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve."France, Italy, Spain and all the peripherals" are in favor of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands." Austria is also opposed, another source said.

Europe’s insoluble problems - Mohamed El-Erian is calling for massive recapitalization of the banking system: The global financial system is being refined “day in and day out,” El-Erian said. “This is not being done according to some master plan,” but in reaction to a series of crisis management interventions. None of these piecemeal policy moves restored confidence in the markets, he said. What is needed is a coordinated and simultaneous set of policy actions globally in four areas: restoration of credit markets, elimination of deteriorating assets from balance sheets, injecting capital quickly into the banking system, and regulatory forbearance. Oh, wait, that was El-Erian back in October 2008. But he’s saying something very similar now:In addition to specifying higher prudential capital ratios, governments must now bully banks to act immediately. Where private funding is not forthcoming, which should now be the presumption for a growing number of banks, recapitalization must be imposed, in return for fundamental changes in the way financial institutions operate and burdens are shared. The main difference, here, is the move from “regulatory forbearance” the first time around, to governments forcing “fundamental changes in the way financial institutions operate” today. But either way, this is basically, the bank-nationalization debate all over again.

Greece Again - Just a day after Greece's ND opposition party "committed" in writing to the details of the October summit agreement, Zero Hedge spots a potentially decisive Reuters story:The country has now started talking to its creditor banks directly, the sources said.Greece has been talking to creditors individually, just to get their own sense of market sentiment," the person said.The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.In all fairness to Greece, the details of the October summit were somewhat fuzzy (as in nonexistent), and so arguably they are not backing out. But the banks were clearly thinking the ultimately haircut not be as great as Greece is demanding. But probably more important is the fact that Greece is now taking a direct role in negotiations. Remember that the previous haircuts were "voluntary" and negotiated by Greece's European overlords to prevent triggering a credit event and CDS payouts. And one has to believe that "following the October agreement" implicitly means the Greeks will not upset the apple cart and trigger a credit event unilaterally. But if Greece is at the table forcing lenders to take massive haircuts, it will be virtually impossible to justify that this is not a technical default.

Eurocarnage Continues - Yves Smith - Things are only going from bad to worse in Europe.  Reader Antifa had noted in comments that the IMF had expanded access on Thursday to borrowing facilities via a Precautionary and Liquidity Line (PLL), which would allow “responsible” borrowers to take down five or perhaps as much as ten times their normal allotment. But I don’t agree with his/her hopeful view that this meant the IMF was acting as lender of last resort. Only the ECB, an issuer of euros, can play that role. The IMF gets its budget from member nations, and my understanding in the US is that it comes from the Treasury, not the Fed, which means it is a budgetary item. New spending allocations, particularly to ‘furriners, are not likely to get much traction. China was already approached directly (for the EFSF) and was notably cool on the idea. Why would it lend indirectly, via the IMF, when it and other emerging economies are already unhappy that their voting share is out of line with their economic power? The BRICs have made it clear they want more voting rights as a condition to making bigger contributions. So I don’t see the IMF as an effective force, in general, and even on a stopgap basis given it certain to be insufficient firepower. Mr. Market seems to think so too. Italy had a disastrously bad bond auction today, a mere €10 billion of two year notes and six month bills (remember, the day of reckoning comes in February, when Italy has to roll €300 billion). The rate on the bills was 6.50%; on the notes, 7.81%. Three year note yields rose as high as 8.13%. Even though the ECB intervened, buying both Spanish and Italian debt, it barely made a dent. Yields in Italy on two to five year paper remained in the 7.67% to 7.77%

Italy Leads Busy Week of Euro-Zone Bond Sales —Italy, Belgium, Spain and France all plan to sell bonds next week, a big test for a region still reeling from unexpectedly weak demand for debt from its German core. Given the surge in bond-market yields in recent week, all four countries are expected to pay considerably more for cash than they did at their previous auctions. Just how much higher the tab turns out to be will indicate the extent to which investors are giving up on the ability of politicians to take tough measures to reduce their debt loads.  Concerns about whether the euro zone can survive a debt crisis that has dragged on for more than two years and has forced three of its 17 members to accept international bailouts increased after bids at Wednesday's auction of 10-year German bonds fell 40% short of the amount offered. Until now, German debt has been the safe haven in the turmoil. All told, five euro-zone governments are together expected to sell about €19 billion ($25.36 billion) in debt next week, more than double the amount three governments sold this week.

Death of a currency as eurogeddon approaches - The market is starting to bet on what was previously a minority view - a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency. The prevailing view was that the German Chancellor didn't really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.  But there comes a point in every crisis where the consensus suddenly shatters. That's what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady's not for turning.  All of a sudden, the pound is the European default asset of choice. What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world's major reserve currencies. That promise today looks to be in ruins.

What's Lost With the Demise of the Euro? Only What Was Unsustainable - At the risk of over-saturating you with more euro-related material, here are the basics we need to keep in mind as the third act plays out. A common currency seemed like a good way to simplify trade and lower transaction costs. As I noted yesterday in Some Heretical Thoughts on the U.S. Dollar, such "folk" convictions rest on "sole-source causation": in this case, that a single currency would only offer more benefits of integration because it lowered complexity and transaction costs. The euro supporters forgot or ignored the primary purpose of national currencies:to account for differences in transparency, productivity, trust, money creation and risk between nations' economies and their Central Banks/States. If you remove this means of accounting for these fundamental differences, then you have removed a feedback loop from a dynamic system, and thus removed an absolutely essential flow of information and transparency. What you're left with is a system of lies, officially sanctioned opacity, misinformation, disinformation, cooked books, artifice and propaganda, i.e. exactly what Europe has become. With the euro, there was no way for the system to account for thr vast differences in debt loads, credit risks, transparency, productivity and a dozen other fundamentals that are expressed in foreign exchange rates. 

Banks Build Contingency for Breakup of the Euro - For the growing chorus of observers who fear that a breakup of the euro zone might be at hand, Chancellor Angela Merkel of Germany has a pointed rebuke: It’s never going to happen. But some banks are no longer so sure, especially as the sovereign debt crisis threatened to ensnare Germany itself this week, when investors began to question the nation’s stature as Europe’s main pillar of stability.  On Friday, Standard & Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.  While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that. “We cannot be, and are not, complacent on this front,” Andrew Bailey, a regulator at Britain’s Financial Services Authority, said this week. “We must not ignore the prospect of a disorderly departure of some countries from the euro zone,”

Bank of England says market risks hit 2008 highs (Reuters) - UK market participants see risks of major crisis at their highest since just before the collapse of Lehman Brothers, with a euro zone break-up their top worry, a Bank of England survey showed on Tuesday. The Bank's twice-yearly systemic risk survey of 68 firms showed that the perceived probability of a future "high impact" event was at its highest level since July 2008, when the survey began and just weeks before the U.S. lender's demise which sent the global financial system into near meltdown. The latest survey, covering the second half of 2011, showed that 54 percent of respondents believe the probability of a short-term high-impact event was very high or high. Confidence in the UK financial stability over the next three years dropped to its lowest since the second half of 2009, the survey showed. Over 60 percent of respondents cited sovereign risk as their top worry.

Andrew Bailey: 'UK banks must brace themselves for euro break-up' - British banks must prepare for the worst-case scenario of a disorderly break up of the euro, according to a senior UK regulator. Andrew Bailey, deputy head of the Prudential Business Unit at the Financial Services Authority (FSA), noted that British banks are not heavily exposed to the eurozone, but said they must prepare for some countries to exit the single currency – or a complete break up. "We cannot be, and are not, complacent on this front," Mr Bailey said. "As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis. "Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the eurozone. "I offer no view on whether it will happen, but it must be within the realm of contingency planning," he added. Failure to plan for the exit of a country from the euro would be "unsound risk management",

David Cameron: "Our Plan to Cut Debt is Failing"- David Cameron and his senior ministers have admitted for the first time that there is a danger they will not be able to tackle borrowing on time.  The Prime Minister on Monday conceded that tackling Britain’s debts was “proving harder than anyone envisaged”, raising the prospect that the Coalition would be unable to close the deficit by 2014-15. That would rule out any significant tax cuts before the next election. It also raises questions about the Coalition’s fundamental purpose. Departing from the deficit-reduction timetable could raise fears that Britain will face rising borrowing costs as bond markets take fright. Debt is “a drag on growth”, Mr Cameron told business leaders. “We are well behind where we need to be,” he said.  Kenneth Clarke, the Justice Secretary, has warned that the global economy is “in a devil of a mess”, which is “bound to have an effect” on the Coalition’s plans to clear most of the deficit before the next election.

Why cutting fiscal deficits is an assault on profits - Reducing the government’s debt was “proving harder than anyone envisaged”, David Cameron, UK prime minister, said in a speech on Monday. He even admitted that “high levels of public and private debt are proving to be a drag on growth, which in turn makes it more difficult to deal with those debts”.  If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea. If the government wishes to cut its deficits, other sectors must save less. The questions are which and how. What the government has not admitted is that the only actors able to save less now are corporations. The government’s – not surprisingly, unstated – policy is to demolish corporate profits. Net lending – the difference between savings and investment – of all sectors of an economy must add up to zero. If the government is running a huge financial deficit – that is, spending vastly more than its revenue – then other sectors must be spending much less than their income. And so, indeed, they are. In the second quarter of 2011, the government ran a financial deficit of 9.3 per cent of gross domestic product. Counterpart surpluses were 1.6 per cent of GDP for foreigners (the inverse of the current account deficit), 1.7 per cent of GDP for households and as much as 6.4 per cent of GDP for corporations. The US picture is similar: in the third quarter of 2011, the deficit of government was 9.1 per cent of GDP. Offsetting surpluses were 3.3 per cent of GDP for foreigners, 2.2 per cent of GDP for households, and 3.7 per cent of GDP for business.

Death By Accounting Identity - Krugman - Martin Wolf has a somewhat despairing-sounding column this morning, in effect pleading with the Cameron government to admit that the laws of arithmetic must apply. Good luck with that. Martin writes, If the private sector is seeking to run down its debts, it is hard for the government to do so, too, because everybody cannot spend less than their income. That is the “paradox of thrift”. No, it is not a novel idea. Ah, but for the past two years leaders in the Eurozone, Britain, and the US Republican party have subscribed to the following plan:

  • 1. Slash government spending
  • 2. ??????
  • 3. Prosperity!

For a while ???? was framed in terms of the doctrine of expansionary austerity: slash spending and the confidence fairy would make private-sector spending rise. At this point, however, few still believe in this doctrine. Also, in the euro area it was hard to see how things would work even if the confidence fairy made an appearance; how was that supposed to resolve the large payments imbalances between the core and the periphery? But even as the intellectual foundations, such as they were, for the austerity plan have been demolished, the plan itself remains unchanged.

Housing market 'unlikely to recover', says Bank of England expert - The housing market is unlikely to ever recover from the financial crisis and it may prove economically beneficial for fewer people to own property, a senior Bank of England expert warned yesterday. David Miles, a member of the Bank’s Monetary Policy Committee, suggested that people may have to wait until they are in their forties to buy a home as banks will not offer large mortgages. His remarks raise the possibility that house prices will not return to pre-recession levels as house buyers will be unable to take out the necessary home loans to trigger another boom. Mr Miles added that he did not “think we should regret” the fundamental transformation of the housing market caused by the credit crisis. The comments may undermine David Cameron and other ministers, who earlier this week unveiled proposals designed to boost housing ownership as part of the Government’s growth strategy.

Two million set to strike next week — The number of public sector workers set to strike next week has reached two million following the latest union votes to back the Trades Union Congress day of action. The growing support for the protest against the government's proposed pension reforms means November 30 could be the biggest day of industrial unrest since the 1979 Winter of Discontent. The Rail, Maritime and Transport union said its members at the Tyne and Wear Metro have voted by 4-1 for strike action and by a larger majority for action short of a strike. Prime Minister David Cameron's official spokesman said: "We are expecting unions to give notice of their intention to strike in the next couple of days, so we will have more clarity in the next few days about who is likely to go on strike.

Young and jobless: UK’s lost generation - To the roster of pain inflicted by the European debt crisis, add this: rising and persistent joblessness among young Britons. Though not at the level of troubled euro zone countries like Greece, and rooted in domestic problems as well, it has reached a point here that is setting off alarms across the political and economic spectrum. Unemployment among British youth, defined as those 16 to 24 years old, rose above the politically sensitive threshold of one million in the three months through the end of September, the Office for National Statistics said. That is the highest level since 1992. An estimated 20.6 per cent of British young people not pursuing a full-time education were without a job, an increase of 1.8 percentage points from the previous three months. The problem is not confined to younger people. Total unemployment in Britain rose by 1,29,000 to 2.62 million in the third quarter, bringing the jobless rate to 8.3 per cent, the highest in 15 years. Youth unemployment has been climbing in many EU member states as economies struggle and governments impose stringent austerity plans. The youth unemployment rate in Spain reached 45 per cent in the second quarter, the worst among EU members, followed by Greece with 42.9 per cent rate, according to Eurostat, the EU statistics agency.

The Blue Bus Is Calling Us - Surely all the pretending nears its dire conclusion. Everybody is broke and everybody is in hock up to his prefrontal lobes and everybody is whirling around the drain over in the grand continental theme park of lovely cities and great eats. I'm sorry, but I don't see how they can stop the hemorrhaging as we slide into the season of holiday enchantment.    Every bank (and its uncle) is dumping everybody's sovereign bonds as though they were discovered to be croissants imported from a leper colony. Feh...! Folks of all stripes and accents desperately seek to move their money to some safe harbor - but where is this cozy mooring? To the US for the moment perhaps; but what happens Monday morning when the markets react to the weekend news that the US Senate super-committee has been utterly unable to agree on decisive action that would forestall the scheduled massive automatic budget cuts built into this red-white-and-blue doomsday machine - not to mention the ratings agencies threats to knock UST-paper down another notch upon such failure. Oy yoy yoy!   Just to be plain here: nothing is working. The global system of accounting control fraud has completely unraveled. Nobody will lend money to anybody anymore because everybody suspects everybody else is lying about their ability to meet any obligation. The whole world has become a daisy chain of schnorrers and schmiklers. All those hundreds of trillions of dollars in credit default swap insurance (ha!). Worthless and pointless, because now that a Greek default of at least 50 percent, officially, has failed to ignite a payout, then no default will. Instead, you'll just get cascades of un-hedged defaults. All the lawyers who ever lived could litigate until the sun turns into a red dwarf and they will never resolve these swindles, and the money represented in them will be so far gone that not even Ray Kurzweil in full Singularity mode will encounter a trace of it in his eternal travels through a zillion parallel universes.