XGOP4Hillary

(http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home)

Forget the happy pabulum the daily media feed us. Welcome to reality. Our financial sector has pulled in half a trillion between the Feds and outside capital. No one can find a bottom. At the same time they are refusing to lend to each other or to consumers/small business. They are readjusting their balance sheets. This is all necessary. It is also quite painful and shows no sign of ending. The ripples from the credit crunch are working their way through the economy with no end in sight. To them must be added the inflationary pressures from the commodity explosion. Now none of this is per se inflationary. To build an inflationary cycle the higher prices must lead to higher wages as more money is used to maintain consumption. We are not doing that beyond some silly symbolic USG checks. So what will happen is obvious. If people must spend more for gas, heating oil and the groceries they will spend less for everything else. That everything else will include debt. Faced with feeding the family or letting the credit card default and the answer is obvious. They will also walk away from homes with negative equity. These are the ripples to fear, not inflation. We will go through a period of reduced expenditure, massive debt default/mortgage default and a nasty populace that will figure out that a small segment of the population in the big cities creamed up all the gains on the upside of the last two bubbles and then handed off the debts to be nationalized on the downside. The deregulation/lower taxes/markets uber alles orthodoxy as about run its course. By refusing in the name of ideological purity and naked greed to discipline the financial industry they will trigger a new round of statist populism. Now the normal response to this would be to argue for good Republican administrators who at least can run a welfare state prudently. After W selling governance as a Republican virtue is a joke. What does this mean?
1. The next four years will be worse than Carter's four regardless of who wins in November
2. They will be worse in different ways depending on whether McCain or Obama wins. If McCain the stalemate will be over the blame. If Obama wins [the more probable outcome] expect an explosion when fiscal and financial realities show that the unmet spending wishes of the traditional liberals collide with the economic mess W leaves behind. The economic mess is worse than Iraq. We can run away from Iraq. There are huge costs in doing so but we can. We cannot run away from the US. The trigger to all this is going to be health care. Obama and the national Dems are mostly running an empty slogan campaign of just saying they will change everything W did. Should work. However one of the few firm markers they have put down is on healthcare. The fantasy is that they can cover the cost by a mix of repealing the Bush tax cuts and ending the Iraq war. When that money proves to be needed just to stem the collapsing Federal deficit the war within the Democratic caucus should be nuclear.

(http://www.ibdeditorial.com/IBDArticles.aspx?id=295225814367283)

If this weren't so sad it would be pathetically funny. IBD is supposed to be part of our professional business press. This is supposed to be an intelligent analysis. It is actually what I will scoop out of my feline overlord's box in a day or two. It is feces.

Mercantilist states buying Treasury bills is NOT investment in the US. It is a place to park surplus dollars. Japan does not grow slowly because it has a trade surplus. It grew extremely rapidly in the 70's and 80's and also had a trade surplus. It created an asset bubble when it revalued the yen in 85 and created a deflationary disaster when it blew up the bubble. A mixture of structural problems, demographics and bad policy decisions have kept it in a two decade long depression.

Germany also had large surpluses with giant growth, medium growth and no growth. Germany also has structural problems. They are less severe than Japan's and the German demographic trap isn't as severe but they are also a more open market than Japan and feel the effects of structurally high wage and business operation costs more than Japan does.

Foreign investment is a GOOD thing when it is actual investement in new plant, equipment etc. It can be good when it is portfolio investemnt [there are too many variables to do a definite yes or no - this is one of those questions that require a multihanded economist and a lot of quite specific detail]. Just having foreigners pile up T-bills is a sign of weakness and is not sustainable. The economic problems of this decade stem from the US living beyond its means and from Asia Inc. practicing mercantilism.

The world has no net wish for more dollars. The world needs for the giant pool of surplus dollars to be reduced. Both need a US trade surplus. Absent this we are adding fuel to a forrest fire.