47 Concocting the Appearance of Recovery - Paul Craig Roberts

(1) Concocting the Appearance of Recovery - Paul Craig Roberts
(2) "Green Shoots" rally: No one is fooled by the fireworks on Wall Street - Mike Whitney
(3) Whistleblower tells of America's hidden health nightmare for its sick poor
(4) Real Health Care Reform - Universal Single-Payer
(5) Financial Crisis & Tectonic Shifts in the US-Japan Relationship - R Taggart Murphy
(6) US trade deficit widens

(1) Concocting the Appearance of Recovery - Paul Craig Roberts

Spinning the Economic News

By Paul Craig Roberts

August 12, 2009

http://www.counterpunch.org/roberts08122009.html

Last Friday a Bloomberg.com headline read: "U.S. Stocks Gain, Treasuries Drop as Unemployment Rate Declines".

Let’s have a look at the reported decline in the rate of unemployment. Do you believe that the US auto industry added 28,000 jobs in July amidst GM bankruptcy, sell-off and close-down of GM auto divisions, and demise of GM suppliers? No? Well, that’s what the Bureau of Labor Statistics reported.

The 28,000 new jobs were created by "seasonal adjustments." July is a month when jobs are automatically added by the BLS to seasonally smooth the layoffs of auto workers during July’s retooling for the new model year. This year most of the retooling did not occur, yet the annual seasonal adjustments did. Adjustments are also made for supporting industries, which are partially idled while auto production halts for retooling.

More phantom jobs were created by the "Birth-Death Model." The payroll jobs data contains guesses about the numbers of new startup company hires and jobs lost from business failures. Failed businesses don’t report the lost jobs (deaths), and new jobs from startups (births) are not captured in the reporting. The government estimates these numbers, but the estimates are based mainly on growth periods, not on recessionary times. Consequently, during economic downturns, the estimates from the Birth-Death Model overestimate the number of new startup jobs and underestimate the job loss.

The employment outlook was further improved by pushing another cadre of workers, who have been unemployed for too long, off the unemployment rolls. Remember that the long-term discouraged (people out of work for more than one year) are not counted as being in the work force. The length of the current downturn means that short-term discouraged workers, who are counted among the unemployed, are now moving into the long-term discouraged category, which simply erases their existence and lowers the measured rate of unemployment.

All sorts of distortions can find their way into the official statistics. For example, industrial production estimates are based on electricity consumption. Unusually hot weather, which causes a jump in air conditioning use, appears in the statistics as an increase in industrial output. Cool weather spells during summer reduces electricity use and results in a phantom drop in industrial output.

Nominal retail sales figures can increase from an uptick in inflation.

An increase in real GDP can be the result of underestimating inflation.

Other distortions come from the year to year comparisons. As time passes, new comparisons are no longer with previous peaks, but with more recent lows. Thus, reported declines are less severe than previously, which makes things sound better when they aren’t.

By spinning the financial news, the appearance of recovery is created, and this lures people back into the stock and real estate markets where they can lose the remainder of their wealth.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions. This fall CounterPunch/AK Press will publish Robert's War of the Worlds: How the Economy Was Lost. He can be reached at: PaulCraigRoberts@yahoo.com

(2) "Green Shoots" rally: No one is fooled by the fireworks on Wall Street - Mike Whitney

http://www.counterpunch.org/whitney08102009.html

August 10, 2009

It's a Planned Demolition
There is No Recession

By Mike Whitney

Credit is not flowing. In fact, credit is contracting. When credit contracts in a consumer-driven economy, bad things happen. Business investment drops, unemployment soars, earnings plunge, and GDP shrinks. The Fed has spent more than a trillion dollars trying to get consumers to start borrowing again, but without success. The country's credit engines are slowing to a crawl.

Fed chairman Ben Bernanke has increased excess reserves in the banking system by $800 billion, but lending is still slow. The banks are hoarding capital in order to deal with the losses from toxic assets, non performing loans, and a $3.5 trillion commercial real estate bubble that's following housing into the toilet. That's why the rate of bank failures is accelerating. 2010 will be even worse; the list is growing. It's a bloodbath.

The standards for conventional loans have gotten tougher while the pool of qualified credit-worthy borrowers has shrunk. That means less credit flowing into the system. The shadow banking system has been hobbled by the freeze in securitization and only provides a trifling portion of the credit needed to grow the economy. Bernanke's initiatives haven't made a bit of difference. Credit continues to shrivel.

The S&P 500 is up 50 per cent from its March lows. The financials, retail, materials and industrials are leading the pack. It's a "Green Shoots" bear market rally fueled by the Fed's Quantitative Easing (QE) which is forcing liquidity into the financial system and lifting equities. The same thing happened during the Great Depression. Stocks surged after 1929. Then the prevailing trend took hold and dragged the Dow down 89 per cent from its earlier highs. The S&P's March lows will be tested before the recession is over. Systemwide deleveraging is ongoing. The economy is resetting at a lower rate of activity.

No one is fooled by the fireworks on Wall Street. Consumer confidence is still falling. Everyone knows things are bad. Everyone knows the mainstream press is lying. The restaurants and malls are empty, the homeless shelters are bulging, and even the big-box stores have stopped hiring. The only "green shoots" are on Wall Street where everyone gets a handout from Uncle Sugar.

Bernanke has pulled out all the stops. He's lowered interest rates to zero, backstopped the entire financial system with $13 trillion, propped up insolvent financial institutions and monetized $1 trillion in mortgage-backed securities and US sovereign debt. Nothing has worked. Wages are falling, banks are cutting lines of credit, retirement savings have been slashed in half, and home equity losses continue to mount. Living standards can no longer be bandaged together with VISA or Diners Club cards. Household spending has to fit within one's salary. That's why retail, travel, home improvement, luxury items and hotels are all down double-digits. The money has dried up.

According to Bloomberg:

 "Borrowing by U.S. consumers dropped in June for the fifth straight month as the unemployment rate rose, getting loans remained difficult and households put off major purchases. Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.

 "A jobless rate near the highest in 26 years, stagnant wages and falling home values mean consumer spending... will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and unemployment is forecast to exceed 10 percent next year before retreating."

What a mess. The Fed has assumed near-dictatorial powers to fight a monster of its own making, and achieved nothing. The real economy is still dead in the water. Bernanke is not getting any traction from his zero-percent interest rates. His monetization program (QE) is just scaring off foreign creditors. On Friday, Marketwatch reported:

 "The Federal Reserve will probably allow its $300 billion Treasury-buying program to end over the next six weeks as signs of a housing recovery prompt the central bank to unwind one its most aggressive and unusual interventions into financial markets, big bond dealers say."

Right. Does anyone believe the housing market is recovering? In the first 6 months of 2009, there have already been 1.9 million foreclosures.

The Fed is abandoning the printing presses (presumably) because China told Geithner to stop printing money or they'd sell their US Treasuries. It's a wake-up call to Bernanke that the power is shifting from Washington to Beijing.

That puts Bernanke in a pickle. If he stops printing; interest rates will skyrocket, stocks will crash and housing prices will tumble. But if he continues, China will dump their Treasurys and there will be a run on the dollar. What to do? Either way, the malaise in the credit markets will persist and personal consumption will continue to sputter.

The basic problem is that consumers are buried beneath a mountain of debt and have no choice except to curtail their spending and begin to save. Currently, the the ratio of debt to personal disposable income, is 128 per cent, just a tad below its all-time high of 133 per cent in 2007. According to the Federal Reserve Bank of San Francisco's "Economic Letter: US Household Deleveraging and Future Consumption Growth":

 "The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period. In the long run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.

 "Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates." ("U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J. Lansing, FRBSF Economic Letter")

A careful reading of the FRBSF's Economic Letter shows why the economy will not bounce back. It's mathematically impossible. We've reached peak credit; consumers have to deleverage and patch their balance sheets. Household wealth has slipped $14 trillion since the crisis began. Home equity has dropped to 41 per cent (a new low) and joblessness is on the rise. By 2011, Deutsche Bank AG predicts that 48 per cent of all homeowners with a mortgage will be underwater. As the equity position of homeowners deteriorates, banks will further tighten credit and foreclosures will mushroom.

The executive board of the IMF does not share Wall Street's rosy view of the future, which is why it issued a memo that stated:

 "Directors observed that the crisis will have important implications for the role of the United States in the global economy. The U.S. consumer is unlikely to play the role of global "buyer of last resort" - other regions will need to play an increased role in supporting global growth."

The United States will not be the emerge as the center of global demand following the recession. Those days are over. The world is changing and the US role is getting smaller. As US markets become less attractive to foreign exporters, the dollar will lose its position as the world's reserve currency. As goes the dollar, so goes the empire. Want some advice: Learn Mandarin.

Sagging Employment: A "recoveryless" recovery

July's employment numbers came in better than expected (negative 247,000) lowering total unemployment from 9.5 per cent to 9.4 per cent. That's good. Things are getting worse at a slower pace. But what's striking about the BLS report is that there's no jobs surge in any sector of the economy. No signs of life. Outsourcing and offshoring are ongoing, and downsizing the path to profitability. That's why revenues are down while profits are up. Businesses everywhere are anticipating weaker demand. The jobs report is a one-off event; a lull in the storm before the layoffs resume.

Unemployment is rising, wages are falling and credit is contracting. All the money is flowing upwards to the gangsters at the top. Here's an excerpt from a recent Don Monkerud article that sums it all up:

 "During eight years of the Bush Administration, the 400 richest Americans, who now own more than the bottom 150 million Americans, increased their net worth by $700 billion. In 2005, the top one per cent claimed 22 per cent of the national income, while the top ten per cent took half of the total income, the largest share since 1928.

 "Over 40 per cent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. "control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 per cent of the sales, and collect over 70 per cent of the profits."

 ... In 1955, IRS records indicated the 400 richest people in the country were worth an average $12.6 million, adjusted for inflation. In 2006, the 400 richest increased their average to $263 million, representing an epochal shift of wealth upward in the U.S." ("Wealth Inequality destroys US Ideals" Don Monkerud, consortiumnews.com)

Working people are not being crushed by accident, but according to plan. It is the way the system is designed to work. Bernanke knows that sustained demand requires higher wages and a vital middle class. But Bernanke works for the banks, which is why the Fed's monetary policies reflect the goals of the investor class. Bubblenomics is not the way to a strong/sustainable economy, but it is an effective tool for shifting wealth from one class to another. The Fed's job is to facilitate that objective, which is why the economy is headed for the rocks.

The financial meltdown is the logical outcome of the Fed's monetary policies. That's why it's a mistake to call the current slump a "recession". It's not. It's a planned demolition.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

(3) Whistleblower tells of America's hidden health nightmare for its sick poor

From: Sandhya Jain <sandhya206@bol.net.in> Date: 11.08.2009 09:52 AM

Paul Harris

11 August 2009

http://www.truthout.org/072609R?n
http://www.vijayvaani.com/FrmPublicDisplayArticle.aspx?id=748

When an insurance firm boss saw a field hospital for the poor in Virginia, he knew he had to speak out. Here, he tells Paul Harris of his fears for Obama's bid to bring about radical change.

Wendell Potter can remember exactly when he took the first steps on his journey to becoming a whistleblower and turning against one of the most powerful industries in America.

It was July 2007 and Potter, a senior executive at giant US healthcare firm Cigna, was visiting relatives in the poverty-ridden mountain districts of northeast Tennessee. He saw an advert in a local paper for a touring free medical clinic at a fairground just across the state border in Wise County, Virginia.

Potter, who had worked at Cigna for 15 years, decided to check it out. What he saw appalled him. Hundreds of desperate people, most without any medical insurance, descended on the clinic from out of the hills. People queued in long lines to have the most basic medical procedures carried out free of charge. Some had driven more than 200 miles from Georgia. Many were treated in the open air. Potter took pictures of patients lying on trolleys on rain-soaked pavements.

For Potter it was a dreadful realisation that healthcare in America had failed millions of poor, sick people and that he, and the industry he worked for, did not care about the human cost of their relentless search for profits. "It was over-powering. It was just more than I could possibly have imagined could be happening in America," he told the Observer

Potter resigned shortly afterwards. Last month he testified in Congress, becoming one of the few industry executives to admit that what its critics say is true: healthcare insurance firms push up costs, buy politicians and refuse to pay out when many patients actually get sick. In chilling words he told a Senate committee: "I worked as a senior executive at health insurance companies and I saw how they confuse their customers and dump the sick: all so they can satisfy their Wall Street investors."

Potter's claims are at the centre of the biggest political crisis of Barack Obama's young presidency. Obama, faced with 47 million Americans without health insurance, has put reforming the system at the top of his agenda. If he succeeds, he will have pushed through one of the greatest changes to domestic policy of any president. If he fails, his presidency could be broken before it is even a year old.

Last week, in a sign of how high the stakes are, he addressed the nation in a live TV news conference. It is the sort of event usually reserved for a moment of deep national crisis, such as a terrorist attack. But Obama wanted to talk about healthcare. "This is about every family, every business and every taxpayer who continues to shoulder the burden of a problem that Washington has failed to solve for decades," he told the nation.

Obama's plans are now mired and the opponents of reform are winning. The Republican attack machine has cranked into gear, labelling reform as "socialist" and warning ordinary Americans that government bureaucrats, not doctors, will choose their medicines. The bill's opponents say the huge cost can only be paid by massive tax increases on ordinary Americans and that others will have their current healthcare plans taken away. Many centrist Democratic congressmen, wary of their conservative voters, are wavering. The legislation has failed to meet Obama's August deadline and is now delayed until after the summer recess. Many fear that this loss of momentum could kill it altogether.

To Potter that is no surprise. He has seen all this before. In his long years with Cigna he rose to be the company's top PR executive. He had an eagle-eye view of the industry's tactics of scuppering political efforts to get it to reform. "This is a very wealthy industry and they use PR very effectively. They manipulate public opinion and the news media and they have built up these relationships with all these politicians through campaign contributions," Potter said.

Potter was witness to the campaign against Michael Moore's healthcare documentary Sicko. The industry slammed the film as one-sided and politically motivated. Secret documents leaked from the American Health Insurance Plans, the industry's lobby group, detailed the plan to paint Moore as a fringe radical. Potter now says the film "hit the nail on the head". "The Michael Moore movie that I saw was full of truth," he admits.

Potter was also working for Cigna when it became embroiled in the case of Nataline Sarkisyan, whose family went public after Cigna refused to pay for a liver transplant that it considered "experimental" and therefore not covered by their policy. Cigna reversed this decision only hours before the Californian teenager died. "I wish I could have done more in that case," Potter said. ...

Obama has put his reputation on the line to persuade wavering Democrats and moderate Republicans to vote on legislation by August. The Senate has said this will not happen. That's a major blow, as it puts off the debate until September and could see the political momentum stall - The Observer

(4) Real Health Care Reform - Universal Single-Payer

By Stephen Lendman
 8-6-9

http://rense.com/general87/healt.htm

Organizations like Physicians for a National Health Program want Americans to have the same system in place in all other Western countries and elsewhere, including Venezuela, South Korea, Japan, Cuba, Brazil, Saudi Arabia, Costa Rica, Singapore, Taiwan, and Thailand. But not in America - the only industrialized country without it despite spending more than double per capita than the other 30 OECD countries and delivering less for it.

In a September 2007 report to Congress, the Congressional Research Service (CRS) compared 2004 US health care spending with other OECD countries:

-- America then averaged $6,102 per person, well over double the average $2,560 for OECD countries;

-- US health care spending was 15.3% of the economy compared to 8.9% on average for OECD countries; for Canada it was 9.9%; Germany - 10.6%; Great Britain - 8.1%; France - 10.5%; and Japan 8.0%;

-- "US prices for medical care commodities and services are significantly higher than in other countries (delivering comparable care) and serve as a key determinant of higher overall spending;" high insurance and drug costs are the most significant factors;

-- life expectancy in America is lower than in other OECD countries;

-- the US ranks 22nd on life expectancy at birth; post-65, it's 11th for men and 13th for women;

-- America has the third highest infant mortality rate after Turkey and Mexico;

-- heart disease, cancer, and respiratory diseases are the top OECD country causes of death; America ranks 17th for heart disease "despite (performing) substantially more invasive heart procedures than all the other (OECD) countries;"

-- quality of US health care isn't superior overall; nor do Americans "have substantially better access to health care resources, even putting aside the issue of the uninsured;" and

-- because of the cost, many Americans delay or forego treatment.

World Health Organization's (WHO) Ranking of World Health Systems

WHO ranks America 37th overall, behind Saudi Arabia, United Arab Emirates, Iceland, Malta, Colombia, Cyprus, Morocco and Costa Rica and about equal to Slovenia and Cuba.

In other measures, it has the US 24th on life expectancy, 72nd on level of health, 32nd in distribution of care, 54 - 55th in financial contribution fairness, 15th in overall goal attainment, and first in per capita amount spent. If Obamacare is adopted, it will drop America lower in world rankings by making its dysfunctional system worse.

In a 2007 Commonwealth Fund study comparing Australia, Canada, Germany, New Zealand, the UK and US, America ranks last as in its earlier studies on access, patient safety, efficiency, chronic care management, and equity. Most notable is its absence of universal coverage. Overall, the US ranks poorly on its ability to promote healthy lives through affordable, high quality care. Its for-profit system prevents it.

National Coalition on Health Care (NCHC) Data

Founded in 1990, NCHC is the "largest and most broadly representative alliance working to improve America's health care." Its membership includes Common Cause, Consumers Union, AARP, Children's Defense Fund, several labor unions, numerous medical groups, including the American Cancer Society, American Heart Association, and American Academy of Family Physicians, League of Women Voters, and National Council of La Raza. Below are data it reports on US health care coverage, costs and quality.

(1) Health insurance coverage:

-- most Americans have employer-provided insurance; costs are shared, and as industrial America became more service-based, employment no longer assures coverage, and when it does it's often woefully inadequate;

-- in 2007, about 46 million Americans were uninsured, and nearly 90 million (about one-third of the below-aged 65 population) lacked coverage during some portion of the year;

-- working adults with no insurance topped 20% in 2006; the same year (before today's economic crisis) 1.3 million full-time workers lost coverage; and

-- employment-based coverage was 62% in 2007; rising insurance costs are largely to blame; from 1999 - 2007, premiums rose 120%, over four times the rate of wage growth;

(2) Costs

-- annual costs are rising at twice the rate of inflation;

-- in 2007, it was about $2.4 trillion or $7900 per capita;

-- estimated 2017 spending is projected to be $4.3 trillion or 20% of GDP;

-- for 2008, the average cost of health insurance for a family of four was about $12,700; it topped $4700 for single coverage but is much higher for older singles and those with a history of poor health;

-- employee contributions to company-provided coverage rose 120% since 2000; out-of-pocket costs for deductibles and co-payments rose 115%;

-- medical expenses are the leading cause of personal bankruptcies;

-- in normal economic times, about 1.5 million families lose their homes annually ...

(5) Financial Crisis & Tectonic Shifts in the US-Japan Relationship - R Taggart Murphy

The Financial Crisis and the Tectonic Shifts in the US-Japan Relationship

R Taggart Murphy

{visit the link to see the graphs}

http://japanfocus.org/-R_Taggart-Murphy/3200

Daniel Okimoto has written an important article for the Asia Pacific Review (vol 16, #1, 2009, pp. 35-55) on the implications of the ongoing financial crisis for US capital dependence on Japan and China. Abridged versions of the article have appeared in both the Japanese and English language editions of the Asahi Shimbun. Okimoto's analysis provides a springboard for wider reflections on how the crisis is bringing on tectonic shifts in the US-Japan relationship – and ultimately may alter Japan's place in the world.

Right at the start of his piece, Okimoto reminds the reader of Japan's central role in financing US deficits. This reminder is needed because so much discussion of the issue today focuses exclusively on China's position as a lender to the United States. While it might seem impossible to exaggerate China's importance, many commentators manage to do just that. They present China's emergence as the key foreign purchaser of American government debt in this century as an event sui generis, ignoring the preceding decades in which it was Japan that played the central role in permitting Washington to run up deficits with impunity. And they overlook the degree to which significant elements of China's race to industrialization were consciously modeled on Japan's postwar experience – a model that called for the deliberate fostering of globally competitive export manufacturers and the accumulation and hoarding of the international reserves, principally dollars, earned through trade and current account surpluses.

Central Bank holdings of US Treasuries 2007/08

Okimoto makes no such mistakes. Taking an American perspective on the evolution of today's global financial architecture and the crisis it faces, he coins the label "mercantilist finance" to describe "a system that has allowed the US to leverage the broad base of its currency – the dollar, the dominant instrument for international transactions – so as to borrow massive sums of money to underwrite its soaring levels of debt." And he begins his analysis of this system with the US Occupation of Japan and the way it set the parameters for the subsequent unfolding of the postwar US -Japan relationship.

Okimoto calls this system "historically unique" since it features capital moving "from developing to developed regions, not the other way around." Okimoto emphasizes the sharp contrast with earlier global regimes in which the richest, most highly developed countries – e.g., Great Britain of the Victorian era – invested surplus capital in less developed parts of the world. Such a pattern to global capital flows makes intuitive sense, but in the last half-century, the flows have been reversed as the world's richest nation also became the world's leading debtor nation and consumer of capital. ...

Since one country's deficit is another's surplus, a fall in the US deficit means a fall in some other country's surplus – and that other country seems to be Japan. (As Michael Pettis notes, "China’s trade surplus has contracted very slowly – much more slowly than the contraction in the US trade deficit" -- see http://mpettis.com/ , July 29, 2009 – Pettis goes on to write that "China’s share of the US trade deficit has grown significantly. Since the US trade deficit is shrinking quickly, this means that other exporters are getting killed."). Japan is now running the first trade and current account deficits that that country has experienced since the late 1970s during the so-called Second Oil Shock.

Japan’s balance of trade

Thus the benefits Japan has been receiving from its participation in the dollar-based system have disappeared. Japan's export numbers are tumbling – bad news for an economy whose export sector has long been its primary engine of growth. Indeed the conventional wisdom now sees Japan's outlook as the worst of the three key players in the global dollar-based financial system – and, indeed, perhaps the darkest of all the major developed economies. It is a real challenge today to find anyone with anything positive to say about Japan's near-term economic future.

There is no mystery as to why. The one globally competitive area of the Japanese economy -- the manufacture of high-value added products for export -- is precisely the area that is hardest hit by the current downturn. America's Great Recession has not only shrunk Japan's leading overseas market for high-value added finished goods (automobiles perhaps the outstanding case in point), it is also playing havoc with its overseas markets for capital goods. Chinese factories, for example, had emerged in recent years as major buyers of Japanese machine tools and other capital equipment, but with their own sales into the American market plummeting, they are not placing many orders today for more equipment.

Meanwhile, other areas of the Japanese economy continue to be plagued by overstaffing and other inefficiencies – a legacy of Japan's understandable reluctance to undermine the institutions and practices that stave off widespread economic distress. The unwillingness to lay regular employees off even when there is nothing for them to do, the pressure on companies to bail out their suppliers and on financial institutions to keep credit flowing to near-bankrupt firms, widespread and seemingly wasteful public works spending – these constitute the actual fabric of Japan's safety net. In the absence of strong, explicit and comprehensive public sector social security arrangements, a government weakens them at its peril. Yet, so the conventional wisdom goes, by propping up so many inefficient firms, by discouraging a genuine market in corporate control from taking root - a market that would force companies to fire people and squeeze supplier costs or face loss of independence - Japan's governing elite prevents the emergence of a leaner, more productive economy.

But despite all these arrangements to re-assure Japanese households that they will not be made destitute, households nonetheless fear declining incomes, inadequate funds for retirement, and outright job loss. They have good reasons. Japan's population is aging rapidly; most middle-aged people are aware that the funds they themselves, their employers, and their government have put aside to finance their retirement are inadequate. Their children are having difficulty finding the desirable "lifetime employment" jobs of the past as companies turn increasingly to part-timers who can be easily laid off. So households don't spend; they don't take up the slack from diminishing export earnings. Japan's ends up with the worst of both worlds: a hugely expensive safety net that doesn't really allay economic insecurity. ...

But as Japan enters the unchartered territory of current account deficits with the collapse of its overseas markets, the paradoxical result is a rising yen. Japan has begun to liquidate the great horde of dollar reserves accumulated over the past half century – a process that is pretty much inevitable once the current account goes into deficit. But as Japan sells dollars, the result is to drive up the exchange rate of the yen, since the dollars Japan holds are being sold for yen. The stronger currency makes Japanese goods more expensive in global markets, further reducing the country's ability to do what it has done to pull itself out of every previous crisis from the end of the Korean War to the oil "shocks" of the 1970s and the bursting of the late-80s bubble: export like mad.

Okimoto notes that between 1982 and 2006, Japan earned some net $280 billion from its foreign reserve holdings, some 88% of which he says are in the form of US treasury and agency bonds. Okimoto reaches that $280 billion number by subtracting the $70 billion that the depreciation of the dollar against the yen has cost Japan from the positive spread or "carry" Japan has enjoyed between dollar and yen interest rates – some $350 billion. But the "carry" has largely vanished since the onset of the current crisis as the Federal Reserve has cut dollar interest rates to practically zero. Meanwhile, as the yen climbs, the exchange loss on the reserves threatens to accelerate.

In other words, as an era of current account deficits arrives for Japan, not only will the country be unable to continue building up its reserves, there is no longer any good economic reason for doing so. Japan will be losing money on its dollar reserves – if it isn't already – while the export markets they long helped keep afloat are shrinking (by holding its reserves in dollars, Japan was effectively financing its biggest export customer, the US). On top of it all, the Japanese government may well be forced to liquidate many of its existing dollar holdings in order to meet some portion of its galloping fiscal obligations.

Recent statistics show this is starting to happen. Japan's holdings of US Treasury securities have begun to fall significantly, dropping 1.3% between April and May, the latest month for which numbers are available. (link)These statistics indicate that China's official holdings at $802 billion are now markedly higher than Japan's official $677 billion. Because of widespread private sector holdings of dollar securities in Japan, Japan may still be a larger net lender to the US, but the significance here is in the trend. If this trend continues – and there is every reason to expect that it will – we will be seeing one of two things occur. Either the era of the dollar's run as the closest thing to a universal currency will end. Or the dollar will continue for some time as the world's money, but with China gradually replacing Japan as the primary external supporter of the American currency. ...

R. Taggart Murphy is Professor and Vice Chair, MBA Program in International Business, Tsukuba University (Tokyo Campus) and a coordinator of The Asia-Pacific Journal. He is the author of The Weight of the Yen and, with Akio Mikuni, of Japan's Policy Trap. He wrote this article for The Asia-Pacific Journal.

Recommended citation: R. Taggart Murphy, "The Financial Crisis and the Tectonic Shifts in the US-Japan Relationship," The Asia-Pacific Journal, Vol. 32-2-09, August 3, 2009.

(6) US trade deficit widens

http://online.wsj.com/article/SB125008008852125785.html?mod=googlenews_wsj

AUGUST 13, 2009

Oil Prices Widen Trade Gap As Imports and Exports Rise

BY NICHOLAS CASEY

The U.S. trade deficit widened in June, forced up by higher oil prices, as growth in both imports and exports signaled renewed life in global trade.

Total June exports rose 1.9% to $125.78 billion, with imports increasing 2.3% to $152.79 billion. That resulted in a trade deficit of $27.01 billion, up 4% from a slightly revised $25.97 billion in May, the Commerce Department reported Wednesday.

The deficit was largely due to energy prices, which have been on the rise again this summer. Adjusted for inflation, the trade deficit narrowed to its lowest level in 10 years.

"What we're having is a leveling out right now," said Joshua Shapiro, an economist with Maria Fiorini Ramirez Inc., an economic consulting firm. "The evidence is that we're in the stabilization phase."

U.S. energy-related imports rose to $22.4 billion from $17.7 billion in May, heavily influenced by a $7.96 spike in the price of a barrel of crude oil. But the figure also reflected increased energy consumption by American consumers; roughly 20 million more barrels of crude oil were imported in June than the month before.

U.S. imports for industrial supplies and materials increased by $3.9 billion, while bills for autos, parts and engines increased by roughly $850 million from the month before. Foods and beverages increased about $80 million from May.

Import decreases occurred for capital goods, such as industrial machinery and equipment, which fell about $75 million. Consumer goods such as toys and jewelry also took a hit, falling $1.7 billion. "Wholesalers and retailers are not quite certain when households will start visiting the malls again," Joel L. Naroff of Naroff Economic Advisors wrote in a report.

Export gains included industrial supplies and materials, which were up $1.2 billion; capital goods, which rose roughly $400 million; and foods and beverages, which rose $250 million. Exports of consumer products were largely flat.