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

Saturday, December 28, 2013

week ending Dec 28

Fed Balance Sheet Clearly Over $4 Trillion -  Earlier in 2013 we saw something that will create serious issues down the road. The Federal Reserve’s balance sheet seemed to be clearly on its way to $4 trillion in assets. Our projection was that it would likely hit the $4 trillion mark by the end of 2013, and that has now occurred on a daily and week-ending balance basis. The Federal Reserve’s reported balance sheet for the week ending December 25, 2013, was at $4.071 trillion, and the balance on December 25 was $4.074 trillion. A $10 billion per month of tapering will only slow down the growth of the Fed’s balance sheet. Meanwhile, the balance sheet can continue to grow and grow. It can grow even if the Fed cuts its bond buying in half. Some $3.759 trillion are of securities held outright. Of that, some $2.204 trillion is held in U.S. Treasury securities. Another $1.497 trillion is held in mortgage securities. Now go back to before the recession and look at the chart from the Federal Reserve below. This had been handily under $1 trillion before the recession and the bank bailouts. It screamed higher in 2008 and 2009 as the Fed and powers that be raced to save the banks and the financial system. Through the start of 2011, the balance managed to remain less than $2.5 trillion, and the balance sheet remained under $3 trillion until the start of 2013. Now the $4 trillion mark has been hit due to the $85 billion per month of bond buying.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, December 26, 2013: Federal Reserve Statistical Release - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed’s Lacker Says Tapering Was ‘Right Decision’ Federal Reserve Bank of Richmond President Jeffrey Lacker said Monday on CNBC that given recent data the Fed’s decision to trim its bond buying program last week was the “right decision” but adjustments could still be made depending on future swings in employment growth. “Given the data” and how the committee positioned itself by identifying labor conditions as the key criteria, he said Fed’s decision to trim $10 billion from its $85 billion a month asset buying program was “kind of a slam dunk.” Nonetheless, he said, “you have to consider the door open for us for pausing if the data comes in a little weaker than we thought or, you know, accelerating if the data comes in stronger.”  Mr. Lacker said the imminent departure of Chairman Ben Bernanke had “nothing at all” to do with the decision to taper. “Zero,” he said. “This seemed like the natural decision at this time, whether he’s leaving next month or not.”

Fed’s Fisher Would Prefer $20 Billion Taper Increments - Federal Reserve Bank of Dallas President Richard Fisher, who next year will gain a voting slot on the Federal Open Market Committee, said in a Fox Business Network interview Monday that he would have voted with the majority on last week’s tapering decision. Asked if $10 billion increments in reducing asset purchases are sufficient, Mr. Fisher said he argued for $20 billion steps. “I think the market could have digested that,” Mr. Fisher said. Discussing U.S. economic growth, Mr. Fisher said “we may not see as robust a number” in the fourth quarter and first quarter compared with the third quarter, but “we’re on an upward trajectory and that’s what’s important.”

What Would It Take for Fed to Pause Its Cuts to Bond Purchases? - It was a bumpy road to the Federal Reserve’s first attempt to begin pulling back on its extraordinary monetary stimulus to the economy. But now that the dreaded taper has finally arrived, most economists expect the central bank to continue paring back the pace of bond purchases in regular increments, likely of $10 billion per meeting at every meeting until the asset purchase program ends. The U.S. Federal Reserve in Washington.—ReutersFed Chairman Ben Bernanke himself was rather explicit at last week’s press conference in suggesting the first move would likely be followed by a steady round of further reductions. “If the incoming data broadly support the Committee’s outlook for employment and inflation, we will likely reduce the pace of securities purchases in further measured steps at future meetings,” he said. So even if policy makers hold out the option of pausing or even reversing course, few believe it actually will. “We expect the Fed to reduce the pace of its purchases by $10 billion at each of its meetings between January and September, and then take the last step from $15 billion in October,” said Michael Gapen, economist at Barclays. “The Federal Open Market Committee says its policy is data dependent and that is true, but we believe the committee would not have taken the first step without the expectation that it would take further steps.” Just how bad would things have to get for policy makers to consider veering off this expected path? Pretty bad. Job growth would likely have to falter significantly from the current 200,000 monthly pace or the underlying economic outlook might need to worsen. “The bad-news hurdle for a halt to ‘tapering’ has probably been set quite high,”

PBS Drops a Bombshell on the Federal Reserve’s 100th Birthday Party -- PBS promised a “debate” this past Friday night on the “benefits and dangers” of the Federal Reserve as the Fed marks its 100 years of existence tomorrow. Instead of a debate, two famous stock market historians made the same stunning announcement – that the Fed has decided its job is to push up the stock market.  Consuelo Mack’s Wealthtrack program on PBS had invited James Grant, Editor and Founder of Grant’s Interest Rate Observer, and Richard Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets at NYU’s Stern School of Business. The opening scene for the program shows Sylla in a party hat lighting the candles on the Fed’s birthday cake while Grant snuffs them out – suggesting that Sylla would be making pro-Fed statements while Grant would take the opposing view. What happened during the program, however, was that both men made the candid and bold accusation that the Federal Reserve, for the first time in its history, has assigned itself the job of propping up the stock market.  Grant had this to say: “New thing – it is in the business of talking up the stock market…The Fed is manipulating prices, especially on Wall Street.” To another question from Mack, Grant says: “The Fed has presided over the decay of finance.” Professor Sylla adds more fuel to the fire, stating: “The Fed seems to have, I think almost deliberately, is trying to push the stock market up. I’ve watched this stuff for 40, 50 years now and this is the first time in my memory when it seemed to be official U.S. government policy that the stock market goes up. And the Fed likes this because it thinks that when the stock market goes up, people who own stocks feel richer, they’ll go out and spend more money, and the unemployment rate will come down.” You can watch the full program here.

If Possible, Fed Forecasts Are Worse Than Its Policies - Here's why. The FOMC released a statement on December 18 which said "The committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace..." Translated into ordinary English: the economy has been doing really badly and we hope that it is going to do better in the future. Curiously, the exact same statement could have been made by the FOMC at any time in the past several years. During that period, the economy was performing abysmally, and the Fed regularly projected that the economy would do much better in the future.Unfortunately, the Fed's hopes never translated into reality.

  • · In 2010, the Fed forecast that the economy would grow at about 4 percent in 2013.
  • · In 2011, the Fed's forecast for 2013 growth declined to 3.2 percent.
  • · In 2012, it was lower still, at 2.6 percent.
  • · Now, in 2013, the Fed thinks that GDP growth this year will be about 2.3 percent.

The third-quarter GDP growth rate of 4.1 percent was driven by spending on inventories, which will detract from fourth-quarter growth. The year 2013 is not an anomaly. Over the past few years, the Fed's forecasts have regularly overshot reality.

Nominal interest rates, inflation, and communications strategy - Nick Rowe - I have been arguing with John Cochrane and Steve Williamson over whether central banks announcing higher nominal interest rates is inflationary or deflationary. The very fact that economists are arguing about that very basic question tells us something important about central banks' using nominal interest rates as a communications strategy: it sucks. This is a point that economists like Scott Sumner and I have been making for some time. Do low nominal interest rates mean monetary policy is loose or tight? It depends. Suppose the central bank suddenly announces a new time-path for the monetary base. Or for the money supply, or the nominal exchange rate, or the price of gold, or something else with $ in the units. The new announced time-path is different from the one people had previously expected. Consider the set of all such possible announcements. Let us divide that set into those that cause an immediate increase in the nominal interest rate, and those that cause an immediate decrease in the nominal interest rate. Let us also divide that set into those that cause an immediate increase in the inflation rate, and those that cause an immediate decrease in the inflation rate. (Strictly speaking there will be some members of the set that have exactly zero effect on the inflation rate, so you could add a third category, if you insist, but let's ignore those borderline cases, to make my life easier.)So we have partitioned the set of all announcements into four subsets. How exactly you allocate members of the total set into those four subsets will depend on your macroeconomic model. But ask yourself this question: can you say that two of those sets are empty sets? I don't think you can.

Debt Rattle Dec 23 2013 – How Do We Define Value? - Ilargi - I would like to get your thoughts on one of the most basic questions in an economy: what is value, what creates value, and how can value change or even fluctuate? Sometimes it’s best to take a step back and make sure we properly (re-)define the terms we use, lest confusion rules the day.  As a reference for the question(s) I want to use two articles I read over the past week. In particular, I’m interested in discussing whether the Fed’s Quantitative Easing (QE) programs have created value, and whether QE is capable of doing so in the first place. And I don’t mean obvious views like ‘money has no value at all because it’s created out of nothing as credit/debt’, we know that. I want to start with the idea that an asset, a good, plus the work man is capable of, can be assigned a value in dollar terms, and then see how that value is defined. The first article comes from Mark J. Perry, University of Michigan economics professor and scholar at The American Enterprise Institute (and I know what various parties think about the AEI, that’s for another discussion). Perry quotes from a report by the World Federation of Exchanges, and there are some impressive numbers in that. What surprised, even baffled me, was Mr. Perry’s conclusion at the end:  The global stock market rally over the last five years has added back more than $34 trillion to world equity values since 2009, and demonstrates the incredible resiliency of economies and financial markets to recover and prosper, even following the worst financial crisis and global economic slowdown in at least a generation.

 Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care? - The headlines for the latest report on U.S. economic growth mostly focused on the revised 4.1 percent growth rate for real GDP. As the following chart shows, that made it the best quarter in two years, and only the second quarter since the recovery began in which growth hit the 4 percent mark or better. A deeper look into the tables put out by the Bureau of Economic Analysis reveals another number that will bring even more holiday cheer to at least some economists:  Nominal GDP growth has also begun to accelerate and the NGDP gap has finally started to close. Nominal GDP (NGDP) is simply gross domestic product expressed in current dollars, that is, measured according to the prices people actually pay for the goods and services they buy. That differs from the more widely reported real GDP data, which adjust prices to remove the effects of inflation. The rate of growth of NGDP is equal to the rate of growth of real GDP plus the rate of inflation.  You might legitimately ask why we should care about NGDP. Yes, of course, we should care about real GDP—that measures how much actual stuff we have to eat and play with. It is natural, also, to care about inflation—no one likes to pay more for their stuff year after year. But what do we gain by adding together the rate of growth of real GDP and the rate of inflation to get the growth rate of NGDP as a single number? The answer, according to a group of economists who call themselves market monetarists, is that the Fed can control NGDP more easily than it can control its separate components. In turn, these economists say, the rate of growth of NGDP drives the rest of the economy. If NGDP doesn’t grow fast enough (5 percent per year is often used  as a rough benchmark), then we will get low inflation, but real GDP growth will be substandard and unemployment will rise. If NGDP speeds up, it will push inflation up a little, but that will be tolerable if inflation is low to start with, and it will also get the real economy growing and bring unemployment down. Then, before the economy overheats, the Fed can taper off its monetary stimulus and NGDP will stabilize at a rate of growth that is sustainable in the long run.

Prices from a Monetary Perspective - Cleveland Fed - Economists like to remind people that inflation and deflation are monetary phenomena and that they ultimately stem from central banks’ monetary policies. Inflation results when a nation’s central bank creates more money than its public wants to hold, and deflation occurs when a central bank creates too little. The connection between central banks’ monetary policies and inflation, however, is imprecise and often drawn out over many years. This imprecision happens for two reasons: Not all price changes stem from inflation; some instead reflect an emerging scarcity or abundance of particular goods. And the public’s demand for money, the amount it wants to hold, often is not very stable. Economists can, however, employ a simple technique that helps us see more clearly the relationship between money and price movements.  To get at the monetary nature of inflation and deflation, economists can divide price changes into two components: excess-money growth and changes in the velocity of money. Excess-money growth is simply the difference between the growth of money and the growth in real output. The velocity of money, in theory, represents the average rate at which money changes hands in a given time period. In practice, economists calculate velocity as anything that affects aggregate prices besides excess-money growth. Velocity might, for example, respond to relative price changes, price controls, and factors that affect money demand besides real GDP, like interest rates or inflation expectations.

PCE Price Index Update: Core Inflation Remains Far Below the Fed Target - The November Personal Income and Outlays report for October was published today by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 0.87% is a small rise from last month's downwardly adjusted 0.72% (previously 0.74%). The Core PCE index of 1.12 is fractionally higher than last month's downwardly adjusted 1.09% (previously 1.11%). As I've repeatedly remarked, the general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has consistently moved in the wrong direction since early 2012 and, after flatling since May, it slipped to a lower level over the past two months.The adjacent thumbnail gives us a close-up of the trend in Core PCE since January 2012. The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted. For a long-term perspective, here are the same two metrics spanning five decades.

Chicago Fed: "Economic growth picked up in November" - The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth picked up in November Led by gains in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.60 in November from –0.07 in October. The index’s three-month moving average, CFNAI-MA3, increased to +0.25 in November from +0.12 in October, marking its second consecutive reading above zero and highest reading since February 2012. November’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed: Economic Growth Picked Up in November - The index went postive (meaning above-trend growth) after a slightly negative (below-trend) October. It has been below trend for 13 of the past 21 months. Here are the opening paragraphs from the report:Led by gains in employment- and production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.60 in November from –0.07 in October. All four broad categories of indicators that make up the index increased from October, and three of the four categories made positive contributions to the index in November. The index's three-month moving average, CFNAI-MA3, increased to +0.25 in November from +0.12 in October, marking its second consecutive reading above zero and highest reading since February 2012. November's CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.  The CFNAI Diffusion Index increased to +0.27 in November from +0.24 in October. Fifty-six of the 85 individual indicators made positive contributions to the CFNAI in November, while 29 made negative contributions. Fifty-four indicators improved from October to November, while 30 indicators deteriorated and one was unchanged. Of the indicators that improved, 11 made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

Beware the New Normal - As the year winds down, there’s some optimism about where the economy is heading..

  • –The Federal Reserve, while stressing labor market weakness, judged that the macroeconomy was on the mend to the point where it could begin to pull back slightly on its asset-buying program.
  • –The revised growth rate for gross domestic product for the third quarter came in with a “4” handle — 4.1 percent — something we haven’t seen for almost two years.
  • –The pace of job growth has picked up slightly in recent months.  The average monthly payroll gain over the past four months was 200,000 a month; over the prior four months, the comparable gain was 160,000.

That said, let’s stick with the macro but add what I and a growing body of econo-watchers worry may be a serious structural problem: We’re settling into a growth rate that’s too slow.  That may sound confusing.  Once we’re out of the downturn and into the bona fide expansion, isn’t the growth rate … um … the growth rate?  In fact, an economy’s potential growth rate is both limited by real constraints and influenced by a bunch of factors, the same way height is influenced by both immutable genes and variable nutrition.  If the labor force contracts because of weak demand or investment is unusually weak because such resources are misallocated (say, oh, I don’t know … into derivative bets on bundles of funky mortgages) or each expansion is driven by a bubble that bursts and leaves lasting damage, these events diminish potential growth in ways that are not the natural workings of organic economic constraints.

Risk And Reality In The US - The US economy is stabilizing, but it's not truly recovering. That's the view of Saxo Bank's Chief Investment Officer, Steen Jakobsen. Following the Fed's tapering news, Steen says the risk is that we trade on perception and not reality. Clearly, the outgoing Fed Chairman, Ben Bernanke, wanted to send a signal to the markets.  Global equity markets, notably in the States, have been hitting record highs for weeks; but Steen warns "we're coming to the end of that cycle." Actual growth in America is well below the average rate of the past 60 years and job creation too is lagging. People may be starting to feel more confident but that's still not translating into significantly higher employment or wages.   "We're at the end of asset inflation," he says, and that "will dawn on the market very soon."

Be prepared: Wall Street advisor recommends guns, ammo for protection in collapse - A top financial advisor, worried that Obamacare, the NSA spying scandal and spiraling national debt is increasing the chances for a fiscal and social disaster, is recommending that Americans prepare a “bug-out bag” that includes food, a gun and ammo to help them stay alive. David John Marotta, a Wall Street expert and financial advisor and Forbes contributor, said in a note to investors, “Firearms are the last item on the list, but they are on the list. There are some terrible people in this world. And you are safer when your trusted neighbors have firearms."  Marotta said that many clients fear an end-of-the-world scenario. He doesn’t agree with that outcome, but does with much of what has people worried. “I, along with many other economists, agree with many of the concerns expressed in these dire warnings. The growing debt and deficit spending is a tax on those holding dollars. The devaluation in the U.S. dollar risks the dollar's status as the reserve currency of the world. Obamacare was the worst legislation in the past 75 years. Socialism is on the rise and the NSA really is abrogating vast portions of the Constitution,” he wrote.

Reason for Optimism? - Despite the best efforts of some policymakers to reduce aggregate demand by way of austerity measures [0], there are glimmers of hope for more rapid growth. 2013Q3 q/q GDP growth has been revised up to 4.1% SAAR; higher consumption is part of the reason. The impact on the path of GDP is noticeable.Notice that not only has the trajectory of GDP moved up noticeably, the forecasted growth rate for 2013Q4 has moved up. The IMF is also revising upwards forecasted growth for the US in 2014. [1] Employment seems to be growing more rapidly. In addition to the acceleration in November employment growth, it's likely that the benchmark revision, to be reported in February 2014, will shift up the trajectory of nonfarm payroll employment and private nonfarm payroll employment. For the first, Figure 2 shows the likely revision, based upon the preliminary benchmark revision (released 9/26). Notice that the household adjusted series matches the revised payroll series toward the end; however, the household series is subject to considerably wider variation due to smaller sample, so not too much should be made of this. Private nonfarm payroll employment shows a similar phenomenon.  Finally, indicators of production show an acceleration of growth.  Other forward looking indicators are positive; today's CFNAI release indicates a shift from contraction (-0.06) to expansion (0.7). Consumer sentiment has also increased, according to the Reuters/UMich index. Finally, I think the factor that makes the growth more likely to be sustainable going forward, barring another debt-ceiling crisis or some sort of financial crisis overseas, is the fact that real household net worth has nearly reattained pre-crisis levels.

Lagarde cheers ‘much stronger outlook’ for US in 2014 - The International Monetary Fund is raising its outlook for the US in a sign that the world’s largest economy has reached a turning point and is poised for stronger growth almost five years after a devastating recession. Christine Lagarde, the managing director of the IMF, delivered a bullish forecast for US growth, saying that a budget deal by the US Congress, strong data and the Federal Reserve’s plan to taper bond buying had given the world “a lot more certainty for 2014”. “Growth is picking up and unemployment is going down. So all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast,” she said on NBC’s Meet the Press on Sunday. Ms Lagarde’s rosy assessment follows a week of promising signs for the US economy. The passage of a two-year budget deal signalled that longstanding political gridlock on fiscal issues in the US capital had eased, at least temporarily, while data showed the economy grew at its fastest rate in nearly two years in the third quarter. The Federal Reserve, meanwhile, has announced a scaling back in its $85bn-a-month monetary stimulus in what was seen as recognition that the US economy was finally delivering sustainable growth. President Barack Obama capped the week with an end-of-year press conference in which he declared: “America is poised for a breakout.” Ms Lagarde said the Fed’s decision to taper asset purchases, announced about a month before Janet Yellen was due to take the helm of the central bank, pending final Senate approval, was evidence that the economy was picking up and that the unemployment rate would decline. “Unemployment will continue to go down. It’s around 7 per cent. It’s likely to move toward the high 6 per cent, but certainly will continue to move down,” Ms Lagarde said. However, she noted that the so-called participation rate – an indicator of how many people were joining the job market and finding jobs – was not increasing.

Q4 GDP: Here come the Upgrades - Via the WSJ: Macroeconomic Advisers ... [raised] its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate. And Goldman Sachs has increased their Q4 GDP tracking to 2.4% annualized growth. And based on the November Personal Income and Outlays report: Using the two-month method to estimate Q4 PCE growth (first two months of the quarter), PCE was increasing at a 4.1% annual rate in Q4 2013. This suggests solid PCE growth in Q4. Of course the contribution from private inventories will probably be negative in Q4, but final demand should be solid.

Goldman Sachs: 10 Questions for 2014 - Goldman Sachs chief economist Jan Hatzius writes: 10 Questions for 2014 (Here are the 10 questions at Business Insider: Goldman's Top Economists Just Answered The Most Important Questions For 2014 — And Boy Are His Answers Bullish) A few excerpts from the research note: We expect the US economy to accelerate to an above-trend growth pace in 2014, as the fiscal drag diminishes sharply but the private sector impulse remains positive. The acceleration is likely to be led by faster growth in personal consumption and business capital spending, with continued support from housing. The unemployment rate is likely to fall about as fast as in 2013, with faster job growth offset by a flattening in labor force participation. But we expect the slack in the labor market to remain large enough in 2014 to keep wage growth subdued, profit margins high, and inflation well below the Fed’s 2% target. The Federal Reserve is likely to conclude its QE3 program in late 2014. But we still see no hikes in short-term interest rates until early 2016 ...

Treasury 10-Year Note Yields Reach Highest Level Since September - Treasury 10-year note yields touched the highest in more than three months after initial jobless-benefit claims fell more than forecast as the Federal Reserve prepares to cut back on its monthly bond-buying. The extra yield investors can get by holding 10-year debt instead of two-year securities, the so-called yield curve, reached the highest level since July 2011. The Federal Open Market Committee said after its Dec. 17-18 policy meeting it will begin reducing $85 billion in asset purchases next month amid “growing underlying strength” in the economy, while maintaining the benchmark interest rate at virtually zero. “We are in holiday mode right now, so markets are extremely thin.” The yield on the benchmark 10-year note rose as much as two basis points, or 0.02 percentage point, to 2.998 percent, according to Bloomberg Bond Trader prices. That was the highest since Sept. 6, when the yield reached 3.005 percent, the most since July 2011. The yield was 2.991 percent at 5 p.m. New York time, up one basis point. The price of the 2.75 percent security due in November 2023 declined 3/32, or 94 cents per $1,000 face amount, to 97 30/32. Thirty-year (USGG30YR) bond yields increased three basis points to 3.92 percent and touched 3.93 percent, the highest since Dec. 6. Two-year yields rose to 0.41 percent, the most since Sept. 16. The gap between yields on U.S. two- and 10-year notes widened to as much as 2.59 percentage points, the most on an intraday basis since July 2011.

Treasury 10-Year Yield Rises to 3% on Fed Policy, Recovery Signs - Treasury 10-year yields climbed to the highets level in more than two years as signs of a quickening recovery boosted speculation the Federal Reserve will keep reducing debt purchases. The benchmark 10-year yield reached 3 percent for the first time in three months as the Federal Open Market Committee reinforced its commitment last week to keeping interest rates low while announcing it will start reducing bond purchases from January. Two-year notes, which aren’t included in the Fed’s monthly program of asset buying, headed for a fifth weekly decline. Citigroup Inc.’s Economic Surprise Index, which measures if data surpasses or falls short of market expectations, climbed yesterday to the highest level since October. “The pace of the U.S. economic recovery means there’s room for the 10-year yield to rise further, perhaps towards 3.25 percent in 2014,” “I don’t think it will go much higher from there. We expect the Fed to keep official interest rates low for another 18 to 24 months.”

Treasury yields highest since July 2011 - The key US interest rate benchmark moved above the psychological threshold of 3 per cent on Friday to its highest since July 2011, as stronger economic data and the onset of fewer government bond purchases by the Federal Reserve weigh on sentiment for owning Treasury paper. The US 10-year note yield is a benchmark for all types of interest rate securities ranging from mortgages to corporate bonds, and highly influences the cost of fixed rate housing loans for American homeowners. Not since the first half of 2011 has the benchmark yield stayed above 3 per cent for an extended period. Higher market interest rates are expected in 2014 as the economy strengthens and the Fed is seen steadily winding down its quantitative easing policy. The risk, however, is that rising long-term yields slow the economy in the coming months. After flirting with a rise above 3 per cent on Thursday, the 10-year Treasury yield, which moves inversely to price, climbed above that threshold to 3.007 per cent, adding to the bond market’s major losses for this year. The Barclays index for long-term US Treasury bonds has registered a total return of minus 12.2 per cent this year as the 10-year yield has risen from 1.80 per cent since January. With the Fed having announced earlier this month it will start a $10bn taper of its current monthly $85bn bond purchases in January, the 10-year yield has climbed from 2.80 per cent. Many Wall Street strategists expect it will reach 3.50 per cent or higher in the coming months. Back in September, the 10-year Treasury yield briefly rose above 3 per cent before the Federal Reserve was expected to announce a retreat from quantitative easing. Instead the Fed demurred from a taper of QE as it said financial conditions had tightened and were posing a threat to the economy.

What Happens Next, Now That The 10-year Treasury Yield Hit The Psycho-Sound Barrier Of 3% - Wolf Richter - Treasuries have been skidding, and yields have been on a tear. Today the 10-year yield hit the psycho-sound barrier of 3%. The last time the 10-year yield hit 3% was in early September, for the briefest moment. But the last time it traded above 3% for any period of time was in 2011. In February that year, it spiked to nearly 4% as QE was petering out. That gave the Fed cold feet, and it unleashed another wave of QE which drove yields down to 2% by the end of 2011, and to a ludicrous 1.38% in July 2012. Ludicrous because it just about guaranteed hapless investors a loss. If they sell it as yields are rising and values are tumbling, there would be a loss of capital. If they hold this paper to maturity, inflation would eat up its value and coupon payments would not be enough to compensate for it. In this scenario, inflation as measured by the CPI might be 2.5% or more, sending the Fed to nirvana, and holders of these notes to bondholder purgatory. They’d lend money to the government for ten years at a loss. Conversely, with the government (and many corporations) borrowing at a profit, it would be smart to go on a borrowing binge, no matter what. That you can’t manipulate a wheezing economy back to health over the long term based on this lofty principle is obvious to all but perhaps the primary beneficiaries, our over-indebted corporate America, the Fed, and the government. But it did lead to equally ludicrously low mortgage rates and to a historic junk-bond bubble with yields of these risky things dropping below the interest that 5-year FDIC-insured CDs used to pay before the Fed purposefully mucked up the lives of savers. In broader terms, it lead to the most gigantic credit bubble mankind has ever seen. Risks no longer mattered, and pricing of risk was removed from investment equations. What it did not lead to was vibrant economic growth.

Could Volker Rule Be a ‘Stealthier’ Way to Cut U.S. Debt? - As Washington’s infamous budget battles and government shutdowns show, resolving the U.S. debt overhang by cutting federal spending and raising taxes is a colossal political task. That’s why, according to Harvard University economist Carmen Reinhart, U.S. officials are resorting to financial regulation and monetary policy as an effective way to pare down the country’s public obligations.“The relatively ‘stealthier’ financial repression tax may be a more politically-palatable alternative,” Mrs. Reinhart said a 2011 paper on how rich countries liquidate their arrears. Regardless of past controversies, the newly-approved Volcker Rule may be proof the Harvard professor is a monetary seer. One form of financial repression is a reduction in nominal interest rates by central banks. The Federal Reserve, the European Central Bank and the Bank of Japan say their interest rate cuts were necessary to spur growth and drive their economies out of economic quagmire. But incidentally, depressing rates reduces the costs governments pay on their debt, which in turn cuts national deficits. But financial regulation can also create a captive markets. For example, The banking regulations published by the European Union in July are meant to require bigger emergency cash reserves. Deeming government securities zero-risk, high quality assets, however, the rules support demand for sovereign bonds. (And that’s despite the fact that some euro zone sovereign debt has proven a pretty risky bet.) Another is the Fed’s October ruling to bolster liquidity at large financial institutions. The new regulation requires minimum holdings of “high quality,” assets that can quickly be converted into cash; government debt fits the bill.And now, whether intended or not, the Volcker rule is another form of financial repression, says Mrs. Reinhart.

The Budget Deficit as Seen From 2009 -- On Dec. 20, the Brookings Institution economist Justin Wolfers sent out this provocative post on Twitter: “The decline in the budget deficit since 2009 is the largest four-year improvement since the demobilization from WWII.”  I was aware that the deficit was declining sharply, both in nominal terms and as a share of the gross domestic product, but hadn’t thought much about the magnitude. Mr. Wolfers, whose partner Betsey Stevenson is a member of President Obama’s Council of Economic Advisers, is correct, as the data show. Fiscal year 2014 began on Oct. 1. The Congressional Budget Office further projects that the deficit will fall to just 2.1 percent of G.D.P. in fiscal year 2015, less than it was in fiscal year 2008, when it was 3.1 percent of G.D.P. Thus we will have seen a decline in the deficit of 7.7 percent of G.D.P. over seven years. There is indeed no comparable period in which the deficit fell as much since the aftermath of World War II for the simple reason that the deficit never grew large enough to drop so much. The largest deficit recorded in the postwar era before 2009 was in 1983, when it reached 6 percent of G.D.P. After the war, the deficit fell to 7.7 percent in 1946 from 22 percent of G.D.P. in 1945. A surplus of 1.2 percent of G.D.P. was achieved in 1947.

Budget Deal Includes COLA Cut - On Wednesday, the Senate passed the Bipartisan Budget Act of 2013 (BBA) by a vote of 64-36. The two year budget deal includes a provision that reduces working age retirees’ annual cost-of-living adjustment (COLA) by one percentage point until they reach the age of 62 – and fails to grandfather existing retirees and currently serving members who plan to serve a 20-plus year career. Because of the fast-track nature of the bill, many members of Congress were caught off-guard by the overall financial impact retirees would face. Servicemembers who retire at the 20 year point will feel the full negative financial impact of the provision by experiencing a near 20 percent reduction in their retired pay by the time they reach age 62. For example, an E-7 retiring this year with 20 years of service would see an average loss of over $3,700 per year by the time he/she reaches age 62 – overall impact: $83,000 loss by age 62.

Maintaining Nuclear Arsenal To Cost $355 Billion - As unemployment benefits are set to expire Saturday for 1.3 million Americans the Congressional Budget Office (CBO) has produced an estimate for the costs of maintaining and modernizing America’s doomsday weapons – $355 billion. In these times is there a more telling comparison? Over one million Americans are casually tossed into the pain of poverty while in the halls of power all available resources are summoned to affirm our country’s commitment to preserving a weapons system that if ever used would lead to total annihilation of our life on this planet. The Congressional Budget Office estimates the cost to maintain and modernize nuclear forces over the next decade will be $355 billion, including $221 billion for Defense Department programs to sustain strategic and tactical strike systems as well as nuclear command, control, communications and early warning systems. Didn’t the Soviet Union collapse in 1989? Isn’t China one of our biggest trading partners? Haven’t we claimed it is unacceptable for new nations such as Iran to develop nuclear weapons? Aren’t we spending billions on nuclear missile defense? So why are we dropping all this cash to “maintain and modernize” our nukes?

Taxes And Income Distribution: The Way It Was And The Way It Is - Got invited on to the local TV station today to discuss income distribution thanks to the recent statements about the matter by President Obama and Pope Francis, only to upset the local anchorman by telling him things he had not known previously, such as the shocking fact that someone making $115,000 per year pays the same in fica/Social Security taxes as someone making $115 million per year, although, well, that must be just fine because “that is the way it has always been, right?”  As it was I advocated raising the income cap on fica and taxing capital gains as income, just as was put into place back in 1986 under Ronald Reagan.  In the very conservative Shenandoah Valley this is how one must pose such radical proposals.  But, it got me to thinking about what I should have said, particularly if I had more time, which one rarely has on TV, especially local TV.  So, when the anchorman, who really is reasonably smart and well-intentioned, asked me if it had always been this way, that people above a certain income level (really, wage and salary level) pay no more in fica taxes than those at that level, I should have reminded him of how things used to be.  Yes, that is the way it has always been, but in other areas of the tax code, things have changed so as to really help out those at the top end of the income hierarchy, even if they have not been made to pay their fair share for our rising Social Security expenditures (and I noted that if one raised the income cap and was revenue neutral, one could cut the overall rate, thus lowering taxes for the bottom 96% of the income distribution, sort of like how closing loopholes back in 1986, such as the special break for capital gains, allowed a general cut in income tax rates for Mr. Reagan).

Taxing The Rich Is Not The Left's Economic Growth Strategy, Center For American Progress Leader Says: -- Higher taxes on wealthy Americans is not the centerpiece of the progressive movement's solution to the nation's economic problems, the head of one of the left's leading think tanks said Wednesday. Neera Tanden, president of the Center for American Progress, argued that raising taxes on the wealthy is a fair-play way toward short-term deficit reduction, rather than a fix for the U.S.' long-term debt problem. She added that economic growth -- not wealth redistribution -- is an equally high priority for alleviating income inequality. "Our view is that we should be focusing on economic growth in the immediate term, and long term deficit reduction," she said. Calls from Democrats to raise taxes on top earners are usually met by the right with the response that the nation's fiscal imbalances cannot be closed by increasing taxes, and that trying to reduce inequality by taking from wealthy Americans and redistributing it to others will simply reduce the economic pie available to all. But Tanden's answer decoupled the tax increase debate from the debt crisis and from growth, instead attaching it to short-term deficit reduction. "I don't think tax increases are about economic growth. Increasing taxes for the wealthy is not an economic growth strategy," Tanden said in an interview in her downtown office. "That's a way to address deficit reduction. That's a way of saying we're all in this together.

District Court Rebukes IRS Church Plan Rulings - The IRS Office of Chief Counsel came in for sharp criticism from a federal judge in the first significant decision in five lawsuits by workers who complain that the IRS is helping employers quietly strip away their pension rights. Hundreds of thousands of workers at hospitals and other nonprofit organizations have been moved into so-called church pension plans, which are exempt from ERISA. IRS private letter rulings enabled each of these moves. Most of the nonprofits that were granted IRS approval to operate as church plans exempt from ERISA were seriously under funded, the trustees having failed to set aside enough money to pay the old-age benefits workers had earned. The federal government guarantees the pensions of workers in ERISA plans, although when a plan fails, workers typically get less than they had been promised. Workers moved into church plans, however, lose the federal guarantee. The five cases don't involve plans run by churches, but those operated by groups that claim a religious affiliation of some kind even though they may have for-profit partners, operate commercial businesses, and engage in activities that violate the doctrine of the affiliated religion. If the workers lose the five cases, there will be a swift expansion of church plans. Workers generally were not told about the valuable government guarantee they lost, although current IRS policy requires notifying workers. Many of these plans asked for, and got, refunds of insurance premiums paid to the Pension Benefit Guaranty Corporation when they operated subject to ERISA.

Moguls Rent South Dakota Addresses to Dodge Taxes Forever - A branch of Chicago’s Pritzker family rents space here, down the hall from the Minnesota clan that controls the Radisson hotel chain, and other rooms held by Miami and Hong Kong money.  Don’t look for any heiresses in this former five-and-dime. Most days, the small offices that represent these families are shut. Even empty, they provide their owners with an important asset: a South Dakota address for their trust funds.  In the past four years, the amount of money administered by South Dakota trust companies like these has tripled to $121 billion, almost all of it from out of state. The families needn’t actually move to South Dakota, or deposit their money at a local bank, or even touch down in the private jet. Little more than renting an address in Sioux Falls is required to take advantage of South Dakota’s tax-friendly trust laws.  States like South Dakota are “creating laws that are conducive to a massive exploitation of a federal tax loophole,”  “We have a tax haven in our midst.”  South Dakota’s sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as “dynasty trusts,” which are designed to avoid the federal estate tax.

Fidelity to Amundi Seek Euro Shelter as Treasuries Swoon - Bond investors seeking to avoid the first successive losses on Treasuries in at least 35 years are finding shelter in Europe. Yields on 10-year U.S. government debt are estimated to rise more than a half-percentage point next year to 3.38 percent, which would result in a loss of 1.6 percent, according to data compiled by Bloomberg. Yield forecasts for Spain and Italy, where borrowing costs soared to more than decade highs during the European debt crisis, indicate bond returns in 2014 will extend this year’s gains of as much as 11.1 percent. With the Federal Reserve taking its first step last week to unwind its unprecedented stimulus, Robeco Groep NV, Fidelity Investments and Amundi are venturing into developed nations hit hardest by the crisis as confidence builds in European Central Bank President Mario Draghi’s ability to safeguard the 17-nation currency bloc. Bonds from Spain to Italy and Ireland posted the world’s biggest gains and the euro rose against the most-traded currencies. Longer-dated Treasuries had the deepest losses. “Europe may not be perfect and there are still a lot of issues, but we don’t expect the euro crisis to flare up again,”

Junk Loans Top ’08 Record as Safeguards Stripped - The amount of loans to the riskiest U.S. companies ballooned to a record this year, propelled by unprecedented demand for floating-rate debt that offers protection from rising interest rates. The market for junk-rated loans increased to $683 billion, exceeding the 2008 peak of $596 billion, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data. The $130 billion surge this year was fueled by borrowings that don’t include typical lender protections such as limits on leverage. Loans, which suffered the biggest losses in the fixed-income market during the financial crisis, staged a comeback as investors funneled a record $64.4 billion into funds that buy the debt in anticipation the Federal Reserve would start unwinding its bond buying that’s suppressed borrowing costs. The demand has enabled companies take on more debt for shareholder rewards, prompting regulators to warn that the excesses which contributed to the credit crisis may be creeping back.

Off Limits, but Blessed by the Fed -- Areas like electricity are generally off limits to banks because of the risks involved. But with its June 2010 letter, the Fed let JPMorgan take an even bigger role selling electricity in California and the Midwest, saying the push would “reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.”  Three months later, JPMorgan traders began a scheme to manipulate electricity prices, ultimately forcing consumers in those regions to pay more every time they flicked on a light switch or an air-conditioner, the Federal Energy Regulatory Commission subsequently contended.  The story of how the Fed cleared the way for JPMorgan — a decision that brought many millions in profits to the bank — illuminates how the Fed has allowed the bank into a variety of markets for basic goods. Since 1956, a federal law has limited banks’ involvement in physical commodities. But confidential documents, many obtained under the Freedom of Information Act, show that since 2005 the Fed has granted three special exemptions to JPMorgan Chase alone.

JPMorgan Doesn’t Want to Talk About Bernie Madoff - Bernard Madoff’s principal bank, JPMorgan Chase, has for years obstructed federal bank examiners trying to ascertain what it knew about his gigantic Ponzi scheme, an official document obtained by Newsweek shows. The Justice Department refused in September to back up Treasury inspector general staff who wanted a court order to enforce a subpoena, in effect shielding JPMorgan from law enforcement, the October 8 document shows. The Justice Department told the Treasury Inspector General “that they were denying the request for enforcement of the subpoena,” which means officials “could not undertake further actions regarding this matter,” wrote Jason J. Metrick, the inspector general special-agent-in-charge. The memo revealing that Justice protected JPMorgan from an obstruction complaint raises anew questions about how much the Obama administration has done to protect the big banks, whose lies about mortgage securities and other investments they sold sank the economy in 2008. Only minor players have been prosecuted, in contrast with the more than 3,000 felony convictions the FBI says it obtained in the much smaller savings and loan scandals two decades ago. JPMorgan was the principal bank Madoff used in his fraud. On the day of his arrest in December 2008, he claimed to be the world’s biggest money manager, handling $64.8 billion of other people’s money, half as much as JPMorgan itself and almost as much as Goldman Sachs and George Soros combined.

Half-Assed --- I read yesterday morning in the Japan Times that the JP Morgan settlement is thought to be a blueprint of future settlements. Some recompense to the Treasury, some putative damages to act a deterrent for the future, but a decided lack of culpability in the veritable errrr ummm culprits. Why, pray tell, is it believed correct by a majority of lawmakers in America that “Gun’s Don’t Kill People – People Kill People”,  yet, the same lawmakers fail to apply similar conviction (no pun intended) to the thought that “Banks Don’t Commit Financial Crime – People Commit Financial Crime”?  It is quite obvious that in the truest sense, a bank cannot (yet) commit a crime, and until such time as HAL or Holly take over the reins and execution of bank trading and management, there are individuals, and responsible managers, and their Managers (upper-case “M”) who, should be culpable. Yet, in 2013 America, if one pays enough, it seems the perps and perp-enablers and perp-encouragers and perp-incentivizers can walk free. The question as to “why” there exists a paradox of culpability is a rhetorical question. The answer is  rather obvious: the legislature and its lawmakers have been captured, which leads to laws and standards of convenience, rather than consistent logic. In the game of political rock-paper-scissors, money trumps philosophical consistency each and every day.

Islamic Banks, Stuffed With Cash, Explore Partnerships in West - A noted Muslim law scholar, Yusuf DeLorenzo, recently pored through the books of Continental Rail, a business that runs freight trains up and down the East Coast. Along with examining the company’s financial health, Mr. DeLorenzo sought to make sure that the rail cars didn’t transport pork, tobacco or alcohol. He was brought in by American investment bankers who want to take rail cars bought by Continental Rail and package their leases into a security. The investment is being built for banks that are run according to Islamic law, which, among other things, prohibits investments in those three commodities. If the cars are acceptable, or halal, the deal will be one of the first in the United States to be completed in compliance with Islamic law. The deal is a sign of how banks that comply with Islamic law are making inroads into the global banking scene and how Western businesses are working to meet the expectations of those banks. The banks can’t find enough acceptable places to park their money, many industry insiders say, so investment bankers are scurrying to assemble deals. Over the last 30 years, the Islamic financial sector has grown from virtually nothing to over $1.6 trillion in assets, according to data from the Global Islamic Financial Review, an industry publication. The financial crisis has only encouraged the growth. Industry assets grew 19 percent in 2011 and 20 percent in 2012, in contrast to the less than 10 percent growth at non-Islamic banks in most of the world.

 The Fragility of an MMF-Intermediated Financial System - NY Fed - Since the financial crisis of 2007-09—and, in particular, the run on prime money market funds (MMFs) in September 2008—policymakers have been concerned that the funds’ fragility may render banks themselves more susceptible to risk. For instance, in a recent article and speech arguing in favor of MMF reform, New York Fed President Bill Dudley stated that MMF fragility may contribute to financial market systemic risk. The idea that the susceptibility of MMFs to runs may make the financial system more unstable seems intuitive, but is it correct? In this post, we show that the idea isn’t only intuitively appealing, it’s also sound from an economic theory standpoint: MMF fragility is indeed a concern for the stability of the banking system and a contributing factor to financial market systemic risk.

Legal teams grapple with banks’ Volcker rule compliance - The world’s largest banks are struggling to set up compliance programmes that satisfy regulators as they digest the new Volcker rule. The Volcker rule, named after former Federal Reserve chairman Paul Volcker, is one of the key provisions in the sweeping Dodd-Frank financial reform bill of 2010. The rule bans banks from trading from their own accounts in what is known as proprietary trading, and includes restrictions on market making and hedging activities. For the biggest banks compliance is especially important because the measure requires that chief executives attest in writing that their company has “reasonably designed” processes in place to achieve compliance. “The compliance part is much more intense than we’ve seen come out of other Dodd-Frank rules,” said a lawyer who represents one of the biggest banks. “So much depends on what ‘reasonably designed’ means and each regulator could have a different idea of that.” Since regulators approved the Volcker rule on December 10 after more than four years of work on it, banks, swaps dealers, broker dealers and other groups have been poring over the 71-page measure and nearly 900-page preamble to understand how it will affect their businesses. Besides working out what they can and cannot do under the rule, lawyers for financial groups are worried about the highly subjective nature of the “reasonably designed” compliance criteria. That phrase is sprinkled throughout the “Compliance Program Requirement; Violations” section of the rule. There is no mention in the rule of possible punishment if a regulator found that the chief executive attestation was not truthful or accurate. For the US operations of foreign banks the most senior manager in the US can attest in writing that the procedures are aimed at complying with Volcker.

Goldman Real-Estate Play Skirts Volcker Ban -  The Volcker rule prohibits banks from owning more than 3% of a hedge fund or private-equity portfolio. So why did Goldman Sachs tell would-be investors that it would contribute up to 20% in a new fund that makes loans backed by office buildings, hotels, shopping centers and other properties? Because regulators excluded many real-estate loans from the tough restrictions on investment funds, allowing Wall Street firms to continue making concentrated bets—sometimes risky ones—with their own capital. Goldman has raised more than $1 billion for the new fund, according to people briefed on the matter. The fund aims to boost that total to $2 billion, and Goldman expects to invest "up to 20% of total equity commitments," according to September marketing documents reviewed by The Wall Street Journal. Goldman also is making direct investments in real-estate assets, according to people familiar with the matter. Last year, it formed a partnership to purchase and upgrade a Chicago office building. Both forays appear to navigate around new regulations mandated by the Volcker rule, a provision designed to limit how big banks risk their own capital in pursuit of profits from trading securities and investing in hedge funds and private equity.

Regulators face legal threat on Volcker - The American Bankers Association on Monday threatened to file a lawsuit against US regulators if they do not suspend a provision in the Volcker rule that has sparked protests among small lenders. As many as 300 banks could record billions of dollars in losses because of the Volcker rule’s treatment of what are known as trust preferred securities (TruPS), which banks believe they have to divest because of the new rule.“The financial harm is real, imminent and irreparable,” ABA chief executive Frank Keating wrote in a letter to the heads of the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The Volcker rule, which was approved by regulators on December 10, is the most contentious mandate to come out of the Dodd-Frank financial reform bill of 2010. The measure bans proprietary trading and was aimed at reining in the risky behaviour of the world’s largest banks. The ABA said if regulators did not issue a stay on the Volcker provisions regarding TruPS, it would file a lawsuit seeking emergency relief before the end of the year. TruPS were sold by small banks and insurance companies in the run-up to the financial crisis and often repackaged into collateralised debt obligations known as TruPS CDOs. “The Volcker rule wasn’t intended to cause community banks to take all these losses,” said Wayne Abernathy, an executive vice-president at ABA. “This was supposed to be about systemic risk.”

U.S. bank watchdogs to consider Volcker rule tweak (Reuters) - U.S. bank regulators said on Friday they would consider allowing banks to hold on to certain complex securities despite a new rule limiting risky investments.The announcement came after lenders warned in a lawsuit of hefty losses from the so-called Volcker rule. The American Bankers Association welcomed the regulatory action. "ABA appreciates the regulators taking this important step, and our experts are studying to see if the affected banks indeed find immediate interim relief from this action," ABA president Frank Keating said in a statement. The Volcker rule prohibits banks from owning hedge funds or private equity funds to reduce risk, but the ban included a type of security that a group of community banks regard as harmless. The regulators said they would now reconsider whether these instruments could be made exempt and would make a decision no later than January 15.

Unofficial Problem Bank list declines to 633 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for December 20, 2013.  Changes and comments from surferdude808:  As anticipated, the OCC released its update on enforcement action activity. Terminations by the OCC and merger activity led to the removal of eight institutions from the Unofficial Problem Bank List. After removal, the list holds 633 institutions with assets of $216.7 billion. A year ago, the list held 841 institutions with assets of $313.3 billion..Next week, we anticipate the FDIC to release its enforcement action activity through November 2013. Along with those changes, we should be able to update the transition matrix for the fourth quarter.

Behind the Headline Numbers of a Mortgage Settlement - Ocwen Financial is a behind-the-scenes firm whose business is to gather mortgage payments from millions of borrowers and pass them on to the banks and investors that own the mortgages. But last week, Ocwen moved into the foreground after a federal regulator, the Consumer Financial Protection Bureau, ordered it to enter into a $2 billion settlement over allegations that it had mistreated struggling borrowers. There were two parts to the settlement. First, the consumer agency required Ocwen to provide $125 million in refunds to borrowers who entered foreclosure. Second, Ocwen was also required to write down the outstanding amount owed on mortgages by $2 billion, to make the loans more affordable for the borrowers. Anyone reading the news release would be forgiven for thinking that Ocwen had to pay out $125 million in refunds and then take a bruising $2 billion hit on the mortgages it services. But a deeper look at the terms of the settlement tells a different story. Ocwen’s refund payment is actually only $66 million, according to a filing by the company. The firms that handled the mortgages before Ocwen are paying the remainder. The $2 billion number is easy to misunderstand. Ocwen is not going to have to bear any of that $2 billion write-down itself, though the consumer agency’s news release never makes that clear. Ocwen does not own the mortgages that it collects payments on. Bondholders own most of them, since banks packaged the loans into securities and sold those bonds into the markets. Indeed, a $2 billion write-down would probably wipe out most of Ocwen’s $1.8 billion in capital.

LPS: Mortgage Delinquency Rate increased in November, Down almost 10% year-over-year - According to the First Look report for November to be released today by Lender Processing Services (LPS), the percent of loans delinquent increased in November compared to October, and declined about 9.4% year-over-year. Also the percent of loans in the foreclosure process declined further in November and were down 29% over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 6.45% from 6.28% in October. The normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 2.50% in November from 2.54% in October.   The is the lowest level since late 2008. The number of delinquent properties, but not in foreclosure, is down 342,000 properties year-over-year, and the number of properties in the foreclosure process is down 511,000 properties year-over-year. LPS will release the complete mortgage monitor for November in early January.

Freddie Mac: Mortgage Serious Delinquency rate declined in November, Lowest since March 2009 -- Freddie Mac reported that the Single-Family serious delinquency rate declined in November to 2.43% from 2.48% in October. Freddie's rate is down from 3.25% in November 2012, and this is the lowest level since March 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Note: Fannie Mae will report their Single-Family Serious Delinquency rate for November next week. Although this indicates progress, the "normal" serious delinquency rate is under 1%. The serious delinquency rate has fallen from 0.82 percentage points over the last year - and at that rate of improvement, the serious delinquency rate will not be below 1% until mid-to-late 2015. Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications. So even though distressed sales are declining, I expect an above normal level of distressed sales for another 2+ years (mostly in judicial states).

MBA: Mortgage Applications Decrease in Latest Weekly Survey, Refinance Activity Lowest since Nov 2008 -- From the MBA: Mortgage Applications Fall During Holiday-Shortened Week: Mortgage applications decreased 6.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 20, 2013. ... The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.... ... " The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.63 percent, the highest level since September 2013, from 4.61 percent, with points unchanged at 0.24 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is down sharply - and down 72% from the levels in early May - and at the lowest level since November 2008 The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index is now down about 11% from a year ago.

Mortgage Applications Drop to 13-Year Low - The average number of mortgage applications slipped 6.3% to a 13-year low on a seasonally adjusted basis as interest rates rose from the previous week, the Mortgage Bankers Association said Tuesday. "Following the Federal Reserve‘s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008,” On an unadjusted basis, MBA said the market composite index fell 7% from the previous week. The refinance index dropped 8% from the prior week, while the seasonally adjusted purchase index eased 4%. Interest rates have generally been rising since early November, resulting in modest declines in weekly mortgage applications. The average rate on 30-year fixed-rate mortgages with conforming loans increased to 4.64% from 4.62% in the prior week. Rates on 30-year fixed-rate mortgages with jumbo-loan balances rose to 4.63% from 4.61%. The average rate for 30-year fixed-rate mortgages backed by the Federal Housing Administration climbed to 4.29% from 4.25% a week earlier. The average rate for 15-year fixed-rate mortgages increased to 3.74% from 3.66%. The 5/1 ARM average climbed to 3.26% from 3.20%.

Mortgage Applications Down 66% From Highs To New 13-Year Low -- From its peak in October 2012, mortgage applications have collapsed 66% and this week printed at new 13-year lows. Since rates started to crack on Taper talk in May 2013, mortgage applications have fallen in a one-way street (but hey, rising rates won't affect the housing recovery, right? remember 15% mortgages... as the usual bullshit meme goes, entirely missing the shift in house prices, affordability, and marginal price-setter). Of course, the usual 'seasonal' effect wil be blamed and recovery will re-blossom in the new year... except, seasonally this is among the worse drop in the last few weeks of the year in the last decade. Adding further salt to the wound of wealth generation, the refi index has dropped to a fresh 5-year low as the home equity ATM remains shut (having dropped 73% in the last few months).

Mortgage Rate Swings May Mean “Bumpy” 2014 Housing Market - Climbing mortgage rates in 2013 corresponded with declines in home buying, a trend that could to some extent continue in coming months as interest rates adjust to shifts in the Federal Reserve’s monetary stimulus effort. The average of 30-year fixed-rate mortgage interest rates so far this year compared against new-home sales illustrates that inversely proportional relationship: When interest rates go up, demand from would-be homeowners drops.  When rates as measured by Freddie Mac started rising in May and averaged 3.54% for the month, the seasonally adjusted annual rate of new home sales dropped by 4% from the prior month, according to the most recent housing data from the Commerce Department. Meanwhile, in October, mortgage rates dropped by three-tenths of a percentage point just as new home sales surged 18%. The trend could continue in 2014, experts said, especially if rates change significantly.  Mortgage rates first spiked in May after the Fed signaled it was considering pulling back its bond-buying program meant to keep a lid on long-term interest rates. The housing market initially stumbled, but started to recover once the central bank decided against any changes to the stimulus effort throughout the summer and into the fall.  Mortgage rates are still at historical lows, but they are already starting to creep upward once again. Freddie Mac said Thursday the average 30-year fixed rate mortgage was at 4.48%, its highest level since mid-September.

Weekly Update: Housing Tracker Existing Home Inventory up 2.3% year-over-year on Dec 23rd - Here is another weekly update on housing inventory ... for the tenth consecutive week, housing inventory is up year-over-year.  This suggests inventory bottomed early in 2013. There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for November).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012 and 2013. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. Inventory in 2013 is now 2.3% above the same week in 2012 (red is 2013, blue is 2012).

Blackstone’s Big Bet On Rental Homes -- From BloombergThe Blackstone Group LP, the world’s largest private equity firm, became the largest owner of rental homes in the U.S. , acquiring 41,000 homes in the past two years. In October, Blackstone offered the first-ever “rental-home-backed” security on Wall Street. The bond is backed by just a fraction — 3,207 — of the rental properties owned by Blackstone. Monthly rent checks from the properties will be used to service the $479.1 million security. Click for gigantic infographic.

Want to Buy a Home? Better Bring Cash - Of the nearly half-a-million homes sold in the U.S. in November, 42% were sold to buyers who paid with cash, according to the latest housing report from real estate data company Reality Trac. That percentage is the highest since 2011, when Realty Trac began calculating the percentage of all-cash buyers. As you can see from the chart above, the percentage of homes bought by institutional investors is also close to its all time high. There are two ways these statistics can be interpreted. On the one hand, seeing such a large percentage of institutional and all cash buyers is worrisome because it says that typical homebuyers–who live in their homes and take out mortgages to finance purchases–don’t have the wherewithal to invest in real estate. It also suggests that banks are still wary to lend to all but the most credit-worthy of borrowers. On the other hand, it’s good to see that there are investors out there who are confident enough in future economic growth to invest in housing.

New Home Sales at 464,000 Annual Rate in November - The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 464 thousand.  October sales were revised up from 444 thousand to 474 thousand, and September sales were revised up from 354 thousand to 403 thousand.   August sales were revised up from 379 thousand to 388 thousand.The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in November 2013 were at a seasonally adjusted annual rate of 464,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.1 percent below the revised October rate of 474,000, but is 16.6 percent above the November 2012 estimate of 398,000."This was reported as a decrease in the sales rate, but that was because sales in October were revised up. Sales in October and November were at the highest rate since 2008. Even with this increase, new home sales are still near the bottom for previous recessions. The second graph shows New Home Months of Supply. The months of supply decreased in November to 4.3 months from 4.5 months in October. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). "The seasonally adjusted estimate of new houses for sale at the end of November was 167,000. This represents a supply of 4.3 months at the current sales rate." On inventory, according to the Census Bureau: "A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale is near the record low. The combined total of completed and under construction is still very low. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In November 2013 (red column), 33 thousand new homes were sold (NSA). Last year 29 thousand homes were sold in November. The high for November was 86 thousand in 2005, and the low for November was 20 thousand in 2010.

November 2013 New Home Sales Declined But Still Good - New home sales data for November 2013 declined – this data included some very good backward revision. The data remains very noisy and needs to be averaged to make any sense of it.  Econintersect Analysis:

  • sales growth decelerated 13.2% (after last month’s revised acceleration of 27.7%) month-over-month.
  • year-over-year sales up 17.9%. Growth remains in the upper end of the range seen during 2013.
  • three month trend rate of growth accelerated 6.1% month-over-month.

US Census Headlines:

  • sales down 2.1% month-over-month
  • year-over-year sales up 16.6%
  • market expected annualized sales of 430K to 433K (actual was 464K – seasonally adjusted)

The quantity of new single family homes for sale remains well below historical levels.

Comments on New Home Sales - Earlier: New Home Sales at 464,000 Annual Rate in November - Looking at the first eleven months of 2013, there has been a significant increase in new home sales this year.  The Census Bureau reported that there were 401 new homes sold during the first eleven months of 2013, up 17.6% from the 341 thousand sold during the same period in 2012.  That follows an annual increase of 20% in 2012. This puts new home sales on pace for about 433 thousand in 2013.  But even though there has been a large increase in the sales rate, sales are close to the lows for previous recessions.  Right now it looks like 2013 will be the sixth worst year for new home sales since 1963. The sales rate was only lower than 2013 in the worst housing bust years of 2009 through 2012, and the worst year of early '80s recession (1982). This suggests significant upside over the next several years. Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current 464 thousand sales rate.  So I expect the recovery to continue.  And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years. The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through November 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Vital Signs: Home Sales Rebound Shows Power of Rates - Mortgage rates matter. That’s the lesson from the recent trend in new home sales. Falling mortgage rates in 2012 and early 2013 propelled sales of new homes higher through the middle of this year. Then, talk of the Fed tapering its bond-buying program caused rates to shoot up. The one-percentage point jump in a 30-year fixed rate from April to August added $100 a month to the cost of a $165,000 mortgage. With monthly payments suddenly higher, demand for housing dropped over the summer. Mortgage rates have come down from their recent high in September and that has lured more buyers back into the market. Sales in October and November averaged their best performance since mid- 2008.

U.S. Consumer Spending Rose 0.5% in November - Americans increased their spending in November by the most in five months, and their income edged up modestly.Consumer spending rose 0.5 percent from October, when spending had risen 0.4 percent, the Commerce Department said Monday. It was the best showing since June. The gain was driven by a jump in spending on long-lasting durable goods such as autos. Consumers‘ income rose 0.2 percent, an improvement from a 0.1 percent decline in October. Wages and salaries, the most important component of income, rose a solid 0.4 percent. That gain reflected strength in the private sector and a modest gain in government pay. Consumer spending is closely followed because it accounts for about 70 percent of economic activity. The strong November showing suggests solid economic growth this quarter. The big rise in spending and smaller income gain meant that the personal saving rate slipped a bit to 4.2 percent of after-tax income in November. That was down from 4.5 percent in October. An inflation gauge tied to consumer spending that is closely followed by the Federal Reserve showed that inflation is still running well below the Fed’s target. Prices were unchanged in November and have risen just 0.9 percent over the past 12 months. The Fed’s target for annual inflation is 2 percent.

Personal Income increased 0.2% in November, Spending increased 0.5% -- The BEA released the Personal Income and Outlays report for November:  Personal income increased $30.1 billion, or 0.2 percent ... in November according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $63.0 billion, or 0.5 percent...Real PCE -- PCE adjusted to remove price changes -- increased 0.5 percent in November, compared with an increase of 0.4 percent in October. ... The price index for PCE increased less than 0.1 percent in November, in contrast to a decrease of less than 0.1 percent in October. The PCE price index, excluding food and energy, increased 0.1 percent in November, the same increase as in October. On inflation, the PCE price index decreased at a 0.3% annual rate in October, and core PCE prices increased at a 1.2% annual rate.  This is very low and far below the Fed's 2% target. The following graph shows real Personal Consumption Expenditures (PCE) through October 2013 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change. The dashed red lines are the quarterly levels for real PCE. Using the two-month method to estimate Q4 PCE growth (first two months of the quarter), PCE was increasing at a 4.1% annual rate in Q4 2013 (using mid-month method, PCE was increasing at 4.6% rate).   This suggests solid PCE growth in Q4.

Consumer Spending Up 0.5% in November, Biggest Real Gain in 21 Months - The November personal income and outlays report shows a 0.5% change in consumer spending, even when adjusted for inflation.  This is the highest monthly percentage change in consumer spending adjusted for inflation since February 2012 and is good news for Q4 GDP.  October consumer spending was revised up to 0.4% for the month.  Personal income didn't fare as well and not adjusted for inflation increased 0.2%.  The rise in consumer spending is another indicator the economy might be picking up. Consumer spending is another term for personal consumption expenditures or PCE.  November's PCE is higher than all of Q3 and assuming December consumer spending stays strong, implies PCE would be much above 3 percentage points of GDP growth.  Real personal consumption expenditures were an annualized $10,868.2 billion.  Q3 Real GDP was $15,839.3 billion which shows consumer spending is about 68% of GDP and critical to U.S. economic growth. Real means adjusted for inflation and is called in chained 2009 dollars. The change is so great, even without any consumer spending growth in December, PCE has already doubled from what Q3 was, $100 billion vs. $52.3 billion for Q3.  This implies consumer spending will be at least 2.8 percentage points of Q4 GDP and the odds of PCE being zero or negative in December are next to nil from all other economic indicators.  In other words, expect PCE to be much higher than a 2.8 percentage point contribution to Q4 GDP.  That said, we expect inventories to change negatively after the whopping Q3 build up, although those monthly figures are not yet released and we'll calculate out those estimates separately in other overviews.  Disposable income is what is left over after taxes and increased 0.1%, even when adjusted for prices for inflation was so low in November.  Disposible income shrank -0.2% in October.  Graphed below are the monthly percentage changes for real personal income (bright red) which increased 0.2% for the month, real disposable income (maroon) and real consumer spending (blue).

Growth rates in consumer spending and income diverge -- Consumer spending in the US accelerated in November, boosting projections for the GDP growth in the fourth quarter. While incomes grew as well, the rate of increases from the same period last year has slowed. With confidence improving, consumers have increased spending while wages have not kept up. Note: The spring 2008 spike in income is due to the last of the Bush administration's tax cuts.  The spike late last year is due to income harvesting (dividends and capital gains) in preparation for tax increases taking place 1/2013. This divergence in the growth rates of spending and income is resulting in declines in personal savings rate. There is a great deal of debate around whether this slower savings rate is a positive for the US economy in the intermediate to long-term period. With the holiday week upon us, this may be a good time to revisit this debate through a very clever video called "Deck the Halls with Macro Follies".

Personal Income Growth Disappoints in November 2013 - Real Personal Consumption Expenditure (PCE) and Real Disposable Personal Income (DPI) are up. However, the rate of increase of income continues to fall further behind the rate of increase of spending.

  • The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.5% to 0.7% (versus 0.5% actual), and a rise in DPI (income) of 0.5%  (versus 0.1% actual). In other words, expenditures were at expectations whilst income was well under expectations.
  • The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth, income trend is down, whilst expenditures are trending up.
  • Real Personal Income is up 0.6% year-over-year, and real personal expenditures are up 2.6% year-over-year. The gap between income and expenditures opened up again this month.
  • this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic – and the backward revisions this month are moderate.
  • Earlier this week, the third estimate of 3Q2013 GDP indicated the economy was growing at 4.1%.
  • The savings rate continues to be low, and again declined marginally this month.

Analysis: Farm Declines Leading Drop in Overall Income --  The Wall Street Journal’s Dan Loney talks with Wells Fargo’s Tim Quinlan about Monday’s reports on personal income and consumer spending as well as the Chicago Fed National Activity Index.

The Big Four Economic Indicators: Real Personal Income Remains the Laggard - Today's release of the November Personal Income and Outlays allows us to calculate the latest Real Personal Income less Transfer Payments. This indicator remains the laggard of the Big Four. Month-over-month November saw a welcome 0.23% growth. The year-over-year change is a less encouraging 1.22%. Of course this is the most problematical of the Big Four when it comes to episodes of erratic volatility, such as we saw with the various strategies to manage the 2013 year-end expectation of tax increases by pulling 2013 income (bonuses, etc.) into November and December of last year. In another couple of months this statistical rat swallowed by the snake" will be have been eliminated from the annual numbers. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data point is for the 53rd month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income tax management strategy at the end of last year with a ripple effect in the opening months of this year. The overall picture of the US economy remains one of a ploddingly slow recovery from the Great Recession. As we can see in the illustration of the average of the Big Four off its all-time high since 2007, the rate of post-trough growth has been slower since February of 2012, although the end-of-year tax-strategy has obscured overall trend slope over the past 18 months. On a more hopeful note, the slope since July has shown encouraging improvement.

The Latest on Real Disposable Income Per Capita -  Earlier today I posted my latest Big Four update which included today's release of the November data for Real Personal Income Less Transfer Payments. Now let's take a closer look at a rather different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The November nominal -0.07% month-over-month and 0.79% year-over-year numbers are quite disappointing; moreover, when we adjust for inflation, the real MoM change is an even smaller 0.5%, and the real YoY is negative at -0.08%. But we must remember that the YoY data points are distorted by the 2012 year-end tax strategy that began goosing incomes in November. The YoY comps will be even worse next month when we compare Decembers. Thereafter we'll get back into a more rational framework. The BEA uses the average dollar value in 2009 for inflation adjustment. But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 55.6% since then. But the real purchasing power of those dollars is up only 18.9%. Of the eight recessions since 1959, five started with a YoY number higher than the current reading. However, the volatility of Real DPI militates against putting very much emphasis on this metric. There are a number of other downward spikes in addition to the more conspicuous results of tax planning or Microsoft's big dividend payout in 2004.

One graph shows why the present stinks (and why the 1960's kicked a**!) - I was working on a couple of year-end type pieces yesterday, when I downloaded one graph that says so much about what has happened to the US economy, and in particular to the fortunes of the US middle class, during that time. Here it is, the YoY percentage growth of real disposable personal income: I've drawn a line across it at the +4.5% mark. Remember, this is disposable income, and it is adjusted for inflation, for a period of over half a century. I pulled it for my year-end piece, because real disposable personal income grew again, especially in the second half of this year.  But even so, it was at a pathetic pace of less than 2.5%. But the longer term is even more startling.  Before 1974, real personal disposable income grew, on average, at about 4.5% a year. 

US Savings Rate Slides As Personal Incomes Below Expectations; Real Disposable Income Growth Tumbles - Moments ago the BEA reported the latest, November, data on Personal Income and Spending. For the second month in a row, Income, which rose a modest 0.2%, missed expectations of a 0.5% rise for the month, even as Personal Spending rose by 0.5% - driven by a 2.2% increase in spending on Durable Goods while Non-durable expenditures were unchanged on the month, in line with expectations. As a result, the US consumers dug even deeper into their meager savings, and in November the savings rate dropped once more, sliding from 4.5% to 4.2%, the lowest since January 2013, after hitting a high of 5.2% in September on "government shutdown uncertainty."   But perhaps most important, is that Real Disposable Income rose by just 0.1% in November, following a -0.2% drop the prior month. As a result, and as the chart below shows, the annual growth in Real Disposable Income has once again resumed its downward trajectory, and at the current pace of declines, it will likely turn negative as soon as next month.

Personal savings and spending show US consumer expansion continuing: Once of the long leading indicators for the US economy that I track is the real personal savings rate. This is the percent of income which is being saved, minus the YoY inflation rate. It serves as a measure of how much or how little people think they need to save vs. the price level. In other words, it is a measure consumer confidence or willingness to take risk. As show in the graph below, typically as economic expansions progress, the real personal savings rate declines. Usually this is because the first reaction to an increase in inflation is to simply dig deeper into savings, or go further into debt. As some point, consumers in the aggregate decide they need to retrench, and their savings increase as a recession causes the inflation rate to subside: Usually when there has been a YoY change in the real personal savings rate of more than 3%, a recession ensues, either quickly or with a several year lag. We did have such an abrupt decrease in 2010 and 2011, due to the post-recession spike in gas prices. While we did have a period of weakness, there was no recession. Instead of suddenly retrenching, consumers were able to cope by digging slightly into accumulated savings, as shown by the below graph of aggregate personal savings: Due to declining inflation since, however, there has been a gradual increase in the real personal savings rate. In other words, consumers have become more cautious, but gradually. The secondary signal that consumer retrenching is reaching the point where an expansion is stalling, is when per capita real retail sales decline (even if real retail sales in the aggregate are still growing). That isn't happening:  So while $3+ gasoline has impacted consumer wallets since 2011, it hasn't been enough to really knock back the US economy, and there is no suggestion of any such recessionary retrenchment in the immediate future.

Vital Signs: Saving Loses Its Allure - Consumers are more interested in spending than saving, a big turnaround from the early stage of this recovery. Households saved just 4.2% of the after-tax income in November, down from 4.2% in October. The saving rate was skewed at the end of 2012 as tax concerns caused some income to be paid earlier than usual. Excluding that swing, the saving rate has been trending down since averaging close to 6% from 2009 until 2011. Households may be socking away less of their current income because soaring stock prices and rising home values are generating wealth gains from existing assets. (The Commerce Department explains on its website the difference between its saving measurement and that of the Federal Reserve.) Rising wealth may also explain in part the solid level of consumer sentiment for all of December. The inclination to spend is good news for retailers hoping for a final surge in holiday gift-buying.

Is the United States saving rate too low? - Evan Soltas reports:The conventional story is that the U.S. has undersaved and overconsumed for decades…Why is that story wrong? It ignores the fact that households and institutions make up only about a third of U.S. gross saving.Domestic businesses, which do the other two thirds of U.S. saving and are not reflected in that personal savings rate, have been saving far more than they have in the past. That has offset the decline in personal saving. We can see that in a graph of gross private saving over gross domestic income below.The U.S. saves about one fifth of gross domestic income — it saved a little more than that in the 1970s and over the last few years, a little less than that in the 1950s and the 1990s. The apocalyptic trend towards zero savings is simply not there. What appears to be a long-term decline in the savings rate is in fact a hand-off between households and businesses in who does the saving. There are useful graphs at the link and basically it means you should have bought those extra Christmas presents.  I would add the cautionary note — for Americans but not for the world — that business savings may be more mobile internationally than are household savings.  You also can view these numbers as a harbinger of greater wealth inequality in our future.

Can Consumers Keep Spending in 2014? -- Data released Monday are positive for the consumer sector — up to a point. Nominal spending increased solidly in October and November. And with inflation almost nil, price-adjusted consumer spending so far this quarter is growing faster than the 2% annual rate of the third quarter. Economists at the Royal Bank of Scotland estimate, even if spending in December is flat, real consumer spending would grow at an annual rate of 4% this quarter. That would be the fastest pace since the end of 2010. Households have also hung on to the optimism gained after the government shutdown ended. The Reuters/University of Michigan final print of December consumer sentiment held at the preliminary level of 82.5, which was heads above the 75.1 at the end of November and 73.2 in October. “Consumers were clearly relieved when the DC gridlock ended. Confidence has bounced back to nearly the same levels it was before the crisis in mid-2013,” Consumers may be feeling better and spending more because their finances are improving. A temporary drag on farm income and a flattening-out of government transfer payments are holding back total November personal income. Wages and salaries alone, though, are up in each of the past four months, helped by faster job growth, especially in October and November. Household wealth also is improving thanks to the surging equity markets and rising home prices. Keeping up the consumer momentum in 2014, however, will depend on an acceleration in job and income growth. And that is the point that could dim the outlook.

Final December Consumer Sentiment at 82.5 (see graph) The final Reuters / University of Michigan consumer sentiment index for December was at 82.5, up from the November reading of 75.1, and unchanged from the preliminary December reading of 82.5.  This was below the consensus forecast of 83.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011.  The decline in October and early November was probably also due to the government shutdown and another threat to "not pay the bills".As usual sentiment rebounds fairly quickly following event driven declines, and I expect to see sentiment at post-recession highs very soon.

Consumer Confidence Surges Most In Over 4 Years With Conditions At 6-Year Highs - With both current conditions and future expectations indices jumping higher, the UMich consumer confidence headline final print rose at its equal fastest pace since Sept 2009. The surge in current conditions - the largest since Dec 2008 - has lifted it back to the highest level since July 2007. If there was anything to note that took the shine off such an exuberant surge it's the fact that the headline number did actually miss expectations (3rd miss of last 4) and the final outlook data dropped from the preliminary print. As we have noted before, it is confidence that 'inspires' the multiple-expanding hope as fundamental reality fades - bulls better hope it's different this time as we hit the year's highs in confidence.

Consumer Sentiment Ends Year at Solid Level -- U.S. consumers’ view of the economy ends the year on a solid level, according to one survey of households released Monday. The Thomson-Reuters/University of Michigan final-December sentiment index held at the preliminary level of 82.5, which was a jump from the final November reading of 75.1, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires expected the end-December index to be little changed at 82.9. The final-December current conditions index rose to 98.6 after the early-month reading surged to 97.9 from 88.0 at the end of November. The expectations index slipped to 72.1 from 72.7 in early December. Consumer sentiment has bounced back after taking a hit from the government shutdown. Heading into 2014, Congress seems to have reached a budget deal that removes the threat of another shutdown in coming months. A renewed drop in gasoline prices, rising stock values, and better job growth are probably also lifting household spirits. While consumer optimism and spending don’t always correlate strongly, retailers probably prefer consumers to feel confident about the U.S. economy during the holiday shopping season that is critical to merchants’ bottom lines.

Americans Still Pessimistic About Economy - Never mind a stock market breaking records and an unemployment rate inching down: Americans still think this economy stinks. That’s according to a new CNN poll out Friday, which found almost 70 percent of respondents think the economy is in bad shape, while only 32 percent think things are good. More than half of Americans don’t think conditions will improve next year, according to the poll. The economy has seen marked improvements in recent weeks. Stocks have surged, unemployment is the lowest it’s been in five years, gas prices have dropped and even the housing market is recovering. But the long-term unemployed or under-employed continue to cut back. The poll found 36 percent were reining in spending on food or medicine, a five-percent increase from 2008, during the height of housing market crash. Those who viewed the economy negatively are mostly rural residents, according to the poll. The poll surveyed 1,035 Americans by telephone between Dec. 16 and 19, with a sampling error of plus or minus three percentage points.

Rampant Returns Plague E-Retailers --- Behind the uptick in e-commerce is a little known secret: As much as a third of all Internet sales gets returned, according to retail consultancy Kurt Salmon. And the tide of goods flowing back to retailers is rising. Shipper United Parcel Service Inc. UPS +0.15% expects returns to jump 15% this season from last year, making them a significant and growing cost for retailers.  The stakes get even higher during the holidays, when return volume peaks. So this year, chains are digging through past transactions to weed out chronic returners, train shoppers to make better decisions or stem buyer's remorse. The biggest cause of returns is size. To help shoppers choose better sizes, Macy's Inc. and Nordstrom Inc. JWN +1.58% are working with analytics startups such as True Fit Corp. that crunch data to show customers how clothes and shoes will fit them in real life. The companies match up garment specifications and other data from retailers with information provided by shoppers about their favorite clothing items, to generate sizing and fit recommendations.

Target says 40 million credit, debit cards may have been compromised - Company officials offered few details on the intrusion, which reportedly began the day before Thanksgiving and lasted until Sunday this week. Security experts said that the kind of information stolen – including names, card numbers, expiration dates and three-digit security codes – could allow criminals to make fraudulent purchases almost anywhere in the world. The breach highlighted vulnerabilities in the massive, interconnected shopping systems used for billions of dollars of retail transactions every day. Customers at Target’s nearly 1,800 stores in the United States were potentially affected, though those who shopped online were not, the company said. “Whatever money Target thought they were going to get during the holiday season just got flushed down the data-breach toilet,” Kindervag said the company will owe money to card brands, like Visa and American Express, that have to reimburse customers for fraudulent transactions. Target, based in Minneapolis and one of the nation’s largest retailers, also faces the risk of enduring damage to its reputation, according to analysts and consumer advocates. The number of serious data breaches appears to be rising. This month, JPMorgan Chase disclosed that 465,000 of its card users’ data had been stolen after an attack on its the Web site for its prepaid card.

Debit and credit cards stolen in Target breach reportedly for sale in underground black markets - Credit and debit card accounts stolen during a security breach involving retailer Target have reportedly flooded underground black markets, going on sale in batches of one million cards. The cards are being sold from around $20 to more than $100 each, KrebsOnSecurity reports.The security news site said it spoke to a fraud analyst at a major bank who said his team was able to buy a portion of the bank’s accounts from an online store advertised in cybercrime forums as a place where thieves can buy stolen cards.The Target data theft is the second-largest credit card breach in U.S. history, exceeded only by a scam that began in 2005 involving retailer TJX Cos. That incident affected at least 45.7 million card users.On Friday, Target reiterated that the stolen data included customer names, credit and debit card numbers, card expiration dates and the embedded code on the magnetic strip found on the backs of cards, Target said. Angry Target customers expressed their displeasure in comments on the company's Facebook page. Some even threatened to stop shopping at the store.

Target: Customers’ Encrypted PINs Were Obtained  — Target says that customers’ encrypted PIN data was removed during the data breach that occurred earlier this month. The company issued a statement Friday that additional forensic work has shown that encrypted PIN data was removed along with customers’ names and card numbers. But Target says it believes the PIN numbers are still safe because the information was strongly encrypted. It says the PIN can only be decrypted when received by its independent payment processor. A PIN number is the personal identification code used to make secure transactions on a credit or debit card. Data connected to about 40 million credit and debit cards used at Target were stolen between Nov. 27 and Dec. 15. Minneapolis-based Target says it is still in the early stages of investigating the breach.

Holiday sales down for 3rd week -- After a strong start to the holiday shopping season, sales at stores have fallen for the third consecutive week as Americans continue to hold back on spending during what is traditionally the busiest buying period of the year. Sales at U.S. stores dropped 3.1 percent to $42.7 billion for the week that ended on Sunday compared with the same week last year, according to ShopperTrak, which tracks data at 40,000 locations. That follows a decline of 2.9 percent and 0.8 percent during the first and second weeks of the month, respectively. The numbers, which don't include online sales, are another challenge in what has largely been a disappointing holiday shopping season for stores. The two-month period that begins on Nov. 1 is important for retailers because they can make up to 40 percent of their annual sales during that time. Retailers started the season cautiously optimistic. But after a strong start through most of November — ShopperTrak said sales were up 3.4 percent for the month — retailers have found it increasingly hard to attract shoppers into stores despite big discounts and expanded hours during the final days. 

Retail Traffic Plunges By "Staggering" 21% In Week Before Christmas - That it has been one of the most lacklustre shopping seasons in recent years has already been repeatedly covered, with average holiday spending expected to decline for the first time since the Great Financial Crisis of 2008, all this despite record promotions and an ever earlier start to Black Friday. Another chart showing the same trend from Bloomberg, with the comment that the "eroding middle class can no longer drive activity as it has in the past" - that's odd: we said the same thing in late 2009 for which we got yet another label of tinfoil conspiracy theorists...  However, while the early start to shopping season has missed expectations, driven primarily by an unprecedented weakness in traditional bricks and mortar outlets, there was some hope that the last stretch into Christmas and the New Year would provide a much needed, last minute bump. Those hopes were dashed last night when Shopptertrack reported that retail traffic plummeted by an unprecedented 21% last week, and in-store sales decreased 3.1% from the year before, dashing retailers' hopes that the final stretch before Christmas would offset soft sales numbers earlier in the holiday shopping season.

Late Surge in Web Buying Blindsides UPS, Retailers - A surge in online shopping this holiday season left stores breaking promises to deliver packages by Christmas, suggesting that retailers and shipping companies still haven’t fully figured out consumers’ buying patterns in the Internet era. United Parcel Service determined late Tuesday that it wouldn’t deliver some goods in time for Christmas, as a spike in last-minute shopping overwhelmed its system. “The volume of air packages in the UPS system did exceed capacity as demand was much greater than our forecast,” a UPS spokeswoman said. Consumers were reporting missing deliveries from FedEx as well, although a FedEx spokesman said the company wasn’t experiencing significant delays. [...] Although weather, Web glitches and late deliveries from manufacturers played a part in late deliveries, the sheer unanticipated volume of holiday buying this year may have been the biggest problem, retail analysts said. Having pushed delivery deadlines later this year, some merchants weren’t ready for a jump in online orders in the last few weeks of December, said Eric Best, chief executive of Mercent Corp., which helps more than 550 retailers with online sales. “During the holidays, we reach the limits on the capacity of these retailers,” he said. At UPS, which delivers around 45% of U.S. packages, more shipments entered its air network on Monday than the 7.75 million it expected, the UPS spokeswoman said

UPS and FedEx Ruin Christmas for Late Shoppers - UPS and FedEx underestimated their capacity needs and failed to deliver packages in time for Christmas. WaPo: Santa’s sleigh didn’t make it in time for Christmas for some this year due to shipping problems at UPS and FedEx. The delays were blamed on poor weather earlier this week in parts of the country as well as overloaded systems. The holiday shopping period this year was shorter than usual, more buying was done online and Americans’ tendency to wait until the last possible second to shop probably didn’t help either. Neither company said how many packages were delayed but noted it was a small share of overall holiday shipments. While the bulk of consumers’ holiday spending remains at physical stores, shopping online is increasingly popular and outstripping spending growth in stores at the mall. ... Godwin said snow and ice in the Midwest last week and an ice storm that hit Dallas two-and-a-half weeks ago were partially to blame. She also said the volume of packages shipped exceeded the capacity of UPS but would not share the number of packages shipped or what the company’s maximum capacity is.

Vital Signs: The Power of Logistics Hiring --- The recent snafu of delayed shipments by United Parcel Service highlights how gift-buyers are becoming more dependent on online shopping—and the people needed to deliver the packages (until drones take over). The growth of internet shopping has boosted the number of year-end jobs created in the courier and messenger sector of the economy (defined as companies that provide intercity, local, and/or international delivery of parcels and documents, including express delivery services). Before seasonal adjustment, the number of net new jobs added in this category has been trending sharply higher over the past decade, just as online shopping has accounted for more and more holiday gift-buying. Last year, an unadjusted 131,400 jobs were added in that category during November and December. After seasonal adjustment, that worked out to 34,000 new jobs. Looked at another way, courier and messenger hiring—less than 1% of all jobs–accounted for more than 7% of all jobs added last November and December. (About 53,200 unadjusted [8,600 adjusted] jobs were added this November, with the December number available when the Labor Department releases its employment report on January 10.) But bear in mind, these are seasonal jobs that disappear in January. Indeed, in January 2013, the sector let go of 105,300 workers–a large 20,900 slots after seasonal adjustment.

The Big Screwup - Paul Krugman - You know how it went. They made big promises: just go to the website, provide the information, and all will be well. What actually happened was nothing like that. It’s true that many, perhaps most people did in the end manage to get what they sought; but millions found themselves frustrated and angry. Was it a disaster? That depends on which anecdotes you choose to emphasize. Will it have long-run consequences? Too soon to tell. Yes, the great online-shopping screwup of 2013 was an object lesson. Oh, wait — did you think I was talking about So, in case you didn’t know, online shopping had a number of glitches this holiday season, with Amazon, for example, failing to make good on many supposedly guaranteed delivery dates — and as a result, quite a few Christmas presents weren’t there when the reindeer took off. The biggest bottleneck seems to have been UPS, which just didn’t provide enough capacity, but it wasn’t the only one. Can’t the private sector do anything right? OK, we all understand that things happen, and that sometimes they go wrong — especially when you’re dealing with something new, like the rapid growth of online shopping. But as Alec MacGillis says, many pundits were quick to declare’s problems evidence of the fundamental, irretrievable incompetence of government, and as an omen of Obamacare’s inevitable collapse. Strange to say, none of these people are making similar claims about UPS or Amazon.

Santa leaves, smart phone steps in: Mobile sales soar on Christmas Day -- A report from IBM Digital Analytics Benchmark monitoring Christmas Day sales shows that mobile shopping and browsing made up 48 percent of all online traffic on December 25. This is the highest percent of shopping traffic that mobile devices have captured this holiday season, and is up 28.3 percent from 2012. When broken down between smart phones, tablets, and social media sites, the numbers also show that those browsing on the go tend to spend more with a tablet than a smart phone—especially when prompted by a Facebook friend or Pinterest board. Overall, online shopping continues to make a bigger dent in holiday shopping than previous years. IBM reports that online sales on Christmas Day were up 16.5 percent from last year, and mobile sales made up for 29 percent of all online sales, which is up 40 percent from 2012. Mobile shopping isn't all created equal, they found. When the researchers teased apart the mobile shopping data, they found that people were more likely to browse online sites with smart phones, but more likely to purchase when on a tablet. Tablets made for 19.4 percent of all purchases, more than twice as much as smart phones, with 9.3 percent of purchases. Those on tablets also spent more: the average purchase on a tablet was $95.61 per order, as opposed to an average of $85.11 per order on smart phones.

Vehicle Sales Forecasts: Solid Sales Expected in December and in 2014 -  The automakers will report December vehicle sales on January 3rd. Here are two forecasts:  From Strong December Car Deals Give Car Shoppers More Reason to Celebrate this Holiday Season, Says forecasts shoppers will snatch up 1,425,818 new cars and trucks in the U.S. in December for an estimated Seasonally Adjusted Annual Rate (SAAR) of 16.1 million. This will be ... about a five percent increase from December 2012. Edmunds projects that 2013 will see 15.66 million total new car sales, which would be a strong eight percent increase over 2012. From Kelley Blue Book: New-Car Sales To Improve Nearly 5 Percent From Last Year; Kelley Blue Book Projects 16.3 Million New Car Sales In 2014 New-vehicle sales are expected to improve 4.7 percent year-over-year in December to a total of 1.42 million units, and an estimated 16 million seasonally adjusted annual rate (SAAR), according to Kelley Blue Book ...  Looking forward to 2014, sales will continue to improve and Kelley Blue Book anticipates the industry to surpass 16 million SAAR for the first year since 2007. It appears sales in December will be solid. Most forecasts were for auto sales growth to slow in 2013 to around 4% growth or 15.0 million units.  However it now appears sales growth was closer to 8% - and expectations are for another 4% growth in 2014. 

Weekly Gasoline Update: Up Three Cents - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium both rose three cents. Regular and Premium are down 51 cents and 45 cents, respectively, from their interim highs in late February. According to, no state is averaging above $4.00 per gallon, and only Hawaii is averaging over $3.90. Eight states (Oklahoma, Montana and Kansas) are averaging under $3.00, down from eight states last Monday.

On This Day In History, Gas Prices Have Never Been Higher - It seems not a day goes by when the mainstream media (or your local friendly asset gatherer) proclaims the drop in gas prices from a Middle-East-turmoiling Summer as "great news" and very positive and an implicit tax cut... as they try to juice hopes and dreams of a better-than-expected holiday spending season. The sad truth - something unusual in this new normal - is that regular gas prices (at $3.258) have never been higher on Christmas Eve. It seems context does matter...  Yesterday, we inched out 2012's $3.247 and moved to $3.258 per gallon...

Vehicle Miles Driven: 4th Month of Fractional Population-Adjusted Increase - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through September. Travel on all roads and streets changed by 2.3% (5.8 billion vehicle miles) for October 2013 as compared with October 2012. Cumulative Travel for 2013 changed by 0.6% (15.6 billion vehicle miles). Cumulative estimate for the year is 2492.6 billion vehicle miles of travel (see report). Both the civilian population-adjusted data (age 16-and-over) and total population-adjusted data are fractionally above the post-financial crisis lows set in June. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most meaningful analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971. Clearly, when we adjust for population growth, the Miles-Driven metric takes on a much darker look. The nominal 39-month dip that began in May 1979 grows to 61 months, slightly more than five years. The trough was a 6% decline from the previous peak. The population-adjusted all-time high dates from June 2005. That's 100 months — over eight years ago. The latest data is 8.80% below the 2005 peak, fractionally above the the -9.02% post-Financial Crisis low set in June. Our adjusted miles driven based on the 16-and-older age cohort is about where we were as a nation in January of 1995..

DOT: Vehicle Miles Driven increased 2.3% in October - The Department of Transportation (DOT) reported:

◦ Travel on all roads and streets changed by 2.3% (5.8 billion vehicle miles) for October 2013 as compared with October 2012.
◦ Travel for the month is estimated to be 258.7 billion vehicle miles.
◦ ◦Cumulative Travel for 2013 changed by 0.6% (15.6 billion vehicle miles).
The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways but has started to increase a little recently.    Currently miles driven (rolling 12 months) are about 2.3% below the previous peak. The second graph shows the year-over-year change from the same month in the previous year.  In October 2013, gasoline averaged of $3.42 per gallon according to the EIA.  that was down sharply from 2012 when prices in October averaged $3.81 per gallon. Gasoline prices were down sharply year-over-year in November too, so I expect miles driven to be up in November too.   As we've discussed, gasoline prices are just part of the story.  The lack of growth in miles driven over the last 6 years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 55 drivers drive fewer miles) and changing driving habits of young drivers.  With all these factors, it might take a few more years before we see a new peak in miles driven - but it appears miles driven are increasing again.

ATA Trucking Index increased 2.7% in November - Here is a minor indicator that I follow, from ATA: ATA Truck Tonnage Index Jumped 2.7% in November The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index increased 2.7% in November, after falling 1.9% in October. ... In November, the index equaled 128.5 (2000=100) versus 125.1 in October. November’s level is a record high. Compared with November 2012, the SA index surged 8.1% ....“Tonnage snapped back in November, which fits with several other economic indicators,” “Assuming that December isn’t weak, tonnage growth this year will be more than twice the gain in 2012.”  Tonnage increased 2.3% in 2012. Costello noted tonnage accelerated in the second half of the year, indicating that the economy is likely stronger some might believe.Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The index is up solidly year-over-year. The monthly decline in October was probably related to the government shutdown, but the index bounced back in November to a record high.

Rail Week Ending 21 December 2013: Four Week Average Contracts YoY -  Week 51 of 2013 shows same week total rail traffic (from same week one year ago) again contracted according to data released by the Association of American Railroads (AAR). The data continues to show a moderate slowing of railcar loads beginning around Thanksgiving relative to the growth seen in the period preceding:

  • Four week rolling average rate of growth (compared with the average one year ago) is decelerating, and is worse than the 4 week rolling average one year ago;
  • 13 week rolling average rate of growth (compared with the average one year ago) is decelerating, but is better than the 13 week rolling average one year ago;
  • 52 week rolling average rate of growth (compared with the average one year ago) is accelerating, and is better than the 52 week rolling average one year ago.

A summary of the data from the AAR: The Association of American Railroads (AAR) today reported mixed U.S. rail traffic for the week ending Dec. 21, 2013 with 289,528 total U.S. carloads, down 0.3 percent compared with the same week last year. Total U.S. weekly intermodal volume was 255,456 units, up 6.4 percent compared with the same week last year. Total combined U.S. weekly rail traffic was 544,984 carloads and intermodal units, up 2.8 percent compared with the same week last year. Five of the 10 carload commodity groups posted increases compared with the same week in 2012, including petroleum and petroleum products with 15,501 carloads, up 12.7 percent; and grain with 21,030 carloads, up 5.0 percent. Commodities showing a decrease compared with the same week last year included metallic ores and metals with 24,754 carloads, down 6.5 percent; and coal with 113,070 carloads, down 2.9 percent.

November Durable Goods Report: A Strong Bounce - The November Advance Report on November Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders: New orders for manufactured durable goods in November increased $8.2 billion or 3.5 percent to $241.6 billion, the U.S. Census Bureau announced today. This increase, up three of the last four months, followed a 0.7 percent October decrease. Excluding transportation, new orders increased 1.2 percent. Excluding defense, new orders increased 3.5 percent.  Transportation equipment, also up three of the last four months, led the increase, $6.3 billion or 8.4 percent to $81.2 billion. This was led by nondefense aircraft and parts, which increased $3.9 billion. Download full PDF  The latest new orders number at 3.5% percent surpassed the forecast of 2.0 percent. Year-over-year new orders are up a remarkable 10.9 percent. If we exclude transportation, "core" durable goods came in at 1.2 percent MoM and 6.1 percent YoY. was looking for a smaller 0.6 percent MoM increase. If we exclude both transportation and defense, durable goods came in at 1.2 percent MoM and up 6.1 percent YoY.Core Capital Goods recovered from two months of contraction with an impressive 4.5 percent bounce. The November YoY number is a positive 7.4 percent.The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two. Over the past year, the market has certainly pulled away from the durable goods reality, something we also saw in the late 1990s.

Durable Goods Shoots Way Up, 3.5% New Order Gain for November 2013  - The Durable Goods, advance report shows new orders increased by 3.5% for November 2013 after a -0.7% decrease in October.   The really good news in this report is the growth in core capital goods.  New orders in core capital goods increased 4.5% for November  This report is often revised dramatically, yet even inventories did not decline.   Even without volatile aircraft durable goods new orders increased.   Below is a graph of all transportation equipment new orders, which soared by 8.4% for the month.  Motor vehicles & parts actually increased by 3.3%.   Aircraft and parts new orders from the non-defense sector increased 21.8%.  Aircraft & parts from the defense sector increased by10.1%.   Aircraft orders are notoriously volatile, each order is worth millions if not billions, and as a result aircraft manufacturing can skew durable goods new orders on a monthly comparison basis.   Core capital goods new orders shot up by 4.5% after declines for the previous two months.  This implies a quickening of economic activity.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves.  Machinery by itself showed a 3.8% increase and communications equipment new orders shot way up by 13.0%. To put the monthly percentage change in perspective, below is the graph of core capital goods new orders, monthly percentage change going back to 2000. 

November Durable Goods Jump, Driven By Abnormal Seasonal Adjustments -- As we have pounded the table for the past 2 years, the one most fundamental component of a self-sustaining, "escape velocity" US recovery has been the persistent absence of corporate spending and capital expenditures, as a result of a corporate mindset in which it is better to reward shareholders with short-term gains such as dividends and stock buybacks, than invest in the future via CapEx (or M&A). Which is why we were eagerly looking forward to today's Durable Goods number as it provides the best read of how America's corporations are gearing up for capital spending in terms of both orders (which can be cancelled at any time as Boeing so vividly remembers in the aftermath of the Lehman bankruptcy) and actual shipments. On the surface, the numbers were great, beating expectations across the board.  The full breakdown:

  • Headline Durable Goods including volatile transports were up 3.5%, beating expectations of a 2.0% rise, and up from an upward revised -0.7%.
  • The much more relevant and informative Durable Goods ex transports rose 1.2%, beating expectations of a 0.7% increase, and up from a downward revised -0.7%
  • On the pure CapEx front, Cap Goods orders non-defense exluding aircraft rose 4.5%, slamming expectations of a 0.7% increase, and up from an upward revised 0.7%
  • And finally, Cap Goods shipments non-defense ex aircraft rose 2.8%, on expectations of a 1.0% increase and up from a downward revised -0.4%.

Still, even with the current pick up, the trend needs to show some additional strength to breach the recent declining trendline as shown in the charts below, first that of Durable Goods, helped recently quite a bit by Boeing orders:

Durable Goods Strong Growth in November 2013 - The headlines say the durable goods new orders improved in November 2013. Most sectors had good growth lead by a very strong gain in aircraft. Econintersect Analysis:

  • unadjusted new orders growth accelerated 4.2% month-over-month , and is up 10.0% year-over-year
  • the three month rolling average for unadjusted new orders accelerated 0.2% month-over-month, and up 8.6% year-over-year.
  • Inflation adjusted but otherwise unadjusted new orders are up 9.0% year-over-year.
  • The November Federal Reserve’s Durable Goods Industrial Production Index growth decelerated 1.2% month-over-month, up 4.5% year-over-year [note that this is a series with moderate backward revision - and it uses production as a pulse point (not new orders or shipments)] – three month trend is improving.
  • unadjusted backlog (unfilled orders) growth accelerated 0.7% month-over-month,.
  • aircraft (both defense and civilian) were the reason for the strength this month.
  • note this is labelled as an advance report – however, backward revisions historically are relatively slight.

Census Headlines:

  • new orders up 3.5% (last month was originally posted as down 2.0% – and now is down 0.7%) month-over-month – making this headline even stronger.
  • backlog (unfilled orders) was up 1.0% month-over-month – and now sits at a historical high.
  • the market expected new orders up 2.2% to 3.0% versus the +3.5% actual

Capital Goods Demand Signals Stronger U.S. Growth: Economy - Orders for long-lasting goods such as computers and machinery climbed in November by the most in 10 months and new-home sales exceeded forecasts, showing a more broad-based U.S. economic expansion entering 2014.  Bookings for non-military capital equipment excluding aircraft, a proxy for future business investment, increased 4.5 percent, more than double the most-optimistic projection in a Bloomberg survey of economists, a Commerce Department report in Washington showed. Home sales eased to a 464,000 annual rate from a revised 474,000 pace in October that was the fastest since July 2008.   Manufacturing is adding fuel to the expansion as assembly lines respond to stronger demand for motor vehicles and home-construction materials. A sustained pickup in investment in new equipment, along with increased consumer spending and the prospect of smaller federal budget cuts, is making companies more confident in the economic outlook.  The gain in business-equipment demand helped drive a 3.5 percent increase in orders for all durable goods last month. The median estimate of 75 economists surveyed by Bloomberg called for a 2 percent advance.  Today’s report also helped alleviate concern that a buildup in inventories, which accounted for 1.7 percentage points of the 4.1 percent annualized gain in third-quarter economic growth, would lead to cutbacks in production. Stockpiles increased at a $115.7 billion pace, the most in three years.  The durable goods inventory-to-shipments ratio, which measures how long such stockpiles will last at the current sales pace, fell to 1.61 months in November, the lowest since March 2011, from 1.64 months.

Vital Signs: Companies Start to Open the Purse Strings -- Businesses are putting fiscal uncertainty in the rearview mirror and moving ahead. That’s the read from Tuesday’s durable-goods report. New durable goods orders increased 3.5% in November, better than expected. What interest economy-watchers is the component that covers capital goods excluding aircraft. This category feeds into business equipment investment in the gross domestic product accounts. Economists don’t expect a boom, but business investment is doing better than the flat reading in the third quarter. The 2.8% increase in core capex shipments — the best since March 2012 — caused economists at Goldman Sachs to lift their tracking of fourth-quarter GDP by one-tenth to 2.4%. Importantly, that investment push will extend into 2014. New orders for capex goods jumped 4.5% in November, reversing squishy numbers in the previous three months. The level of new orders is at the highest since June, and on a nominal basis at least, demand for capital goods is back to its prerecession levels.

U.S. Durables Orders, New-Home Sales Point to Growth - --A pair of economic reports released Tuesday showed renewed optimism by businesses and prospective homeowners, two of the biggest drivers of U.S. economic growth. Orders for U.S. durable goods--big-ticket items such as cars and aircraft designed to last more than three years--rose by 3.5% last month, reversing a decline in October, the Commerce Department said. Excluding the volatile transportation category, manufactured-goods orders rose 1.2%, the strongest gain since May. Meanwhile, Americans continued to purchase new homes at a brisk pace in November, the latest sign the housing market is regaining traction after a rise in mortgage rates. New-home sales hit a seasonally adjusted annual rate of 464,000 last month, down only 2.1% from October's upwardly revised annual rate of 474,000, the Commerce Department said in a separate report. October and November marked the two strongest months of new-home sales since mid-2008, during the recession. The reports point to an economy on stronger footing as the year winds to a close, with businesses picking up investment and new home sales remaining near postrecession peaks. The data led Macroeconomic Advisers to raise its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate. The overall durable goods increase was driven by business investment, particularly in civilian aircraft orders, which rose nearly 22%. But a broader measure of business spending on software and equipment rose at a solid pace in November after falling in recent months. Orders for nondefense capital goods, excluding aircraft, increased by 4.5%, its strongest pace since January. That could be a sign businesses stepped up spending after the partial government shutdown in October.

Are the Good Durable Goods Orders As Good As They Appear? - ‘Tis the night before Christmas, and economists and the stock markets are rejoicing in the gift of an unexpected jump in durable goods orders in November. Some market analysts are declaring it to be a harbinger of a strengthening economy in 2014. One can always hope.   However, before anyone gets too carried away, it would be wise to note that some of these November orders may be due to a pending tax increase. The last extension of “bonus expensing”  in the American Taxpayer Relief Act of 2012 – which allows immediate write-off of 50% of the cost of equipment – will expire on December 31. The cost of new equipment will be several percent higher in 2014.  The current surge in orders could be part of a rush to get machinery in place in offices and on factory floors by the end of the year to qualify for the faster write-off. The surge may be followed by a dip in investment this winter.

Richmond Fed Index Shows Manufacturing Increase - Manufacturers in the central Atlantic region say activity continues to expand this month, the Federal Reserve Bank of Richmond said Tuesday. Service sector revenues in the area, however, contracted sharply. The Richmond Fed’s manufacturing current business conditions index stayed at 13, the same as in November but better than the 1 reading of October. Numbers above zero indicate expanding activity. The subindexes were mixed this month. In general, the subcomponents are improving after activity nearly contracted in October during the government shutdown. The Richmond Fed district includes the Washington, D.C., area. The new-orders index slowed to 10 from 15 in November. The shipment index this month was little changed at 15 from 16. The employment index jumped to 14 from 6 in November, but the workweek index slowed to 6 from 12. The current-prices-paid index fell to 1.53 from 1.97 while the prices-received index stood at 1.04, little different from 1.08 in November. Looking out over the next six months, manufacturers expect improvement. The shipments-expectations index fell slightly to 34 from 37 last month, and the orders-expectations index rose to 34 from 33. The employee-expectations index increased to 17 from 16. On the service side, activity weakened. The Richmond survey’s revenues index fell steeply to -4 in December from 8 in November. The sales-revenues index for retailers alone plunged to -15 after it jumped to 33 in November from a -5 in October.

Richmond Fed Manufacturing: Activity Remained Steady in December -- The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to the nation's Central Bank. The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. Today's update shows the manufacturing composite unchanged from last month at 13. Today's number came in a bit below the forecast for an increase to 15 . Because of the highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends, now at 9.0. Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.  Here is the latest Richmond Fed manufacturing overview. Fifth District manufacturing activity continued to grow at a slightly slower pace in December, according to the most recent survey by the Federal Reserve Bank of Richmond. Shipments and the volume of new orders grew at a slightly slower rate compared to last month. Manufacturing employment picked up this month, while wages and average work week rose more slowly. The backlog of orders and vendor lead time declined in December, as capacity utilization rose. Manufacturers remained optimistic about their future business conditions. Survey participants predicted the volume of new orders and shipments would grow at a faster pace. Additionally, they looked for capacity utilization to grow more quickly during the next six months. Firms anticipated rising backlogs of new orders and longer vendor lead times. Producers expected the number of employees and wages to grow at a faster pace during the next six months. Compared with the current month, expectations were for slower growth in the average work week. Raw materials and finished goods prices rose at a slower pace in December compared to last month. However manufacturers expected faster growth in prices paid and prices received over the next six months.

The Young, the Restless and Economic Growth - Despite the strong showing in third quarter, GDP growth since the official end of the recession in June 2009 has been substandard. Some worry that the U.S. may follow in Japan's footsteps, experiencing a "lost decade" of economic stagnation. It may sound strange, but here's one way to avoid Japan's fate: import young people. Like many developed countries, Japan has a rapidly aging population. Countries with older populations have lower rates of entrepreneurship. Economic stagnation can be a consequence of slow innovation and lethargic business formation. To avoid becoming Japan, the U.S. needs a younger population. More and improved immigration is one way to achieve that goal. In a current study analyzing the most recent Global Entrepreneurship Monitor (GEM) survey, my colleagues James Liang, Jackie Wang and I found that there is a strong correlation between youth and entrepreneurship. The GEM survey is an annual assessment of the "entrepreneurial activity, aspirations and attitudes" of thousands of individuals across 65 countries. In our study of GEM data, which will be issued early next year, we found that young societies tend to generate more new businesses than older societies. Young people are more energetic and have many innovative ideas. But starting a successful business requires more than ideas. Business acumen is essential to the entrepreneur. Previous positions of responsibility in companies provide the skills needed to successfully start businesses, and young workers often do not hold those positions in aging societies, where managerial slots are clogged with older workers. Silicon Valley provides a case in point. Especially during the dot-com era, the Valley was filled with young people who had senior positions in startups. Some of the firms succeeded, but even those that failed provided their managers with valuable business lessons.

Sen. Elizabeth Warren Introduces Bill To Stop Credit Reports For Job Applications - Much of America – hard-working, bill-paying America – has a damaged credit rating. There are a lot of different reasons, but a lot of people just caught a bad break. They got sick. Their husband left or their wife died. They lost their job. Problems only got worse after the financial crisis. Shrinking home prices made it impossible to sell or refinance a home. People lost their small businesses. Smaller savings left people without much cushion to ride out the tough times. People missed a payment or went into debt. Most people recognize that bad credit means they will have trouble borrowing money or they will pay more to borrow. But many don't realize that a damaged credit rating can also block access to a job. It was once thought that credit history would provide insight into someone's character, and many companies routinely require credit reports from job applicants. But research has shown that an individual's credit rating has little or no correlation with his ability to succeed at work. A bad credit rating is far more often the result of unexpected personal crisis or economic downturn than a reflection of someone's abilities. Today, along with Senators Blumenthal, Brown, Leahy, Markey, Shaheen, and Whitehouse, I am introducing a bill to stop employers from requiring prospective employees to disclose their credit history or disqualifying applicants based on a poor credit rating. 

Weekly Initial Unemployment Claims decline to 338,000 - The DOL reports: In the week ending December 21, the advance figure for seasonally adjusted initial claims was 338,000, a decrease of 42,000 from the previous week's revised figure of 380,000. The 4-week moving average was 348,000, an increase of 4,250 from the previous week's revised average of 343,750. The previous week was revised up from 379,000.The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 348,000. Weekly claims are frequently volatile during the holidays because of the seasonal adjustment.

Weekly U.S. Jobless Claims Drop 42K to 338K — The number of Americans applying for unemployment benefits dropped by 42,000 last week to a seasonally adjusted 338,000, the biggest drop since November 2012. But economists say the figures from late November and December are warped by seasonal volatility around the Thanksgiving, Christmas and New Year’s holidays. The Labor Department reported Thursday that the less-volatile four-week average rose 4,250 to 348,000. Claims had jumped 75,000 over the two weeks that ended Dec. 14 before plunging last week. The Labor Department struggles to account for seasonal hiring by retailers and other businesses and for temporary layoffs of cafeteria workers and other employees at schools that close for the holidays. Unemployment claims are a proxy for layoffs and the recent declines are consistent with a solid job market.

Initial Claims Tumble Even As 1.3 Million Americans Are Set To Stop Collecting Benefits - Despite the BLS claiming no states estimated their data and the previous week's apparently errant (but significantly not revised lower), the claims data this week saw its biggest week-over-week percentage drop since January 2006 (which ironically almost perfectly bottom-ticked the previous 'recovery' claims improvements). Continuing claims, however, rose for the 3rd week in a row - the largest 3-week rise in since March 2009! Of course, the more critical part of the labor department's report is the end of the Emergency Unemployment Compensation (EUC) program which will pay one more claim this week and then 1,333,332 will begin to lose their benefits. EUC benefits cannot be paid for any week of unemployment after Dec 28th (which, of course, is great news for the unemployment rate).

Initial Unemployment Claims Gone Wild - The DOL reported people filing for initial unemployment insurance benefits in the week ending on December 21th, 2013 was 338,000, a 42,000 decrease from the previous week of 373,000.  Many headlines proclaim the largest drop since November 2012, yet what the press does not mention is that time period in 2012 also had wild, whacky statical swings.  The real problem with these figures is they are really out of whack and way out of the norm, even for the holidays.  Graphed below is the number change of initial claims and we can see wild swings from week to week.  Many in the press claim the holidays, from Thanksgiving to the New Year are the reason for the wild swings.  Yet the below graph shows the percentage change in initial claims from week to week in order to show the variance.  Notice how the percentage change has increased dramatically on a weekly basis in 2013  One has to go back to September 2005 to find an almost 30% weekly percentage change like these.  Yet for 2013, there are multiple above 20% percentage changes.  One can be explained by California back processing claims and having delays.  Yet two weeks ago there was a 21% increase in initial claims.  If anything this week's -11.1% change implies an timing issue and a correction for the sudden rise two weeks ago.  In other words, this week's figure is not to be believed.  Additionally with wild weekly swings like this, by percentages which takes into account the larger numbers of filers during the great recession, we cannot say weekly drops are due to real changes in filings.  We can say something funky is going on with the data collection and reporting methods.  It is also possible that the wild weather is bringing havoc to initial claims.

It’s still too early for Congress to stop worrying about unemployment: This is the month that unemployment officially fell off the agenda in Washington, D.C. There are three major levers that policymakers can use to push for full employment in the aftermath of the Great Recession. The federal government can run additional deficits to boost aggregate demand. The Federal Reserve can provided monetary stimulus to increase investment. And regulators can fix the broken housing market to allow for quicker deleveraging and to prevent destabilizing foreclosures. But policymakers are now easing up on all three levers. The Federal Reserve is beginning to “taper” its stimulus efforts, and emergency unemployment insurance is unlikely to be extended in 2014. But there are other, less-noticed ways in which the government is pulling back on employment. There's the looming expiration of the Mortgage Forgiveness Debt Relief Act, created by then-Rep. Brad Miller (D) in 2007. This tax exemption allowed homeowners to write off the dollar amount of their mortgage write-downs, especially from short sales. The bill allowed many Americans to deleverage more easily. But Congress isn’t going to extend this credit for another year -- a huge unforced error. Allowing this credit to lapse could also create major problems for homeowners who are part of recent housing settlements.

As the Politics Play Out, Key Jobless Benefit Lapses - An emergency jobless-benefits program due to expire this weekend would pinch the finances of more than a million Americans, setting the stage for the what could become lawmakers' first flashpoint of the midterm election year.While the program's end would barely dent the broader economy, the money at stake is meaningful. The federal Emergency Unemployment Compensation, launched during the middle of the recession, pays on average $300 a week to 1.3 million long-term jobless who have exhausted the roughly 26 weeks of unemployment insurance benefits most states provide. If extended, the program would transfer about $25 billion in 2014 from the government to the unemployed, the Congressional Budget Office calculates.  As soon as Congress returns from its holiday break, the Democratic-run Senate will consider a bipartisan measure to extend the program by three months. The interval is meant to give lawmakers time to work on a longer-term solution. But the extension isn't a slam-dunk as support in the GOP-controlled House remains unclear.

A Quick Thought on the Expiration of Long-Term UI --  I wanted to take a quick moment to note that extended unemployment insurance benefits expire tomorrow, meaning over one million long-term unemployed will lose vital benefits; if the expiration is not reversed by congressional action, almost five million unemployed persons could lose benefits by end of next year. You can learn the details of the case here, but I wanted to make one political economy point.  Though Republicans have been leading the call in favor of expiration, this is not a simple tale of good D’s and bad R’s.  It’s also the result of a fiscal policy standard, often supported by both parties, that stands firmly against any deficit spending.Thus, when Rep. Boehner asked D’s a few weeks ago how they planned to pay for the $25 billion extension of UI, they were in a box.   Whatever spending cuts they could find were already in the little Ryan/Murray budget deal, the R’s would not countenance increasing tax revenues, and the notion of putting it on the deficit was largely verboten by both parties.This is a mistake.  With long-term unemployment still highly elevated, adding a temporary extension of UI benefits to the deficit is totally legitimate fiscal policy.  It’s just become way too hard to find folks in DC who understand that anymore.

Is the Labor Force Participation Rate about to Fall Again? -- Atlanta Fed's macroblog -- A few posts back my Atlanta Fed colleagues Tim Dunne and Ellie Terry offered up our latest contribution to the ongoing head-scratching over the rather spectacular decline in U.S. labor force participation (LFP) since the onset of the Great Recession in December 2007.  Two developing stories suggest the LFP may not be leaving the spotlight just yet. The first is this one, from USA Today: Some 1.3 million Americans are set to lose their unemployment benefits Saturday... Federal emergency benefits will end when funds run out for a program created during the recession to supplement the benefits that states provide. The cutoff will initially affect 1.3 million people, but 1.9 million more will lose benefits by mid-2014 when their 26 weeks of state paychecks run out, according to the National Employment Law Project. What will those 1.3 million Americans do when their benefits run dry? According to a recent study by Princeton University’s Henry Farber and the San Francisco Fed’s Robert Valletta—also presented at a conference hosted here at the Atlanta Fed in October—on balance, the affected individuals are likely to leave the labor force:  We found small but statistically significant reductions in unemployment exits and small increases in unemployment durations arising from both sets of UI extensions. The magnitude of these overall effects is similar across the two episodes...We find that the effect on exit from unemployment occurs primarily through a reduction in labor force exits rather than through exit to employment (job finding). This is important because it implies that extended benefits do not delay the time to re-employment substantially and so do not have first-order efficiency effects.

The Plight of the Employed - Paul Krugman -- Mike Konczal writes about how Washington has lost interest in the unemployed, and what a scandal that is. He also, however, makes an important point that I suspect plays a significant role in the political economy of this scandal: these are lousy times for the employed, too. Why? Because they have so little bargaining power. Leave or lose your job, and the chances of getting another comparable job, or any job at all, are definitely not good. And workers know it: quit rates, the percentage of workers voluntarily leaving jobs, remain far below pre-crisis levels, and very very far below what they were in the true boom economy of the late 90s:  Now, you may believe that employment is a market relationship like any other — there’s a buyer and a seller, and it’s just a matter of mutual consent. You may also believe in Santa Claus. The truth is that employment is, in many though not all cases, a power relationship. In good economic times, or where workers’ position is protected by legal restraints and/or strong unions, that relationship may be relatively symmetric. In times like these, it’s hugely asymmetric: employers and employees alike know that workers are easy to replace, lost jobs very hard to replace. And may I suggest that employers, although they’ll never say so in public, like this situation?  I don’t think I’d go so far as to say that there’s a deliberate effort to keep the economy weak; but corporate America certainly isn’t feeling much pain, and the plight of workers is actually a plus from their point of view.

Why Corporations Might Not Mind Moderate Depression - Krugman -   I want to follow up on a train of thought I started yesterday. I pointed out, following on a suggestion by Mike Konczal, that the continuing dire state of the labor market enhances the bargaining position of employers, increasing their power. But can this effect actually mean that employers are better off in a somewhat depressed economy than they would be in a boom? A lot people have the instinctive reaction that it can’t be possible — that businesses would prefer to have stronger demand, even if it means that they have to pay their workers more and treat them better. And maybe that’s true. But it’s by no means an open-and-shut case. Suppose (as I am, in fact, supposing) that we have in mind some kind of efficiency wage story, in which the effort employers can extract from their employees depends in part on the state of the labor market.  Other things equal, firms will choose the level of N that maximizes their profits. But in so doing, they will be ignoring the effect of their collective hiring decisions on the unemployment rate. Indeed, any individual firm has a negligible effect on U. But collectively they in effect determine U — and a high level of U, we’ve been arguing, increases their power over workers and hence their profits. Again, other things equal. So a slack economy could in effect serve as a coordinating device for firms; one way to think about it is that it keeps firms from competing too hard for workers, enabling them to exert more monopsony power. This effect would have to be weighed against the direct adverse effect of slack demand on profitability, but there’s no rule saying that firms have to do worse in a depressed economy; they could actually do better.

The Fear Economy, by Paul Krugman - Some people would have you believe that employment relations are just like any other market transaction; workers have something to sell, employers want to buy what they offer, and they simply make a deal. But anyone who has ever held a job in the real world — or, for that matter, seen a Dilbert cartoon — knows that it’s not like that. The fact is that employment generally involves a power relationship: you have a boss, who tells you what to do, and if you refuse, you may be fired. This doesn’t have to be a bad thing. If employers value their workers, they won’t make unreasonable demands.   So employment is a power relationship, and high unemployment has greatly weakened workers’ already weak position in that relationship.  We can actually quantify that weakness by looking at the quits rate — the percentage of workers voluntarily leaving their jobs (as opposed to being fired) each month. Obviously, there are many reasons a worker might want to leave his or her job. Quitting is, however, a risk; unless a worker already has a new job lined up, he or she doesn’t know how long it will take to find a new job, and how that job will compare with the old one.  And the risk of quitting is much greater when unemployment is high, and there are many more people seeking jobs than there are job openings. As a result, you would expect to see the quits rate rise during booms, fall during slumps — and, indeed, it does. Quits plunged during the 2007-9 recession, and they have only partially rebounded, reflecting the weakness and inadequacy of our economic recovery.  Now think about what this means for workers’ bargaining power. When the economy is strong, workers are empowered. They can leave if they’re unhappy with the way they’re being treated and know that they can quickly find a new job if they are let go. When the economy is weak, however, workers have a very weak hand, and employers are in a position to work them harder, pay them less, or both.

 Government Employment - The Missing Key to America's Employment Puzzle - In this posting, I'm going to look at one of the key reasons why the current recovery is different for unemployed Americans.  As you will see, looking back three recessions, one aspect of the economy has prevented the jobs picture from improving as quickly as it might.  Let's open with this graph showing the number of government jobs in the United States since the beginning of the Great Recession in December 2007:  At the beginning of the recession, there were 22.376 million government workers in the United States.  This rose to a peak of 22.992 million in May 2010 and fell back to a post-recession low of 21.826 million, rising ever slightly to its current level of 21.857 million.  That means that since the Great Recession took hold, the economy has seen 519,000 government jobs vanish or 2.32 percent of the pre-recession total.  Now, let's look back at the second last recession that stretched from March 2001 to November 2001.  I'll look at government employment data for a 53 month period beyond the end of that recession to match the time period in the first part of this posting:  You'll notice right away that this graph is almost a perfect inversion of the first graph.  At the beginning of the 2001 recession, there were 20.945 million government workers in the United States.  This rose to 21.326 million by the end of the recession and kept rising throughout most of the remaining 53 months, hitting 21.754 million in April 2005.  That's an overall increase of 809,000 jobs or 3.86 percent of the total pre-recession government workforce.

All Federal Workers to Get 1% Raise - Federal employees in January will get their first across-the-board pay raise in several years, as President Barack Obama moved Monday to activate a 1% increase for all government workers. The increase came by an executive order and was expected. The raise was requested by the White House earlier in the year and Congress didn’t take the necessary steps to prevent it from taking place. Federal benefits and salaries are often targets during budget discussions. The recent House and Senate budget agreement required certain federal employees to contribute more to their pensions, and some Republicans have proposed cutting the federal workforce to save money. The Obama administration in previous years agreed to freeze the pay of federal employees as part of the ongoing deficit-reduction fights in Congress. It’s the first across-the-board pay bump for federal employees since federal employees received a 2% increase in January 2010. Federal employees were able to collect bonuses, overtime and promotion pay raises. Federal agencies must accommodate the pay increases within their budgets and they do not collect additional funds because of Mr. Obama’s order.

How Well Did New Jobs Pay in 2013? - The U.S. economy has added more than 2 million jobs so far in 2013, the fastest pace of growth since 2005.  But many of the new positions are concentrated in industries with below-average wages, one factor holding back consumer spending and faster growth.  Professional and business services — a broad category that includes lawyers and engineers but also secretaries and security guards — saw payrolls grow the most from November 2012 to November 2013, with 626,000 new positions created. Most of those jobs came in lower paying segments like administrative support, which added 379,200 positions and has an average weekly salary of only $621.07. Temporary help was another big category, with 211,900 net hires and average weekly earnings of $554.23.  By comparison, average weekly earnings for all private workers were almost $828. Other big gainers with low wages: the leisure and hospitality industry, with average weekly wages at $349, retailers ($518) and restaurants and bars ($307).Even with lower wages, the positions offer an alternative to government assistance. They can also provide valuable experience for workers just starting out on a career path. One bright note, higher paying industries have shown renewed signs of strength and some economists expect sectors like manufacturing and construction to add jobs at a faster pace in 2014.

Robots and Economic Luddites: They Aren't Taking Our Jobs Quickly Enough - Lydia DePillis warns us in the Post of 8 ways that robots will take our jobs. It is amazing how the media have managed to hype the fear of robots taking our jobs at the same time that they have built up fears over huge budget deficits bankrupting the country. You don't see the connection? Maybe you should be an economics reporter for a leading national news outlet. Okay, let's get to basics. The robots taking our jobs story is a story of labor surplus, too many workers, too few jobs. Everything that needs to be done is being done by the robots. There is nothing for the rest of us to do but watch. Okay, now let's flip over to the budget crisis that has the folks at the Washington Post losing sleep. This is a story of scarcity. We are spending so much money on our parents' and grandparents' Social Security and Medicare that there is no money left to educate our kids. This is confused because if we are living in the world where the robots are doing all the work then the government really doesn't need to raise tax revenue, it can just print the money it needs to back its payments.  The government is just going to print trillions of dollars? That will send inflation through the roof, right? Not in the world where robots are doing all the work it won't. If we print money it will create more demands for goods and services, which the robots will be happy to supply. As every intro econ graduate knows, inflation is a story of too much money chasing too few goods and services. But in the robots do everything story, the goods and services are quickly generated to meet the demand. Where's the inflation, robots demanding higher wages? In short, you can craft a story where we have huge advances in robot technology so that the need for human labor is drastically reduced. You can also craft a story where an aging population leads to too few workers being left to support too many retirees. However, you can't believe both at the same time unless you write on economic issues for the Washington Post.

Philly Fed: State Coincident Indexes increased in 46 states in November -- From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2013. In the past month, the indexes increased in 46 states, decreased in two states (Alaska and Ohio), and remained stable in two (New Hampshire and Washington), for a one-month diffusion index of 88. Over the past three months, the indexes increased in 46 states, decreased in three, and remained stable in one for a three-month diffusion index of 86.Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed: The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). . This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In November, 48 states had increasing activity(including minor increases). This measure has been and up down over the last few years ... Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and all green at times during the recovery. There are a few states with three month declining activity, but most of the map is green - and I expect the map to be all green soon.

Would Increasing the Minimum Wage Create Jobs? - The standard argument against raising the minimum wage is that it kills jobs by making workers more expensive to hire. Whether or not that's true has been the subject of century-long economics debate, which probably won't be resolved any time soon. But lately, some liberals have been attempting to flip the old criticism on its head. Higher minimum wages, they say, don't destroy jobs. Higher minimum wages create jobs! This week, for instance, the Economic Policy Institute released a report estimating that raising the federal minimum wage to $10.10 an hour, up from $7.25 today, would add an additional 85,000 jobs to the economy, a finding that's been covered in liberal-leaning outlets like The Huffington Post. When economists study the minimum wage, they generally find that it either creates a small number of job losses, or leaves employment untouched. But once in a blue moon, their math does suggest a link between a higher-wage floor and job creation.  Why might that be? There are a few potential explanations. But the one we care about today frames the minimum wage as a kind of economic stimulus. The key is that poor and middle class families tend to spend more of their income than the wealthy, since they're often struggling to meet basic needs. So by taking money from businesses and giving it to their worst paid employees, raising the minimum wage might, in theory, increase consumer spending—which in turn boosts the economy and creates jobs.

Should We Raise the Minimum Wage? 11 Questions and Answers - 2013 was a good year for supporters of a higher minimum wage. States including New York, California, and New Jersey passed hikes. Residents of SeaTac, Washington, voted to turn their tiny city into a living economics experiment by increasing its minimum to a $15 an hour. Washington, D.C., seems poised to raise its own wage. And President Obama threw his support behind a bill that would increase the federal minimum to $10.10 an hour and require it to rise with the cost of living. You can expect to hear more liberal agitating for a higher wage in 2014. And of course, you can also expect to hear conservatives shout back that the idea is a job killer. To prepare you for the inevitable policy argument, here's your FAQ.

And then inequality happened - The United States is a place of wide income inequality. By recent estimates, the wealthiest 1 percent of Americans take home over 22 percent of pre-tax income and hold more than 34 percent of wealth. So for many it was heartening that, on Dec. 4, President Obama gave a major speech positioning inequality as a significant issue both morally and economically. Obama described three myths prevalent in the debate on the subject. First, he addressed the belief that this issue affects only a mostly black and brown minority of Americans. Next, he assured listeners that ensuring growth and tackling inequality are complementary goals. Finally, and perhaps most importantly, he pushed back on the idea that government cannot do anything to remedy the problem.Left-leaning pundits praised the president. The Washington Post’s Greg Sargent wrote that “experts…will see it as one of the most important speeches of the Obama presidency.” Paul Krugman, in The New York Times, declared that Obama was “finally sounding like the progressive many of his supporters thought they were backing in 2008.” You might think this would make the wealthy tremble in their calfskin loafers. In fact, though, the very grammatical constructions of the speech suggest they have nothing to fear. Even as he made the case for government involvement, Obama’s language signaled something else: that our economic divide is a problem of origin unknown, and thus beyond our power to solve.

Inequality for Dummies - For starters, economic inequality is manifestly real, growing and dangerous. The gulf between the penthouse and the projects is obscenely wide. Obama cited some of the startling numbers: The top 10 percent of Americans used to take in a third of the national income. Now they gobble up half. The typical corporate C.E.O. used to make 30 times as much as the average worker. Now the boss makes 270 times as much as the minion. Many factors have led to this trend, including the offshoring of work to low-paid foreign labor, the automation of everything from manufacturing to meter-reading, a tax code that allows the accumulation of riches at the top, the slow growth of educational attainment, the demise of strong unions, a collapse of the social contract.  The alarming thing is not inequality per se, but immobility. It’s not just that we have too many poor people, but that they are stranded in poverty with long odds against getting out. The rich (and their children) stay rich, the poor (and their children) stay poor. President Obama’s speech on Dec. 4, widely characterized as his inequality speech, was actually billed by the White House as a speech on economic mobility. The equality he urged us to strive for was not equality of wealth but equality of opportunity.  A stratified society in which the bottom and top are mostly locked in place is not just morally offensive; it is unstable. Recessions are more frequent in such countries. A widely praised 2012 book, “Why Nations Fail,” argues that historically when the ruling elites have pulled up the ladder and kept newcomers from getting a foothold, their economies have suffocated and died. The rich spend heavily on lobbyists and campaign donations to secure tax breaks and tariff advantages and bailouts that perpetuate their status. Not only does a dynamic economy stagnate, but the left-out citizenry becomes disillusioned and cynical. Sound familiar?

I fell off the left-right continuum today - There was an article in the New York Times Inequality for Dummies – by regular Op Ed columnist Bill Keller, who clearly thinks he represents the pragmatic, reasonable progressive “centre-left” as distinct from the “left-left” who have their heads in the sand and apparently are content to mouth of slogans to make themselves feel better but which do nothing to address reality or advance the progressive cause. His topic, not unsurprisingly given the title is income inequality and he seems to think this is a topic that exposes the “left-left” types for who they are – out of touch populists who are: … indulging a “‘we can have it all’ fantasy.”  He was quoting Allyson Schwartz, a Democratic candidate for Pennsylvania governor and board member of the so-called “centrist think-tank” Third Way, who launched an internicine attack on US Senator Elizabeth Warren and New York City Mayor-elect Bill de Blasio – who are “left-left” types according to Keller. The “we can have it all” attack was over the Elizabeth Warren’s “plans to expand Social Security benefits and delay Medicare reforms” (Source)  It was written by the Third Way leaders and attacked “left-wing populists”. The “we can have it all fantasy” was represented in this way: If we force the wealthy to pay higher taxes (there are 300,000 tax filers who earn more than $1 million), close a few corporate tax loopholes, and break up some big banks then—presto!—we can pay for, and even expand, existing entitlements. Meanwhile, we can invest more deeply in K-12 education, infrastructure, health research, clean energy and more.  The Third Way representatives then told us that the left-wing populists were in denial when it came to the reality that the:… payouts to seniors have exceeded payroll taxes collected from workers. This imbalance widens inexorably until it devours the entire Social Security Trust Fund in 2031, according to the Congressional Budget Office. At that point, benefits would have to be slashed by about 23%.  This inexorability (I love it when mindless conservatives use the word “inexorable” – it is a clue they know nothing) apparently leads to an “undebatable solvency crisis”. Phew.

Reduce Inequality to Fight Secular Stagnation - Larry Summers’ IMF speech on secular stagnation partially shifted the attention from the crisis to the long run challenges facing advanced economies. I like to think of Summers’ point of as a conjectures that “in the long run we are all Keynesians”, as we face a permanent shortage of demand that may lead to a new normal made of hard choices between an unstable, debt-driven growth, and a quasi-depressed economy. A number of factors, from aging and demographics to slowing technical progress, may support the conjecture that globally we may be facing permanently higher levels of savings and lower levels of investment, leading to negative natural rates of interest. Surprisingly, another factor that had a major impact in the long-run compression of aggregate demand has been so far neglected: the steep and widespread increase of inequality. Reversing the trend towards increasing inequality would then become a crucial element in trying to escape secular stagnation.

Redistribute wealth? No, redistribute respect - I've always been a communist revolutionary at heart. Inequalities between human beings have always annoyed me, and I have the strong desire to see them eliminated. In American society, we generally discuss three kinds of "equality": 1) "equality of outcome", usually meaning equality of wealth or income, 2) "equality of opportunity", and 3) "equal rights" under the law. The first is typically supported by true communists and socialists, and some liberals; the second by centrist liberals; and the third by libertarians and conservatives. The arguments between proponents of the three types of equality are voluminous and endless. And I think all three are important. But I find that there is something missing from this list. It's equality of respect. I had this realization (as with so many others) while living in Japan. I first noticed it when I was sitting in a "kaiten-zushi" restaurant, watching some cooks chop fish. It was robotic, repetitive work, about as difficult - and about as well-paid - as flipping burgers. But my Japanese friend referred to one of those cooks as "sushi-ya-san", meaning "Mr. Sushi Chef". She used the honorific reflexively, not patronizingly or sarcastically. The respect for this low-paid, low-skilled worker was reflexive, automatic. I suddenly wondered if we could get Americans to start calling burger-flippers "sir". The thought made me laugh.

Welfare Benefits for Big Business -- News reports have emerged this year that some of the nation’s largest and best-known corporations – like Walmart and McDonald’s – may have disproportionate numbers of their employees taking part in public assistance programs like Medicaid and food stamps. A video that went viral on YouTube criticized McDonald’s for offering its employees assistance with navigating the complex web of federal government assistance programs. Most public assistance programs are aimed at poor people and limit participants’ incomes to a maximum somewhere around the poverty line (about $20,000 a year for a family of three). Because jobs generate incomes, it’s difficult for a worker to be admitted into antipoverty programs unless he or she works part time or earns near the minimum wage. Thus, it is no surprise that employers like McDonald’s and Walmart offering part-time or minimum-wage positions would have a disproportionate number of their employees in such programs. One point of view is that employers just want to be helpful, and some of them happen to be in a line of business where they can create job opportunities for low-skilled people, many of whom can also benefit from knowledge about antipoverty programs. But critics assert that low pay is a deliberate corporate strategy to use government program revenues to enhance their bottom line.Economists have long cataloged the winners and losses from antipoverty programs – we call it the “economic incidence” – and the answer is more subtle than either side acknowledges.

Demand for food stamps soars as cuts sink in and shelves empty -- Deep cuts to the US food stamps programme, designed to keep low-income Americans out of hunger in the aftermath of the economic recession, have forced increasing numbers of families such as theirs to rely on food banks and community organisations to stave off hunger. An expansion of the programme, put in place when the recession was biting deepest, was allowed to expire in November, cutting benefits for an estimated 48 million people, including 22 million children, by an average of 7%.  As these cuts begin to bite, even harsher reductions are in prospect. Republicans in the House of Representatives have proposed $38bn cuts over 10 years, in their latest version of a long-delayed farm bill that would also require new work requirements and drug tests for food stamp recipients.The cuts have forced poor families to make tough choices. The Guardian spoke to beneficiaries of the food stamps scheme, known as the Supplemental Nutrition Assistance Programme (Snap), in San Antonio, Texas. As the second most populous US state after California, Texas suffered the second-biggest cut to its Snap programme, affecting 4 million recipients.  Acosta, 36, a mother of four children aged 14 and under, described how being laid off from her job as a healthcare administrator seven months ago had caused an immediate family crisis.  An $800 medical bill, no longer covered by insurance, meant Acosta quickly fell behind on the $1,200 monthly payments on her house, then the car. She lost both, and was forced to move in with her sister in Edinburg, Texas, 200 miles south, until her unemployment benefit came through. The strain of having her income slashed has taken its toll.

In No One We Trust - Joseph Stiglitz - In America today, we are sometimes made to feel that it is naïve to be preoccupied with trust. Our songs advise against it, our TV shows tell stories showing its futility, and incessant reports of financial scandal remind us we’d be fools to give it to our bankers. That last point may be true, but that doesn’t mean we should stop striving for a bit more trust in our society and our economy. Trust is what makes contracts, plans and everyday transactions possible; it facilitates the democratic process, from voting to law creation, and is necessary for social stability. It is essential for our lives. It is trust, more than money, that makes the world go round. We do not measure trust in our national income accounts, but investments in trust are no less important than those in human capital or machines. Unfortunately, however, trust is becoming yet another casualty of our country’s staggering inequality: As the gap between Americans widens, the bonds that hold society together weaken. So, too, as more and more people lose faith in a system that seems inexorably stacked against them, and the 1 percent ascend to ever more distant heights, this vital element of our institutions and our way of life is eroding.

How Debtors' Prisons Are Making A Comeback In America - Apparently having 5% of the world’s population, but 25% of its prisoners simply isn’t good enough for neo-feudal America. No, we need to find more creative and archaic ways to wastefully, immorally and seemingly unconstitutionally incarcerate poor people. Welcome to the latest trend in the penal colony formerly known as America. Debtors’ prisons. A practice I thought had long since been deemed outdated.  From Fox News: As if out of a Charles Dickens novel, people struggling to pay overdue fines and fees associated with court costs for even the simplest traffic infractions are being thrown in jail across the United States. Critics are calling the practice the new “debtors’ prison” — referring to the jails that flourished in the U.S. and Western Europe over 150 years ago. Before the time of bankruptcy laws and social safety nets, poor folks and ruined business owners were locked up until their debts were paid off. Reforms eventually outlawed the practice. But groups like the Brennan Center for Justice and the American Civil Liberties Union say it’s been reborn in local courts which may not be aware it’s against the law to send indigent people to jail over unpaid fines and fees — or they just haven’t been called on it until now. It doesn’t look like a bargain. For example, according to the report, Mecklenburg County, N.C., collected $33,476 in debts in 2009, but spent $40,000 jailing 246 debtors — a loss of $6,524.

California police department gets 37,000 lb armored military truck worth $650,000 - A California police department has received a 37,000 armored truck that was once used in military training exercises.  The Salinas Police Department took ownership of the hulking tank-like vehicle on December 17 and parked it in front of the town's Rotunda for public viewing.The $650,000 truck has caused quite a stir in the town, with many residents questioning why a military armored vehicle would be needed in civilian situations.The truck provides protection from handgun and rifle fire as well as explosions. It will be used for the Salinas SWAT team and can transport eight to 10 officers at a time.

Detroit’s Deals with Financial Institutions Led to Disaster - Today’s New York Times published one of the most important stories yet about the Detroit bankruptcy, a story that shines a harsh light on the financial institutions whose tricky deal-making helped tank the city’s finances. At the heart of the story is Detroit’s decision to enter into swap contracts that were spectacularly ill-advised: “Detroit entered into the swap contracts back in 2005, when it tapped the municipal bond market for $1.4 billion to put into its workers’ pension funds. Much of the deal was structured with variable-rate debt, and the swaps were intended to work as a hedge, to protect Detroit if interest rates rose. But as things turned out, rates went down, and under those circumstances, the terms of the swaps called for Detroit to make regular payments to UBS and Merrill Lynch Capital Services, now part of Bank of America. Detroit has been doing so, even in bankruptcy. The swaps now cost it about $36 million a year.  The borrowing required an unusual structure to avoid violating the city’s legal debt limit. In 2009, the debt was downgraded to junk, putting the city out of compliance with the terms of the swaps. So Detroit restructured the swap obligations, offering the two banks the tax revenue that it received from local casinos as a backstop.” How did Detroit get taken down this road to disaster? In his report on the Detroit bankruptcy for Demos, Wallace Turbeville raises an important question about the ethics of the financial institution that negotiated the pension financing deal that did so much to precipitate Detroit’s bankruptcy. Turbeville wonders whether Detroit officials were taken advantage of because they didn’t understand what they were doing—or worse, that they did understand:

Detroit's abandoned buildings draw tourists instead of developers — He'd heard stories of ruin and blight, but that didn't prepare Oliver Kearney for what he saw: Prostitutes roaming the streets at 8 a.m., rubble-strewn parking lots overrun with weeds, buildings taken over by bright pink graffiti, the message scrawled on blackboards in deserted schools: "I will not write in vacant buildings." He took 2,000 photographs his first day. "No other American city has seen decline on this scale," Kearney said. "It's really a once-in-a-lifetime thing you're going to see." And he saw it all on a tour. Kearney, an 18-year-old aspiring architect, persuaded his father to travel with him from Britain to Detroit to participate in one of the city's few burgeoning industries: tours of abandoned factories, churches and schools. Led by tour guide Jesse Welter, they crawled on their hands and knees to peek inside a train station closed long ago; they squeezed through a gap in a fence to climb the stairs of what was once a luxury high-rise; they ducked under crumbling doorways to see a forgotten ballroom where the Who held its first U.S. concert. "In Detroit, you can relate, you can see traces of what's happened, you can really feel the history of a city," Kearney said. "In Europe, when things become derelict, they'll demolish them."

Subtract Teachers, Add Pupils: Math of Today’s Jammed Schools - The recession may have ended, but many of the nation’s school districts that laid off teachers and other employees to cut payrolls in leaner times have not yet replenished their ranks. Now, despite the recovery, many schools face unwieldy class sizes and a lack of specialists to help those students who struggle academically, are learning English as a second language or need extra emotional support.  Across the country, public schools employ about 250,000 fewer people than before the recession, according to figures from the Labor Department. Enrollment in public schools, meanwhile, has increased by more than 800,000 students. To maintain prerecession staffing ratios, public school employment should have actually grown by about 132,000 jobs in the past four years, in addition to replacing those that were lost, said Heidi Shierholz, an economist at the Economic Policy Institute in Washington.  School districts in other hard-hit states, including California, Maryland, Michigan, North Carolina and Texas, are coping with similarly squeezed resources. Along with budget cuts at the federal, state and local levels, rising public school enrollment over the past five years has exacerbated the pinch.  The staffing gap has pushed elementary class sizes to 30 students and more in parts of California, where special state funds had been designated since the mid-1990s to keep classes in kindergarten through third grade capped at 20 students. In Dallas this year, the public school district has applied for more than 200 waivers from the state’s maximum class size of 22 students for kindergarten through fourth grade.

Amid mass school closings, a slow death for some Chicago schools - Because if all goes according to the city’s plan, there soon will be no Walter Dyett High School to return to in Bronzeville, an historic African-American enclave on the city’s south side. Dyett is scheduled to close at the end of next school year, at which point, community groups say, there will be no other viable public high school in the neighborhood–essentially creating a “school desert.” Mass school closings have become a growing trend in major cities across the country, including Philadelphia, New York City, Oakland and Detroit. But in Chicago, the school board has struck more broadly and with a heavier axe than any other school district in the country. For more than a decade the school district has been on a mission to close underperforming and underutilized schools, mostly in minority neighborhoods on the city’s south and west sides. Since 2001 the district has shuttered or phased-out about 150 schools, including 49 over this past summer. It was the largest single mass school closing in American history and affected more than 30,000 students who were either displaced or whose schools absorbed the massive spillover. In Chicago and nationwide the school closings have destabilized tens of thousands of mostly African-American students. About 88% of the students affected by the Chicago closings are African-American, 10% are Latino and 94% come from low-income families.

‘Small typo’ casts big doubt on teacher evaluations - A single missing suffix among thousands of lines of programming code led a public school teacher in Washington, D.C., to be erroneously fired for incompetence, three teachers to miss out on $15,000 bonuses and 40 others to receive inaccurate job evaluations. The miscalculation has raised alarms about the increasing reliance nationwide on complex “value-added” formulas that use student test scores to attempt to quantify precisely how much value teachers have added to their students’ academic performance. Those value-added metrics often carry high stakes: Teachers’ employment, pay and even their professional licenses can depend on them. The Obama administration has used financial and policy levers, including Race to the Top grants and No Child Left Behind waivers, to nudge more states to rate teachers in part based on value-added formulas or other measures of student achievement. But teachers have complained that the results fluctuate wildly from year to year — and can be affected by human error, like the missing suffix in the programming code for D.C. schools. “You can’t simply take a bunch of data, apply an algorithm and use whatever pops out of a black box to judge teachers, students and our schools,” Randi Weingarten, president of the American Federation of Teachers, said this week. The AFT and its affiliates have signed off on contracts that use value-added measures as a significant portion of teacher evaluations — including in D.C. — but Weingarten called the trend “very troubling” nonetheless.

Who Are These Kids? -- About 10% of my enrolled undergraduate students literally do nothing in my class.  They attend zero lectures, do zero homework, and fail to show up for the midterm or the final.  Yet when I'm handing out grades, the official roster confirms that they paid their tuition in full. I understand dropping out.  But if you're going to drop out, why not drop out officially, so you get a tuition refund?  Under GMU rules, students can only get a 100% refund if they drop before the second week starts.  But they can get a 67% refund during the next two weeks, and a 33% refund until the end of the first month.  Do students who do no work during month #1 seriously fail to ask for a refund because they imagine they'll turn over a new leaf starting in month #2? The obvious explanation, of course, is that it is the parents of these errant students, not the errant students themselves, who would pocket any refund.  Students refuse to officially drop because they prefer to delay the day of parental wrath.  To make this story work, however, either (a) students who do zero work must be pathologically myopic, or (b) parents of students who do zero work must be perversely forgiving. Questions:
1. All my undergrad courses are upper division.  Are students who do zero work even more common in intro classes?
2. Are pathologically myopic students and perversely forgiving parents really the whole story here?  Or is something else going on?

Getting Out of Discount Game, Small Colleges Lower the Price - Now, like some other small private colleges, Converse is cutting tuition and reducing discounts. Betsy Fleming, Converse’s president, said the tuition discount rate would drop to 25 percent, well below the national average, from the current 56 percent. The college will still offer aid to talented students, but only to the extent covered by its $39 million endowed scholarship funds.  While Converse’s reset was the most drastic, others including Concordia University, St Paul, in Minnesota, Ashland University in Ohio, Ave Maria University in Florida, Belmont Abbey College in North Carolina and Alaska Pacific University in Anchorage, have also recently announced tuition cuts. For decades, most private college pricing has reflected the Chivas Regal effect — the notion that whether in a Scotch or a school, a higher price indicates higher quality. “Schools wanted a high tuition on the assumption that families would say that if they’re charging that high tuition, they must be right up there with the Ivies,” said David L. Warren, president of the National Association of Independent Colleges and Universities. “So schools would set a high tuition, then discount it. But when the schools in your peer group all have discounts, it becomes an untenable competition for students, with everyone having to increase their discounts.”

2013: The Year America Went Back to College - Major news outlets like the New York Times have always covered the goings on at Ivy League quads, but this year the mainstream media seriously interrogated higher education as a complex ecosystem. This year America went to college because America is really nervous about everything College-with-a-capital-C is supposed to mean: mobility, meritocracy, and the American dream. Speaking of the Times, they devoted a lot of resources to long-form reporting on higher ed this year. Their coverage of what researchers call tuition discounting at expensive universities is an example of how the higher-ed inside game jumped into popular awareness in 2013. The Atlantic, Politico, and yours truly here at Slate started delving into the complexity of higher ed memes in ways that had once been primarily the domain of niche publications like Inside Higher Ed. Nonprofit initiatives such as the New America Foundation’s Higher Ed Watch leveraged a steady stream of empirical research on higher-ed trends from the likes of PolicyMic and the Brookings Institution. Demos best exemplified how this convergence of in-depth analysis and resources from intersecting organizations made for better analysis. Demos didn’t just pick up on a Century Foundation report on declining public investment in community colleges. It put those findings in the context of trends in for-profit higher education and skyrocketing student loan debt. Demos also produced what was, pound-for-pound, my favorite white paper of the year: Its empirically grounded analysis of the long-term effects of student loan debt applies rigorous social science methods to a question that matters to millions of Americans. Even better, the report is well-written, approachable, and readily available. That is research and analysis that matters.

Detroit bankruptcy threatens benefits of families of fallen cops — Three years after her husband was killed in the line of duty, Melissa Alexander-Huff and her son are still coping with the loss. Detroit Police Officer Brain Huff was shot and killed in May 2010 as he entered a vacant east-side duplex to investigate a report of a break-in. And now, like other survivors of Detroit police and firefighters killed in the line of duty, Alexander-Huff, 47, is facing the likelihood of another loss — this one, financial. The City of Detroit, as part of its bankruptcy, plans to cut the pension and health care benefits Alexander-Huff was promised after her husband's death. "It's not only cold, it's somebody demonic or evil that would only want to step in and include the widows in everything they want to cut and take away," she told the Free Press on Dec. 4. "Haven't we lost enough? Shall we bury ourselves and jump into the graves with our husband? Because that is what the City of Detroit is basically doing to us. They're killing us and our children."

Ruling Says San Jose Cannot Cut Employee Pensions - In a case that could have a big impact on cities throughout California, a judge has ruled that San Jose cannot implement cuts to city employee pensions to save taxpayer funds. But the city can cut salaries to realize the savings expected from pension reductions. Santa Clara County Superior Court Judge Patricia Lucas released the ruling on Monday. It stems from a lawsuit over Measure B, which called for existing city employees, including police officers and firefighters, to pay 16 percent more into their pensions and retiree health care plans. While the ruling is expected to be appealed, legal experts say it could set precedent for cities around the state that are considering pension cuts as a way to save taxpayer funds without having to cut services. Measure B won nearly 70 percent voter approval in June 2012, but was challenged by employee unions. According to the San Jose Mercury News: Municipal unions sued, saying the retirement benefits were previously approved at the bargaining table and represented a “vested right” that employees could not lose just because the city ran into hard financial times.

Setting the Record Straight on Social Security - A group that calls itself “Committee For A Responsible Federal Budget” wrote what it claims to be “Setting the Record Straight on Social Security.”  The article needs to be responded to at some length, both to correct its errors and to show how it goes about its business of lying to people.A lie is a statement or statements intended to deceive another person. Professional liars can usually manage to lie to their victims and lead them to harm by carefully selecting “facts” so as to lead to a false conclusion without ever actually saying anything that is “technically not true.” CRFB would like you to believe the only solution is to cut benefits and turn Social Security into a welfare program by means testing.  Social Security works because it is NOT a welfare program. Instead it is a way for workers to save their own money, protected from inflation and market losses, and insured against personal misfortune.  That is, it is protected by the government, but not paid for by the government.  CRFB would tax you  to pay for benefits that only “the deserving poor” would receive after careful examination to be sure they were poor enough to “deserve” welfare.  Then the politicians could squeeze benefits to the level of real misery, preserving only the name “Social Security” but turning it into something ugly that they control themselves, and can always cut by using the politics of “welfare” which they know how to manipulate very well.

Latest ACA problem: New Medicaid enrollees may find their coverage is limited - Expanding eligibility for Medicaid was one of top features of The Affordable Care Act. But now even it is running into problem.Those now eligible for Medicaid are concerned they won't find as wide a choice of physicians in the Medicaid program as they can find in the commercial health insurance market. Insurance broker Eileen Shrem said one of her clients earns about $10,000 a year and is eligible for Medicaid. If that client decides instead to remain in the commercial market, her premium will be about $349 a month, and she won't get a subsidy to buy commercial coverage, since people who are eligible for Medicaid can't get a subsidy. Shrem's client, however, has health problems and she's not sure she can get what she needs through Medicaid. "So what she is doing is calling her doctors to find out if they take Medicaid or not before she makes the decision," Shrem said.Medicaid eligibility in 2014 rises to 138 percent of the federal poverty level. Between 138 percent and 400 percent of poverty, federal subsidies are available under the ACA to help people afford coverage in the commercial insurance market.

Missouri bill would gut Obamacare - Next month, the Missouri Senate will consider a bill which would effectively cripple the implementation of the Affordable Care Act within the state. Following the lead of South Carolina, where lawmakers are fast-tracking House Bill 3101 in 2014, and Georgia, where HB707 was recently introduced by Rep. Jason Spencer, Missouri State Senator John T. Lamping (R-24) pre-filed Senate Bill 546 (SB546) to update the Health Care Freedom Act passed by Missouri voters in 2010. It passed that year with more than 70% support. SB546 would ban Missouri from taking any action that would “compel, directly or indirectly, any person, employer, or health care provider to participate in any health care system.” That means the state would be banned by law from operating a health care exchange for the federal government.  The bill also proposes suspending the licenses of insurers who accept federal subsidies which result in the “imposition of penalties contrary to the public policy” set forth in the legislation. Since it is unlikely that any insurer would then accept a subsidy, not a single employer in the state could be hit with the employer-mandate penalties those subsidies trigger.

NYT Goes for the Gold in the Find Bad Things to Say About Obamacare Game – Dean Baker - Yes folks, the NYT is trying to dislodge Fox News. Here they are with a front page story telling us about the tragic situation of the Chapmans, a New Hampshire couple making $100,000 a year who will have to spend $1,000 a month for insurance with Obamacare. This would come to 12 percent of their income. The piece tells readers: "Experts consider health insurance unaffordable once it exceeds 10 percent of annual income." That's interesting. If we go to the Kaiser Family Foundation website we find that the average employee contribution for an employer provided family plan is $4,240. The average employer contribution is $11,240. That gives us a total of $15,470. Most economists would say that we should treat the employers payment as a cost to the worker since in general employers are no more happy to pay money to health insurance companies than to their workers. If they didn't pay this money as health insurance then they would be paying it to their workers in wages. If we say that this family has a $70,000 annual income (roughly the median for two earner couples), then the cost of the health care policy would be close to 20 percent of their income, even adding in the $11,240 employer contribution to their income. In this respect, the $1,000 a month that the Chapmans are paying under Obamacare looks pretty damn good. It is more than 20 percent less expensive than the average policy in the Kaiser survey. Of course a lot depends on what is covered and the extent of the deductibles, but based on the information given in the NYT article there is no reason that anyone should be shedding tears for the Chapmans.

Rule Change on Health Insurance Rattles Industry - Monday is the final day for consumers to get new health coverage that takes effect when the new year arrives, leaving thousands of people racing to sign up in time—and health insurers trying to figure out whether the federal health law will work in the way they had hoped. The number of Americans enrolling continues to fall short of the goals the Obama administration has laid out, which is a problem for the White House.It also represents a problem for the insurance industry, which calculated that the prospect of millions of new customers brought their way by the Affordable Care Act and its coverage requirements would make up for any disruption that came along with the law. Karen Ignagni, the industry's top representative in Washington, spent the weekend managing the fallout after the administration overhauled its approach to people who buy coverage on the individual market. The insurers Ms. Ignagni represents as head of the industry's main lobbying group, America's Health Insurance Plans, got late notice Thursday night of the new rules: People dumped by their insurers could buy bare-bones "catastrophic" plans or get a hardship exemption from having to buy health insurance at all. Those were customers Ms. Ignagni's members were counting on to buy fuller coverage. In an interview Friday at AHIP's offices, Ms. Ignagni expressed concern about any erosion of the "individual mandate" requiring most Americans to carry health insurance or pay a penalty. Thursday's action "was of particular concern because we were worried about the message with respect to individuals having a path around the mandate; that was the first time that the administration had said anything like that," she said.

Weak-Kneed on the Health Care Mandate - The enrollment numbers have been rising every day in anticipation of the deadline for obtaining coverage, which was supposed to be at a minute before midnight tonight. But, as the Washington Post reported today, the deadline was postponed for 24 hours. The administration was worried the website would be overwhelmed by a last-minute surge in enrollments — hardly a sign of confidence.  The delay comes a few days after a far more troubling announcement last week, when the administration said that people whose insurance was cancelled would not have to sign up for coverage and would not be subject to the individual mandate penalty next year. That exemption could apply to as many as a half million people who lost their policies but not have not yet signed up for a new one on the exchanges. There have been many other delays and postponements due to the inept rollout of the health law, but last week’s was the first to begin chipping away at the individual mandate, the heart of the whole system. The penalty aspect of the mandate for those who refused to get insurance — the subject of last year’s Supreme Court debate — was not terribly onerous, at least for the first few years, but was designed to be a psychological shove towards coverage. Insurers built their policies around the idea that most people would rather pay an insurance premium than a penalty. But now a large group of people won’t have to pay it in 2014. They can sign up for cheap catastrophic coverage if they choose, but they can also go without it. Insurance companies quickly protested that the move would mess up their pricing calculations and roil the marketplace. That’s probably an exaggeration; what’s worse is that the announcement undermines the administration’s previously impermeable defense of the mandate.

Sign-Up Period Extended Again for Health Plan -  The Obama administration said Tuesday that it would provide more time for people to complete their applications for health insurance if they could show that they missed the deadline because of problems with the federal health care website. The move was the latest in a series of deadline changes, exemptions and clarifications that have confused insurers and many Americans and opened the administration to increasing criticism from Republicans who have opposed the Affordable Care Act from the start and have repeatedly tried to overturn it. It was not clear on Tuesday how many people would be affected, or how consumers would prove that website errors had prevented them from signing up by the deadline on Tuesday night.  The announcement itself was vague, saying only that if website problems had prevented any consumers from enrolling, they might qualify for what the government has called “a special enrollment period.” The administration did not say how long that would last. Nor did it define what website errors might be involved.

Obamacare had lots of sign-ups on deadline day -- The evidence we have so far — albeit limited — suggests that lots of Obamacare shoppers made it in just under the wire.California estimates that 27,000 people picked insurance plans this past Monday and 29,000 the Friday prior. Just last week, the state was averaging 15,000 sign-ups per day. Washington state had 10,000 people enroll Monday, and a total of 20,000 from Dec. 20-23. That accounts for one in 10 Washingtonians picking private health insurance plans. And New York had about 20,000 sign-ups come in that same day.Of course, these are only the three states we know about. The 36 states on do not release data on their own schedule but rather rely on the federal government's monthly data sets. We won't know December enrollment numbers until sometime in the middle of January.. Charles Gaba has been going to painstaking efforts to show the trajectory of health law sign-ups over the past three months. His graph (which is better viewed here, on his Web site) gives a helpful visual sense of what the last month has looked like for health-care enrollment. This uses all available data, including the monthly, federal reports and more up-to-date state data, too. bidders’ past jobs not scrutinized -- CGI Federal, the company responsible for building the problem-plagued Web site for the Affordable Care Act, won the job because of what federal officials deemed a “technically superior” proposal, according to government documents and people familiar with the decision. Not considered in the 2011 selection process was the history of numerous executives at CGI Federal, who had come from another company that had mishandled at least 20 other government ­information technology projects more than a decade ago. But federal officials were not required to examine that long-term track record, which included a highly publicized failure to automate retirement benefits for millions of federal workers.

The Affordable Care Act’s free-market economics - Washington Post editorial - PRESIDENT Obama’s Affordable Care Act (ACA) forced millions to switch their insurance plans. Now, critics say, those people can’t keep their doctors, either. Another broken promise? More proof the ACA is a disaster? Not quite: As with all of those canceled policies, this “outrage” isn’t good evidence that the law is flawed, no matter what the president may have promised.  The issue is that some of the people who must switch health plans are transitioning into policies with narrow networks that don’t always include the doctors, hospitals and other providers they used before. Anecdotes have emerged of people parting with physicians they’ve trusted for years. Yet, even for people who have never switched plans, this sort of thing happened well before the ACA; insurers constantly negotiate with providers over inclusion in coverage networks and payment rates. Doing so is one way insurers can keep costs down in the individual insurance market. In the past, other ways to control costs included skimping on benefits and turning away the sick and the old. Now, the ACA is about to stop the last two practices, a key, and popular, feature of the law. That leaves trimming provider networks as one of the last tools open to insurers to restrain premiums. Meantime, the ACA obliges insurers to compete for business on new and more transparent markets. Insurance companies have generally responded by offering policies at a range of price points and a range of networks. If people want a wide network with lots of doctors participating, they can pay for one. If they would rather keep their premiums down, they can buy into a narrower network or sign up for a plan that demands they pay more of their health costs. For the uninsured — a huge portion of those who will be on the ACA’s new marketplaces — any of those would be a step up. After factoring in government subsidies, many transitioning off policies they had in the individual insurance markets will have a good deal, too.

John Cochrane on portable health insurance --  The entire Op-Ed is interesting and noteworthy, but the part on health insurance is perhaps the cutting edge of the piece analytically: Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses. People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest. I suppose my worry is this.  As individuals age, they will become greater health risks and that will hold even if Cochrane keeps Medicare going.  That means a higher price for their individual portable insurance.  It is not clear to me under what conditions premia can be raised legally (what does “unexpected increase” mean?), but it seems the result is much higher premia for sick people, or legally-mandated low premia, but then providers will restrict access and lower the quality of care, as another means of raising the price of course.  Contractually speaking, price is verifiable but quality of care is not.  The overall problem is not one of “adverse selection” but rather simply that the good information of the suppliers means that insurance is hard to sell at all for many conditions.

What to Do When a High-Profile U.Chicago Economist Says the Airline, Telephone and Package-Shipping Industries Prohibit Use by Preexisting Flyers, Callers and Shippers: If you’re a liberal, take this ball and run with it! - Beverly Mann - In a cringe-inducing yet revealingly panicky Wall Street Journal oped published yesterday, University of Chicago economist John H. Cochrane acknowledges that the substantive problems with Obamacare probably are making a single-payer option or a single-payer system attractive to a broad swath of people because, well, the status quo is becoming untenable and because Obamacare has shown that major changes in the role and manner of heathcare insurance in this country are, here in this country just as in every other advanced society in the world, actually possible.Cochrane’s piece is titled, “What to Do When ObamaCare Unravels: Health insurance should be individual, portable across jobs, states and providers, and lifelong and renewable.”  The premise for his prescription is as transparently ludicrous as that prescription–the right’s favorite–has always been.  The answer, he claims, is … complete nationwide deregulation of the insurance industry! Release the for-profit insurance companies to compete nationwide, and deliverance will come! Because, he says, it’s lack of nationwide competition that is what’s compelled the industry to dramatically raise premiums annually for decades now, and to create and increasingly limit “provider networks,” and to blacklist from the individual market anyone who once had a hangnail, and to spontaneously cancel policies or greatly increase the premiums of people when they do need medical care, and to have lifetime claim limits.He does not offer an explanation for why nationwide competition would change any of this when statewide competition, even in very large states, has, suffice it to say, not. What he does instead is point to the deregulation of the telecom and airline industries, and to the competition that FedEx and UPS provide vis-a-vis the post office–the latter a.k.a. “the public option.”  Specifically, he says: Sure. We can have a single government-run airline too. We can ban FedEx and UPS, and have a single-payer post office. We can have government-run telephones and TV. Thirty years ago every other country had all of these, and worthies said that markets couldn’t work for travel, package delivery, the “natural monopoly” of telephones and TV. Until we tried it. That the rest of the world spends less just shows how dysfunctional our current system is, not how a free market would work.

Thanks Obamacare? Warren Buffett Cuts Health Benefits By Over 57% At Heinz - Not satisfied with paying less taxes than his secretary, it seems Warren Buffett has decided that his employees should also pay more for their healthcare. His latest acquisition, Heinz, has recently announced a very significant cut in retiree health benefits. Of course, as the Pittsburgh Post-Gazette reports, Heinz is not admitting this is due to Obamacare but the company is not alone with 60% of employers considering changes through 2013. In an effort to cope with the uncertainty of ongoing health payments, companies have chosen (potentially smaller) lump-sum benefits, leaving the employee to fund the rest. As one reitree noted, "I feel that they should stand behind the moral obligation of the preceding owners of this company and maintain the program," but, keeping promises does not seem to be the norm these days. Via Pittsburgh Post-Gazette, Mr. Waldo, 82, who retired from the Pittsburgh food company in 1985, received a letter in late November notifying him that Heinz was reducing its contribution to a retiree reimbursement account used to cover certain medical expenses, such as co-pays for doctor visits and health insurance premiums.  "Beginning in 2014, Heinz will contribute $1,093 per year, per household to your RRA," the letter dated Nov. 21 said. The cut, not the first to the retiree benefit, takes the level that Heinz is contributing to the account down from $3,500 per year, Mr Waldo said.

Hospital Chain Accused of Manipulating Data to Boost Rating - Hospital chain Prime Healthcare Services was highly rated by a reputable analytics service for the quality of its care. But, as described in a report by the Center for Investigative Reporting, (CIR) its profile might be less an accurate appraisal than a fictional goal. The California-based chain, says the CIR, “might be receiving five-star health care ratings because it exaggerates how ill its patients really are,” according to state lawmakers who sent the company a letter suggesting Prime’s rating by Truven Health Analytics is bogus. Truven crunches data, promising “unbiased information, analytic tools, benchmarks and services to the healthcare industry” used by consumers and health-care professionals (hospitals, government agencies, insurers, pharmaceutical and medical device companies) to assess quality. It’s not only members of the California legislature who question Prime’s integrity — the company has acknowledged that the U.S. Justice Department is investigating Medicare billings for the 23-facility, five-state chain. In June, Prime paid a $275,000 settlement over allegations that it had breached federal patient privacy laws.

Why it’s time to ditch the word “cancer” - During a lifetime’s work as a surgeon in the NHS, I treated many people with cancer in various parts of the body. About 30 years ago, mid-career, I was found to have a malignant tumour; my chances of surviving for five years were less than one in 20. Following chemotherapy, radiotherapy and eventually major surgery, I made a good recovery and am lucky to be able to write these words today. The experience taught me a lot and profoundly influenced my attitude to those of my patients with similar problems. Then, many years later, I noticed a small lump beside my nose which I recognised as a basal cell carcinoma: a tumour that, left untreated, would have spread and destroyed my whole face. A colleague removed it under local anaesthetic and I have had no trouble since. In a letter to the Times in April 2011, I suggested that the practice of including these two conditions under the same emotive label of cancer (“the Crab”) was misleading and should be abandoned. As cancer cells multiply in a human body, they form an expanding tumour, which compresses and damages neighbouring structures. Eventually, some of them may break off into the circulation and form colonies (metastases) in other parts of the body.  Relatively benign lesions such as the one on my nose remain in the same place, whereas the one that I’d developed many years previously had the capacity to kill me, had it not been for the excellent treatment that I received from the NHS.

Flawed Research Used to Attack Multivitamin Supplements: Two flawed studies and an editorial published in the December 17th issue of the Annals of Internal Medicine have attempted to discredit the value of multivitamin supplements.1-3 Both of the studies were plagued by grievous methodological flaws. In one of the studies, subjects were given low-quality, low-potency multivitamin supplements. Treatment adherence rates and drop-out rates were horrendous in the studies. Nevertheless, mainstream sources are using these reprehensible studies to undermine dietary supplements. The first study examined the cognitive effects of low-potency multivitamin supplementation in aging male participants. 2 Not surprisingly, the conclusions in the present analysis question the value of multivitamin benefits for cognition. In the other study, subjects with a history of heart attack were given a multivitamin supplement or placebo and monitored for about 4.5 years for cardiovascular events.1 Despite succumbing to heinous design flaws, this study actually revealed evidence that multivitamins reduced cardiovascular risk. However, the investigators constructed the study so as to ignore anything short of miraculous cardiovascular risk reduction, so the conclusion drawn questions multivitamin benefits. These major gaffes in study design and methodology are not being discussed by conventional sources or the media. Instead, these untoward studies are fueling the mainstream effort to undermine high-quality dietary supplements.

Unwanted Memories Erased in Experiment -- Scientists have zapped an electrical current to people's brains to erase distressing memories, part of an ambitious quest to better treat ailments such as mental trauma, psychiatric disorders and drug addiction. In an experiment, patients were first shown a troubling story, in words and pictures. A week later they were reminded about it and given electroconvulsive therapy, formerly known as electroshock. That completely wiped out their recall of the distressing narrative. "It's a pretty strong effect. We observed it in every subject," said Marijn Kroes, neuroscientist at Radboud University Nijmegen in the Netherlands and lead author of the study, published Sunday in the journal Nature Neuroscience. The experiment recalls the plot of the movie "Eternal Sunshine of the Spotless Mind," in which an estranged couple erase memories of each other. Science has tinkered with similar notions for years. In exposure treatment, repetitive exposure to a phobia in a nonthreatening way is designed to help patients confront their fears and gradually weaken the fear response, a process known as extinction. Some researchers also are experimenting with antianxiety drug propranolol. The hope is that one day it may be possible to selectively eliminate a person's unwanted memories or associations linked to smoking, drug-taking or emotional trauma.

What Happens in My Vagus Stays in My Vagus  - Get away from my neck, you medical-device vampires!  A highly unpleasant spotlight, which turned me into a Vagus showgirl for five years, has finally been turned off. I just completed a Cyberonics, Inc., clinical trial of the Vagus Nerve Stimulator, to assess its effectiveness in helping those who suffer from treatment-resistant depression. It was a ridiculous, scandalous experience.I don't trust Big Pharma, and I don't trust the multibillion-dollar medical device industry. My cynicism was vindicated by the bizarre combination of incompetence and ruthlessness that characterized this study. In trial after trial, this device has shown itself to have extremely limited value. But Cyberonics (which sounds like a sci-fi cabal that unleashes evil robots), is determined to keep trying until it wears down its opponents and qualifies for reimbursement, so it can achieve its dream: a fabulous financial windfall. This whole episode illustrates the morally compromised nature of both the FDA and the medical device industry. I am thrilled to report that Medicare, Medicaid and the nation's insurance companies are holding their ground, finding Cyberonics' latest clinical trial to be as underwhelming as all the others. They are "flatly refusing" --in virtually every case -- to pay for the device, the surgery, and the lifetime of after-care that is required, according to the Washington Post.

Fake Knee Surgery as Good as Real Thing, Study Finds - A fake surgical procedure is just as good as real surgery at reducing pain and other symptoms in some patients suffering from torn knee cartilage, according to a new study that is likely to fuel debate over one of the most common orthopedic operations. As many as 700,000 people in the U.S. undergo knee surgery each year to treat tears in a crescent-shaped piece of cartilage known as the meniscus, which acts as a shock absorber between the upper and lower portions of the knee joints. The tears create loose pieces of cartilage that doctors have long thought interfere with motion of the joints, causing pain and stiffness. But researchers in Finland who studied two sets of patients—one that received the surgery, and another that was led to believe that it had—observed no significant differences in improvement between the groups after one year.  Surgery did provide a slight advantage in certain areas early on, including a decrease in pain felt after exercising and in some quality-of-life measures, but the differences disappeared by the end of the 12 months, the researchers said in a paper published Wednesday in the New England Journal of Medicine. "The implications are fairly profound," said Jeffrey Katz, a professor of medicine at Brigham and Women's Hospital in Boston who wasn't involved in the Finnish study. "There may be some relatively small advantages to meniscal surgery, but they're short-lived."

McDonald’s to Employees: Don’t Eat Fast Food, It’s Bad for You -- "McResource Line" — McDonald's' employee-only resource and advice site — has been dispensing a hot mess of helpful tips in recent months: From advising workers to get a second job, to suggesting they sell their stuff for quick cash, to reminding them to tip their nannies and pool boys generously this holiday season.  Its latest recommendation, however, may be its most useful yet: Lay off the fast food.  An image posted on the site labels a McDonald's-like meal of hamburger, fries, and a coke as an "unhealthy choice," and warns employees against consuming such foods, which are "almost always high in calories, fat, sugar, and salt." "It is hard to eat a healthy diet when you eat at fast-food restaurants often," the site goes on to say. "Many foods are cooked with a lot of fat, even if they are not trans fats. Many fast-food restaurants do not offer any lower-fat foods. Large portions also make it easy to overeat. And most fast food restaurants do not offer many fresh fruits and vegetables." So what can employees do to eat healthier? For one thing — stay away from McDonald's. "In general," the site suggests, "eat at places that offer a variety of salads, soups, and vegetables."  In a statement to CNBC, McDonald's insisted the website's tips "continue to be taken entirely out of context."

McDonald’s Employee Website Yanked After Ridicule - McDonald’s  has taken down a website for its employees that faced ridicule for its seemingly tone deaf advice. The site’s latest gaffe: a post, reported by CNBC on  Monday, that told employees to avoid fast foods in favor of a “healthier choice.” The health tip came on the heels of financial advice posted to the site, McResource Line, that was assailed as out of touch with the reality for most employees. A recent study found that more than half of families of fast food workers receive assistance from a public program like food stamps, CNN reports. A post earlier this month provided advice on how much one should tip pool cleaners and housekeepers. And in July, the site published a sample monthly budget as a guideline for employees that didn’t account for food and gas and included income from a second job — seen as a not-so-subtle acknowledgement that McDonald’s wages alone don’t provide a sufficient living wage. In a statement on its own website, McDonald’s acknowledged that it has taken down the resource site. “A combination of factors has led us to re-evaluate and we’ve directed the vendor to take down the website,”

Research raises concerns about global crop yield projections - About 30 percent of the major global cereal crops – rice, wheat and corn -- may have reached their maximum possible yields in farmers’ fields, according to UNL research published this week in Nature Communications. These findings raise concerns about efforts to increase food production to meet growing global populations. Yields of these crops have recently decreased or plateaued. Future projections that would ensure global food security are typically based on a constant increase in yield, a trend that this research now suggests may not be possible. Estimates of future global food production and its ability to meet the dietary needs of a population expected to grow from 7 billion to 9 billion by 2050 have been based largely on on projections of historical trends. Past trends have, however, been dominated by the rapid adoption of new technologies – some of which were one-time innovations – which allowed for an increase in crop production. As a result, projections of future yields have been optimistic – perhaps too much so, indicates the findings of UNL scientists.

California Gripped By Driest Year Ever — With No Relief In Sight - As California enters its third consecutive dry winter, with no sign of moisture on the horizon, fears are growing over increased wildfire activity, agricultural losses, and additional stress placed on already strained water supplies.  The city of Los Angeles has received only 3.6 inches of rain this year — far below its average of 14.91 inches, USA Today reported. And San Francisco is experiencing its driest year since recordkeeping began in 1849. As of November, the city had only received 3.95 inches of rain since the year began.  The state is enduring its driest year on record and while a drought emergency has not yet been officially declared, the U.S. National Drought Monitor shows that as of December 24, nearly the entire state is gripped by severe to extreme drought conditions. The portion of the state currently hit hardest by drought includes the Central Valley, a prime agricultural area, and “a lack of rain and snow this winter could bring catastrophic losses to California agriculture, as water allotments are slashed by state agencies,” USA Today reported.  The lack of precipitation is also extending what’s been a devastating wildfire season in California. According to AccuWeather, fire season usually tapers off in the fall and December marks the beginning of the wet season, which usually extends through March. This year, however, looks to be different. “It will remain dry through February and probably early March in California,” . “It’s possible that a system or two could reach the state, but not enough to put a dent in the drought.” As a result, wildfire risk remains high.

Global warming will intensify drought, says new study - It is clear that human emissions have led to increased frequencies of heat waves and have changed the patterns of rainfall around the world. So, when you look at the Earth in total, the canceling effects of wetter and drier hides the reality of regional changes that really matter in our lives and our economies. . It is well known, and each of us knows this by experience, warm air can hold more water than cold air (although technically air doesn't "hold" water). As the Earth heats, there is the tendency for a more moist atmosphere – consequently, heavier downpours. All of this has been predicted and observed. But, this added moisture has to come from somewhere and in regions where there is ample water (such as over oceans), a nearly unlimited supply means rising temperatures lead to increasing moisture. But, in dry regions where there is very little water to evaporate, this "moistening" effect doesn't exist. Here, increasing temperatures just dry things out. The fancy term for this moisture transfer is evapotranspiration (ET). So on to droughts. A very recent study by Trenberth et al., "Global warming and changes in drought" published in Natural Climate Change has investigated the way droughts are measured. They discuss various drought metrics such as the Standardized Precipitation Index which is based entirely on precipitation, the Standardized Precipitation and Evapotranspiration Index which includes ET effects, and the Palmer Drought Severity Index (PDSI) which balances precipitation, evaporation, runoff, and includes local soil moisture and vegetation

Food Security in Graphics from World Resources Institute -- The world’s population is projected to grow from about 7 billion in 2012 to 9.6 billion people in 2050. More than half of this growth will occur in sub-Saharan Africa, a region where one-quarter of the population is currently undernourished. In addition to population growth, world’s per capita meat and milk consumption is also growing—especially in China and India—and is projected to remain high in the European Union, North America, Brazil, and Russia. These foods are more resource-intensive to produce than plant-based diets. Taking into account a growing population and shifting diets, the world will need to produce 69 percent more food calories in 2050 than we did in 2006. We can’t just redistribute food to close the food gap. Even if we took all the food produced in 2009 and distributed it evenly amongst the global population, the world will still need to produce 974 more calories per person per day by 2050.

The Dirty Way to Feed 9 Billion People - Future 1: It's a world with intermittent food riots stemming from rising and unpredictable fertilizer prices, declining crop yields, and collapsing farm profits. Toxic algal blooms are spreading in the world's lakes, and the Gulf of Mexico dead zone is the size of Michigan. Trade ambassadors of the United States and Europe pay regular visits to Morocco, negotiating arms deals and special trade relations in the hopes of keeping the fertilizer coming. It's a crappy world getting crappier. Future 2: It's a world with abundant production from rich green fields fed by a resilient and reliable fertilizer supply that is recycled regionally and locally by a new industrial sector built on energy and nutrient recapture from food waste, manure, and sewage. Cities are now part of the farm. Low, stable fertilizer prices mean enhanced food security for all. Lakes and rivers are clean and supply abundant fresh drinking water, while dead zones have recovered and coastal oceans support sustainable fisheries for a rich source of protein. It's a crappy world getting better! These two futures hinge on what happens during the coming decades as supplies of high-quality phosphate rock become so depleted that it no longer pays to dig them up. Why’s phosphate so important? Because it’s a bedrock of modern agriculture.

Peak Trash - The end of the year is peak trash season across America as the Environmental Protection Agency estimates Americans produce around 25% more waste around the holidays than other periods. As the WSJ notes, Christmas isn't so pretty on the back end. The additional garbage—which adds up to over one million tons of waste—includes food scraps, cutlery, wine bottles, wrapping paper and Christmas trees; but Online sales add a thickening layer of refuse. In recent years, as more consumers have taken to buying online, the volume of corrugated cardboard boxes, air-filled plastic pockets and Styrofoam pellets in trash has grown. The rise is unprecedented as corrugated cardboard boxes account for as much as 50% of the paper product waste from some nearby towns, versus less than 20% a decade ago.

Gallery: Our Beautiful, Fragile World (slides) Peter Essick, a photographer for National Geographic, has a new book out called Our Beautiful, Fragile World. It focuses on places in this world where humanity's footprint is transforming the landscape, sometimes with horrific effect, sometimes with an inadvertent beauty.  Stunning photography of man's mightiest shame (story)

Bitcoin has a dark side: its carbon footprint - At today’s value of roughly $1,000 per bitcoin, the electricity consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the realm of possibility given the artificially limited bitcoin supply – this impact rises to 8.25 gigatonnes, or 30 percent of today’s global output, and equivalent to that of China and Japan combined. Bitcoins aren’t mined from the earth’s crust like most physical commodities – although at least that leaves tangible evidence of its environmental impact. Rather, they are “mined” by computers solving a set of complicated computational problems. These problems are designed to get more difficult over time, until the year 2140 when the 21 millionth (and final) bitcoin is mined. Early in bitcoin’s existence, it was feasible to run a successful mining operation with a standard PC. Now the task requires custom mining rigs that can run orders of magnitude more processes per second. The top of the line model, which is currently made by a Swedish company called KnCMiner, costs around $13,000 and can mine at a rate 550 gigahashes per second: They’ve sold $28 million worth, and soon these too will be obsolete. The total computational power of the global bitcoin mining network today is more than seven million gigahashes, and climbing. That’s 256 times greater than the world’s top 500 supercomputers, combined. These computers are consuming so much electricity that it’s already unprofitable to mine in some regions of the world. According to the total electricity cost of all mining acticity conducted over the last 24 hours was $19,652,986.38, as the system consumed 131,019.91 megawatt hours. In April, Bloomberg Sustainability called bitcoin mining it a “real-world environmental disaster.” At the time, the system was consuming just 7,000 megawatt hours per day – things have increased 142-fold in the last eight months.

"Dark Money" Funds Climate Change Denial Effort - Scientific American - The largest, most-consistent money fueling the climate denial movement are a number of well-funded conservative foundations built with so-called "dark money," or concealed donations, according to an analysis released Friday afternoon. The study, by Drexel University environmental sociologist Robert Brulle, is the first academic effort to probe the organizational underpinnings and funding behind the climate denial movement. It found that the amount of money flowing through third-party, pass-through foundations like Donors Trust and Donors Capital, whose funding cannot be traced, has risen dramatically over the past five years. In all, 140 foundations funneled $558 million to almost 100 climate denial organizations from 2003 to 2010.  Meanwhile the traceable cash flow from more traditional sources, such as Koch Industries and ExxonMobil, has disappeared.The study was published Friday in the journal Climatic Change."The climate change countermovement has had a real political and ecological impact on the failure of the world to act on global warming," Brulle said in a statement. "Like a play on Broadway, the countermovement has stars in the spotlight  – often prominent contrarian scientists or conservative politicians – but behind the stars is an organizational structure of directors, script writers and producers." "If you want to understand what's driving this movement, you have to look at what's going on behind the scenes."

Claim: November 2013 is the ‘warmest ever’ – but will the real November 2013 temperature please stand up? - Lots of clima-hullaballo this week in the media thanks NOAA and this announcement in NOAA’s “State of the Climate” report seen here: . They state: The combined average temperature over global land and ocean surfaces for November 2013 was record highest for the 134-year period of record, at 0.78°C (1.40°F) above the 20th century average of 12.9°C (55.2°F). Much of the global “record highest” claim hinges on this one point about Russia: Note the +5C anomalies in that region in the map cited by NCDC: Source: But, according to satellite temperatures, the ranking claimed by NCDC isn’t anywhere near to “record warmest”. Dr. John Christy gives these values for the satellite data sources of global temperature and their ranks:

  • UAH Nov 2013 9th warmest Nov (0.20 C cooler than warmest Nov.)
  • RSS Nov 2013 16th warmest Nov (0.22 C cooler than warmest Nov.)

And, when we look at the UAH map of the world, while Russia was certainly warmer, it wasn’t as warm as NCDC makes it to be: 

'Massive' reservoir of melt water found under Greenland ice - Researchers say they have discovered a large reservoir of melt water that sits under the Greenland ice sheet all year round. The scientists say the water is stored in the air space between particles of ice, similar to the way that fruit juice stays liquid in a slush drink. The aquifer, which covers an area the size of Ireland, could yield important clues to sea level rise. The research is published in the journal Nature Geoscience. The melting of the Greenland ice sheet has been a significant contributor to a rise in sea levels over the past 100 years. Scientists still have many unanswered questions about the direction and speed and ultimate destination of this melted water. This new research finds that a significant amount is stored in partially compacted snow called firn. In the spring of 2011, researchers drilled deep into this slushy layer and to their surprise, found liquid water flowing back to the surface even though air temperatures were -15 C. As this was well before the onset of the summer melt, the team concluded the water had persisted in a liquid state through the Greenland winter.

27,000 square miles of melt water stored in firn in upper 80 feet of Greenland's ice sheet all year round - National Science Foundation-funded researchers at the University of Utah have discovered a previously unknown aquifer in the Greenland ice sheet that holds liquid water all year long in the otherwise perpetually frozen winter landscape. The aquifer is extensive, covering 27,000 square miles. The reservoir is known as the "perennial firn aquifer" because water persists within the firn (i.e., layers of snow and ice that don't melt for at least one season). Researchers believe it figures significantly in understanding the contribution of snowmelt and ice melt to rising sea levels. The journal Nature Geoscience published the study online Sunday, December 22, 2013."Of the current sea level rise, the Greenland Ice Sheet is the largest contributor -- and it is melting at record levels,” said Rick Forster, the study's lead author and a professor of geography at the University of Utah. "So understanding the aquifer's capacity to store water from year to year is important because it fills a major gap in the overall equation of meltwater runoff and sea levels."  Forster's team has been doing research in southeast Greenland since 2010 to measure snowfall accumulation and how it varies from year to year. The area they study covers 14 percent of southeast Greenland yet receives 32% of the entire ice sheet's snowfall, but there has been little data gathered.

Sea Ice Volume is Not Recovering - Andy Lee Robinson has updated his indispensable animation of sea ice volume – which makes the point yet again how dramatically northern sea ice is declining – despite the inevitable efforts of distorters and deniers. Also worth remembering that for total area of ice, we are at a low that is historic over not just the satellite era, but at least 1450 years into the past.  Look at the figure below, derived in 2011 from temperature proxies which were then compared to  ocean sediments – (different critters live in iced-over ocean vs open water) and consider that the so-called “recovery” of sea ice is just a tiny squiggle at the bottom end of a 150 year long slide. Below, Dr. Walt Meier of NSIDC discusses the techniques of evaluating ice cover before the satellite record. Explanation at 2:53, if you’re in a hurry.

Teaching the Terrifying Math of Climate Change - The “terrifying new math” is pretty simple. McKibben, founder of and the world's most prominent climate campaigner, proposes that there are just three numbers that we need to pay attention to in order to reach some radical conclusions about the future of fossil fuels. The first number is 2 degrees Celsius, or about 3.6 degrees Fahrenheit. In the 2009 Copenhagen Climate Accord, 167 countries, including the United States, pledged that “deep cuts in global [greenhouse gas] emissions are required . . . so as to hold the increase in global temperature below 2 degrees Celsius.” The Copenhagen Accord was a timid, inadequate document. According to McKibben, even a 2 degree rise in global temperatures is fraught with danger, but it's the only international consensus on a climate target—“the bottomest of bottom lines,” he writes. The second scary number is 565 gigatons—or 565 thousand million tons. That's humanity's carbon “budget”—how much carbon dioxide we can pour into the atmosphere with a reasonable chance of keeping global temperatures to a 2 degrees Celsius increase. That 565 gigatons sounds like a lot until we hear that global carbon dioxide emissions rose by 31.6 gigatons in 2011, and that projections call for humanity to blast through our 565-gigaton quota in less than 16 years. Which brings us to the final number that makes the other two numbers so frightening: 2,795 gigatons. This number represents the stored carbon in reserves held by coal, oil, and gas companies, and the countries—Kuwait, for example—that act like fossil fuel companies. In other words, the fossil fuel industry already has plans to exploit five times as much carbon as can be burned without exceeding the 2 degrees ceiling. Burning these fossil fuels would enter the world into a dystopia of climate science fiction—a rise in sea levels not seen in human history, species extinction, droughts, superstorms, heat waves from hell, coral kill-offs, and consequences we cannot yet imagine.

Drowning Nation Faces Extinction -- The Pacific island nation of Kiribati looks like a paradise but its days are numbered. As global climate change causes the oceans to rise, these low-lying atolls are losing ground with each passing year...but Kiribati faces a more immediate crisis: the encroaching saltwater is poisoning the freshwater supply, which could turn Kiribati’s mostly impoverished citizens into refugees within a few years. The remarkable images and facts about Kiribati. (Bloomberg video)

Malign Confusion about Growth, Economic Growth or “Degrowth”: Which Way Forward? – Part 2 - Michael Hoexter - Lately, climate scientists have stepped into the gap where economists have generally feared to tread and have suggested that intentional “de-growth” is the only hope to stop the rising emissions associated with economic development and growth.  No news to anyone who follows developments in climate science, the earth’s climate is facing tipping points beyond which a recognizable human civilization will be almost impossible to maintain due to the expansion of inhospitable or entirely uninhabitable climate zones, destruction of existing human settlements by water and weather, and the destruction of co-evolved species (including food) upon which we depend.  The target of a maximum of 2 degrees Celsius rise in global temperature has been chosen as a difficult-to-achieve but also permissive target, which some think should be 1.5 degrees or less.  One way or the other global warming gas emissions, still on an upward trajectory, need to be reduced and the current upward trend reversed almost immediately.   Climate scientists understandably have been impatient with the response of the social sciences and policymakers to the threats they see present and emerging.

Malign Confusion about Growth, Economic Growth or “Degrowth”: Which Way Forward? – Pt 3 -  Michael Hoexter - To avoid social collapse, Anderson and Bows’ degrowth perspective would require that a fossil fuel-independent basic community and transport infrastructure is in place in those countries that embark on a radical degrowth program.  They also assume, I believe, a robustly unified polity and sacrifice-ready members of the top 10-20% in wealth, who would assent to degrowth targeted at their consumption, with much sacrifice required of people of more modest incomes and wealth.  The countries where it would be easier but by no means easy to institute a degrowth program would include the densely populated countries of the British Isles, Western, Northern, and Central Europe that still have extensive rail and public transport networks, though have become dependent on fossil-fueled trucking for freight and fossil fueled personal transport for convenience.  Not only do these regions possess these potentially zero- or low-carbon networks but they also have from pre-capitalist times, structures of urban and community life which pre-date the fossil fuel age.  By contrast, the United States, Canada, Russia, Australia, and much of Latin America do not have a low- to zero-carbon potential infrastructure already built.  In many areas of these countries, commerce and community hinge upon the ready access to fossil fuels, as urban planning and more recent economic development, were predicated upon automobility and far-flung supply chains for goods and services.  Some of these nations have had oil deposits and a large oil industry presence in their political and economic systems.

What if Consumers, Not Producers, Paid for Emissions? - It is probably a safe bet that very few Americans unwrapping a brand-new iPhone left under their Christmas tree are thinking about its impact on the global climate.  The company expects an iPhone 5s to inject 70 kilograms — about 154 pounds — of carbon dioxide equivalent into the atmosphere over its lifetime, 11 pounds less than the iPhone 5 that Apple introduced last year.  The “good” news is that under the standard accounting of carbon emissions bandied about at climate talks, it’s not, mostly, Americans’ fault. About three-quarters of the carbon dioxide is considered the responsibility of other people — in places like China and Taiwan, South Korea and Inner Mongolia — where the phone and its parts were made.  The bad news is not just that the effort to curb global warming is as stuck as ever, but that, whether we like it or not, we’re all in this together.  The obstacles remain significant. Countless summit conferences since the Kyoto Protocol on climate change was adopted more than 15 years ago have failed to budge the fundamental roadblocks standing in the way of collective action: How should the costs be divided? Who did what to whom?  Globalization — which in the process of “exporting” production and jobs from rich to poor countries also “exported” the carbon dioxide emitted to make the products consumed by the rich countries — adds another complex twist to allocating responsibility for the carbon in the air. The disquieting question is this: Are emissions the responsibility of the countries that made them or of the countries for whom the products were made?

Carbon Capture and Storage: An Update - If carbon capture and storage could be accomplished at a reasonable cost--and that "if" is absolutely enormous--the implications for the question of climate change are extraordinary. At least some of any needed reduction in emissions could happen while still burning fossil fuels. The Australian-based Global CCS Institute describes the potential and the issues facing carbon capture and storage in its annual report,  The Global Status of CCS--2013.. For the record, this Institute was established in 2009 with initial funding from the government of Australia, and its members "include national governments, global corporations, small companies, environmental non-government organisations, research bodies and universities." It seems to me a bit of a cheerleader for the potential of carbon capture and storage approaches, but it still offers a useful overview of where the technology stands at present. The report envisions a future in which CCS technology would account for perhaps 15% of reduced carbon emissions by 2050, compared with the baseline that would otherwise exist. The argument is that if carbon emissions are going to be cut, then CCS technology will be cost-effective compared with some of the other options.

China roars ahead with renewables - China’s National Energy Administration (NEA) has just released some remarkable data on the addition of new electric generating capacity in 2013. China’s electric power system has been growing at a tremendous rate to keep up with the country’s breakneck expansion of its manufacturing industry over the past decade. Between 2010 and 2011 China’s power system passed the 1 million kilowatt mark (kW), making it comparable in size to the US. In the years 2010, 2011 and 2012 the system was growing at around 10% a year, by amounts varying between 83 million kW and 94 million kW each year. But in 2013 so far (the first 10 months, Jan to Oct), the National Energy Administration revealed that capacity additions have slumped. They total just 63 million kW so far, and might amount to perhaps 88 million kW for the year. The total power system in China appears to be levelling out.The remarkable feature is that the share of renewables has leapt in significance. Whereas non-fossil fuel capacity additions totalled 31 million kW in 2012, these renewable and nuclear power stations have totalled 36 million kW so far this year – and could be projected to be 43 or 44 million kW for the whole year. That’s one new non-fossil power station of 1 million kW nearly every week!

Renewable Energy Accounted For All New U.S. Electric Capacity In November - The U.S. added 394 megawatts of new capacity to produce electricity in November, and all of it came from renewable sources, according to a Federal Energy Regulatory Commission (FERC) announcement on Friday.  The latest “Energy Infrastructure Update” report from FERC’s Office of Energy Projects now shows that energy sources such as biomass, geothermal, hydropower, solar, and wind have now accounted for more than a third — 34.9 percent — of all new electrical generating capacity in the United States, with the majority coming from solar. As for total installed operating generating capacity, renewable sources now account for nearly 16 percent, the report said — more than nuclear (9.20 percent) and oil (4.05 percent) combined.  November is the third month this year that renewables accounted for 99 to 100 percent of new power capacity. In October, the U.S. added 699 megawatts of new capacity to produce electricity — 99 percent, or 694 MW, of which came from renewable sources. In March, solar produced 100 percent of new electrical generation capacity, with seven new units in California, Nevada, New Jersey, Hawaii, Arizona, and North Carolina.

Clean Energy Presents “Perfect Storm” for Utilities -- A new report from UBS finds that renewable energy and energy storage are together presenting a “perfect storm” for big utilities. The declining cost of solar, energy efficiency, and electric vehicle technologies threaten to upend centralized electricity generation, putting the utility business model in jeopardy. Grid parity has already been achieved in certain parts of the world where conventional electricity rates are high and renewable resources are plentiful. Renewable energy is beginning to cut into the bottom line for U.S. utilities. The average price for solar PV modules declined by 80% between 2008 and 2012. Net metering policies and innovative financing schemes like SolarCity’s leasing model are making distributed generation – where consumers generate power on-site – much more financially viable. This leads to a utility “death spiral,” in which utilities begin to lose customers, forcing them to jack up rates to cover lost revenue, which in turn pushes more people away. As of 2011, about three-quarters of U.S. utilities had a BBB credit rating or worse, indicating a striking lack of confidence in their financial future. In 2000, less than 40% of utilities earned such an abysmal grade.

More water leaks detected at Fukushima No. 1 - Tokyo Electric Power Co. said Tuesday it has detected leaks of radioactive water from two more storage tank areas at the Fukushima No. 1 nuclear plant. Water levels have dropped inside walled areas in which storage tanks for radioactive water are located, indicating that up to 225 tons of tainted water may have seeped into the ground, Tepco officials said. The two areas are located to the west of the No. 4 reactor building. Water samples collected Friday contained 20 becquerels of strontium-90 per liter in one of the two areas and 440 becquerels in the other, higher than Tepco’s provisional limit of less than 10 becquerels for water that can be released from storage tank areas. The news came after Tepco reported radioactive water leaks from two other tank areas over the weekend.

US Sailors to Refile Fukushima Radiation Lawsuit - Weeks after a judge dismissed the case, an attorney for U.S. sailors exposed to radiation after the 2011 earthquake off the coast of Japan said he intends to refile the lawsuit. Charles Bonner, who represents 51 sailors who served aboard the USS Ronald Reagan during disaster relief operations after the March 11, 2011, earthquake and tsunami, said he plans to amend and refile the complaint against Tokyo Electric Power Co., or Tepco, in part to include another 25 to 50 service members. The utility's Fukushima Dai-Ichi plant was crippled by the storm and became the site of the world's worst nuclear meltdown in decades. Like the previous version, the new complaint will allege the company knowingly withheld information from the U.S. military about the risk posed by radioactive material that contaminated the area and poisoned American sailors who responded with emergency aid. "They lied to the public," Bonner said in a telephone interview. "They lied to the U.S. military about the leak that was going on. They didn't tell the U.S. military that they were in full meltdown mode."

Thyroid Cancers Surge Among Fukushima Youths - It seems US sailors aren't the only ones who three short years after the Fukushima disaster are being stricken by cancers and other radiation-induced diseases. For once, the media blackout surrounding the Japanese nuclear power plant tragedy appears to have crumbled, and at least a portion of the truth has been revealed. Hong Kong's SCMP reports that fifty-nine young people in Fukushima prefecture have been diagnosed with or are suspected of having thyroid cancer. Notably, all of newly diagnosed were younger than 18 at the time of the nuclear meltdown in the area in March 2011. They were identified in tests by the prefectural government, which covered 239,000 people by the end of September. And while it is not rocket surgery to put two and two together, now that the data is in the public domain, here come the experts to explain it away. On one hand, there are those who seemingly have not been bribed by the Abe government to "bend" reality just a bit in the name of confidence. People such as Toshihide Tsuda, a professor of epidemiology at Okayama University who has called upon the government to prepare for a possible increase in cases in the future. "The rate at which children in Fukushima prefecture have developed thyroid cancer can be called frequent, because it is several times to several tens of times higher," Japan's Asahi Shimbun quoted him as saying. He compared the figures in Fukushima with cancer registration statistics throughout Japan from 1975 to 2008 that showed an annual average of five to 11 people in their late teens to early 20s developing cancer for every 1 million people.

Scientists Link Spike in Thyroid Disease to Fukushima Disaster - Real News Network video & transcript - There's been a lot of talk on the internet about Japan's electric company, TEPCO, dumping radioactive water in the Pacific Ocean after the Fukushima nuclear disaster. So we here at The Real News wanted to know if there are real dangers to this activity, especially in light of the fact that highly radioactive water from the site has been seeping into the groundwater and the harbor off the plant.  With us to discuss whether this should be of real concern is our guest, Joseph Mangano. He is a health researcher and an expert on hazards of nuclear weapons and reactors. He is also the lead author in a recently published article in the peer-reviewed journal Open Journal of Pediatrics. It's titled "Fukushima Fallout: Damage to the Thyroids of California Babies".

Fukishima ‘Much Worse’ Than We Thought -- Everyone knew the Fukushima disaster was bad. We likely underestimated how bad.  BBC: A nuclear expert has told the BBC that he believes the current water leaks at Fukushima are much worse than the authorities have stated. He says water is leaking out all over the site and there are no accurate figures for radiation levels. Meanwhile the chairman of Japan’s nuclear authority said that he feared there would be further leaks. The ongoing problems at the Fukushima plant increased in recent days when the Tokyo Electric Power Company (Tepco) admitted that around 300 tonnes of highly radioactive water had leaked from a storage tank on the site.But some nuclear experts are concerned that the problem is a good deal worse than either Tepco or the Japanese government are willing to admit. They are worried about the enormous quantities of water, used to cool the reactor cores, which are now being stored on site.Some 1,000 tanks have been built to hold the water. But these are believed to be at around 85% of their capacity and every day an extra 400 tonnes of water are being added.“The quantities of water they are dealing with are absolutely gigantic,” said Mycle Schneider, who has consulted widely for a variety of organisations and countries on nuclear issues. “What is the worse is the water leakage everywhere else – not just from the tanks. It is leaking out from the basements, it is leaking out from the cracks all over the place. Nobody can measure that.

Nuclear scare stories are a gift to the truly lethal coal industry, - Monbiot - Most of the afflictions wrongly attributed to nuclear power can rightly be attributed to coal. I was struck by this thought when I saw the graphics published by Greenpeace on Friday, showing the premature deaths caused by coal plants in China. The research it commissioned suggests that a quarter of a million deaths a year could be avoided if coal power there were shut down. Yes, a quarter of a million. Were Greenpeace to plot the impacts of nuclear power on the same scale, the vast red splodges depicting the air pollution catastrophe suffered by several Chinese cities would be replaced by dots invisible to the naked eye.This is not to suggest that there are no impacts, but they are tiny by comparison. The World Health Organisation's analysis of the Fukushima disaster concludes that "for the general population inside and outside of Japan ... no observable increases in cancer rates above baseline rates are anticipated". Only the most contaminated parts of Fukushima prefecture are exposed to any significant threat: a slight increase in the chances of developing cancer. Even the majority of the emergency workers have no higher cancer risk than that of the general population. And this, remember, was caused by an unprecedented disaster. The deaths in China are caused by business as usual.The tiny risk that is imposed by nuclear power has both obscured and invoked the far greater risk that is imposed by coal. Scare stories about nuclear power are a gift to the coal industry. Where they are taken seriously by politicians – as they have been in Japan – and cause a switch from nuclear to coal power, they kill people.

Signs of Baby Steps on Stanching Wasteful Flaring of Natural Gas - I hope you’ll read “Applying Creativity to a Byproduct of Oil Drilling in North Dakota,” a valuable Clifford Krauss feature on baby steps taken by the oil and gas industry to stanch the wasteful, polluting flaring of natural gas from the country’s booming Bakken oil fields in North Dakota. (There’s no infrastructure for storing or transporting the gas and the oil is the quarry, given its much higher price.) Gas pipelines are rapidly being built. Companies like Statoil and General Electric are teaming up to develop and deploy new modular systems for exploiting, instead of incinerating, the gas. The article describes how such systems could also finally justify an end to flaring in gas-rich but energy-poor places like sub-Saharan Africa.   There, gas produced during oil drilling is routinely flared because there’s no established local market.  The piece builds on a High Country News article earlier in the year describing other initial efforts, both through government action and industry innovation, to stem the waste.  But Krauss’s piece shows that industry is capable of far more than it has done so far. The pace of industrial innovation is driven both to the pull of markets and the prod of government policies and public pressure. This line says much: “It will take a combination of entrepreneurship, the companies being embarrassed and tighter regulation,”

This Court Ruling Could Raise Natural Gas Prices - We saw a landmark decision last week in U.S. courts. One that could become the biggest new driver for North American natural gas prices. The decision came in the supreme court of Pennsylvania. Where judges voted 4-2 to overturn new laws that limited the ability of municipalities in the state to regulate hydraulic fracturing for oil and natural gas drilling. Pennsylvania's Republican governor Tom Corbett had previously announced the laws in an attempt to limit local bans on fracking. Several such moratoriums have been pursued by cities and counties in Pennsylvania. And around the country. The new laws looked to be putting regulatory power firmly back in the hands of the state government. A move that would have streamlined oil and gas development here. But no more. With the laws now overturned by the supreme court, municipalities will be free to impose their own bans on fracking. Effectively halting development in such locations. The decision comes at a crucial juncture for natural gas prices. Pennsylvania's Marcellus shale is today the biggest driver of growth of in U.S. natgas production. Output here continues to soar, while other big shales like the Haynesville are actually declining.  That could change if the new shift in rules causes a drilling slowdown in Pennsylvania. Putting a crimp in America's most productive shale gas play. And potentially levelling production.

Disney And Oil Industry Team Up For 'Rocking In Ohio' Event -- Radio Disney, "home of the hottest kids' music," is teaming up with Ohio's oil and gas industry to teach school kids that pipelines are awesome.  "Rocking In Ohio" is an interactive, game show-like presentation entirely funded by the Ohio Oil and Gas Association and presented jointly with Radio Disney. This "special partnership," as they call it, "highlights the importance of Ohio’s oil and gas industry, and why science, technology, engineering and math (STEM) are crucial in developing energy resources in Ohio," according to the association. The traveling show is part of an industry-funded outreach program called the Ohio Oil and Gas Energy Education Program (OOGEEP), which partners industry representatives with science teachers in the state. "Rocking In Ohio" was performed at the Ohio State Fair in August, and since then the show has made at least 26 stops at county fairs, science centers and schools.

Inspector General Finds EPA Justified in Intervening to Protect Drinking Water from Fracking - Today the U.S. Environmental Protection Agency (EPA) Inspector General found EPA Region 6 was justified in legally intervening to protect Parker County, TX residents’ drinking water from drilling impacts. At Sen. Inhofe’s (R-OK) request, the Inspector General investigated to determine if Region 6’s intervention against Range Resources was due to political influence by the Obama administration. “The EPA’s internal watchdog has confirmed that the EPA was justified in stepping in to protect residents who were and still are in imminent danger,” said Sharon Wilson, Gulf regional organizer of Earthworks. “Now we need an investigation as to whether political corruption caused EPA to withdraw that protection.” The EPA invoked its power to protect drinking water in 2010, prompting Oklahoma Sen. Inhofe to request the Inspector General’s investigation in 2011. The EPA withdrew its legal complaint against Range Resources in 2012 despite having a report from an independent scientist showing that a gas well drilled by Range likely polluted nearby water supplies.

2013 in review: Obama talks climate change – but pushes fracking -This was the year when climate change came out of the closet. Barack Obama elevated climate change to one of his top presidential priorities. White House and other officials brought up the topic in public after spending the previous four years scuttling away from any mention of climate change. Climate change became a factor in state elections and there were polls suggesting even Republicans in the most conservative states wanted to take measures to avoid a future of dangerous climate change. But it was also a year when Obama claimed as a personal achievement the expansion of oil and gas production through hydraulic fracturing, and when the coal industry sent coal overseas to rescue the mines closing down at home. Barack Obama used the 21 January inaugural address for his second term in the White House to renew his commitment to respond to the climate crisis "knowing that failure to do so would betray our children and future generations".  He was even more forceful in his first State of the Union address on 12 February seizing the moment to put Republicans on notice: "If Congress won't act soon to protect future generations, I will." But there was no let-up in the fracking boom that has turned America into an energy superpower – and is burning up stores of carbon that the UN's climate science panel said should be left in the ground to avoid a future climate disaster.

U.S. Pipeline Safety Agency Says No To Pipeline Safety Improvements - It was the summer of 2011 in south-central Montana when 42,000 gallons of crude oil that was supposed to end up at a ExxonMobil refinery in Billings, Montana, accidentally wound up in the Yellowstone River.  Hundreds of residents along a 20-mile stretch of the Silvertip pipeline spill were evacuated, and an estimated 70 miles of the Yellowstone’s riverbank were contaminated. Property contamination, sick livestock and wildlife, and local health problems eventually spurred those who owned land nearby to sue, claiming the spill could have been avoided. “They should have known long before this happened that this river floods every spring and produces massive erosive forces,” attorney Jory Ruggiero told the Associated Press at the time.   Indeed, the historic spill was the result of what is known in the industry as “scouring.” Scouring occurs when flooding or rapid currents sweep away several feet of the river bed, exposing buried pipelines to potential damage. Despite this, the Pipeline and Hazardous Materials Safety Administration (PHMSA) has decided not to change its regulations to better protect underground pipelines from scouring, according to a letter reportedly seen by the Wall Street Journal on Nov. 19 and published in a report Sunday.  PHMSA reportedly made its decision just one year after Congress ordered it to evaluate its policies in the wake of incidents like Exxon’s Silvertip pipeline, and the incident just one month later when scouring caused 3,300 barrels of natural gasoline, a gas additive, to spill into the flooded Missouri River basin.

U.S. tight oil production surging - The U.S. Energy Information Administration last week issued an early release of its Annual Energy Outlook 2014, which shows substantially more optimism about near-term U.S. crude oil production compared to the AEO 2013 assessment completed just eight months ago. In its April report the EIA was anticipating that U.S. production of crude oil from the tight formations now made accessible with fracking drilling methods would total 2.3 million barrels per day for 2013, and could increase another half-million barrels per day above that before peaking in 2020. But the new assessment is that 2013 tight oil production will amount to 3.5 mb/d-- over a million barrels more than the earlier estimate-- and will gain another 1.3 mb/d beyond that before peaking in 2021. Those numbers along with the EIA's other projections imply that total U.S. field production of crude oil from all sources would reach 9.6 mb/d in 2019-- almost as high as the all-time U.S. peak in 1970-- before resuming its decline. If you add in natural gas liquids (which you really shouldn't) and ethanol produced from corn (which is even less useful [1], [2]), the total would substantially exceed the historical U.S. peak.  Interestingly, any reductions in crude oil prices associated with this increased production are expected by the EIA to be relatively modest and short lived. Why wouldn't all this new production have a more dramatic effect on the price of oil? The answer is that, had it not been for the increase in tight oil production in the U.S. and oil sands from Canada, global oil production would actually have declined between 2005 and 2012. And the growth in oil consumption from the emerging economies has eaten up more than all of this new production.

Surge Seen in U.S. Oil Output, Lowering Gasoline Prices - Domestic oil production will continue to soar for years to come, the Energy Department predicted on Monday, scaling to levels not seen in nearly half a century by 2016. The annual outlook by the department’s Energy Information Administration was cited by experts as confirmation that the United States was well on its way — far faster than anticipated even a year ago — to achieving virtual energy independence.  The report predicted that the increase in United States production would contribute to a decline in the world oil benchmark price over the next few years to $92 a barrel in 2017 from a 2012 average of $112 a barrel, which should translate into lower prices at the pump for consumers.  It projected that domestic oil production would increase by an average of 800,000 barrels a day annually through 2016, nearly reaching the 1970 historic high of 9.6 million barrels a day. The increase in domestic oil production should bring the imported share of oil supplies down o 25 percent in 2016 from the current 37 percent.  Just a few years ago, the country imported half of its oil supplies. “The E.I.A. report confirms that the United States really is experiencing an energy revolution,” said Daniel Yergin.

In The Midst Of Record Oil Boom, Obama Administration Seeks More Oil Production - America produced an average of 7.5 million barrels of crude oil per day in 2013, an increase of one million barrels per day and the biggest one-year jump in the nation’s history, FuelFix reported Thursday. The U.S. Energy Information Association (EIA) estimates production will grow by another one million barrels in 2014 and will peak at a whopping 9.5 million barrels per day in 2016.  Despite the oil boom already well underway, the Associated Press reported this week that the Obama administration was seeking to ‘clean up’ coal by capturing carbon dioxide from coal-fired power plants and using it to force more oil out of the ground.  “Obama has spent more than $1 billion on carbon-capture projects tied to oil fields and has pledged billions more for clean coal,” according to the AP report. While the administration has touted the environmental benefits of carbon-capture, some are skeptical of a plan that seeks to reduce carbon emissions by increasing the production of another fossil fuel — which will only emit more CO2 when burned. Fueling the criticism, AP notes that “the administration also did not evaluate the global warming emissions associated with the oil production when it proposed requiring power plants to capture carbon.” And the report cites a 2009 peer-reviewed paper which “found that for every ton of carbon dioxide injected underground into an oil field, four times more carbon dioxide is released when the oil produced is burned.” The administration counters that the oil would be extracted regardless and will help bolster U.S. energy security by producing more energy domestically.

Worst Fuel Oil Loss Since 2011 Seen Easing on Import Cut - Refining losses from producing fuel oil in Asia are poised to narrow as imports from western countries and Iran decline while global economic growth boosts demand for transportation fuels.  Cargoes of the ship and power-station fuel cost an average of $10.18 a barrel below Dubai crude this month, the largest monthly discount since April 2011, according to data compiled by Bloomberg. That gap, known as the crack spread, will narrow to minus $8 a barrel in the first quarter of 2014, according to the median estimate in a survey of five analysts and traders.  A recovery in fuel oil, which refiners typically produce at a loss after making gasoline and diesel, will help boost margins at companies including South Korea’s S-Oil Corp. and Royal Dutch Shell Plc.  Iran, once the second-biggest supplier to China, has cut exports by 67 percent compared with earlier this year. At the same time, global demand for shipping fuel is forecast to rebound amid economic growth from the U.S. to China.

Judge Rules Against BP in Spill Settlement Dispute — A federal judge has rejected BP’s argument that a multibillion-dollar settlement over the company’s massive 2010 Gulf oil spill shouldn’t compensate businesses if they can’t directly trace their losses to the spill. U.S. District Judge Carl Barbier said in Tuesday’s ruling that the settlement was designed to avoid the delays that would result from a “claim-by claim analysis” of whether each claim can be traced to the spill. Earlier this month, a three-judge panel of the 5th U.S. Circuit Court of Appeals ruled that Barbier erred when he initially refused to consider BP’s “causation” arguments. Barbier agreed with plaintiffs’ lawyers that BP can’t make these arguments because the company took a contradictory position on the same issue when it urged Barbier last year to approve the settlement.

Alberta’s Tar Sands Will Now Be Regulated By Fossil Fuels-Funded Group - The Alberta government is handing over the regulatory responsibility for the province’s tar sands industry to a corporation that’s funded entirely by Canada’s oil, coal and gas industry.The Alberta Energy Regulator (AER) is taking over the duties of the now defunct Energy Resources Conservation Board (ERCB) — which was funded in part by taxpayers — and Alberta Environment and Sustainable Resource Development. Previously, the ERCB was responsible for making sure “appropriate precautions are taken to develop oil sands resources in the interests of all Albertans…through regulation, reviewing applications, managing conditions and approvals, surveillance, and enforcement” — now, those responsibilities will fall to the AER. On top of that, according to the AER’s website, the AER’s duties include “allocating and conserving water resources, managing public lands, and protecting the environment while securing their economic benefits for all Albertans,” as well as administering Canada’s Water Act and Public Lands Act, dealing with fossil fuel-related spills, and approving or denying oil and gas permits. The shift to the AER as the main environmental regulator in Alberta is part of the provincial government’s plan to streamline the approval process for oil companies. It’s drawn concern from environmentalists in Alberta, who are worried that the AER’s financial backing from the fossil fuel industry makes the group too close to the industry it’s supposed to regulate. Adding to their worry is the fact that the AER’s chairman of the board, Gerry Protti, is one of the founders of the Canadian Association of Petroleum Producers, a major oil lobbying group.

If Mexico is the next Brazil in oil production, brace for disappointment - Recent reforms that would open oil exploration and development in Mexico to major oil companies for the first time in decades has the media all atwitter about the prospects of a reversal in declining Mexican oil output and a possible doubling of production. The reforms have brought out comparisons with Brazil which has a similar arrangement in which the country's state-owned oil company works with major international oil giants to develop Brazil's petroleum resources. Adding to the frothy atmosphere, former Brazilian President Luiz Inacio Lula da Silva proposed a partnership between Mexico and Brazil to develop oil resources in both countries. In a world with daily average oil prices hovering near record levels, such news might be welcome if only we could actually count on the accompanying optimistic production forecasts. But, it's instructive to look at what actually happened in Brazil since the time its potential as a major new oil producer was touted several years ago. Brazil had discovered large oil deposits in ultradeep (30,000 feet down) reservoirs far offshore. In 2009, Petroleo Brasileiro SA (Petrobras), Brazil's state-owned oil company, announced that it would invest approxmately $175 billion in oil exploration over several years to boost Brazilian liquid fuel production from 2.4 million barrels per day (mbpd) in 2008 of oil, biofuels and other liquids to 4.6 mbpd in 2015, a move that would make the country a major oil exporter.  In 2012 the country produced 2.65 mbpd of liquid fuels, making hardly any progress toward the goal announced for 2015. (The figures for oil proper, that is crude oil plus lease condensate which is the definition of oil, were 1.81 mbpd in 2008 and 2.06 mbpd in 2012.) In fact, instead of contributing to the worldwide supply of exports, Brazil remains a net importer of oil according to the U.S. Energy Information Administration (EIA), and those imports grew from 36,470 barrels per day in 2011 to 155,040 barrels per day in 2012.

Venezuela Devalues Bolivar By 44%, Wiping Out Ford’s LatAm Profit - Venezuela devalued its currency bolivar by 44% today. Tourists can buy bolivars at 11.3 per dollar compared with the official 6.3 per dollar for most other transactions. Oil investments will also use the new exchange rate. This move followed a 32% devaluation in February. Bolivar is losing value because of Venezuela’s dismal hard currency reserve, reports Bloomberg:A decade of currency controls has made dollars increasingly scarce in the South American country, with foreign reserves falling to a nine-year low this month. The restricted supply of dollars to companies has led to shortages of imports ranging from tires to beef.  This devaluation essentially wipes out Ford Motor‘s (F) profits in Latin America, says Russ Dallen at BBO Financial Services:Ford announced last week that it was expecting to lose $350 million because of this devaluation in Venezuela, basically wiping out all of its profits from the whole of Latin America.  In short, Ford, like many international companies, has over $700 million trapped in bolivars that they have not been able to repatriate or exchange, as the Government will not give them the dollars and it is illegal to use the black market (which would also mean an even greater loss).

No Blowback For Saudi Arabia? -- The War Nerd thinks there will be no blowback for Saudi Arabia from sending Jihadis to kill Syrians. The Middle East has been Saudi-ized while we looked on and laughed at those goofy Saudis who didn’t understand progress. No wonder they’re content to play dumb. If we took a serious look at them, they’d be terrifying. And of all their many skills, the one the Saudis have mastered most thoroughly is disruption. Not the cute tech-geek kind of disruption, but the real, ugly thing-in-itself. They don’t just “turn a blind eye” to young Saudi men going off to do jihad—they cheer them on. It’s a brilliant strategy that kills two very dangerous birds with one plane ticket. By exporting their dangerous young men, the Saudis rid themselves of a potential troublemaker while creating a huge amount of pain for the people who live wherever those men end up.  This worked well, the War Nerd says, and Wahabized Afghanistan and Chechnya while the blowback, he says, has been zero in those cases:

Pentagon Says Rare Earth Elements Less at Risk - China controls the rare earth elements that US defense relies on for its high-tech equipment, and now the Pentagon is claiming that the balance is shifting. There is always a risk that China, which monopolizes extraction of rare earth elements, could disrupt supplies diverted for use in US military applications, but a new report by the Pentagon now says that the market is changing and the risk is lessening. “Prices for most rare earth oxides and metals have declined approximately 60 percent from their peaks in the summer of 2011.” There are 17 rare earth elements that are used to manufacture not only a wide array of today’s electronics, but also defense equipment from cruise missiles to missile guidance systems, smart bombs and night-vision technology. There are military applications for seven of the rare earths: dysprosium, erbium, europium, gadolinium, neodymium, praseodymium and yttrium. China controlled 95% of the rare earths market in 2011, and its government was limiting exports and placing restrictive taxes on their sale, causing prices to soar and creating panic that US demand for commercial and military applications would not be met. The new Pentagon report says supplies from outside China have now increased, and this trend should continue with US Defense Department efforts to come up with a better domestic production strategy for rare earth metals—one that would be “economic and environmentally superior”.

Airpocalypse: China’s 4-year pollution plan - The plan for dealing with the overwhelming smog problem stifling China’s cities seems to be adaptation followed by clean up. In the short term, children in Shanghai have been ordered to stay indoors and Chinese airline pilots are being required to master low-visibility landings. One forward-thinking measure has been to limit the amount of new car sales and vehicles permitted on the roads in urban areas. The coastal city of Tianjin has decided to join other metropolises by capping how many license plates it issues to 100,000 per year.  Cars are a big deal, but coal is an even bigger one. China now burns as much coal as the rest of the world’s countries combined. The irony is that although coal is helping to drive China’s breakneck industrialization and economic growth, it also has the ability to shut everything down. This has been the case several times in cities like Beijing, Shanghai and the chilly northern outpost of Harbin. The chillier things get the more coal gets burned for heating purposes, which of course means more smog.So the Chinese government has a plan to significantly improve the country’s air by 2017: a 4-year, US 176 billion dollar clean-up scheme that involves cleaner cars, cleaner energy sources and cleaning up China’s dirty industry. The goal is to reduce airborne particulate matter in large cities by a minimum of 10%. According to the deputy head of the Chinese Academy for Environmental Planning, the massive clean-up will increase China’s GDP by $330 billion US and create at least two million new jobs.

China's local government debt seen at $3 trillion as of end 2012 (Reuters) - China's total local government debt may have reached 19.9 trillion yuan ($3.28 trillion) by the end of 2012, almost double that of two years previously, a media report said on Monday, citing a private study by a government think tank. Local government debt in China has surged in recent years as credit flowed into the building of public infrastructure. Poor government disclosure on debt levels, however, has aggravated concerns about the true size of the debt. China's National Audit Office said in July it would conduct an audit of all government debt at the request of the cabinet, but the results have not yet been published. Official figures showed local government debt stood at 10.7 trillion yuan by the end of 2010. "We need to pay great attention to the debt level of local government," The study also said that the total debt of China's central and local governments reached nearly 28 trillion yuan by the end of 2012, accounting for 53 percent of the country's GDP.

China's $50 billion move to avert cash crunch - China's central bank has been forced to pump nearly $50 billion into the financial system to prevent a second damaging cash crunch this year. Some banks in the world's second largest economy have been struggling to secure funds as the end of the year approaches, a time when they usually need extra cash to meet minimum deposit requirements, and as companies seek more money for operations. Investors were spooked late last week as indicators of tight liquidity surged to heights last seen in June, when Chinese markets were roiled by a major credit crunch. In response, the People's Bank of China said that it had pushed more than 300 billion yuan ($49.4 billion) to select banks in an effort to avoid bank defaults. It took the unusual step of announcing the move on Weibo, China's equivalent of Twitter. "The fragile nature of [China's] financial system remains a challenge for the central bank and poses a threat to the economy," said Nomura's China economist Zhiwei Zhang. Although the central bank's emergency action will likely prevent a repeat of June's credit crunch, it is still possible that some banks will be unable to make payments to each other next year, he said.

How Tighter Government Spending Contributed to China Rate Spike --An unusual shift to slower government spending toward the end of the year caught the Chinese central bank off guard and helped send money-market rates last week to their highest levelssince a crisis in June, economists say.The People’s Bank of China said Friday it had been forced to inject more than 300 billion yuan (US$49.2 billion) into China’s money markets over a three-day period after the interest rates banks charge each other for short-term loans surged to 8.2%. The injection helped bring down rates to 5.6% by Monday morning.  Last week’s levels were the highest since June’s cash squeeze sent short-term rates soaring above 28%. Then, China’s lenders were caught in a credit squeeze caused by a combination of factors, ranging from lower capital inflows and seasonal tax payments to a mismatch between banks’ short-term funding and longer-term lending. The PBOC let the problem fester before stepping in, to teach banks a lesson. Those seasonal factors have come into play now as well. But “the recent rate spike is, to a large extent, a reflection of the government’s tighter stance on spending,” Citigroup economist Ding Shuang said. The Chinese government usually draws down fiscal deposits — the amount of funds the government keeps in the financial system—more quickly in December, as it speeds up spending and fiscal disbursements before the end of the year, UBS economist Wang Tao said in a recent note. That boost in government spending adds liquidity to the banking system, and the PBOC normally withdraws liquidity at the end of the year to offset the inflows. This time, though, the government’s tighter fiscal policy means year-end spending has been restrained, Ms. Wang said.

Report Faults Increase in China’s Local Government Debt — China’s local government debt has reached an “alarming level” and poses a significant risk to the country’s fast-growing economy, according to a Chinese government think tank. Two years after analysts began raising concerns about municipal borrowing, Chinese local governments appear to have piled up even more debt, about $3.3 trillion by the end of 2012, perhaps double the level in 2010. The report, released this week by the Chinese Academy of Social Sciences, is the latest indication that China may be investing too aggressively in property and infrastructure projects, potentially setting the stage for a wave of loan defaults and a severe economic downturn. While many economists expect China’s economy to grow 7 percent in 2014, there are mounting concerns about the sustainability of the country’s economic engine. In Beijing, the authorities are pushing to restructure the economy to make it more market oriented, in the hopes of tackling inefficiencies and potentially huge hidden liabilities.

China Cash Crunch Shows Central Bank's Difficulties - A cash crunch among China's banks intensified, highlighting the difficulties faced by the central bank in managing an increasingly stressed financial system. The current squeeze is driven by several factors, analysts said. One is a little-noticed drop in China's year-end government spending. ... Banks are becoming more cautious and are hoarding more cash for future needs in case the cash squeeze worsens. Some of them are also boosting provisions for potential loan defaults..."To prevent systemic risks, and reduce the impact on liquidity, the supervision of the interbank market will continue to be strengthened," analysts at Bank of China Ltd. said in a report Monday, adding that interbank lending was "accentuating hidden dangers" in the financial system. The rise in rates came despite the Chinese central bank's announcement late Friday that it had injected more than 300 billion yuan into the financial system over a three-day period following the increase in interbank rates last week.

China Rates Approach Crisis Levels Despite Central Bank Measures - An exceptional bid by China’s central bank to curb soaring interest rates and relieve pressure on the financial system appeared to have come up short on Monday, as Chinese money market rates shrugged off the measure and continued to approach the crisis levels seen in June. The central bank, the People’s Bank of China, said late Friday that it had provided more than 300 billion renminbi, or about $50 billion, in short-term funds to selected banks over a three-day period that week. Rates continued to surge on Monday, however, in China’s money markets — a key source of short-term funding for commercial banks and also for financial institutions engaged in risky, off-balance-sheet shadow lending. One key rate, the seven-day repurchase rate, rose as high as 10 percent on Monday. That was double the rate of a week earlier and the highest level since June, when the People’s Bank of China allowed rates to surge in an effort to curb speculative investment in the country’s sprawling shadow banking sector.  China’s banks are scrambling for short-term cash to meet month-, quarter- and year-end regulatory requirements. At the same time, demand for cash is high among Chinese companies seeking to meet year-end payments.

China's cash crunch threatens Shadow Banking shock - A blast of money from China’s central bank has failed to stem a deepening cash crunch in the country as liquidity dries up and struggling lenders hoard funds. One-week borrowing costs in Shanghai jumped 119 basis points to 8.643pc, the highest since the cash crisis in June that sent minor tremors through the financial system. Though less volatile, the crucial 3-month ‘Shibor’ rate watched for signs of trouble in the shadow banking sector has climbed 80 points to 5.52pc since the beginning of the month. Fitch Ratings says the biggest risk may lie in China’s wealth management products, a “hidden second balance sheet” of the banks alone worth $2 trillion. Half of all liabilities have to be rolled over every three months and a further 25pc every six months. There are reports that some are already under water. If rates remain at current levels for long, weaker funds could be caught in a squeeze akin to the shock that hit Northern Rock and Lehman Brothers in the West when the capital markets seized up.

China’s Central Bank Eases Fears of Credit Crisis - — China’s central bank injected fresh money into the markets on Tuesday, easing the pressure on the financial system and quelling fears about a credit crisis. In response, interest rates in China’s money markets, a crucial source of day-to-day funding for banks, quickly dropped. Rates had surged over the past week, climbing to six-month highs. The volatility highlights the challenges the government faces as it looks to overhaul the financial system. A plenum meeting of the top Communist Party leadership concluded last month with pledges to deliver on broad new policy mandates that would give the market a larger role in setting the speed and direction of China’s economic development. In part, that means reining in the country’s sprawling state-owned enterprises, which for the past decade have grown increasingly reliant on cheap and plentiful credit to fund their expansion. At the same time, the government needs to ensure that China’s private companies, which typically struggle to get loans from state-owned banks, can gain access to the money they need to continue growing and creating more jobs. The goal for the central bank, the People’s Bank of China, which is widely regarded as one of the institutions at the forefront of the country’s effort to liberalize the economy, is to experiment where it can with looser rates.

China debt grows to $4.6 trillion - It's no secret: China has a growing debt problem. The world's second-largest economy has been struggling to arrest local government debt -- the result of easy credit and round after round of stimulus. While it's hard to gauge the scale of the problem, a recent government think tank report may shed some light. The Chinese Academy of Social Sciences estimates local government debt reached 19.94 trillion yuan ($3.3 trillion) by the end of 2012. Local government debt accounts for most of total government debt, which is expected to have hit 27.7 trillion yuan ($4.56 trillion), or roughly 53% GDP. The report puts local debt at double what it was three years ago, when China last conducted a nationwide debt audit. Results of the most recent government debt audit, launched in July, haven't been released. For now, China's local government debt remains lower than that of many other advanced economies, such as the U.S., U.K., France, Japan, Germany and Spain. But what is scary is the pace at which debt has accumulated. China's increase in local government debt is part of a larger issue -- a credit explosion as regional governments borrowed to finance major infrastructure projects to combat a slowing economy. Mushrooming credit is cause for concern as it has often been followed by financial crises in other emerging markets. In China, it has stoked fears that capital has been misallocated, and has further contributed to a run-up in corporate and government debt.

Chinese Debt Levels Reaching Concerning Levels -- From the Financial Times: China’s credit boom is still in full swing. Total credit in the economy (total social financing) showed a 40 per cent rise in November over the prior month and is on course for growth this year of almost 20 per cent. It is continuing to expand at twice the rate of nominal, or money, gross domestic product, and according to official data has pushed the credit to GDP ratio up to 215 per cent in 2013, and most likely more. It is clear that banking institutions, state-owned enterprises and local government financing vehicles have remained relatively insensitive to, or been able to circumvent, higher interest rates and bond yields, central government curbs on the shadow banking sector, and the rampant real estate and infrastructure markets.  There are basically two types of recessions.  By far the most common occurs when the central bank raises interest rates to slow either demand pull or cost push inflation (or both).  Both developments are the result of an economy running too hot.  Recovery from these types of recessions is usually fairly quick.   The second type of recession is a debt-deflation recession.  Here, a credit fueled asset bubble bursts, leading those who hold the asset to sell same in order to pay off the loan backing the asset purchase.  As everybody does this at the same time, asset prices plunge, leaving many who have loans underwater on those loans.  This leads to a painfully slow recovery -- much like the one the US has been experiencing for the last 4 years. China has been running hot for some time -- as in years.  However, inflation is not a major issue.  That leaves the most probably cause of the next Chinese recession as an asset bubble bursting, leading to a debt-deflation scenario. 

Pettis on Debt, Malinvestments, Hidden Losses, and China's GDP -- Heading into 2014, Michael Pettis at China Financial Markets remains adamant that growth estimates for China are too high and that rebalancing (while necessary), implies lower growth than most expect. Via email ... It is widely acknowledged that perhaps the most important reason to change the Chinese growth model is its excessive reliance on debt to generate growth. Debt has soared in recent years, to the point where many economists simply look at credit growth in the current quarter in order to determine what GDP growth over the next few quarters are likely to be.But as China deleverages, growth in demand must drop sharply. After all, if economic growth over the past several years has been goosed by rapid credit expansion, deleveraging must have the opposite effect. It is strange that economists who acknowledge that the current growth model is overly dependent on debt have failed to understand that its reversal will have the opposite impact. If it did not, it is hard to explain why anyone would consider debt to be a problem in the first place.If China currently has wasted significant amounts of investment spending, it is clear that much of the accompanying bad debt has not been written down correctly. Bad loans are almost non-existent in the banking system – that is they have not been recognized in the form of reserves or write-downs. But the failure to recognize the loss does not mean that the loss does not exist. The losses implicit in the bad loans must (and will) be written down over the future, either explicitly, in which case they will result in a direct deduction to GDP growth, or implicitly, in which case they will require implicit and hidden transfers from one part of the economy or another (usually the household sector) to cover the gap between the “real” cost of capital and the nominal (subsidized) cost of capital. This transfer must reduce future growth.

China Estimates 2013 Growth at 7.6% as Challenges Seen Ahead -  China estimates that growth slowed to 7.6 percent this year, with mounting challenges putting pressure on the nation’s traditional growth model of investment-led spending, according to the official Xinhua News Agency. The calculation for the gain in gross domestic product for 2013 was included in a report by the State Council, or cabinet, to the legislature, and compares with a government target of 7.5 percent, Xinhua reported yesterday. A 7.6 percent pace would mark a third straight annual drop in the expansion rate. “We cannot deny a downward pressure on economic growth,” Xu Shaoshi, minister in charge of the National Development and Reform Commission, told legislators in a briefing on the report, Xinhua said. The State Council document listed among the looming challenges a worsening in pollution and social conflicts. Xu said the nation’s traditional growth pattern is challenged by rising labor and environmental costs, according to Xinhua. Twenty-seven Chinese provinces and cities raised the minimum wage in 2013 by an average of 17 percent, Xinhua reported today, citing Yin Weimin, minister of human resources and social security.

Appreciating the BRICs - ANY American who has travelled around India will know that his money, by some strange magic, stretches further in that country's dusty kirana stores, guarded malls and tasty darbars than it does back home. To be precise, he can buy 2.8 times as much in India with a dollar's worth of rupees than he can with a dollar in the United States, according to the IMF. This is because India's prices are only about 35% of America's (when converted into a common currency at market exchange rates). This magic is not unique to India of course. It applies across most developing countries.  In the biggest emerging economies, however, the magic is wearing off. Ten years ago, Brazil's price level was only 40% of America's. This year it was 90%. China's has risen from 39% to 67% over the same period, even as Russia's has soared from 31% to almost 83%. Taken together the BRICs have become notably dearer (see chart) over the past decade. Their combined price level rose rapidly towards American levels from 2003 to 2011, before plateauing in the past two years. This dramatic convergence of price levels is an underrated economic force. It is one big reason why the BRICs' dollar GDPs now loom so much larger than anyone expected back in 2003. That was the year when Goldman Sachs released the first of their long-range projections of the BRICs' economic fate over the next half century. Their projections raised eyebrows at the time.  Now that the BRIC economies have faltered, the bank's whole thesis has been scoffed at. But, looking back at their attempt to look forward, the bankers were, if anything, too timid. As I mentioned in a previous post, the BRICs combined dollar GDP will be 70% bigger this year than Goldman Sachs had projected ten years ago.

Brazil Braces for Tax Hikes - Taxes in Brazil will go up next year as the government looks to shore up its finances after much criticism from the investment community and the threat of a downgrade to the country’s sovereign credit rating. Much of the increase will come from a rollback of tax cuts introduced over the last few years to try to bolster growth. Their efficacy has been limited: despite some success in the immediate aftermath of the financial crisis, economic growth has since lost steam.The economy isn’t expected to have a stellar year in 2014, but bringing back some balance to Brazil’s finances has become more urgent. Tax increases unveiled Tuesday should add 1.15 billion Brazilian reais ($486 million) to the government’s coffers in 2014, according to the finance ministry. Other increases could potentially add another 3 billion reais to next year’s revenue, the ministry said. That contrasts with just a few years ago, when Brazil was an exemplar of fiscal discipline among emerging markets. That  helped the country sail through the recent  financial and economic crisis that engulfed much of the developed world. The economy has lost steam since 2011 and the government responded by providing more and more tax cuts with little response in activity.

How the Taper Could Hit the Rupee -- Now that the U.S. Federal Reserve’s dreaded taper has arrived, some in India are wondering whether the rupee is headed for new lows again.  Many emerging markets took a thumping this summer after the Fed first hinted it might scale back its monthly asset purchases. But India got it the worst. The rupee collapsed after Ben Bernanke testified before the U.S. Congress in May, and stocks tanked. In July, the Reserve Bank of India had to implement emergency measures to curb liquidity and protect the currency’s value. The rupee hit an all-time low in late August after notching its worst daily performance since 1995 and its worst monthly performance since 1993. Why did some emerging markets take it on the nose while others were left mostly unscathed? The usual explanation is that spooked investors chose to dump countries, such as India, Turkey and Indonesia that were more dependent on foreign financing, and where economic prospects were grimmer. This view is also informing the latest predictions about which countries might see further turmoil now that the Fed’s taper is actually about to begin. But in a working paper published Dec. 12, economists Barry Eichengreen of the University of California, Berkeley, and Poonam Gupta of the World Bank found that better macroeconomic fundamentals—a smaller government-budget gap, lower public debt, better GDP growth, higher foreign-currency reserves—didn’t necessarily insulate a country against getting whacked by taper talk this summer. A more important factor, they wrote, was simply the size of a country’s financial market. Giants like Brazil, India and South Africa experienced bigger swings in their real exchange rates than minnows like Armenia, Bosnia and Herzegovina, and Albania. Why? When it looked like long-term interest rates in the U.S. would start to rise again, investors focused their selling on developing countries with large, liquid markets where they could exit easily without taking big losses.

Goodbye Price Stability, Hello Exchange Rate Volatility - Over the last six months, many developing emerging market economies had witnessed large, unforeseen, and unpredictable swings in their exchange rates. A recent policy brief by the Peterson Institute for International Economics provided Estimates of Fundamental Equilibrium Exchange Rates and revealed that many of these depreciations were, in fact, overshooting the fundamental equilibrium exchange rates that are consistent with the current account balances of these economies. Now it is found that Indonesia needs its currency to appreciate by 3.9%; Thailand, by 2.4%; the Philippines, by 3.8%; Malaysia, by 4.3%. Meanwhile, Turkey has to let its currency depreciate by 18.1%; South Africa, by 6.8%; Poland, by 4%; Brazil, by 3.4%. Table 1 below summarizes the relevant data.  These findings suggest that central banks (CBs) have now moved from the objective of price stability (and by extension exchange rate stability by way of interest rate volatility as the main instrument) over the period 2002-2008, to the new policy of exchange rate volatility to pursue interest rate stability. All these revelations point to an excessively volatile environment for exchange rates, the most important macroeconomic price for a national economy. These findings suggest that central banks (CBs) have now moved from the objective of price stability (and by extension exchange rate stability by way of interest rate volatility as the main instrument) over the period 2002-2008, to the new policy of exchange rate volatility to pursue interest rate stability. Interest rates all over are forced to the 0% lower bound in response to the pressures and whims of the global finance capital, a phenomenon to which Cömert and Yeldan (2008) referred as “interest rate smoothing.”

Gallup study: 1 in 5 worldwide living in extreme poverty -- More than 1 in 5 people worldwide live in extreme poverty — defined by the World Bank as living on less than $1.25 per day — according to self-reported household income data released by Gallup on Monday. Analyzing data from 131 countries compiled from 2006 to 2012, Gallup found that a third of respondents get by on less than $2 per day — sobering news for the World Bank, which has declared an ambitious goal of slashing the global extreme-poverty rate to just 3 percent by 2030. The rate is dramatically higher than the world average in sub-Saharan Africa, where 54% of respondents from 27 countries live in extreme poverty. In Burundi and Liberia, the proportion is almost 90 percent. Analysts note that Gallup employed a unique methodology using self-reported income rather than the laborious calculations of daily consumption — calories consumed, utility costs — used by the World Bank. “It’s a much cruder attempt to obtain these numbers, and yet the results seem broadly in the same range,” said Laurence Chandy, a fellow in the Global Economy and Development program at the Brookings Institution. “So it seems that we can assume rough and ready estimates through a much less laborious process.”

Asian Currencies Decline This Week as Fed Taper Spurs Outflows - Most Asian currencies fell this week as signs of an improving U.S. economy bolstered demand for the dollar amid tapering from the Federal Reserve that’s spurring outflows from emerging markets. Global funds pulled $3.2 billion from South Korean, Thai, Philippine and Indonesian stocks so far in December as the Fed prepares to pare stimulus in January, exchange data show. The Thai baht led losses this week as the two-month-long political protests escalated, raising concerns about economic growth and tourism. Trading was muted due to closures in many markets for the Christmas holidays, according to Malayan Banking Bhd. “Most Asian currencies weakened because of the broad dollar strength,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking in Singapore. “The positive U.S. data also supports the case for further Fed tapering.” The baht depreciated 0.8 percent from Dec. 20 to 32.859 per dollar in Bangkok, having touched 32.873, the weakest level since June 2010, according to data compiled by Bloomberg. Indonesia’s rupiah fell 0.5 percent to a five-year low of 12,281.

Record High Amount of Foreign Currency Bonds Maturing in 2014  - It has been found that US$30.7 billion worth of foreign currency-denominated bonds issued by Korea reach maturity next year. The amount is the largest in history. Under the circumstances, experts are warning that unexpected problems could arise unless preparations are made in the form of maturity extensions or additional issue, with the interest rate being predicted to rise amid the US Fed’s tapering of its quantitative easing policy and the capital flow into emerging markets forecast to be on the decrease. According to the Korea Center for International Finance (KCIF) and banking industry sources, the amount can be divided into US$4.3 billion for January, US$4.8 billion for April, and US$3.9 for May. Not just Korea but also many other Asian countries are expected to have conversion issues next year despite the tapering, signaling a higher interest rate. In the meantime, the capital flow into the bond markets of emerging economies is showing a downward trend. According to fund data provider EPFR, US$20.3 billion has flowed out of bond funds based on the US dollar, yen, and euro since April this year, which is equivalent to 33% of the inflow during quantitative easing.

Japan Labor Shortage Could Clip PM Abe’s ‘Second Arrow’ -- A lack of skilled labor is impeding sorely needed improvements to Japan’s disaster preparedness – and holding back the progress of Abenomics.  The need for public works projects is well recognized in Tokyo, where the government says there’s a 70% chance of a magnitude-7 earthquake hitting the capital, with its aging infrastructure, in the next 30 years. Public-works projects also make up a significant portion of the fiscal stimulus that’s the key “Second Arrow” of Prime Minister Shinzo Abe’s signature economic program. Problem is, Japan doesn’t have enough construction workers to carry out so many public works projects. In the past 20 years, as the population has aged, the number of Japanese construction workers has fallen by more than 20% to five million. The labor shortage already was pronounced in the Tohoku region — where reconstruction continues from the March 2011 earthquake — but is now spreading across Japan. That’s an issue in a country where up to 40% of the bridges, tunnels and levees will be 50 years or older within the next decade. The collapse of a roof in an expressway tunnel last December some 50 miles from Tokyo, killing nine people, also brought home the need for upgrades.

Depth of Apparent BOJ Board Split Worth Watching - The depth of an apparent split in the views of the Bank of Japan's policy board members may be worth keeping an eye on in the coming months. At their November meeting, the board members were divided over the interpretation of a third-quarter slowdown, with one expressing concerns the nation’s growth trend may have shifted downward after the brisk expansion earlier in the year. The board met a week after the government’s initial estimate showed the GDP growth rate halved to 1.9% during the third quarter, compared with the first six months of the year. The slowdown raised questions about whether the economy can withstand a sales-tax rise planned for spring next year. One member said the slowdown in the real GDP growth rate might not be temporary, but “could represent a downward shift in the trend,” the meeting summary showed. In addition, one member noted “unfavorable developments” in the GDP data, such as the build-up of inventory and a drop in employee compensation. “Many members,” in contrast, took the GDP data positively, saying economic activity “continued to show positive movement, particularly domestic demand.” The minutes added to signs of a growing divide between pessimists and optimists on the board. BOJ Gov. Haruhiko Kuroda has maintained the BOJ can meet its target of 2% inflation in two years, as the economy is taking shape as he expected, while four other members have recently signaled they either don’t find the price goal realistic, or are less confident of hitting it in the proposed time frame.

Japan's record budget spending highlights balancing act (Reuters) - Japanese Prime Minister Shinzo Abe on Tuesday secured cabinet approval for a draft budget for the next fiscal year that aims to split the benefits of higher tax revenue between trimming fresh borrowing and stimulating the economy with record spending. The government's second annual budget since Abe's election triumph a year ago marks a balancing act between boosting growth and doing just enough to show it is keen to rein in public debt, which is more than twice the size of the economy. Of projected record spending of 95.88 trillion yen ($921.97 billion) in 2014/15, about one-third will be spent on social security while debt servicing costs will account for nearly one-quarter. "Abe vows to seek both growth and fiscal consolidation, but the focus now needs be on stimulus," said Hidenori Suezawa, analyst at SMBC Nikko Securities. "Hasty fiscal tightening could derail the economy and foil the sales tax plan in 2015." Spending in the general-account budget for the year starting April 2014 will rise more than 3 trillion yen from this year's initial budget, the Ministry of Finance said, with higher outlays for public works, military and social security. Ministry officials played down the rise, however, saying it was inflated by technical factors such as the transfer on-budget of outlays from special accounts, and allocations from a planned April sales tax hike to shore up social security funding. Interest payments also rose while welfare costs increased as Japan's population ages.

BOJ Beat: Kuroda Sees “Golden Opportunity” to Escape Deflation - Bank of Japan Gov. Haruhiko Kuroda said Wednesday that recent broad improvements in the economy have created a “golden opportunity” for the country to escape years of deflation, calling on business leaders to transform their deflationary mindsets. In his year-end speech delivered to about 300 business leaders and executives, Mr. Kuroda said that the essence of deflation is rooted in the collective behavior of  firms and households. If they expect prices to keep falling, they prefer to hold onto to cash instead of spending or investing. While such actions are rationale for each company or individual, they can harm the overall economy if everyone acts in the same way at the same time. This tends to put the economy into a vicious circle where a sustained fall in prices leads to a decrease in corporate earnings and less capital expenditures, as well as smaller growth in wages. Mr. Kuroda stressed these conditions need to be changed. “It is necessary to break the rules of game that prevailed in the “deflation equilibrium,” Mr. Kuroda said. While he said the central bank isn’t trying to artificially generate inflation through its unprecedented easing rolled out in April, Mr. Kuroda reaffirmed his commitment to achieving 2% inflation as early as possible.The BOJ governor said the monetary stimulus was aimed at reversing the vicious cycle embedded under deflation to a virtuous one of a moderate rise in prices, an increase in sales and profits, an increase in wages and so on. The consumer price index will likely stay a tad above 1.0% in the first half of next year, after topping 1.0% this year, he added.

Fastest Japan Inflation Since ’08 Stokes Wage Pressure - Japan’s inflation accelerated to the fastest pace since 2008 last month, bringing the rate closer to policy makers’ target while threatening to erode household spending power unless employers boost wages. Prices excluding fresh food rose 1.2 percent from a year earlier, the statistics bureau said today in Tokyo, more than a median forecast of 1.1 percent in a Bloomberg News survey of economists. A separate report showed industrial output rose 0.1 percent from October, less than forecast, in a risk for projections of an acceleration in economic growth this quarter. Today’s data raise the stakes for employers girding for annual wage negotiations, with Prime Minister Shinzo Abe calling on them to boost salaries by more than the increase in the cost of living. Separate figures showed signs of a pickup in the labor market, with one job for every applicant -- the most since 2007. “The rate of price rises will allow the unions to push for higher wages,” At the same time, “they may temper their demands because of concerns about keeping jobs -- so it’s difficult to see meaningful wage hikes.”

Ex-Government Official Says Japan Has Three Hurdles to End Deflation - For the first time in four years, the government refrained from using the word “deflation” to describe the state of the economy in its monthly report released Tuesday, seen as a positive step toward an exit from 15 years of declining prices.That comes amid a continued rebound in the consumer price index, which saw a rise to the 0.9% level in October. On Friday, the government will release the consumer price index for November with forecasts for a 1.1% inflation rate. Jun Saito, a former chief economist at the Cabinet office, says however that it’s wrong to focus solely on the CPI to judge whether deflation is safely out of the way.  For success in beating deflation, Mr. Saito says to look for the following:

  • GDP Deflator:  The GDP deflator is used to determine the real change in the nation’s overall economic output as opposed to the nominal, pre-adjusted, figure. In normal times, real growth is less than the nominal growth since inflation is the cause of some of the rise in the data. For Japan, however, the GDP deflator has actually been an inflator in recent years. That has meant that Japan’s real GDP has been above the nominal level.
  • Output Gap: The output gap is the difference between actual output and potential GDP, which is based on what the country can produce with the current labor force and stock of capital goods. A minus figure means that there is still slack in the economy, while a positive number suggests that more factories and workers are needed, which could in turn lead to inflation.
  • Money Supply: While less-widely tracked in recent years, the figure offers some hopes that inflation is around the bend. Japan’s money stock increased 3.8% in the third quarter from a year ago, outpacing economic growth of 2.4% in the same period. The Bank of Japan’s monetary easing program is helping to push up the figure since it effectively puts more money into the economy as it buys up Japanese government bonds.

Japan's monetary base tops record 200 trillion yen - Japan's monetary base grew about 45 percent from a year earlier to an all-time high of 200.31 trillion yen as of Thursday, topping 200 trillion yen the Bank of Japan has targeted for the end of 2013, the central bank said Friday. The amount of the monetary base consisting of cash in circulation and the balance of current account deposits held by commercial financial institutions at the bank make up about 40 percent of Japan's gross domestic product, a ratio higher than around 20 percent for the United States and Britain. Most of the money remains in financial institutions' current accounts at the BOJ, but the central bank projects the amount to fall gradually if the economy recovers and boosts demand for funds from companies and individuals. Under its large-scale monetary easing policy introduced April 4 to beat nearly two decades of deflation, the BOJ set the monetary base as the main policy target, instead of the overnight call rate. The BOJ has since sought to double the monetary base within two years. If the bank increases it at an annual pace of about 60 trillion to 70 trillion yen, the monetary base is expected to rise to 270 trillion yen at the end of next year.

World trade and output both reached new all-time record highs in October -- The CPB Netherlands Bureau for Economic Policy Analysis released its monthly report last week on world trade and world industrial production for the month of October 2013. Here are some of the highlights of that report:

  • 1. World merchandise trade volume (adjusted for price changes) increased by 1.4% in October from September, and by 4.1% from a year ago to reach a new all-time record high in October (see blue line in chart above). On a month-over-month basis, import growth in October was 1.3% for both the advanced economies and the emerging economies, while export growth was higher in the emerging economies (1.9%) than in the advanced economies (1.1%).
  • 2. On an annual basis through October, the volume of trade grew faster in the emerging economies than in the advanced economies for both exports (4.7% vs. 3.6%) and imports (5.4% vs. 2.9%).
  • 3. At a new record high of 134.6 for the world trade index in October, the volume of global trade is now more than 10% above its previous cyclical peak of 122.2 in early 2008, and 37.3% above the recessionary cyclical low of 98 in May 2009.
  • 4. World industrial production (adjusted for price changes) increased in October on a monthly basis by 0.2% to a new record high, led by monthly growth of 0.6% in the emerging economies which offset the -0.2% decline in the advanced economies in October (see red line in chart).
  • 5. At an all-time high index level of 121.7 in October, world industrial output is now 7.2% above its previous recession-era peak in February 2008 of 113.5, and 23.7% above the recessionary low of 98.4 in February 2009.

Trans Pacific Partnership - Paul Krugman argues that the Trans Pacific Partnership is no big deal: I’ve been getting a fair bit of correspondence wondering why I haven’t written about the negotiations for a Trans Pacific PartnershipThe answer is that I’ve been having a hard time figuring out why this deal is especially important. …The big talk about TPP isn’t that silly. But my starting point for things like this is that most conventional barriers to trade — tariffs, import quotas, and so on — are already quite low, so that it’s hard to get big effects out of lowering them still further.  OK, I don’t want to be too dismissive. But so far, I haven’t seen anything to justify the hype, positive or negative.Via Mark Thoma, ralmond said…The three most worrying things I’ve heard about this treaty:

    • 1. It would allow corporations to sue countries for damages (in a corporation friendly court of arbitration) if they changed laws which caused economic damage to the country. This would effectively stop any new environmental or labor protection laws.
    • 2. It extends the life of patents and copyrights and removes a lot of the fair use carve outs (e.g., translating formats for blind or deaf). It may be worse than that copyright law they were trying to ram down our throats two years ago before the internet protests stopped it.
    • 3. It removes capitol controls, so that countries would not be able to put up emergency capital control to avoid spillovers from financial crises.

Of course, the negotiations aren’t finished, so all of this is up in the air. But why all the secrecy? These provisions have potentially big impact so they need to be fully negotiated, not fast tracked. Especially if the trade barrier stuff is not such a big deal.

Max Baucus move to China raises US doubts over trade negotiations - President Barack Obama’s attempt to push through legislation allowing for the swift passage of trade deals in Congress has been clouded by his nomination of senator Max Baucus as ambassador to China, removing a supporter of the effort on Capitol Hill. Mr Baucus, a veteran Democratic lawmaker from Montana, is chairman of the Senate finance committee, and after months of delay, aides have signalled that he intends to introduce a bipartisan trade bill with Orrin Hatch, the top Republican on the panel, early next year. But if confirmed to the China post, Mr Baucus would soon be leaving and vacating his chairmanship of the committee, taking him out of what is expected to be a fierce political battle to gain congressional approval for the so-called Trade Promotion Authority. Also known as a “fast track” bill, TPA sets negotiating objectives for the administration in trade talks, in exchange for a promise that once signed, the agreements will move through the legislature on a quick timetable and with no amendments. TPA, which lapsed in 2007, is seen as essential if Mr Obama is to deliver on his ambitious second-term trade agenda, including sweeping deals with 11 other Pacific nations – known as the Trans-Pacific Partnership – and the EU. Mr Baucus is known for being a supporter and architect of TPA and a key advocate for trade liberalisation within the Democratic party, where many can be very sceptical of the benefits of more open trade. But his most likely replacement at the helm of the Senate finance committee is Ron Wyden, the Democratic senator from Oregon, who has more mixed views on trade. 

Government sees Pacific trade pact talks taking time (Reuters) - Negotiations on a trade pact between a dozen countries around the Pacific Rim will take whatever time they need as the deal has to be both ambitious and comprehensive, U.S. trade representative Michael Froman said on Saturday. The U.S.-backed deal, which Washington had wanted to conclude this year, aims to establish a free-trade bloc stretching from Vietnam to Chile and Japan, encompassing about 800 million people and almost 40 percent of the global economy. But differences over farm tariffs between the United States and Japan have proved to be one of the major roadblocks and it will now not be finalized this year.More far-reaching than other deals, the TPP pact is aimed at going beyond tariffs on physical trade and it will try to regulate sensitive areas such as government procurement and give companies more rights to sue. One problem area is the United States and Japan's disagreement over Japan's long-stated aims to exempt five sensitive farm products - rice, wheat, beef and pork, dairy products and sugar - from the scrapping of tariffs. 

Yet Another Trade Deal Outrage - There is yet another outrage against citizens of nations.  This time the plan is to allow corporations to sue nation-states when they do not like their labor and environmental laws.  This nefarious agenda is currently being negotiated between the United States and the EU.  The trade agreements Transatlantic Trade and Investment Partnership, or TTIP, and TAFTA, the Transatlantic Free Trade Agreement is where these new corporate powers would be activitated. This is a modified version of the Multilateral Agreement on Investment which caused uproar and protests in the mid 90's.  Like most things multinational corporations want, it's back again. Imagine what would happen if foreign companies could sue governments directly for cash compensation over earnings lost because of strict labour or environmental legislation. Since July the European Union and the United States have been negotiating the Transatlantic Trade and Investment Partnership (TTIP) or Transatlantic Free Trade Agreement (TAFTA), a modified version of the MAI under which existing legislation on both sides of the Atlantic will have to conform to the free trade norms established by and for large US and EU corporations, with failure to do so punishable by trade sanctions or the payment of millions of dollars in compensation to corporations. Over and over again we see sovereign nations hand over their sovereignty, rights and laws to multinational corporations through trade treaties.  Clearly corporations do not have to declare war on nations, they simply supersede the rights of nations by negotiating more bad trade deals.

Midsize Cities in Poland Develop as Service Hubs for Outsourcing Industry - Mr. Wegielewski, 29, found a job close to home in an industry that has become one of the largest employers in Poland: outsourcing. He is a project leader in data and system analysis for Infosys, the Indian outsourcing giant with a big office here that serves clients in Amsterdam, London and New York, among other business capitals. Infosys, based in Bangalore, has its largest site outside India here. About 2,000 people work in a new office building overlooking a traffic circle named for Solidarity, the trade union movement that led Poland out of Communism. “A lot of my colleagues left,” Mr. Wegielewski said in English. “I wanted to stay.” In fact, Lodz, a former textile manufacturing center with a population of about 740,000, is just one of several Polish cities that have become service hubs for an international corporate clientele that values Poland’s well-educated and often multilingual work force. In midsize cities like Wroclaw and Gdansk, Poles are doing back-office work not only for Indian outsourcing companies like Infosys, Wipro and Tata Consulting Services, but also for major corporations like IBM and banks including Citigroup and Bank of New York Mellon. About 110,000 people work in what is broadly known as the business services industry in Poland. The category includes outsourcers like Infosys that take over such functions as finance or information technology for customers, as well as banks and other companies that set up in-house operations to do their own back-office work.

Greece offers free electricity after firewood-induced smog causes health concerns  - Greek authorities on Monday offered free electricity to low-income families on certain days, after smog rose sharply as hard-hit residents increasingly shun fuel for cheaper firewood to heat their homes. The health ministry said it had finalised a plan originally announced in November that offers free power to poorer households when smog exceeds safety levels. The move came after another weekend of extensive wood-burning that choked skies in Athens and other main cities.In the capital’s northern suburbs, particulate matter was double the normal level for the area and approached what authorities have set as the “alarm” threshold of 150 milligrammes per cubic metre. Authorities said a pollution warning issued when cold temperatures were forecast for this past weekend seemed to have helped control the pollution. Greeks have turned to burning wood as energy prices have soared over the last two years thanks to tax hikes required by Greece’s EU-IMF loan bailout.

IMF: Cyprus’ growth may be hampered for a decade - CYPRUS’ efforts to extricate itself from its massive debt could weigh on output for the next decade, the IMF warned yesterday in a review in which it said the island was well on track in its economic adjustment programme. The International Monetary Fund (IMF) and the EU have provided it with €10 billion in aid. In its second progress review, the IMF said the programme was on track and Cyprus’ recession, although severe, was shallower than expected. A modest economic recovery in the euro zone was helping through increased trade. The fund in early December trimmed its forecast for the island’s contraction to 7.7 per cent from 8.7 per cent. But it stuck by its initial forecast for a cumulative economic contraction of 13 percent for the 2013-2014 period.Years of fiscal slippage and a banking system heavily exposed to debt-crippled Greece took Cyprus to the brink of financial meltdown. Its banks chalked up massive losses on an EU-endorsed restructuring of Greek sovereign debt, to make that country’s debt mountain more manageable, but exacerbating Cyprus’ problems.Cyprus shut down one insolvent bank and confiscated deposits to boost the capital buffers at another when the IMF and the EU refused to use taxpayers’ money to recapitalise the lenders. It was the euro zone’s first such ‘bail-in’ process, in which depositors were forced to help bail out their banks. The €10 billion euros in aid is mainly for fiscal purposes. The IMF said the fall in Cyprus’s gross domestic product was expected to be steeper, and the subsequent recovery slower, than in most other eurozone programme countries.

Italian Families' Spent 11% Less On Christmas Gifts In 2013 - According to pundits, 2012 was the worst year for the Eurozone's peripheral economies, only worse than the just as tumultuous 2011, while 2013 was - if only listens to Europe's propaganda masters - a year of recovery thanks to the ECB's "whatever it takes" mentality. Which fails to explain why families in recession-battered Italy spent 11.4% less on gifts this Christmas than last year and one in five households did without presents completely, according to the consumers' group Federconsumatori estimated on Thursday. From ANSA:The group said the Italian households spent an average of 131 euros each on gifts for a total of 3.35 billion euros. Another consumers' association, Codacons, said overall Christmas spending, including expenditure on food and drink as well as gifts, was down 8% this year with respect to 2012. According to Codacons' data, spending on gifts was 15% down on last year

French Hope Dashed As Joblessness Surges Back Towards Record High - For the second time in 6 months, French joblessness has re-surged back towards record highs, dashing the hopes and dreams of a European recovery. The first time it was thousands of texts that didn't get sent that implied joblessness dropped, this time, no excuse and we push back to within 2k of the all-time high unemployment in France. As Germany heads inexorably in the other direction, one can only hope the French President does not decide to take matters into his own hands and 'draft' the youth into employment.

French unemployment rises to 3.29m -- The eurozone's second-largest economy is on the brink of another recession after a 0.1% decline in third-quarter GDP was compounded by poor manufacturing numbers for November. The unemployment data for the same month, confirmed the downbeat outlook as the ministry of work announced an additional 17,800 job-seekers signed on last month after a small drop in October. The new figures bring the number of unemployed in mainland France to 3.29 million, taking it to more than 10.5% of the working population. The small rise in November was marked in all age groups, including the under-25s, who have been targeted by a new government contract scheme. The minor drop in October of 20,500 people was the first time the total had fallen since April 2011. Halting the rise of unemployment in France was described as Hollande's "primary objective" since he was elected president in 2012. France's Socialist leader has promised to get unemployment falling by year-end, although according to official forecasts it will not start to decline until the middle of next year.

Chancellor Urges Reforms to Preserve Euro - In her first parliamentary speech since her re-election for a third term on Tuesday, she warned that Europe needed to take further action to make the euro zone crisis-proof. "I know that pushing through treaty changes in the member states can be difficult, but if you want more Europe, you have to be prepared to develop it further," Merkel said. Germany wants closer economic policy coordination and will push at a summit of European Union leaders on Thursday and Friday for members to agree binding contracts with the European Commission to implement further reforms. It is also pushing for changes to the Lisbon Treaty to give greater European control over policy. Germany's closest ally in Europe, France, opposes such a move, as do other member states. "European unity remains one of the most important tasks of the grand coalition," said Merkel. "Germany is only strong if Europe is strong." She said she would fight an EU probe announced on Wednesday into exemptions from a green energy surcharge for some 2,000 German companies. The European Commission is examining whether the exemptions, totalling some €5 billion and granted to heavy energy users like the steel industry, were unfair and should be repaid. The German government would not tolerate a weakening of German industry or job losses, she said. "Germany wants to remain a strong industrial location, we need competitive companies," she said. "This is about companies and when it's about companies, it's about jobs."

Turkey becomes the first victim of the Fed Taper -  The Turkish lira has tumbled to a record low amid a deepening political crisis in Ankara, the first emerging market domino to wobble as the US Federal Reserve starts to wind down global dollar stimulus.  The currency has weakened by 6pc against the euro over the last two days, culminating a 25pc fall this year. Foreign funds have cut holdings of Turkish debt by a quarter since the May.Turkey has gone from star performer to 'sick man' of the emerging market block as the Fed begins to taper bond purchases, a move that threatens to set off a further rotation of funds back into US dollar assets.

Some notes on the UK recovery - The latest national accounts data we have is for 2013 Q3. Between 2012Q4 and 2013Q3 real GDP increased by 2.1% (actual, not annual rate). Not a great number, but it represented three continuous quarters of solid growth, which we had not seen since 2007. So where did this growth come from? The good news is that investment over that same period rose by 4%. (This and all subsequent figures are the actual 2013Q3/2012Q4 percentage growth rate.) Business investment increased (2.7%), public investment did not (0.5%), but dwellings investment rose by 8%. The bad news is that exports rose by only 0.1%. Government consumption increased by 1.0%.  Over half of the increase in GDP was down to a 1.8% rise in consumption. Not huge, but significant because it represented a large fall in the savings ratio, as this chart shows.  The large increase in saving since 2009 is a major factor behind the recession. The recovery this year is in large part because the savings ratio has begun to fall. We should be cautious here, because data on the savings ratio is notoriously subject to revision. However if we look at the main component of income, compensation of employees, this rose by 3.4%, while nominal consumption rose by 4.4%, again indicating a reduction in savings.    So the recovery so far is essentially down to less saving/more borrowing, with a minor contribution from investment in dwellings (house building). As Duncan Weldon suggests, the Funding for Lending scheme may be an important factor here. However it may also just be the coming to an end of a balance sheet adjustment, with consumers getting their debts and savings nearer a place they want them to be following the financial crash.

 British Economic Triumphalism in Perspective, by Menzie Chinn: Prime Minister Osborne has lauded the recent UK growth numbers as validation for the policy of austerity [1] (recently relaxed, although he doesn't mention that). ... I think it useful to compare the US and the UK. The former embarked upon a policy of fiscal stimulus, and then retrenchment, but nothing compared to the retrenchment implemented in the latter. And in the US, per capita GDP growth was much more rapid than in the UK. The gap between the two series is 7.3% as of 2013Q3. So, the growth in the UK now is merely digging the economy out of a big hole dug for itself in the search of expansionary fiscal contraction. [2].