David Broder's War

Dean Broder uncorks a rich defense of the People's Republic of China today, arguing that a trade war would ensue if the Obama Administration moves forward with tariffs on tire imports.

Many in business fear that this is the opening round in what could become a much larger and more dangerous trade war.

For now, the Chinese have threatened only minor retaliation, a cutback in imports of auto and chicken parts from the United States. But both sides have plenty of other, larger weapons they could deploy [...]

The danger is that once you strike the first blow against foreign competitors, you can't tell what will happen next. Obama has taken that risk, so fingers are crossed.

Oh noes, trade war! Except, no, China's consumer base offers little possibility for China to have the room to engage in retaliatory strikes.

Chinese consumers who buy $608 billion of goods from overseas are diminishing the prospects of a trade war with the U.S.

China’s imports, up 68 percent in five years, now amount to almost one-third of gross domestic product, according to World Bank data. The nation’s demand for foreign products is a boon for American companies, which exported $351 billion to China in the past five years.

U.S. President Barack Obama’s 35 percent tariff on tires from China spurred a Chinese investigation into prices of U.S. poultry and car products. Dangers of further escalation may be mitigated by the increasing benefit China provides the world economy. Poised to surpass Japan as No. 2 in GDP, its purchasing power is a lure to firms seeking new customers.

“As China depends more on domestic demand, its rise won’t be seen by the rest of the world to be as big a threat as some view it now,” said Shen Minggao, a former consultant to the World Bank who is chief economist in Hong Kong for the Greater China region at Citigroup Inc., the third-largest U.S. bank.

In fact, with respect to the one threat the PRC made, to look into "dumping" of chicken parts, the Chinese have such an appetite for chicken feet that they would practically revolt if the government tried to cut off imports.

The fact that China has demand and not just supply means that there is an equilibrium where trade laws can actually be enforced. That's all that's been done in this respect, and Dean Broder is just trying to protect the neoliberal consensus by arguing otherwise.

You Mean People With No Money Aren't Spending?

Economists, living in their bubble, managed to be surprised by this.

U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow.

Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

The credit crunch, stagnant incomes and declines in household wealth are casting doubt on the strength of the economic recovery. The arrival of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, as consumers delayed other purchases [...]

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.

I'm guessing that cash for clunkers was the only thing bringing anyone out to purchase something on credit. Otherwise, people simply don't have the money after years of wage stagnation and record unemployment. People are learning the "new normal" of frugality out of complete necessity. In the long run, living within means is a good thing; in the short run, it's debilitating to the US economy.

And it's another example of how economists are not living in the real world with their models and charts. They don't see anything wrong with corporations making massive profits off the backs of consumers living on credit, or how that entire system could fold like a house of cards. They viewed capitalism as a shiny object and never saw its potential pitfalls in an unregulated form.

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

Of course, their salaries in part depend on them not knowing these facts, as the Federal Reserve has essentially bought off the profession and tilted it toward the principles of the unfettered free market. Ryan Grim's article is a must-read.

...the head of China's sovereign wealth fund: "Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

Jobless Recoveries Aren't Recoveries

The President's poll numbers, which haven't slipped as much as has been reported if you take away crazy Zogby Internet polls (42%? Really, Zogby?), have little to do with his policies and much to do with the economy. Most political leaders are falling right now as the economic slump continues to worsen. The "recovery" that we're seeing is really more of a case of getting worse more slowly. The so-called "liberal interventions" that Obama has made in the economy clearly staved off a deep depression. Virtually everyone who's studied the issue would agree. But it's hard to prove a negative, and this is the source of Obama's troubles right now. For example, Joe Biden is right to say that the stimulus is working, but this is a difficult concept for people to wrap their heads around:

"The recovery act has played a significant role in changing the trajectory of our economy, and changing the conversation in this country," Biden said. "Instead of talking about the beginning of a depression, we are talking about the end of a recession."

Absolutely true, but if there are still no jobs, this won't register. People feel that the recession is still happening because, for their personal lives, it is. The rates of job loss have slowed but remain negative. That means less people working. That means less money available to spend. That means lower consumer spending. And so retailers feel the pinch, individuals feel the pinch, and even with economic growth, everyone feels like they're in a recession.

Jobs lag a recovery, so there's a chance for the White House to break out of this. But in recent times, the jobless recovery has become more and more prevalent. Know this - an economic "revival" which benefits elites and not the overall public will not be looked upon favorably. In fact, people will blame the President for failing to turn things around. You can put together all the white papers you want about the recovery meeting benchmarks, or whatever. But the only answer to the economic troubles are JOBS. If we don't value work over wealth in this country, we will not sustain an economic future.

...Biden's speech on the Recovery Act actually does some good message-building about the economy and the need for public investment, which is key.

We're also investing what everybody knows is necessary to build a 21st century economy. I have people sometimes say, aren't you guys doing too much? You know, Presidents in the past have been able to -- and I've been here for eight of them -- they've been able to take the problems that they have and segregate them -- said, we're going to take these two first. We'll put these other four or six or five aside, and we'll get to them next, because they know the status quo ante will pertain. But name me one problem that landed on the President's desk that allowed him to say, no, no, we're going to focus on this, and then in three years we'll get to this?

I say to my friends, does anybody think we can lead in the 21st century without a radically altered energy policy? Does anybody think we can sustain our position in the world without a radically altered education system, where we're no longer 17th in the world in the number of college graduates we graduate? Does anybody think we can sustain without radical change in the cost of health care in this country, and bending that curve? [...]

To state the obvious, we will emerge from this great recession. And I believe that is only -- that's necessary but not sufficient. We have to emerge better positioned to lead the world in the 21st century as we did in the 20th century.

Where the last cycle generated billions of dollars -- billions from investments made via high-speed trades, this cycle needs to make real investments in high-speed rail.

In the last cycle, "innovation" meant bundling and selling subprime mortgages. In this one, our innovations will bundle and sell technologies to produce clean, efficient, renewable energy.

Where the benefits of productivity have not grown in the past, from 2000 and 2007, productivity grew 20 percent; yet the middle-income households fell 3 percent, their income. In this cycle, we're determined to make sure that productivity doesn't elude the poor and the middle class. And this cycle must be one in which, once again, American workers get his or her fair share of the wealth they helped produce.

Meanwhile In The Real Economy

We could deliver health care and add a second stimulus and do a host of other things to improve the economy, but if numbers like this continue to be the norm, we're not going to get very far in fixing things.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
...
The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

What's more, a separate report says that foreclosures will peak at the end of 2010. That's when a certain set of midterm elections will be held.

Foreclosures hurt the economy really badly. But banks and lenders have made the calculation that it costs them less to foreclose than it does to modify terms of loans. Because if they reduce principal on the loans, their solvency would once again come into question. I know that the government's smiling because they didn't have to dip into an expected $250 billion earmarked in the budget to cover bank losses further, but that's only because reality has been papered over. The Federal Reserve and the FDIC and other government entities have basically covered the banks. But mass loan mods would expose them.

Which is why it isn't happening. And as a result, people suffer. And so does the real economy. As long as foreclosures continue, which leads eventually to higher unemployment and more foreclosures ina kind of death spiral, the American consumer will simply not have the wherewithal to spend at the rates necessary for recovery.

When you look at Obama's poll numbers, think in the context of the economy. It's always been the greatest predictor of national political performance. He inherited a mess, but if he cannot work it out over four years or give people a credible reason to believe he's acting in their interests, he'll be gone.

The Lingering L-Shaped Recession

The OECD has joined the "green shoots" caucus by affirming that signs of a recovery are imminent, and the President of the European Central Bank is openly talking about central bankers scaling back their support once this recovery hits.

I really don't know what these people are talking about. If they want signs, I can give them signs. And there are just as many on the down side of the ledger as there are on the up side. There's the second wave of the foreclosure crisis. And let's add the credit card default crisis nipping at its heels. As more layoffs accrue, less people have the ability to pay their bills; that's just axiomatic. And the stress tests calculated credit card losses at a lower level of unemployment that what could easily happen in an adverse scenario.

The banks have an incentive to make profits, despite these scenarios that would eat into them, because they can reduce their capital needs if profit inch higher. There's only one way for them to do that - reduce lending and hoard money, along with gouging customers with fees to increase profits.

Finally, there's this historic shift from spending to saving that has accompanied economic insecurity. Now, in the long term, saving needs to increase to a more manageable level. But the paradox of thrift in the short term is harmful to any recovery.

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE (personal consumption expenditures) of a rising saving rate?

I created the following scatter graph for the period from 1955 through Q1 2009. This compares the annual change in PCE with the annual change in the saving rate.

Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (no Immaculate recovery).

Let's recap: lower consumption, lower wages, higher unemployment leading to more credit card defaults, a potentially devastating second wave of foreclosures, and banks that must hoard capital and take profits, leading to less lending.

This is considered a GOOD outlook?

That only makes sense with a giant second stimulus, but the "green shoots" happy talk undercuts that option. Instead, I think Krugman is right - we're looking at half-steps that get the economy into some uneasy equilibrium without any serious recovery, and we just float for a decade.

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said.

"We're doing what the Japanese did in the nineties," he told a small group of reporters during a visit to Beijing.

He said it was not clear that China would suffer sub-par growth as a consequence of the fallout of the present crisis.

"I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent.

Without a second stimulus, I don't know how this ends.

Economic Tea Leaves (Not Tea Bags)

The Federal Reserve released a regional report showing some slight upticks in the economy in some regions and some sectors. Essentially they showed the economy falling at a slower rate. But they were alone among the spate of economic news over the past 48 hours.

Foreclosures went up 24% in March to its highest monthly total on record. Unemployment claims declined this week but are still at a very high level. And most startling, consumer prices fell for the first time since 1955 at the same time that local sales tax revenue fell dramatically. This is pretty common economics 101 - less demand, lower prices. But it risks a serious deflationary trap, despite the macroeconomic moves to print more money, which is typically inflationary. We are the opposite of a Weimar Republic right now.

The Labor Department said its closely watched Consumer Price Index fell 0.1 percent, after increasing 0.4 percent in February. Analysts polled by Reuters had forecast headline CPI rising 0.1 percent.

Core prices, which exclude food and energy items, rose 0.2 percent after rising by the same margin in February. That compared to analysts' prediction for a 0.1 percent increase. Core prices have risen by 0.2 percent for three months in a row. March core prices were lifted by increased costs for tobacco and vehicles.

On a year-over-year basis, consumer prices fell 0.4 percent in March, the first 12-month decline since August 1955, following a 0.2 percent increase the previous month. Core prices rose 1.8 percent year over year.

Since the entire world has built their export surplus on the banks of the American consumer, this severe drop in consumer spending has serious consequences for the world.

The facts are pretty straightforward. National economies rev up – or not – based on what business spends (known as investment), what households buy (consumption) and what is bought or sold between a country and the rest of the world.

The American household was the rock in all this [...]

Hence the delicately put, but nevertheless piercing, view from the European Central Bank, which would like to see a United States upturn as much as anyone in the world: “While households have been a powerful force in dampening the downturn in past recessions, the same may not be true in the current episode,” the central bank bulletin says.

It's not going to be the same, and the world will have to find new markets to make up for Americans living within their means, or live with lower growth. Of course, in the midst of this downturn, it could delay the bounce back for a long time.

G20 FTW

The G20 Summit has wrapped up with a final communiqué (French? I knew it!). Kevin Drum sees little change from the draft communiqué. Basically, the big news is $1.1 trillion dollars in guarantees to the IMF and the World Bank standing in for global stimulus, as well as a load of new regulations of the global financial system.

The Group of 20 also agreed on new global rules to cap the pay and bonuses of bankers, as well as a common approach to dealing with the toxic assets on the balance sheets of the world’s banks. That is an issue that has bedeviled the Obama administration and other governments [...]

A financial stability board with enhanced authorities will also be created to provide an early warning mechanism to alert nations of systemic risks to the international economy, the communiqué said.

“Together these steps give us confidence that world economy can return to trend growth,” Mr. Brown said.

The announcements came after negotiators from the United States and Europe worked frantically to hash out an agreement on new regulations, a day after France and Germany signaled a rift over the level of scrutiny that regulators should have over hedge funds and other global financial institutions.

While the United States was determined to resist European efforts to create regulatory authorities with crossborder authority, officials said the two sides worked out policies on transparency and early risk warnings for banks that would placate France and Germany.

“There’s not going to be a ceding of sovereignty to a global regulator,” said a White House official, who spoke on condition of anonymity because the negotiations were confidential.

France other Europeans countries also pressed China to accept action against tax havens, a step it has resisted because of the possible consequences for its coastal banking centers, Hong Kong and Macao.

“I think we’re going to see an agreement,” said Stephen Timms, the financial secretary to the Treasury. “I am expecting sanctions against tax havens. We want that pressure to be maintained.”

There's also some namby-pamby language about "naming and shaming" countries that erect trade barriers, but the truth is that every developed country does it, and the playing field is never level.

I actually do appreciate this statement from the President, signaling that the US cannot carry the consumption growth of the global economy any more.

Such resistance may not have mattered as much in the past. In previous downturns -- including the Asian crisis in the late 1990s -- the United States was by and large the driving force of global recoveries. But in the wake of the current crisis, Obama said, Washington will have to deal with "our long-term fiscal position" and the notoriously low consumer savings rates that for years drove Americans further into debt even as U.S. imports soared.

This time, he said, the rest of the world cannot depend on the "United States being a voracious consumer market."

"Those are all issues that we have to deal with internally, which means that if there's going to be renewed growth, it cannot just be the United States as the engine," he said during a news conference with British Prime Minister Gordon Brown. "Everybody is going to have to pick up the pace."

For too long we have used cheap credit and a culture of consumption to drive growth, and that's just not sustainable any more. Our citizens are drowning in debt and can't buy all of China's crap. I don't want to see a zero-growth economy - with population growth you consign large chunks of the world to endless poverty and starvation - but the burden must be shared and the go-go consumption just has to end.

IL-05: Way Outside The Box

As we await the carnage that the Axis of Nelson-Collins brought to the recovery bill, my thoughts turn to what could happen if some real progressives were in positions of power in Washington. We have an opportunity in Rahm Emanuel's old seat, IL-05, where I lived for a while a decade ago (and I believe my Congressman was one Rod Blagojevich).

Earlier this week I was able to attend an event with Thomas Geoghegan, a labor lawyer who has dedicated his life to helping working people, running for Congress as a first-time politician. He has a completely different conception of what's needed right now, a three-point plan that you'll almost never hear from anyone in the political arena. He describes it in this video:



1) Increase Social Security benefits so we have a livable public pension system comparable to the rest of the developed world. Businesses have all but eliminated their pensions, and Social Security is not enough to survive.

2) Single-payer national health care now. It is crucial we take over the non-wage labor costs from the private sector so they can increase their global competitiveness and stay in business. Insurance company overhead is a waste of money and single payer is the way to fund health care and hold down costs.

3) Reduce the interest rates on what the financial sector can take out of the economy, and in exchange for bailing out the banks (and taking them over temporarily), cancel consumer debt just like we're canceling the debt from toxic securities.

Geoghegan's overall goal is to increase the economic security of working people while making US businesses more competitive globally. The key point he said is that "people have no sense that they get anything back on their taxes" and that we'll never win the long-standing tax battle if we don't offer something tangible. In European nations the tax base is higher, but people are happy to pay it because they see a return. His smaller point was that the banks have become the real economy instead of the industrial sector, and this has taken all the creative energy of the economy away from entrepreneurship and into the financial sector.

This is a radical departure from how most politicians talk about the economy. Instead of placating an interest group or tailoring a message to the people who can fund a campaign, Geoghegan is really talking about the return of the social contract, where work is rewarded and government is on the side of the people. We're so unused to hearing these ideas, so ready to dismiss them as unworkable, that these avenues get permanently closed off. It's time to shift the debate.

If you believe in the progressive movement and in real, lasting change, you can get behind Tom Geoghegan's campaign. More here, here and here.

A 16-Year High

Remarkably, 16 years takes us right back to the end of the term of the last President Bush, right before the last Democratic President. What a coincidence:

With the recession in full swing, the nation’s employers shed 524,000 jobs in December, the government reported Friday, and a rapidly deteriorating economy promised more significant losses in the months ahead. December’s job losses brought the total for 2008 to 2.6 million, spanning a recession that started 12 months ago.

The unemployment rate jumped to 7.2 percent in December from 6.8 percent in November and 5 percent last April, when the recession was four months old and just beginning to bite. More than 11 million Americans are now unemployed, and their growing ranks seem likely to put pressure on President-elect Barack Obama and Congress to act quickly on a stimulus package that mixes tax cuts and public spending.

The 7.2 percent was the highest unemployment rate since January 1993, when the country was still shaking off a jobless recovery from the 1990-91 recession. The loss in total jobs for 2008 was the largest since 1945.

Believe it or not, that 524,000 number was pretty much as expected - it could have been worse.

And unlike January 1993, this isn't going to be the low ebb this time. Even with a massive stimulus, nobody expects job loss to turn around right away, with the unemployment rate expected to climb to 8 or even 9%. Holiday sales were officially in the crapper, and with consumer spending still driving the economy, expect lots and lots of store closings in 2009. That will roil the commercial real estate market, which is on the verge of collapse. In addition to jobs falling, hours worked fell sharply since September, meaning that people are working less.

Barack Obama is stepping into a nightmare.

Maybe we all have to learn something from Pittsburgh.

World Report

Been a while since I got into this.

• Iraq: The speaker of the Parliament has been officially ousted in a move that doesn't seem to bother anyone, not even the speaker, who was kind of a loose cannon. But if anything, it's a symbol of the political power plays that have gripped the country for the past six months, leading into provincial elections. The Prime Minister is surely consolidating power, using a narrow amount of goodwill engendered by security gains to muscle his competition for power. Maliki wants a strong central government because he's at the head of it, while the Sunni and Kurdish factions want their own authority and independence.

“Maliki is monopolizing all the political, security and economic decisions,” said Omar Abdul Sattar, a Sunni member of Parliament. He listed political parties that he said were turning against the prime minister, including a powerful Shiite party, the Islamic Supreme Council of Iraq, which is fighting Mr. Maliki’s drive to centralize power in Baghdad and pushing to give more to the provinces — where the party has important power bases, particularly in the south. “It’s simply the story of the transformation from a democratic prime minister into a dictator,” he said.

Given Iraq's history with dictatorships, and the fractious nature of ethnic and sectarian divides in the country, this is a natural state of affairs, which is why the hopeful talk of democratic transformation in the heart of the Middle East was always such rubbish. We invaded Iraq to remove a dictator so they could eventually install another one, this time with a more overtly religious cast. Not that Iraq was a threat to the United States beforehand, but it's hard to see how this made our country any safer, especially when factoring in the human and financial costs.

• Israel: I'm very worried that full-scale fighting is about to break out between Israel and Hamas in Gaza. Hamas ended its cease-fire last week, and has been lobbing dozens of rockets into Israeli territory. Since Hamas' electoral victory, Israel has sealed off the Gaza strip, turning it into essentially a large prison. Egypt, which has been offering aid and assistance to the Palestinians in Gaza, wants to mediate a truce, but I don't think it's likely. There is a faction in Israel that sees crushing Hamas as part of the road to peace - and that's the LESS hawkish faction! This is going to explode in the next several days. Very worrying.

• Japan: The Pacific Rim nation is mired in another deep recession, as industrial output cratered and deflation appeared imminent. Japan was growing largely on the back of American consumption of their goods the past few years, and so this was inevitable. As America's rise back to prominence is tied to stimulating a home-grown industrial base, it's hard to see how Asian nations like this improve unless we give up and try to return to an unsustainable consumption model again.

• Somalia: The President of the transitional (read: powerless) government is resigning. By next year, I gather that you will see the Islamic Courts Union back in power here. Ethiopia will pull all their forces out in the next few weeks, and there is little to stop the ICU. And so a US-sponsored war will have produced nothing but more bloodshed and the rise of a powerful cadre of pirates, who reduced global economic trade through thievery. It was a shortsighted solution lacking a regional context, and it failed totally.

• Guinea: I'm not going to lie and say that I am perfectly well-versed about Guinea (not to be confused with Guinea-Bissau or Papua New Guinea), but they've had a coup by a military junta, which is the 10,834th of the military-led coups in Africa since, oh, last week. The latest in Guinea followed the death of a longtime dictator, Lansana Conte. The cycle of coups and state-sponsored repression is so commonplace on the continent, that it's hard to find a glimmer of hope. The African Union is simply not a strong enough institution to deter the practice.

• Europe: European leaders are talking about accepting some Guantanamo detainees as a gesture of goodwill toward the new President. Obama is going to have a global honeymoon period where he can really get a lot accomplished, and closing Gitmo should be at the top of that list as pertaining to foreign policy. One possible red flag is the persistence of Robert Gates at the helm of the Defense Department. He is being sued by Guantanamo detainee lawyers for signing a false affidavit that allowed him to sidestep disclosure of torture. That will not help any charm offensive. Pro Publica has a good roundup of the year in Gitmo here.

Still Negative-1 Shopping Days Left Until Christmas

On Christmas Day, the Washington Post tried to spin some retail sales numbers, noting with pride that they had risen month-to-month in November for the first time since May. Apparently the idea that the holiday shopping season started in November, and October was a real cratering on retail sales, weren't enough context for them to stop writing the story, not to mention the fact that retailers were offering huge discounts just to get people in the store. A better judge of the retail market is probably year-over-year sales than month-to-month, and on that score, the news is as bad as ever.

U.S. retailers' sales fell as much as 4 percent during the holiday season, as the weak economy and bad weather created one of the worst holiday shopping climates in modern times, according to data released on Thursday by SpendingPulse.

The figures, from the retail data service of MasterCard Advisors, show the 2008 holiday shopping season was the weakest in decades, as U.S. consumers cut spending as they confront a yearlong recession, mounting job losses and tighter credit.

"It's probably one of the most challenging holiday seasons we've ever had in modern times," said Michael McNamara, vice president of Research and Analysis at MasterCard Advisors.

As holiday sales often make up for a lot of retailers' entire yearly profit margins, expect a fair amount of bankruptcies and store closings in Q1 of next year. We are not even close to being on the upswing. The hope is that it can't get too much worse.

The Vicious Cycle

If the no drama team is scared, then I'm scared.

It's quite unsettling to talk to members of Barack Obama's transition teams these days, especially those who are helping with the economics portfolio. Without going into details, the sense I get from them is that they are very worried that the economy will get a lot worse before it gets better. Not just worse... a lot worse. As in -- double digit unemployment without the wiggle factors. Huge declines in aggregate demand. Significant, persistent deficits. That's one reason why the Obama administration seems to be open to listening to every economist with an idea and is stocking the staff with the leading lights of the field. In one sense, the general level of concern among Obama advisers and transition staffers is reassuring; they get the magnitude of the problems, and they're not going to assume that, just because the bottom has never dropped out before -- certainly not in the lifetimes of most people doing policy these days, the bottom will never drop out.

Ambinder winds this around to the worry that an unstable nation, like Pakistan, will suffer a total economic collapse and the US won't have the wherewithal to bail them out. But I see a bigger problem - that the worldwide slowdown and drop in demand crashes China's stratospheric growth, which has been an engine for the global economy for the last decade.

BEIJING — Chinese exports registered their largest drop in nearly a decade last month, suggesting that the global recession could be far worse than many economists had previously predicted.

According to statistics released by the Chinese government Wednesday, exports fell 2.2 percent from November 2007 to November 2008 — the largest year-over-year monthly decline since April 1999.

Even at a time of increasingly dour economic news, the Chinese trade numbers stunned many economists. They struck an ominous note for China, where labor unrest has increased markedly as the economy has slowed in the last month.

Many analysts had anticipated that the monthly trade figures would show China's export machine slowing along with the global economy, but few had expected it to slip into reverse. In October, exports surged 19.2 percent year-over-year.

"We were expecting a slowdown, but the magnitude is a bit shocking," said Wang Tao, an analyst at UBS Securities.

China makes stuff that American consumers buy. When American demand drops, China has a lot of surplus labor. And their factories close. Really terrible situation.

We're also seeing extremely stable entities like the NFL and National Public Radio cut jobs and close down parts of their business (the Arena League? Gone).

In these troubled times, it's important to hold people responsible, so that as we drag ourselves out of this ditch, we never put ourselves in the same situation again. Joseph Stiglitz, who isn't on Obama's economic team right now for reasons that are inscrutable, makes the argument in this month's Vanity Fair that the problem was explicitly ideological.

There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight [...]

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000–2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown—as we are seeing now, and as Greenspan should have known.

What we ought to see here is the death of both neoliberalism and free market fundamentalism - the ideas that risk can always be managed, that asset bubbles are good when they're running so they should be encouraged, that investment banks should be unregulated and free to make big bets with other people's money, that credit rating agencies owned by the banks would be independent enough to make judgments on those banks, that tax cuts are an economic panacea, all of it. Stiglitz' final paragraph should be seared into our brains.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

What has me worried is that this failure of ideology will result in a very long and deep economic collapse, out of which there isn't much hope for a few years, and that Obama, not his predecessors, will be tarred with the responsibility for the problem because he could not work the country out of it, and in opposition we get the exact same failed solutions (really, Mike Pence is calling for things like a balanced budget amendment), and an American public starving for relief will buy what Republicans are selling again. That's the vicious cycle we have to avoid, and so drastic steps must be taken without worrying about the short-term political consequences.

Get Ready For The Suck

The new kind of trickle-down in the US economy is the trickle of job losses in the shaky manufacturing and construction sectors into scale backs in consumer spending, which will lead to job losses in retail. Which is exactly what's happening. Circuit City, a really crappy store which treats their workers like garbage (they fired a bunch of them a couple years back for making too much money), filed for bankruptcy protection today. DHL in Wilmington, Ohio is pulling up stakes, a move suggested during the Presidential campaign (John McCain and staffers like Rick Davis were instrumental in putting the DHL sale to a German company through, and this was the inevitable result). That's basically a whole city you're about to see go under.

The spiral downward cannot be counteracted without massive stimulus, and soon. Paul Krugman had a good idea over the weekend, to aid state and local governments who might otherwise lay off teachers, cops, firefighters and state employees:

State and local governments operate under fiscal rules that lead to booming spending and tax cuts when the economy is strong and the reverse when the economy is weak. This is bad governance: services are cut precisely when people need them most. It’s also bad macroeconomics: it exacerbates the business cycle.

Right now, we’re seeing a sharp drop in state revenues, which is going to lead to big cutbacks in spending and tax increases at exactly the wrong time.

Obama mentioned aid to state and local governments in his press conference yesterday. Indeed. This is a very quick form of fiscal stimulus, because it’s not about starting new spending, it’s about sustaining current spending. It should be done immediately.

But what if Bush says no? Congress should pass the aid plan anyway, and Obama should promise to sign it as soon as the current tenant vacates the White House. That way states will know that the money is coming, and be able to budget accordingly.

That's pretty urgent, as state budgets get revised and workers either lose their jobs or keep them. A new wave of job loss is not what we need right now.

Krugman also offers a word of warning about how to best understand the Roosevelt era - we didn't have ENOUGH spending at key moments.

The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery.

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.

Indeed.

Welcome Mr. President

Enjoy the 14-year high in the unemployment rate, at 6.5%. It'll probably be worse once you are inaugurated. 240,000 Americans jobs lost in October. And the holiday season, which usually results in a job increase as retail hires more help, is expected to be dismal. Consumer spending dropped 3.1% last quarter.

But I'm sure George Bush is totally interested in fixing this so Obama can have a clean start. Right.

Why is President Obama ruining the economy?

As Retail Goes...

...so goes the economy. Watch the LA Times try to spin this as good news for bargain hunters!

After 59 years in business, the Mervyns department-store chain called it quits Friday -- promising a huge going-out-of-business sale just in time for the holidays.

And there is plenty of competition for a close-out Christmas. Linens 'n Things Inc. began a liquidation sale Friday, and Shoe Pavilion Inc. starts one this weekend, according to firms that said they were hired to liquidate the stores.

Already gone are the novelty retailer Sharper Image Corp., Wickes Furniture and Levitz Furniture, and retail experts say more closings loom.

"This is unprecedented, really, the number of stores that are going to be closing," said Daniel Kane, principal of Tiger Capital Group, one of several firms hired to liquidate Linens 'n Things and Shoe Pavilion. "There's going to be a tremendous amount of bargains out there."

I think the larger point is that retail stores can't stay open, not that there will be abundant sales spectaculars.

Consumer spending is something like 2/3 of all economic activity, and when people can't keep their job, or can't borrow against their house or their credit card, they can't spend. They don't have a money printer like the government. They can't bail themselves out. So belt tightening leads to store closings, which leads to more job loss, which leads to belt tightening. It's a downward spiral.

And it's UNSUSTAINABLE to rely on the American consumer to drive the entire economy. You have to make stuff as a nation. This is why we desperately need a job creating fiscal stimulus.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

Will the next administration do what’s needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending — but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: “Well, the first thing we have to do is get spending under control.”

If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.

He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit.

I feel a little better about the Beltway chorus after seeing Ruth Marcus' recognition that cutting spending in an economic downturn is suicide.

Ruth Marcus: I'm sure I should have been clearer on this in the column, but I was not arguing for mid-recession belt-tightening. We're all Keynesians now and I am open to stimulative action in the short term. What I am hoping for is that the moment could be used as a way to forge a more responsible, more productivity-enhancing budget in the longer term, that could fund investments in important things like health care, and free the next president from some of his more unaffordable promises.

The responsible thing to do right now is invest in America's future, in its infrastructure and in long-term sustainable industries like renewable energy. Fixing the health care crisis for the sake of American competitiveness must be a priority as well. Considering that John McCain thinks that putting money in the hands of low-income people who will actually spend it during a recession makes no sense and rewards "lucky duckies", the choice for President is clear.

The Bigger Economic Fish To Fry

As stocks tank today on news of terrible retail sales that may only get worse right before the holiday shopping season, the reality that the greater economy is in terrible shape is starting to sink in. The market is especially jittery so that news is being more harshly reflected, but it's at least based in some truth. We don't make anything in America, and consumer spending props up the economy, and if jobs are slashed and you can't borrow against your home or your plastic anymore, those sales are going to drop, and that's the ballgame.

As Robert Reich says eloquently today, the problem is not people "living above their means" but wage stagnation which forced people to borrow just to maintain their lifestyle.

It's not as if the typical family suddenly went on a spending binge --- buying yachts and fancy cars and taking ocean cruises. No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it's more accurate to view it as an ongoing struggle to stay afloat when the boat's sinking.

The "living beyond our means" argument suggests that the answer over the long term is for American families to become more responsible and not spend more than they earn. Well, that may be necessary but it's hardly sufficient.

The real answer over the long term is to restore middle-class earnings so families don't have to go deep into debt to maintain what was a middle-class standard of living. And that requires, among other things, affordable health insurance, tax credits for college tuition, good schools, and an energy policy that's less dependent on oil, the price of which is going to continue to rise as demand soars in China, India, and elsewhere.

In other words, the way to make sure Americans don't live beyond their means is to give them back the means.

What we need is a major stimulus program - bailing out the banks will not be enough. This is in direct contrast to neo-Hooverists like Ruth Marcus who think that a recession will somehow work itself out as long as you don't use the power of the federal government to do anything. That's blinkered thinking. Nobody will invest during a slowdown EXCEPT the government - nobody will create jobs, nobody will stimulate the economy, and nobody at all will look after poor people and give them the opportunity to succeed.

The question is whether Obama will listen to the clucking of the Neo-Hooverist chattering class or come up with a solution commensurate to the problem. He's been playing footsie with the Blue Dogs and talking about reinstituting PAYGO rules. Of course, they are already IN PLACE in the House, they just are routinely ignored, as they were during the bailout.

Did you get that part? The Senate has "more or less ignored" the few actual measures of fiscal restraint the Blue Dogs tried to keep in place. Kind of makes you wonder how such a group is still described as so powerful, if the few aspects of their fiscal retraint are "more or less ignored." In fact, one has to wonder how such a supposedly powerful group committed to fiscal responsibility has managed to co-exist with a federal government that has overseen the least fiscally responsible spending regimen in history.

Could it be that the power of the Blue Dogs is not actually in maintaining fiscal responsibility, but in threatening to throw their lot with the demographically compatible Republicans in a narrow divided Congress and pass legislation that will then be signed by George Bush? And, could it be that when that threat is no longer applicable--which it almost certainly won't be once the Congress is no longer narrowly divided and George Bush is no longer President--that their demands will go from "more or less ignored" to almost entirely ignored?

I should hope so. Austerity budgeting is not what we need right now - this is not 1993, the recession is much wider and deeper, there's still a financial crisis on Wall Street, and there are major public investments that are desperately required. We can argue about the form a stimulus package could take - I think it needs to be a lot bigger than the $150 billion dollar number being tossed around right now, and it needs to go to infrastructure like building a new clean energy grid, wiring America for broadband, high-speed rail and mass transit - but we cannot argue about its necessity.

There are of course questions about Obama. His policies are pretty middle-of-the-road and not necessarily up to the challenge of the moment. There is reason to be concerned. There is also over the last month a keen understanding that these are abnormal times. The question is how Obama will adjust. Will it be like this?

How does a liberal do these things? Well, first a liberal decides to take away the inflation problem, that whenever people get money they spend it on things that cause the demand for oil to increase. He does so by making a huge multi-hundred billion dollar investment in fuel efficiency by buying up all the least fuel efficient vehicles, by spending massively on public transit, by doing a massive fiber build-out and encouraging businesses to telecommute. He reduces the speed limit to 55 on all roads. He starts charging people for driving during rush hour. He encourages businesses to have workers work 9 hour days and take off a long weekend every two weeks. He massively invests in green energy. He sets up a program to refit every building in the US so that it uses as little energy as possible, or even produces energy. He changes the energy network so every American can sell power to the power company. In doing all these things, he actually reduces US demand for oil and increases its energy output. And all this activity creates jobs, a lot of jobs, which can't be offshored or outsourced.

And while the liberal may give a tax credit here, or a tax credit there, a lot of things he just has the government do, or has it spend the money directly. When you refit your house you don't get a tax credit, you get someone to come and do the work, then a government inspector checks it's done properly, then the company that refitted the house gets paid you get a reduced bill and share in some of the savings by actually receiving a check every month for as long as you live in the house. When new networks are set up, the government exercises eminent domain and encourages municipalities to set up their own networks. It forces large cable and phone companies to let anyone sell time on their networks, just like in the old dial up days and just like in countries like Japan that are far ahead of the US. Governments build the networks themselves, and run them themselves, since the major telecom companies have proven they wont' give the US good broadband [...]

Oh, I know all of this is a dream. Obama's not a liberal, despite all the screaming. That's not his fault, there's hardly a liberal left in America. As I like to joke, "Americans wouldn't know a liberal if he gave them universal health care". And some will say that if Obama was a liberal, he couldn't be elected, though frankly, after this campaign, I think that's a weak argument.

But, because Obama isn't a liberal, what he's going to do is do neo-liberalism, aka:Reaganomics, one more time. One more roll of the dice at the land casino. It won't work, and in a few years we'll be back here again.

And then we'll find out whether or not Obama can learn from experience. Most people can't, really, they just repeat the same mistakes over and over again. But some can. FDR did, he tried something and if it didn't work, he tried something else, and it was something genuinely different. Obama, it is said, models himself after the Kennedys, but I hope he'll learn something from FDR as well.

I'm not totally convinced of Welsh's argument vis-a-vis Obama, but he's absolutely right on the liberal response. There's a role to play for citizens who want to see a new economy, who want to grow up in a country with good paying jobs building things at home, who want advances in education and health care and the environment. There's a moment to push Obama to do what's needed.

Flailing From One Solution To The Next

I mentioned in the last post John McCain's big idea today - cutting capital gains taxes this year to fix the economy. Um, virtually nobody has capital gains this year. In case you haven't been tuning in, the stock market is down a lot. It's absurd. But even more absurd has been his halting response to the economic crisis overall.

While John McCain claims that these times require a “steady hand on the tiller,” his reaction has been anything but. The most recent example saw the McCain campaign promising the rollout of new economic plans this weekend, but by Monday opting to give a new political speech. Today, in another erratic response to the financial crisis, McCain rolled out new spending proposals while his campaign argued that he had always planned to roll out new economic plans today, a day after saying they had no plans to unveil any new economic proposals. This comes less than a week after the sloppy rollout of his new mortgage plan, which found him and his head economic adviser disagreeing, within hours, about whether new funding would be needed to implement that plan. In the past month, McCain’s response to the crisis has “careened,” sometimes changing course within the span of a single day and this past spring, he offered three different housing plans after admitting that he didn’t anticipate the housing crisis. McCain’s unsteady responses over the course of this crisis have demonstrated how out-of-touch he is with the struggles facing working Americans and how ill-equipped he is to implement the solutions and changes that we need.

That pretty much says it all.

Looking at the substance of it, McCain's plan would also "Lower taxes for seniors tapping their retirement accounts and suspend rules that force seniors to liquidate their accounts during economic crisis." This would move capital out of the market at precisely the time when a capital injection is needed. That's not necessarily bad, but McCain himself said the goal is to "avoid an exodus of capital from the market," and then introduced a plan which would do that.

And, there's nothing in his plan about creating jobs, which is the only thing that would boost consumer spending, fully 2/3 of the economy in this country at this point. Same for regulation of the markets, which everyone acknowledges is needed at this time. (The regulation bill is going to be one of the big fights of 2009.)

Maybe he should go back to reading Greenspan's book...

The Meltdown

Inflation outpaced wages in June and consumer spending plummeted. Inflation, in fact, rose at its highest one-month level since 1981. That's going to go down somewhat in Juy, because gas prices have decreased. But we're still looking at stagnant wages, increasing unemployment, and no end in sight to the housing crisis. The economy is in the shitter.

Paul Krugman looks at this today.

The good news, I guess, is that we’ve been experiencing a sort of slow-motion meltdown, lacking in dramatic Black Fridays and such. The gradual way the crisis has unfolded has led to an angels-on-the-head-of-a-pin debate among economists about whether what we’re suffering really deserves to be called a recession.

Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting.

Home prices are down about 16 percent over the past year, and show no sign of stabilizing. The pain from this bust is widely spread: there are millions of American families who didn’t buy mortgage-backed securities and haven’t lost their houses, but have nonetheless been impoverished by the destruction of much or all of their home equity.

Meanwhile, the job market has deteriorated even more than you’d guess from the jump in the headline unemployment rate. The broadest measure of unemployment, which takes into account the rapidly rising number of workers forced to take cuts in paid hours and wages, has risen from 8.3 percent to 10.3 percent over the past year, roughly matching its high point five years ago.

And there’s no end to the pain in sight.

While economists debate statistical analyses, people out in the country are hurting. In particular I worry about the underemployed, those part-time workers who can't string enough jobs together to survive. They're not traditionally counted in the employment statistics, and yet they're as much of a problem as the "underinsured" are in the health care crisis.

Krugman thinks another stimulus package may be in order, along the lines of what Barack Obama has proposed. But clearly, the sputtering economy has to become more of a focus of the campaign.

Incidentally, it’s surprising that the lousy economy hasn’t yet had more impact on the campaign. Mr. McCain essentially proposes continuing the policies of a president whose approval rating on economics is only 20 percent. So why isn’t Mr. Obama further ahead in the polls?

One answer may be that Mr. Obama, perhaps inhibited by his desire to transcend partisanship (and avoid praising the last Democratic president?), has been surprisingly diffident about attacking the Bush economic record. An illustration: if you go to the official Obama Web site and click on the economic issues page, what you see first isn’t a call for change — what you see is a long quote from the candidate extolling the wonders of the free market, which could just as easily have come from a speech by President Bush.

Obama actually stepped in the right direction on this today. He needs to realize he's in a fight instead of hovering above on some plane of post-partisanship.

Holy crap are we in economic trouble

I think good ol' G.W. is trying to leave a legacy similar to Cal Coolidge and Herbert Hoover. I can't think of a time since I've been alive with such bad fundamentals. First off, nobody wants our dollars anymore.

Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars.

Hit by a free fall with no end in sight, the once mighty U.S. dollar is no longer just crashing on currency markets and making life more expensive for American tourists and business people abroad; its clout is evaporating worldwide as foreign businesses and individuals turn to other currencies.

That's really unbelievable. I've been overseas a bit, and in quite a few places they'd actually charge you less if you paid in dollars just so they could get their hands on them. That's been true in good economic times and bad, because the dollar was seen as tied to a strong and financially secure nation. Clearly that illusion has been wiped clean.

At the Taj Mahal, dollars were always legal tender, alongside rupees, for entry into the palace. But because of the falling value of the dollar, the government implemented a rupees-only policy a month ago. Indian merchants catering to tourists have also turned bearish on the dollar.

"Gone are the days when we used to run after dollars, holding onto them for rainy days," said Vijay Narain, a tour operator in the city of Agra where the Taj Mahal is located. "Now we prefer the euro. It gives us more riches."

In Bolivia, billboards feature George Washington's image on a $1 bill alongside a bright pink 500 euro note, encouraging savers to turn to the euro to tuck away money earned abroad or sent home in remittances.

"If the dollar's going down ... save it in Euros!!!" say the signs popping up around La Paz for Bolivia's Banco Bisa.

I'm reminded of the book The United States of Europe, and while not everything prophecied in that book is likely to come true, clearly they have a fiscal stranglehold on us right now.

That's a long-term problem. In the short term we're absolutely in a recession.

The US economy has already fallen into a recession, according to a majority of economists surveyed by The Wall Street Journal published Thursday.

“The evidence is now beyond a reasonable doubt,” said Scott Anderson of the bank Wells Fargo. Anderson was among the 71 percent of 55 economists asked to assess the state of the economy who agreed it is already in recession.

The biggest evidence of this is that retail sales fell in February. With consumer spending accounting for 2/3 of the economy, as the strappy shoes from Thom McCann go, so goes the nation.

The two ways in which Americans kept solvent and above water for the last decade or so has been through cheap credit and ballooning home values. The home values are cratering and have plenty of a ways to go before they hit the floor, and this is tightening credit. There are no pots of gold left for the average American.

The median price for a (Southern California) home last month was $408,000, down 17.6% from a year ago, according to DataQuick Information Systems. Area home prices have now fallen 19% on average from their peaks last year.

....The rapid pace of the decline has led Los Angeles economist Christopher Thornberg, who last year predicted a 20% decline in Southern California home prices, to revise his projection. He now thinks prices will fall 40%.

$400,000 still prices most of the middle class out of the market, leading to stories like this. Actually the entire LA Times business section last week, with its stories for how to scrimp and save against the rising cost of living, was just overwhelmingly depressing.

Deanna Corbin, 46, would live in Los Angeles if she could. But she can't, at least not with a modicum of space and safety, not on her $38,000 salary as an administrative secretary.

So Corbin gets up at 4 a.m. every day and hustles her 11-year-old daughter out the door by 5 for the two-hour drive from their apartment in Lancaster to downtown L.A.

Most days, they don't return home until 8 p.m., when Corbin tries to devote some time to her daughter's homework before they both collapse into bed. It all begins again at 4 the next morning.

How's that for your American dream?

Hoenstly, at this point you'd have to be a maniac or a sadist to WANT to become President. Our economy is the equivalent of Wile E. Coyote standing two feet from the cliff and just about to look down and disappear in a poof of smoke. Or, as my dad said to me today, "We're a third-world economy and we don't even know it."

Looming Recession Update: Redeeming Gifts For Food

This is truly the biggest indication that we're headed into a severe recession that I've yet seen:

Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items — pasta sauce, diapers, laundry detergent — instead of iPods or DVDs.

Merchants had hoped shoppers armed with gift cards would provide a lift after a dismal holiday shopping season — partly because shoppers tend to spend even more than the value of the card. But that didn't seem to happen last month, and retailers are feeling the pain.

On Thursday, the nation's retailers turned in their worst January in almost four decades as high gas and food prices, a slumping housing market, tighter credit and a tougher job market pushed consumers to the edge.

Our economy is so dependent on consumer spending that the simple fact that nobody's buying the new release of Michael Clayton despite the totally cool commentary track is really enough to send the whole nation into a tailspin. The truth is that nobody has saved any money for a while, and the most common places where people have typically been able to gather that money, through home equity loans, are drying up as a consequence of the housing crisis. People could turn to their maxed-out credit cards, but for some insane reason the credit card companies are making that more unlikely:

Hundreds of thousands of Capital One and Bank of America cardholders have been notified in recent months that their interest rates are going up — in some cases to as much as 28% — even though they haven't been missing payments.

...."They need to raise rates because they can't raise fees anymore," [David] Robertson said. "It's politically untenable."

...."The card issuers are moving from a risk-management strategy to a revenue-generating strategy," [Robertson] said. "Credit cards are consistently the most profitable retail banking product," Robertson observed. "The growth is not there anymore. And with a recession coming down the pike, there's no expectation of more spending by consumers. The industry needs to raise prices to keep profits where they need to be."

As Kevin Drum notes, this is just going to make people less likely to use their credit cards, meaning less consumer spending and a bigger problem for the same banks trying to make money off their credit cards. The logic is so short-sighted, and it mirrors the logic that has brought us to this economic meltdown in the first place.