Merry Christmas

More Profits, Less Welfare

Lucienne Bloch, Land of Plenty, woodcut, ca 1935.  Lucienne Bloch was in the WPA and worked with muralist Diego Rivera in the 1930s.

While Congress is working on half-measures to reform the US system of health insurance, I ran across these news stories about how our health care and welfare systems are working.  We always hear myths about America's systems of health and welfare:  You can depend on health insurers to protect your health.  Anyone can get the medications that they need.  America wouldn't let children go hungry.  The reality is anything but.

Aetna Is Forcing 600,000-Plus to Lose Coverage in Effort to Raise Profits

In a third-quarter earnings conference call, officials at Aetna announced that the health insururer is planning to force up to 650,000 clients to drop their coverage next year in order to raise to meet profit expectations.  They predicted that the company would lose between 300,000 and 350,000 members next year from its national account as well as another 300,000 from smaller group accounts.  Aetna's third quarter earnings were up 26 percent year over year, but if they price more families out of insurance, they can do better.

Unburied Bodies Tell the Tale of Detroit -- A City in Despair

Things are bad in Detroit.  The murder rate is soaring. The school system is in receivership. The city treasury is $300 million short.  The city cannot reliably provide rubbish collection and other basic services. Thousands of houses are abandoned.  Entire shopping districts lie boarded up.  Auto manufacturing plants have been abandoned for years.

Can it get worse?  It just did.  People are dying from their poverty, and not even receiving burials.

In June, the $21,000 annual county budget to bury Detroit’s unclaimed bodies ran out. Many there cannot affort to bury their family members, and the city managed to provide burial in the past. Now that the city is in financial straits, the bodies are piling up in the morgue now.

What has alarmed medical examiners at the mortuary is that most of the dead died of natural causes. It is evidence, they believe, of people who could not afford medical insurance and medicines and whose families can now not afford to bury them.

Many people cannot afford health insurance ... and they are dying because of it.  Does anyone doubt that the US needs national health insurance for all the people?

The Safety Net Is Failing Needy Americans

Four organizations -- The Institute for Policy Studies, the Center for Community Change, Jobs With Justice, and Legal Momentum -- have released a study showing how the nation's social welfare system is failing millions of Americans during the Great Recession, just as the need is greatest.  Here are highlights from Battered by the Storm: How the Safety Net is Failing Americans and How to Fix It.

Temporary Assistance to Needy Families (TANF) is supposed to be our nation’s last line of defense against falling into the depths of poverty.

Yet this program is so deeply inadequate that by 2008, the number of needy children receiving TANF fell to only 22 percent. Under the pre-“welfare reform” system of Aid to Families with Dependent Children (AFDC) in 1995, 62 percent of poor children were benefiting. Eligibility criteria are set at sub-poverty levels in some states, making poor children ineligible, and barriers such as lack of childcare and lack of access to employment have further kept poor children from receiving desperately needed economic assistance that a system such as TANF should provide.

The food stamp program is doing better, because it has responded to growing need by reaching more households.  Sadly, the average monthly benefit per person is only about $100.  The report asks: "How can our children be happy, healthy, and adequately nourished on that?"

The reason for this human misery lies in the political trend of the past 30 years that has benefitted the wealthiest Americans while reducing wages and increasing poverty for the rest.  With the onset of the Great Recession, we are seeing more poverty and likelihood of reprecussions for years to come.

Henri Matisse, Icarus

Eight Centuries of Financial Crises

Thomas Hart Benton, The Departure of the Joads, 1940.  Oil painting commissioned by 20th Century Fox to advertise their film production of John Steinbeck's novel, The Grapes of Wrath.

As behavioral economists know well, humans suffer from biases that cause them to overweight the present and the recent past in their reasoning.  If one's biases have been based on a period of good economic times, it is not surprising that many will be unprepared and suffer greatly during a general crisis.  Those wanting to place the present financial crisis in a long-term historical context may wish to read a fascinating, recently-released study from the National Bureau of Economic Research -- This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, by Carmen M. Reinhart of the University of Maryland and Kenneth S. Rogoff of Harvard University.  Quotes of some of the key findings, with my comments:

We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies.

The current crisis is nothing unique, because disruptive financial crises have occurred from time to time over the centuries.  Maybe it is prudent to live one's life as if financial and economic disaster is a real possibility (like avoiding massive debts, saving money, etc.).

Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors.

People have limited memories and tend to treat the recent past as "normal".  Those living in good times will hardly be prepared for extreme adverse events, unless they consciously review the historical record.

We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses.

In other words, the current crisis is highly typical.  Problems started in US and spread to the rest of the world.  Within the US, the crisis started in the financial centers, including the large mortgage brokers and investment banks, spread into markets for securitized mortgages and credit default swaps, and snowballed into problems for Main Street and the entire nation.  A lack of proper regulatory oversight permitted critical financial institutions to operate without consideration to risk management and precipitate a massive crisis.

Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

Just because US hasn't experienced inflation, exchange rate crashes, or currency debasements yet, we can't ignore these possibilities.  Conditions are still in place for the crisis to morph into new phenomena.  Debt is being transferred from the financial system to the balance sheet of the Fed.  Most private debt (home mortgages, commercial real estate, credit cards, etc.) has hardly been touched yet.  There is a distinct risk that more crises could come soon.

The authors looked in particular detail at the years 1800 to 2006, where the data are the most complete:

Aside from the current lull, one fact that jumps out from the figure are the long periods where a high percentage of all countries are in a state of default or restructuring.

Countries are connected financially, now as in the past.  We should be on the lookout for further breakdowns as the crisis spreads and strains build on weak points throughout the world.   East European countries have built huge debts with West European banks.  Will this be the next place to crack?

Serial default on external debt—that is, repeated sovereign default—is the norm throughout every region in the world, even including Asia and Europe.

Soverign default isn't just possible, it is common.  Countries like France and Spain have defaulted multiple times in the past.  In view of the problems faced by a number of governments around the world (not just the US), we should be prepared for more shocks to come to the financial system.

Our extensive new dataset also confirms the prevailing view among economists that global economic factors, including commodity prices and center country interest rates, play a major role in precipitating sovereign debt crises.

If you have been worrying about these kinds of risks, you weren't off the mark.  Despite worries about the long-term sustainability of the US debt, there are many other countries around the world where sovereign risks are greater and more immediate.  Whenever central banks raise short-term interest rates in anticipation of economic recovery, there will be countries and corporations that will be unable to withstand the shock.

Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

Capital mobility is one of the hallmarks of the present era of globalization.  However, our world has undergone earlier eras of globalization, accompanied both by capital flows and episodes of financial crises.  In fact, the present era's flows of instantaneous information seem pale in their impact, compared to the flow of material goods loosed on the world by industrialization and the age of steam in the nineteenth century.   We are not unique, and we would do well to consider the lessons of past crises.

Yet, the government’s gain to unexpected inflation often derives at least as much from capital losses that are inflicted on holders of long-term government bonds.

The US response to the financial crisis seems to have done little but increase the risks of new bubbles.   Is anyone worried that the US might try to inflate its way out of its debt problems?  Is anyone worried about a bubble in US Treasuries?  Of course they are.

Watteau, The Embarcation for Cythera, 1717.  Cythera is one of the Ionian islands and in antiquity was site of a shrine to Aphrodite.  Watteau is playing on a popular notion viewing Cythera as a fictional place where the power of love eliminated petty conflicts and people could live harmoniously and engage in amorous pursuits.  This idea followed the humanist views of the age of reason, whereby human beings were seen as perfectable and capable of achieving greater happiness.  In the midst of this dreamy optimism, the lower classes lived desperate lives under the thumb of the aristocracy.  In the painting, the elegantly attired rich await their departure for Cythera.  After their departure from the dust bowl, the Joads faced desperation, disillusion, and rejection.

Caryatids

Porch of the Caryatids, the Erectheon, Athens (author's photo)

Architecturally, a caryatid is a female figure acting as a column to hold up a structure. In a more figurative sense, I can't help thinking how much these caryatids on the Acropolis remind me of the American people. Our special burden isn't architectural, of course. It is debt, public and personal.

For some of us the burden is immediate and acute. The fallout of the financial crisis has left many unemployed, buried in debt, and foreclosed or at risk of foreclosure. States and cities are going broke as their tax base has withered. The elderly who lived prudently and saved their money are being punished by a financial system that keeps savings interest rates low, but quickly loans funds to speculators.

As for the rest of America, those not being crushed by debt, most of us are probably not overly worried about debt. But that may be a mistake. Since the start of the 21st century, Federal government debt has been rising due to lax fiscal policy, tax breaks for the rich, subpar economic growth, funding endless wars, and many other reasons, political and economic. Most recently, bailouts of our reckless financial sector ballooned the Federal debt to previously unimaginable levels that should give us all pause for our futures. Meanwhile, a recession has reduced the tax base from which to pay for the ballooning national debt. Even as economic growth shifts overseas, policies to renew economic growth seem lacking.

Now that the national debt is ballooning, and the economic capacity to service the debt is declining, our creditors seem to be growing increasingly worried. If they come to believe that they won't be paid back anything close to 100 cents on the dollar, they may look elsewhere to invest. That dollar could tank, interest rates rise, and the resultant defaults send the economy into a deep depression.

Rodin transformed the architectural convention of the female form supporting weight in the Fallen Caryatid Carrying Her Stone. In her fatigue, the caryatid can no longer support her weight. As she is crushed under the stone, what is going through her head?

Those who have lost jobs, homes, or lifetime savings know what it is like to support a weight too heavy to endure. The rest of us should care, because we are all caryatids now.

Fallen Caryatid Carrying Her Stone, Auguste Rodin, Musee Rodin, Paris

No American Dream without Social Mobility

The American Dream

Income disparities in America have been growing for years as the very rich got richer and the rest of society stagnated economically. But the American Dream is till alive, isn't it? You can still advance based on your abilities and not your family background, can't you?

It's All Based on Social Mobility

We like to think of America as a land of opportunity, where anyone can succeed no matter how rich or poor he or she starts out in life. Unfortunately, America does not compare well to other advanced countries when it comes to the basic precondition for the American Dream, social mobility. There are many advanced countries where the social rank of a child's family means a lot less than it does in America for that child's educational achievement and chances of future economic advancement.

New Data from the OECD

Now comes a report from the Organization for Economic Cooperation and Development examining social mobility in the advanced economies. Orsetta Causa and Asa Johansson, the authors of Intergenerational Social Mobility, find that there are many advanced countries where the economic conditions of a child's family mean a lot less than they do in America for that child's future educational achievement and economic advancement in life.

What They Found

The influence of parental background on individual earnings varies widely across OECD countries, but low mobility across generations, as measured by a close link between parent’s and children’s earnings, is particularly pronounced in the United Kingdom, Italy, the United States and France. Mobility is higher in the Nordic countries, Australia and Canada.

The influence of parental socio-economic status on students’ achievement in secondary education is particularly strong in the United States, France and Belgium, while it is weaker in some Nordic countries, as well as Korea and Canada.

Inequalities in secondary cognitive skills are likely to translate into inequalities in post-secondary educational achievement and subsequent wage inequality in the labour market.

The Role of Social Policy

According to the report, any measure that reduces inequality will make it easier for individuals to break free of the constraints of their backgrounds. More progressive income taxation and higher short-term unemployment benefits were found to be helpful. Both were associated with a looser link between parental background and outcomes for children's cognitive skills and wages. If children are to succeed based on their own merits, they need equal access to the means of self-help.

Good for Economic Growth

Not only is social mobility fair, but it can be good for all of society. The report points out "the ability of an economy to continuously allocate human resources to their best use can have important effects on economic performance". The better the opportunity to succeed on your own merits, the better your skills will be employed in the economy. By understanding how economic growth and equal opportunity are mutually supporting, we can design policies to encourage both.

Worrying Trends in Income Inequality

With the gap between rich and poor growing so rapidly, it is no surprise ifthe American Dream is fading. A 2008 OECD report found that this trend is persistent and getting worse rapidly. (See Growing Unequal? Income Distribution and Poverty in OECD Countries, Country Note: United States.) The trend goes back to the 1970s, but since 2000, income inequality has increased rapidly.

Rich households in America have been leaving both middle and poorer income groups behind. This has happened in many countries, but nowhere has this trend been so stark as in the United States.

The distribution of earnings widened by 20% since the mid-1980s which is more than in most other OECD countries. This is the main reason for widening inequality in America.

As a result, the United States is the country with the highest inequality level and poverty rate in the OECD, with the exception of Mexico and Turkey. Just consider the data: "The average income of the richest 10% is US$93,000 US$ in purchasing power parities, the highest level in the OECD. However, the poorest 10% of the US citizens have an income of US$5,800 US$ per year – about 20% lower than the average for OECD countries."

We Need to Overhaul Social and Economic Policy

No one wants his or her children at a disadvantage in life merely because they lack the advantages available to the rich. However, as the 2008 OECD report notes: "Redistribution of income by government plays a relatively minor role in the United States." Unless we design policies to increase social mobility, we will continue to underuse our society's human resources and suffer sub-par growth. Meanwhile, other nations are growing quickly, and their people are reaping the benefits.

We aren't a third world country -- not yet -- but we can do better. After all, we still see outselves as a world leader, and maybe we can act like a leader. Social stratification is growing in America, and we must act to reverse the trend if we are to preserve the American Dream.

Bush Exploited the Common People to Make the Rich Richer

As the Global Sociology blog notes, "stratification happens when the tax regime favors the transfer of wealth to the top". After years of growing income disparity between the rich and the rest of America, surely the federal government wouldn't exacerbate the problem would it? Well if it was the Bush administration, the answer is "yes".

The tax cuts sponsored by President George W. Bush lapse at the end of next year. Those cuts will have saved individuals, and cost the government, $2.34 trillion, according to The New York Times. Unfortunately, not every individual benefitted equally.

As the table above shows, a full 61.6% of the Bush tax cuts went to the top 20% of wage earners! Only 1.3% went to the bottom 20% of wage earners, and only 7.6% went to the next 20%. If you were in the middle quintile of US wage earners, you received about 11.8%, or about half of your "fair share".

This was income redistribution at its worst. The rich were in power, and their greed knew no limits. No wonder so many Americans have felt for years that their country is in danger of becoming another banana republic, because under Bush it sure looked like this country was dominated by an oligarchy of inherited wealth.

No, the right wing cannot justify the cuts as economic stimulus. Economic progress was stalled for years under Bush, and the majority of Americans are worse off than they were at the start of the decade. As the facts show, the tax cuts were nothing more than a scheme to transfer wealth to the rich, pure and simple.

Not only were benefits distributed unfairly through society, but reduced taxes mean reduced Federal tax revenues. You and I and everyone else in American with an income (if they are lucky enough to have one) is still paying off that deficit with our taxes now.

Fortunately, Bush's unfair tax cuts are lapsing now, but more will be needed to reverse the trend toward greater social stratification in America. Let's hope that America can get back on the path to social justice and economic growth for everybody.

Investing in America's Future

The Problem is Waste

A frequent theme on this site is that today's financial crisis lie is the direct result of a longstanding misallocation of resources into unproductive ends. Current consumption, larger houses, etc. were preferred to savings and investment in the future, even if families and governments buried themselves in debt.

What the President Said

In "American Blew It, Will Obama?", we quoted the President's realistic State of the Union Speech about the incredibly short-sighted policies that led us into this mess:

In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election.

Despite years of waste, maybe we could have muddled through if it hadn't been for the kleptocratic policies promoted by the preceding administration. As the President said:

A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway.

What We Said

Not only did these policies weaken the American middle class, but the diversion of precious resources away from more fundamental investments left the nation less competitive economically. As we pointed out in "Mis-Allocated Resources":

One of the issues brought to the fore by the present financial crisis is the extent to which America's productive capacity has been hollowed out. . . . Houses, shopping malls, internet concept stocks -- all were bubbles that wasted billions of dollars that could have funded productive, forward-looking activities.

In other words, we borrowed against our futures through leveraged speculation rather than investing in basics like R&D, training the workforce, etc.

New Support from the Financial Mainline

It seems that the mainline financial community is coming to agree with this point of view. In his latest monthly commentary, "Midnight Candles", PIMCO's Bill Gross cited some statistics compiled by his organization:

The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades.

Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services.

A long history marred only by negative givebacks during recessions in the early 1990s, 2001–2002, and 2008–2009, produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually.

We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds.

Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been.

In other words, by leveraging up in stocks and other paper assets, we deleveraged our GDP, and by a huge amount.

The Only Solution

To repair America's decline, we must get at the root cause -- misdirection of resources. We can't continue to emphasize the financial sector of the economy. We must invest in the things that will make us productive, which are human potential, intellectual property, and productive capacity. This is the only path to a future that will benefit all the American people.

The Barbarous Relic -- "I Just Buy It"

John Maynard Keynes, whose ideas have such an important place in modern macroeconomics, referred to gold as a "barbarous relic" in his 1924 work Monetary Reform and in a 1944 speech to the House of Lords. With the decline of the gold standard for currencies, one might think that gold is little more than a "barbarous relic", having little interest to any but jewelers, electronics fabricators, and commodity futures traders.

Yet with the decline of the gold standard for currencies, the modern world faces a situation in which central banks can create their fiat currencies at will. In the wake of the financial crisis, they have been doing a lot of that lately. If new dollars, euros, etc. are not consumed in acts of deleveraging, as they have been to some extent so far, currency holders (like you and I) may start to become concerned that their dollars, euros, etc. will become worth less relative to real things that are less easy to create. In other words, they may worry that the necessary inputs to their lives and their industries -- energy, food, metals -- will become more expensive in monetary terms.



Perhaps this is why gold the "barbarous relic" attracts interest today and often seems to trade on the basis of perceived risk rather than on the basic supply and demand, or interest rates that determine carring costs for future delivery. But given such a tenous perception as risk, would anyone want to hold gold as a significant portion of his portfolio for very long? When perceived risk is such a personal matter, what complicated strategy would one need for deciding when to buy and when to sell? For most of us, gold seems too risky itself to hold with confidence.

If we look at Commodity Online, we see that famed investor Jim Rogers said of gold "If it goes down I'll buy some more, and if it goes up I'll buy some more. I periodically buy some gold. I don't have a method to it. I just buy it."

If one thinks that recent price ranges for gold are far below future prices, then he does not need a complicated strategy for buying and selling: "If it goes down I'll buy some more, and if it goes up I'll buy some more."

So, there you have a strategy for accumulating and holding gold as a hedge for the loss of value of the currencies and other financial assets created by mere humans. The strategy is insensitive to fluctuations in price: "I periodically buy some gold. I don't have a method to it."

The deflationary forces of a deep recession give little indication of future inflation, especially as so many people are saving their dollars and buying US Treasury securities for safety now. Indeed, Treasury prices seem insensitive to the impending flood of issuance. That is the present, however. If you think that the world's reserve currency, the US dollar, will be worth much less in the future, you might want to consider other assets, such as gold, and a trading strategy. Gold -- "I just buy it".

Health Care in the US -- Inefficient and Discriminatory

No Public Option. President Obama has apparently taken the "public option" for US health care off the table -- in other words, whatever health care reform the Obama administration is able to engineer, it won't be a public program providing universal care with the Federal government as single payer.

Who Wins, Who Loses. The big health care business special corporate interests must be greatly relieved. With the help of their right-wing ideologues, they have finally paid off enough members of Congress to get their way. The American people are the real losers, because the system will not get the fundamental reform that it requires.

Why We Need Health Reform. If you need more evidence that the US health system is in need of fundamental reform, just consider the above chart from the World Health Organization, comparing the health of citizens of the US, UK, France, and Singapore. It shows how poorly the US health system performs relatively to other advanced nations.

The systems compared by WHO. The health systems in the UK and France are publicly funded, universal, and government run. The US system is half public and half private, where no one is guaranteed health coverage. The Singapore system is another part-public, part-private hybrid system, where the government provides most care for those who are least economically advantaged, and costs are variously shared between the government and the rest of the population.

Effectiveness. The US has the lowest life expectancy of the countries compared. This is no surprise, because there is little promotion of disease prevention, little outreach to those who are in chronic need, and little attention to promoting healthy life styles and good health practices. It is easy to conclude that, given the rich resources available, the US system is not effective at promoting and delivering good health.

Efficiency. Of the countries compared, the US expends the highest percentage of its GDP on health care. It is easy to see that the US system is highly inefficient at delivering health.

Equity. In the US, only 10% of non-Hispanic whites are without health insurance. 16.8% of Asians, 19.5% of blacks, and 32.1% of Hispanics are without health insurance. If the statistics divide so strongly along ethnic lines, it is clear that the US system is highly unequal.

Why the Right Opposes Health Reform. Health reform isn't welfare for the rich, that's why. Billions for Wall Street? No problem. Never mind that government programs are paid for by the people's taxes and are supposed to be for the public good. Billions for the public good? If it really helps the people, it's "socialism". Socialism for the rich is ok here.

Why Public Options Are Vilified. Ever notice how Americans say that they encourage entrepreneurial risk taking, but they only consider the upside of the risk? Rich entrepreneurs are wonderful, but if you take a risk and fail, obviously you didn't try hard enough. In fact, you are so lazy and stupid that you no longer deserve the right to life and liberty. No health care for you. Not that it's their fault, but neither do your kids. It is convenient to have people to blame.

Why Vested Interests Call It "Socialism". Powerful vested interests are trying to use twisted rhetoric to set the terms of the health care debate, and right-wing ideologues are happy to play along. It is very convenient for the powerful to taint public health systems as doctrinally "socialist", because they think that they can divert the American people from discussing the real issues at stake. If no one compares the economic and health benefits of alternative systems of organization, they won't notice how inefficient and unequal our current US system is. There really are alternatives to our inefficient, unequal system.

Why We Need a Public System. The only way to reduce health-care costs is to to provide health care consumers with the power to negotiate costs with their doctors, hospitals, drug companies, and others who provide the goods and services. This means a system of sufficient scale and create an authority that will enable private insurers to negotiate effectively ... or else let the Federal government do the negotiating itself. And the only way to promote freedom, equality, and opportunity in the US with an affordable system is to have a public health care system that provides care for all of us.

No Exit

Not the financial Terminators, we hope

Mr Bernanke's Testimony. In Congressional testimony last week, Federal Reserve Chairman Ben Bernanke tried to put to rest the widespread concerns that the Fed has no "exit strategy" from the unprecedented degree of monetary easing and fiscal stimulus currently underway. Many commentators seem greatly relieved by the Chairman's testimony, which identified many of the monetary tightening mechanisms in the Fed's arsenal. Others were not impressed.

The Fed's Tightening Mechanisms. The Fed's inventory of assets includes short-term Treasury bills, which it can sell in order to soak up excess any excess liquidity in the hands of the public and thereby reduce inflationary pressures. The Fed can also encourage banks to hold excess funds (and not loan them to the public) by raising the interest rate that it offers member banks on overnight deposits. These kinds of tightening mechanisms are well known, and it is remarkable that so many observers seemed to be reassured by the Chairman's testimony.

Near-Term Deflationary Pressures. It is true that there is little apparent risk of inflation in the US in the near term. Deflationary forces are likely to persist for some months, or longer, for many reasons. Levels of debt are very high and money entering the financial system is being used for deleveraging and not for real economic activity. Overseas holders of US Treasuries are interested in supporting their own economies by keeping their currencies low relative to the dollar, so as to encourage exports. Debtors are defaulting in increasing numbers, and levels of economic activity are still declining.

Disciples of Bush asleep at the switch again!

Long-Term Debt Problems. Despite the near-term comfort, there are very real long-term risks. The off-balance sheet obligations of Medicare, Medicaid, Social Security, and other programs are huge and growing. The US shows little political will to prevent the train wreck that will occur when runaway promises threaten to turn into a runaway debt load.

Debt Reduction Problems. To make things worse, the economy may stay weak for years, making it even harder to pay for the financial bailouts, let alone pay for expensive social programs. What if the economy is still weak when the interest load starts to become unbearable for the US? Would the Fed defend the dollar by soaking up excess liquidity and risk sending the US into another depression? A depression is hardly the time to raise interest rates.

The Financial Terminator? California's current budget problems may be a forwarning of things to come for the US as a whole. There are clear imbalances in the state's long-term obligations and its ability to fund them. However, the state's supposed budget "solution" fails to cut costs or raise taxes enough to solve the long-term imbalances already built into the system.

The similarities to the growing budget burdens of the US are worrying for the US dollar. Like an army of financial Terminators, creditors do not treat spendthrift debtors kindly.

Closer to the Breaking Point?

Darius III encounters Alexander at the Battle of Gaugamela, detail from mosaic in the House of the Faun, Pompeii

The AP reported today that the administration's annual midsummer budget update — usually scheduled for mid-July — has been put off until the middle of next month, "giving rise to speculation the White House is delaying the bad news at least until Congress leaves town on its August 7 summer recess".

The delay is raising worries that the budget update will reveal what we already know -- "higher deficits and unemployment and slower growth than projected in President Barack Obama's budget in February and update in May". The AP story suggests that the release is being delayed because it could complicate his efforts to get his signature health care and global-warming proposals through Congress.

Investors need to worry about market implications.

More economic weakness would depress stock markets and drive hot money into dollars and Treasuries as safe harbors. That has been the usual play on news of economic weakness. But everyone already knows that the economy is weaker than the Obama administration forecasted.

Besides, the current meme is the continuing growth of China, accompanied by hot money flowing into speculative markets like commodities. Maybe the risks of a surprising budget update lie in a different direction.

Real news would be to reveal an even worse position than anticipated with the Federal budget. If worries arose about the ability to fund the deficit, investors would flee Treasuries, sell the dollar, and seek safety in the traditional safe haven -- gold.

Mis-Allocated Resources

Lest we forget, one of the reasons that the financial crisis is having such a deep impact on America's economy is the lack of underlying vigor in that very economy. Make no mistake, the immediate issues relate to growing government debt, sky-high consumer debt, and the breakdown of the financial system. But would we have piled up so much debt if economic growth had been greater? Would US trade have been so imbalanced if we had had goods and services to provide that the rest of the world wanted? Would we face such a low probability of ever paying American's debts (approaching zero now) if our economy were more competitive?

One of the issues brought to the fore by the present financial crisis is the extent to which America's productive capacity has been hollowed out. Now there is no doubt that the US cannot compete against the titans of East Asia.

The US needs to fix these problems, but how? Let's look at how we got into this mess. A lot of ink has been written on the immediate financial crisis, but there is more involved than that.

Bubble after bubble has resulted in wasting this country's productive effort on assets that it doesn't need. Houses, shopping malls, internet concept stocks -- all were bubbles that wasted billions of dollars that could have funded productive, forward-looking activities. And yet there was little competition for those dollars, because little thought went into preparing the US for the future. Even as we watched the world changing around us, economic issue after economic issue was ignored while the nation blindly stumbled its way into indebtedness and obsolescence.

Yes, we have idly watched the world changing around us. First, the bombed-out industries of Europe and Japan caught up and then surpassed the US in many areas. Then undeveloped countries like China and the former European colonies caught fire and started on the path to development. If the emerging markets are developing basic industries that produce the same goods that US can produce, but at a fraction of the input costs, you know that the US has a serious challenge. US industries tried to adapt, but eventually even high tech industries migrated overseas. Emerging economies out-competed the US in autos, textiles, electronics, and other industries on which we once depended.

Once, you would have expected the US to respond to a changing world by maturing its economy to another level, either undercutting its competitors in established markets or using its technological and educational resources to innovate and develop products and markets. After World War II the US had a tremendous lead in technology, industrial capacity, research and development, and education to serve as the basis innovation.

But the US let its supposedly enduring advantages erode away. Policy focused instead on keeping Americans happy and comfortable, and not on preparing for the future. In recognition of this new role for the citizenry, we decided to refer to ourselves as "consumers" rather than as "citizens". Consumers let themselves be lulled into a false sense of security. When economic challenges arose overseas, consumers responded to an eroding standard of living first with two-job families, and then by accumulating debt.

Divisive politics fanned fears and kept voters' attention focused away from the real challenges facing the country. Concerns with debt, both personal and national, were scorned as old-fashioned. Serious coordination of economic growth was viewed as too "socialist" for a country like America. Laissez-faire doctrine ran unchecked and landed us where we are today, the victims and perpetrators of a financial crisis.

Along the way, no serious thought was given to building a long-term foundation for a growing and competitive economy. Our industrial capabilities aged and dwindled. American innovations were exploited to the advantage of nations with nimbler businesses, cheaper labor, and access to capital markets that now serve the entire world. New US growth went into service industries that fed the consumer and left the US uncompetitive.

Now that the US is saddled with growing debt loads, an uncompetitive economy leaves few alternatives for responding to the crisis. Building a competitive nation takes a long time.
Of course, the thought of investing for the future is futile now, because we cannot afford the investment. Few can afford advanced education, and the technological lead is gradually moving more overseas. If the US is becoming a banana republic economically, it is also falling toward the lower tiers in science, engineering, education, and health -- all of the things we need to build up our human resources.

Beyond the obvious low interest rates that prompted all the borrowing and the asset bubbles, what kind of errors contributed to this situation? Some are on the front pages, but others are not. Let's see . . .

Students were motivated to study for MBA and became little managers. No one wanted to be a scientist or engineer. No one wanted to do real work. No one wanted to develop new knowledge or apply knowledge to innovate new products.

What about all of the effort devoted to building bigger and bigger houses? Who really needs all of that space? Prudence was left by the wayside when people engage in consumption arms races with their neighors. Vanity and lack of regard for the future drove people to live at the edge of affordability and risk going over the edge, which many eventually did.

What could we have done with all of the resources that went into building unneeded housing space? If we had spend the money on other activities, we could have bought infrastructure, an educated work force, research and development, or modern production systems. All would have made us more competitive and furthered future growth.

It wasn't just housing. A consumer society needs lots of stores, and retail companies waged their own arms race in expanding the available shopping space. Why did the US need so much more retail space than other countries need? Was it because the citizen needed to be distracted from political reality by a fantasy world? A recent New York Times article cites the book Retrofitting Suburbia that the US had 20 square feet per capita of retail space in 2003, while the next largest amount was 13 square feet for Canada. Sweden had only 3 square feet per capita. Did we really need so much retail space? Much of it is sitting vacant now. What if we had allocated the economic resources not to the unneeded houses and shops, but rather to the activites that I mentioned earlier -- infrastructure, an educated work force, research and development, or modern production systems? Maybe we would be more productive and able to pay our bills. All it would have taken was a little thought for the future and less political exploitation of the citizenry.

Many laissez-faire extremists say that Government has no role in making such decisions. Let the markets decide, they say, and you are a Communist if you disagree. Well, there are no historical data to support their extreme position, and we now see what lies those deluded extremists told. We see what hate they fomented to distract the electorate and hold onto their power. Sure, we need individual initiative in the economy, but it is now obvious that some government coordinating role is absolutely necessary. Unfortunately, whatever the way forward, it will be a long time before America digs itself out of the debt hole.

The Yuan Takes a Step Forward

It didn't make much of a ripple in the news at the time, but a couple of weeks ago Chinese regulators approved HSBC and Bank of East Asia as the first foreign banks to sell yuan-denominated bonds in Hong Kong.

A spokesman for HSBC China characterized sales of yuan bonds as provding a benchmark that other banks can use for yuan trade settlement, and a spokesman for Standard Chartered in Hong Kong said that the move will promote yuan liquidity. Benchmarks and liquidity will support China's goal to increase the use of the yuan for trade and investment, and to reduce risks of dependency on the US dollar.

As reported on Bloomberg, China announced a pilot project on April 8 to allow international trade settlement in the yuan in Shanghai and four cities in Guangdong province. Although Hong Kong's official currency is the Hong Kong dollar, bank deposits denominated in yuan have been accepted in the city since 2004.

If the process continues, China will eventually establish the enviable position of routinely settling international trades in yuan. Readily pricing trade goods in yuan would reduce China's need to maintain a narrow band on the exchange rate with the US dollar.

While the ability to sell yuan bonds in Hong Kong is hardly the same as making the yuan freely convertible to other currencies, it is a step in that direction. Given the rapid economic growth of China, it seems only a matter of time until the yuan is established as a major international currency. Such an event would be another step in the gradual but inexorable process of lessening the world's dependence on the US dollar as the common unit for pricing in international trade.

Over time, that will mean yet greater erosion in the premium that international banks and traders place on holding dollars -- i.e., more dollar weakness and a decline in American influence relative to developing countries like China.

Marc Faber's Latest Advice

It's always fun to read "Dr Doom" Marc Faber's investment thoughts, although it is not always clear if he is being serious or just trying to attract attention with extremely bearish views. Witness his recent Bloomberg interview in which he predicted that the US is doomed to hyperinflation on the order of Zimbabwe's.

Faber's most recent subscriber newsletter avoids mentioning the hyperinflationary extremes of Zimbabwe, but it is still negative on the US in the long term. In a story on FT.com/Alphaville, blogger Gwen Robinson summarized a few points from Faber's recent subscription newsletter.

After the recent rapid advance of stocks worlwide, Fabers sees them in the short term as either moving sideways or mildly correcting, although he does not expect the downside in the advanced markets to exceed the lows of last March, or the lows in emerging markets to exceed the lows of late last year. Although he likes neither the US dollar nor Treasury bonds long-term, in the short-term Faber sees both as oversold and due for a rebound. Both should rebound as safe-haven plays if the stock market corrects in the near term.

Faber hedged his short-term views of stocks, however. He cited insider selling and the net issuance of shares as reasons to avoid stocks right now, but because so many money managers have missed the spring stock rally, Faber believes that they “could lose their patience and their sudden rush into long positions could lead to another stock market upside explosion.”

Faber's longer-term views are less equivocal. Because he still sees the US fiscal deficit as posing a risk of accelerating inflation in the next few years, he advises as follows:

1. Shift from US dollars into Canadian and Asian currencies.


2. Keep accumulating precious metals.


3. Move out of US government bonds in favor of commodities, commodity-related companies, and hard assets in general.

This viewpoint (declining US, bond bear) is becoming more prevalent these days. You might think of that as a contrary indicator, but just because it is becoming more prevalent, doesn't mean it is wrong. Faber has been dismissed as "Dr Doom", but sometimes a bearish strategy is an appropriate stance. Is it a prudent course of action now, given the facts available to us?

SEC Sues Angelo Mozilo

The government is finally going after the most prominent of the senior executive fraudsters responsible for the subprime mortgage crisis. The SEC has filed a civil suit against former Countrywide CEO Angelo Mozilo, plus his former CFO and COO, for allegedly profiting personally while keeping the home lender’s deteriorating finances from the public as the subprime mortgage crisis unfolded.

Readers will remember that stockholders and employees suffered when Countrywide's finances and stock price deteriorated to the point that it had to be acquired by Bank of America. Pension funds, investment banks, and other holders of securitized mortgages originated by Countrywide also suffered when the risks of those mortgages became known. Everyone has suffered from the resulting credit crisis.

According to Bloomberg , the SEC said that while publicly reassuring investors about the quality of his loans, Mozilo issued “dire” internal warnings and engaged in insider trading accelerating stock sales, profiting by $140 million. Penalties sought by the SEC include fines and forfeiture of profits.

Everyone hates Mozilo for his arrogance, but there is apparently good evidence of his willful wrongdoing. An internal email described a “particularly profitable subprime product as ‘toxic.’” He also wrote that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, the SEC said. The SEC's suit plainly says: “Each of the defendants was aware, but failed to disclose, that Countrywide’s current business model was unsustainable.”

We can only hope that criminal charges are not far off.

Retail Sales Fell "Unexpectedly" in April

Retail sales are like other economic statistics in having too much variability to base conclusions on the month-to-month changes. In fact, thanks to financial deleveraging, the economy contracting is so strongly that the monthly numbers aren't even news.

Not to be daunted by the obvious, the media felt compelled to perform their mindless monthly ritual, adding no economic value to the data -- witness this pointless headline from Bloomberg today: U.S. Economy: Retail Sales Unexpectedly Fell in April.

Retail sales fell unexpectedly? On which planet? Who was expecting increased retail sales when more people lost their jobs in April? When more families lost their homes? When there are five unemployed people for every job opening? When Chrysler is in bankruptcy and GM is about to go bankrupt? Well, Bloomberg must believe it, because they repeated it in the body of the report:

Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to conserve cash.

Maybe Bloomberg just likes to emphasize the redundancy of this kind of non-news, because they contradicted themselves in the same report, admitting what everyone (including the "experts") already knows -- that consumer spending is dead and will remain that way for a long time:

Fewer jobs, falling home values and the biggest loss of household wealth on record may limit consumers’ ability to spend for years, analysts said.

If anyone has an income, he or she is saving as much of it as possible, because consumers have caught on that the bubble-induced good-old-days are gone. They have too much debt to deleverage, and their expectations for the future are greatly reduced. When the US returns to positive economic growth, it won't be at the rates that everyone came to take for granted. You can bet that consumer spending will be reduced "for years".

Too bad for the malls, because this nation is over-built with retail space that can't be supported any more. Look for retail occupancy rates to continue shrinking.

On the bright side, investors can think about which retailers will survive, how they will tighten their operations, and when they might start growing their businesses again. When economic activity has reached bottom, retailers will start to show positive year-over-year sales comparisons. If valuations are low enough then, maybe people will even start to think about buying the retail stocks ... that is, if would-be investors have saved enough money to afford more than putting food on their tables.

Why a Flu Pandemic Is Disruptive

As we have said in an earlier post, an influenza pandemic has the potential for disrupting the critical infrastructure of our society, such as health care, utilities, and public safety. Any disruption to these essential services can make everyday life more difficult, disrupt our businesses, create additional health risks, and reinforce the economic downturn.

Why would critical infrastructure be threatened? A pandemic could potentially be disruptive because it has the potential to sicken so many of the essential personnel responsible for our critical infrastructure -- as well as the rest of us. The Homeland Security Council has made it very plain that the effect on workplace absenteeism could be severe throughout society:

There will be up to 40% workplace absenteeism at the peak of the pandemic in any given community -- National Strategy for Pandemic Influenza

In our highly interconnected world, many factors will combine to keep people out of the workplace:

1. Up to 1/3 of the workforce can be expected to be sick over the course of the pandemic (which will come in waves); some will die


2. Some who are well will stay home to care for sick family members (most healthcare will be supportive care)


3. Government and workplace policies to control the spread of the disease will keep others home


4. As the pandemic worsens, fear will keep others home


5. Persons exposed to the disease may be quarantined, even if they are not sick


6. If schools are closed, some will stay home to care for children


7. Official disease containment measures could limit commerce further: Non-essential businesses may be closed, and non-essential workers furloughed


8. Border crossings could be limited, thus limiting the availability of parts and materials needed by industry, as well as limiting access to customers in other countries


9. Effects will multiply as supply chains are disrupted. One business's closure will have a domino effect on its customers, its customers' customers, etc.

In today's highly interconnected world, a worsening in any of these factors will act on other parts of society to create even greater friction to the normal working of society. With all these interactions, perhaps it is plausible that the cumulative effect could reach the 40% absenteeism estimated in the National Strategy for Pandemic Influenza. If that happens, we will all need to be very well prepared.

WHO Says Pandemic Is Imminent -- Prepare Now

As I noted in an earlier post, a severe influenza pandemic can potentially do more than make us sick; it can have such a pervasive effect on our society that everyday commerce and public services are disrupted to some extent. A severe disruption in some services (utilities, medical care, etc.) could further endanger lives. A severe disruption to commerce could stifle economic activity -- just when there is a glimmer of possible recovery from a severe economic downturn.

Today, the WHO has raised its alert from Phase 4 to Phase 5. Phase 5 is only one step removed from the global pandemic phase. On its web site, the WHO defines Phase 5 like this:

Phase 5 is characterized by human-to-human spread of the virus into at least two countries in one WHO region. While most countries will not be affected at this stage, the declaration of Phase 5 is a strong signal that a pandemic is imminent and that the time to finalize the organization, communication, and implementation of the planned mitigation measures is short.

So, the WHO says that a pandemic is imminent, and there is little time to finish implementing whatever actions you need to mitigate the effects of the pandemic. It's time to take pandemic preparations seriously for your family, business, and community. If you, your business, or your community has not planned any mitigation measures, then you are far behind the curve. The time to act is now, but you still need to figure out what to do before you can make preparations.

What to do? The US Government has provided planning guidelines and placed links to them on the home page of PandemicFlu.gov. There are separate links on that page to planning guidelines for families, businesses, hospitals, and communities. Take a look.

As the WHO said in its Phase 5 announcement, "Influenza pandemics must be taken seriously precisely because of their capacity to spread rapidly to every country in the world." A pandemic is not a sure thing, but when there is a real and rising risk of a catastrophic outcome, we need to take it seriously. We all know what happened to our financial system when catastrophic downside risks were ignored for far too long.

Flu Could Bring US to a Standstill

Just when some observers think that they see a glimmer of hope for recovery of the world economy, along comes the swine flu. Now the worry is that a disease of pandemic proportions could bring suppress economic activity even further and throw the world into an even deeper depression.

How bad could things get for the economy, really? The US government prepared a strategy for how to respond to a possible influenza pandemic, and we can turn to the report for an estimate.

The US government's Homeland Security Council published the National Strategy for Pandemic Influenza in 2005, and their Implementation Plan seriously considers the disruptive effects that a disease of pandemic proportions could have on health, commerce, and the overall functioning of our society.

How bad does the government think it could get? The Nationsl Strategy warns that the pandemic “will ultimately threaten all critical infrastructure by removing essential personnel from the workplace for weeks or months”.

Critical infrastructure refers not only to the hospitals, clinics, etc. needed to care for the ill, but also to the things that make our society run normally -- transportation, energy, telecommunications, finance, etc. Essential personnel include people who keep the systems running for our water, electricity, medical care, food, and other essentials of life.

A national strategy is fine, but how well will it be implemented if an influenza pandemic actually strikes? An effective response needs to reach down to see that life continues for each and ever one of us.

A lot depends on how well states, local communities, and industry have prepared for the emergency, and on how well they all coordinate. How prepared are your business and your community?

US Government Estimates for Influenza Pandemic

Now that everyone is thinking about the possibility of a swine flue pandemic, how bad could it get?

For educated estimates of the morbidity and mortality that the US could experience during an influenza pandemic, we can turn to the HHS Pandemic Influenza Plan, November 2005. This government plan was specifically avian influenza (H5N1) and not the swine flu virus (H1N1), but of course avian influenza remains a threat too, and the characteristics of a new virus are not predictable. The HHS plan provides the following estimates and bounds for the US, based on the statistics of three 20th century pandemics:

• Number of ill: 90 million (30% of population)
  
• Number requiring outpatient medical care: 45 million (45%-50% of the ill)
  
• Number hospitalized: 0.865 million - 9.9 million
  
• Number of deaths: 209,000 - 1,903,000

Estimates vary with the assumed severity of the disease, with the lesser numbers corresponding to a disease like the influenza pandemics of 1956 and 1968, and with the larger numbers corrresponding to the influenza pandemic of 1918.

Either way, a pandemic of these proportions would have a greatly crippling effect on society in several ways -- the proportion of the population ill and off work, the number of people demanding health care, and the number of deaths. US society is unaccustomed to coping with disruptions of this magnitude, and the consequences for our economy and security are worryingly difficult to estimate.

Swine Flu Pandemic Potential

The swine flu outbreak that started in Mexico has spread to several parts of the United States and may also have spread overseas. Swine flu is caused by the H1N1 influenza virus, a mixture of swine, avian, and human viruses. A report from Reuters cited experts saying that the outbreak is probably already widespread and impossible to contain, for these reasons:

1. This new strain of influenza has shown it can spread easily from person to person.
2. It has been found in several places and among people who had no known contact, which suggests there is an unseen chain of infection.
3. This can happen because (a) respiratory illnesses are so common that doctors rarely test patients for flu, and (b) people could have had the swine virus and never known it.
4. Another factor suggesting that the disease is spreading undetected is that in the United States it has so far only been found in people who had mild illness.
5. World Health Organization director Dr. Margaret Chan has said the new strain of H1N1 has the potential to become a pandemic strain because it does spread easily and does cause serious disease.
6. CDC experts note that while it is possible to contain an outbreak of disease that is in one limited area, once it is reported in widespread locations, the spread is impossible to control.
   

America Blew It ... Will Obama?

President Obama's State of the Nation speech said it, true and straight. The US has screwed itself into the ground, and we did it to ourselves:

"Now, if we’re honest with ourselves, we’ll admit that for too long, we have not always met these responsibilities – as a government or as a people."

The President also acknowledged that our decline has been ongoing for some time:

"The fact is, our economy did not fall into decline overnight."

But he didn't say how far the US has fallen. At the end of World War II, we were the only large industrial power in the world. Germany and Japan were in ruins. Britain and the Soviet Union had been bled dry. Europe would struggle for years, and the economic powerhouses of East Asia wouldn't appear for decades. A colonial legacy left much of the rest of the world undeveloped. In contrast, the US was powerful and prosperous.

Yet despite this tremendous head start, the US has let its competitors catch up, no matter how you define the race. Per capita income? Life expectancy? Educational achievement? Investment in renewable energy? Social support systems? We are not number 1 in any of these, and we are falling farther behind. As the President said:

"Our children will compete for jobs in a global economy that too many of our schools do not prepare them for."

Did we invest in our future with better education, research and development, advanced manufacturing processes? We played our superior hand by behaving like spoiled playboys and wasting our wealth on big homes, flashy cars, and immediate consumption. We had a privileged position in the world, and yet we lived beyond our means. We built up a mountain of debt, and now that mountain is suffocating us. As the President said, this country followed totally short-sighted policies:

"In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election."

As much as we wasted, maybe we could have muddled through if it hadn't been for the kleptocratic idiocies of the past few years:

"A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway."

This President is far too honest and outspoken. No wonder Wall Street hates him. The President also said how difficult the road back to prosperity is:

"The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth."

In other words, the solution is not government policy. We have to pay off our debt and work our way out of this hole. That will take years, so don't look for an immediate fix. Unfortunately, the administration isn't waiting for time to heal the wounds:

"Now is the time to act boldly and wisely . . . "

You mean by encouraging people to take out loans, spend their money, and incur more indebtedness? Isn't that how we got into this mess? This risks more and bigger bubbles.

"You see, the flow of credit is the lifeblood of our economy."

He means it. He's going to push money at the banks, no matter how much debt is piled onto the taxpayers and their children.

"You should also know that the money you’ve deposited in banks across the country is safe; your insurance is secure; and you can rely on the continued operation of our financial system."

On the contrary, the share prices of the big banks indicate indicate anything but trust in their solvency. The only way we can have faith in the security of our bank deposits is if the Federal Government adds to the dwindling reserves of its deposit insurance. How much more government debt will that pile up?

"So I ask this Congress to join me in doing whatever proves necessary."

Whatever proves necessary . . . as if he is backed into a corner, with no plan and ready to do anything, no matter the long term consequences.

Japanese Economy Decelerates

Hakuin Ekaku (1685 to 1768) drawing of Bodidharma, who brought Zen Buddhism to China, with Japanese calligraphy: “Point directly at the human mind, see one's nature, and become Buddha.”

In the aptly-named article Japan faces 'unimaginable' contraction the Financial Times announced several bad items of news about the Japanese economy today.

Kazuo Momma, head of the research and statistics department at the Bank of Japan, gave a speech today in which he provided an advance impression of Japan's fourth quarter 2008 economic product data, which are scheduled to be announced next week. Momma said "From October to December the scale of negative growth may have been unimaginable -- and we have to consider the possibility that there could be even greater decline between January and March."

Polls of economists suggest that the fourth quarter data may indeed be "unimaginable". They predict a fall in GDP of more than 3% from the previous quarter, or a decline of more than 10% at an annualized rate. A separate report by Tokyo Shoko Research said that the number of corporate bankruptcies in Japan rose 16% year-over-year in January, and total debts of failed companies rose 44% year over year.

One of the themes recently espoused in this blog is that many other nations are more vulnerable to the economic slowdown than is the US, and here we have evidence of this thesis from Japan. This is bad news for the US as for the rest of the world, because all economies are simultaneously providing decelerating feedback to each other.

Ito Jakuchu (1716-1800), Chrysanthemums by a Stream with Rocks