25 Predictions for 2009

  1. The US Dollar will undergo a substantial devaluation. It will eventually fall below 60 on the US Dollar Index.
  2. The price of oil will go up again but only because it is denominated in US Dollars. It may potentially rise up to $60 depending upon how far the US Dollar will drop, but will not rise due to increased demand.
  3. Oil production throughout 2009 will be substantially lower than the past two years.
  4. Gold will exceed $1000 per ounce as a result of the dollar drop too.
  5. US unemployment will exceed 10% sometime during the year.
  6. The Dow Jones Industrial Average will drop below 7082.26 (half the October 2007 high of 14,164.53. It's already around 8500 so it won't have far to go).
  7. Two quarters of 2009 GDP will be negative. The NBER will not announce an end to the recession at all in 2009.
  8. Inflation will rise again a few months after the US Dollar drops (see prediction no. 1 above)
  9. Ben Bernanke will resign or will be fired. A major shakeup of the Federal Open Market Committee will see many new faces.
  10. US Public Debt will exceed 55% of GDP.
  11. Barack Obama's decisions will disappoint experts, but will retain a high level of popular support.
  12. Paul Krugman will admit he was seriously wrong about something.
  13. Iceland's economy will begin to recover in the second half of the year.
  14. A growing number of Brits will demand adopting the Euro and abandoning the weak Pound. While this number may exceed 50% of the population, it will not be enough for UK politicians to make any decision throughout the year.
  15. Australia will lose The Ashes to England in the middle of 2009.
  16. More climate scientists will admit that global warming is occurring faster than they thought it would.
  17. Sea levels will rise by more than 3mm in 2009.
  18. Kevin Rudd will mention Biochar.
  19. Applications for Green cards will decline substantially.
  20. Linux adoption will exceed 1.2%.
  21. Firefox adoption will exceed 25%.
  22. Duke Nukem Forever will be released to universal indifference.
  23. Robert Mugabe will remain president of Zimbabwe as conditions plumb new depths of misery.
  24. The Australian Economy will go into recession.
  25. Heath Ledger will posthumously win the 81st Academy Awards Best Actor Oscar for his role as the Joker in The Dark Knight.


Still falling

In general, there is usually a lag between bad economic data and increased unemployment and drops in GDP. As monthly figures come in sounding out bad news in housing, industry, automobile production and so on, the effects upon GDP and employment usually follow months later.

This was why 2007 Q4, which saw GDP change by -0.2%, saw unemployment rise from 4.7% to 5.0% - a rise, but not a substantial one.

Back in the early 1990s, unemployment rose even while the economy began growing again. It was dubbed "the jobless recovery" as a result. What we can learn from this is that unemployment levels often take a while to stabilise even after the economy has begun to heal.

In recent times, though, we have seen a rather precipitous decline in employment levels. September 2008 saw unemployment at 6.1%. October 2008 was 6.5%, and November 2008 6.7%. Japanese trade figures for this period show a record decline. This is not a situation in which such declines are within arbitrary "tolerance levels" - they are record drops, never experienced before.

It is likely that 2008 Q4 saw US GDP decline by more than 1%. It is a steep decline, as exhibited by substantial unemployment growth and a record decline in Japanese trade. Moreover, news articles have pointed out that this was one of the worst Christmas retail seasons for a long, long time.

The only time we will see relief is when monthly indicators begin bottoming out. Once housing prices, for example, begin showing no monthly declines, can we also begin to see a potential recovery.

But the problem is that the economy is still falling. From 2007 Q4 until now, most of these indicators have been falling. Here's housing starts, which have been declining in percentage terms since 2006:

This graph shows percentage growth. Once housing starts level out, the line should go back to zero for a while. It's not looking good is it?

And here's retail sales. Remember, anything below the zero line means decline:

Industrial Production:

Vehicle Sales:

Here's the adjusted Monetary Base. It's difficult to see, but look at the far left of the graph. Panic?

In short, the bottom hasn't been hit yet. That means unemployment has a long way to go up. I predict mid teens at some point, and certainly over 10% some time in 2009.


Conservatism shot itself in the foot


Larry Kudlow in 2005:
Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.
And where was this mea-culpa inducing article written? The National Review, conservatism's intellectual flagship.

It was supply-side conservatives who created and promoted the conditions for a subprime mortgage collapse, not to mention the fiscal stupidity practised by Congress during the same period.

Conservatives like Kudlow are tainted for life. They will find that less and less people will listen to those who promised a market utopia. Just like Russian Communism, Supply-side conservatives have found themselves red faced and egg faced as the economy collapses, spouting canards and ideological dot points that contradict reality, as though repeating falsehoods somehow makes them correct.

Neo-psych: Beards and Chicks

Neo-psychedelia is the sort of music I'm getting into these days. What seems common amongst these bands is beards and women:

Black Mountain. Beards: 2. Chicks 1.

Dead Meadow. Beards: 2. Chicks 0.

The Black Angels. Beards: 2. Chicks 2.

The Warlocks. Beards: 0. Chicks 2.

Suicide in Art

For whatever reason, I discovered the Wikimedia Suicide in Art category. So for your edification, here are some suicide attempts throughout history.

Suicide by wearing blue pantaloons. Source.

Suicide by self-inflicted gender realignment surgery. Source.

Suicide by falling asleep after playing with knives. Source.

Suicide by gaining weight until knife pierces heart. Source.

Suicide by looking exceedingly ugly (and stabbing the wrong part of your chest). Source.

Suicide by lying down near the docks pretending to sleep while a man smoking a pipe watches you until you starve to death. Source.

Suicide by being drunk and stupid in front of your army buddies. Source.

Suicide by finding a really, really bad place to urinate. Source.

Suicide by ripping down the shower curtain and hoping Norman Bates will attack you. Source.

Suicide by drunken, debauched sorority party. Source.

Suicide by suddenly looking up at the wrong time. Source.

Suicide by lighting crew. Source.

Suicide by eating too much at Christmas. Source.

Suicide by imbibing American brewed lite beer. Source.

Suicide by crowd-surfing at the coliseum. Source.


Merry Christmas

It may be December 24th everywhere else in the world but here across the international date line it is Christmas day. It's 8.25am and I've so far consumed a cup of tea and a fruit mince pie. I'm currently consuming a cup of coffee and a croissant with another one to follow. Then it's off to church and then to my Mother-in-law's where we will have the present giving, Christmas lunch and undoubtedly an afternoon of children playing, eating chocolates and looking at our gifts.

Merry Christmas. I'll post again tonight about the meaning of Christmas too.


Am I the cutting edge?

Arianna Huffington, today:
The collapse of Communism as a political system sounded the death knell for Marxism as an ideology. But while laissez-faire capitalism has been a monumental failure in practice, and soundly defeated at the polls, the ideology is still alive and kicking.

The only place you can find an American Marxist these days is teaching a college linguistic theory class. But you can find all manner of free market fundamentalists still on the Senate floor or in Governor's mansions or showing up on TV trying to peddle the deregulation snake oil.


It's time to drive the final nail into the coffin of laissez-faire capitalism by treating it like the discredited ideology it inarguably is. If not, the Dr. Frankensteins of the right will surely try to revive the monster and send it marauding through our economy once again.
OSO, September 2005:
The fact is that the strict free-market capitalism that is promoted and adhered to by its ideologues in the US is as empty and as inefficient as the strict communism that was promoted by Soviet ideologues back in the 1970s. What is needed is a recognition that government and private enterprise can and should exist side-by-side in a truly free society. The market cannot produce from itself things like universal health care, law enforcement and public education - in the same way that the government cannot efficiently produce the raw materials, services and consumer goods that the market is so good at controlling.
Paul Krugman, today:
A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.
OSO, October 2007:
At this present moment in time the United States is the world's biggest consumer. Although the US is also a producer, the economy is geared more towards consumption than production. China and Japan's economies are geared more towards production than consumption.

The world economy therefore needs the United States to consume less, and for China and Japan to consume more.
Where's my Nobel Prize?

(bitter self promotion is now over)


Geothermal power is it

  • Proven Technology - Iceland and New Zealand have used it for decades.
  • Widely Available - Shallow "hot spots" in the crust are located all over the globe. India, China, Russia, Europe, North America (and more) - all have "hot spots" that can be exploited for power.
  • Zero carbon emissions - It's just water being emptied down one pipe, going into the earth's crust, turning into steam, exiting out another pipe, turning a turbine, cooling down again, and then emptied down the inlet pipe again.
  • Localised - a nation's electricity can be sourced within its own borders or from neighbours.
  • Inexpensive - over the long term. The initial building phase is very expensive (drilling down a few kilometres, arranging the pipes etc) but, once the infrastructure is built, it is cheap to maintain.
  • Plentiful - the potential amount of electricity available to be exploited is several magnitudes greater than current demand. If demand = 1, potential supply = 1000+.
  • Self-replenishing - while "hot spots" eventually begin to cool when used for geothermal power purposes, they are replenished by the heat of the earth's core. Shutting down a geothermal plant for a few years may be all that is needed to heat up the "hot spot" again.
  • Zero pollution - no particulates like coal power, no radioactive wastes like nuclear power, no "visual pollution" like wind turbines. The power plant could even be built totally underground, thus preserving anything important on the surface.
  • Simple and reliable - the technology needed to build the power plant and to keep it running has been available for more than 50 years.
  • Replaces oil - electric vehicles can be charged with electrical power sourced from geothermal. Electric trains can replace diesel ones. This completely negates 99% of the demand for oil.

Sam Bottoms - "Lance" from Apocalypse Now - has died

In case you can't remember who he is:

Willard: "Lance on the forward 50's was a famous surfer from the beaches south of LA. You look at him and you wouldn't believe he ever fired a weapon in his whole life."

Lance: "I think we have to wait until the tide comes up!"

(radio) "...I can't get no... satisfaction..."

Lance: "Give me that dog!"

Lance: "Hey, you know that last tab of acid I was saving? I dropped it."

Lance: "Purple haze!"

Willard: "Chief, tell them to hold fire. It's just little sticks. They're just trying to scare us."

Chief: "A Spear?"

Willard: "Part of me was afraid of what I would find and what I would do when I got there. I knew the risks, or imagined I knew. But the thing I felt the most, much stronger than fear, was the desire to confront him."

Chef: "Ain't coming in there. Them bastards attcked us."

Willard: "Everybody wanted me to do it, him most of all. I felt like he was up there, waiting for me to take the pain away. He just wanted to go out like a soldier, standing up, not like some poor, wasted, rag-assed renegade. Even the jungle wanted him dead, and that's who he really took his orders from anyway."

Kurtz: "The horror. The horror..."

LA Times Obit.


Yes... but

The falling dollar is good for manufacturers.

Yes. True. But.

The falling dollar is bad for consumers.


The US Economy is geared towards consumption.

Which means.

Net short-medium term effects of a falling dollar will be bad.


A low Dollar in the long term will help rebalance everything.


Moving America from being a consumer nation into a producer nation.


Moving America from being a borrowing nation into a saving nation.


America has been a consumer/borrower for about 25 years.

Which means.

The move to being a producer/saving nation will be painful.


While America's trading partners (Japan and China mainly) will suffer less from this movement, they will still suffer.

Which means.

The rest of the world will recover sooner than America will.


The Dollar drop bankrupts America.


Who knows if that is a real possibility?

OSO's debt watch

Public Debt on 2008-12-17 was $6.42 Trillion

US GDP in 2008 Q3 was $14.42 Trillion

Debt/GDP Ratio: 44.52%
( [Debt ÷ GDP] x 100 )

Public Debt/Person: $20,978.60
(Public Debt
÷US Population)



Public debt is $6,418,858,135,322.00 Source
Latest GDP is $14,420.5 billion Source
Population in November 2008 is 305,971,664. Source (Resident population plus armed forces overseas).


The Dollar is cliff diving

This is the US Dollar Index going back to October 2006:

The Dollar devalued slowly as the economic crisis unfolded in 2007. Then in mid 2008 it shot up as everybody sold stocks and ran to treasuries.

But that cliff at the end. That's the last week or so. From 88 to 80 is a drop of around 9%. Scary.


The Fed is going Nuclear

Treasuries rose, pushing the yield on 10-year and 30-year government securities to near record lows, on speculation the Federal Reserve will cut interest rates and announce plans to buy U.S. government debt.

The 30-year yield fell to 2.95 percent, close to the lowest since regular sales began in 1977, and 10-year notes dropped to 2.47 percent as investors sought the highest returns on the safest government securities. Ten-year note rates were 176 basis points more than on two-year debt, down from 253 basis points a month ago.

“We expect the Fed to go all the way to zero, and that will surprise the market,” said Axel Botte, a strategist in Paris at AXA Investment Managers, which has $800 billion in assets under management. “The market may rally” further.
I suggested this course of action a few weeks ago, so either someone from the Fed reads my blog or fools never change.

Such an activity - creating money and buying back debt - helps to both reduce government debt while simultaneously preventing deflation.

The problem is, though, that in the current climate such an activity would be the same as pushing up the p/e ratio of debt.

Let me explain.

As you know, shares have two methods of rewarding investors. The first is payment of dividends. The second is its price. When the latter dominates, you get an asset price bubble - the money returned on investment is low compared to its increased value.

The same is true of property. People purchased property over the years because its value kept going up and up. In fact, property investors weren't too concerned if renters in their investment properties didn't pay enough rent to cover the mortgage since, in the end, the increasing value of the house was the most important thing. As a result, an asset price bubble occurred.

So now we have the possibility of the Fed buying back debt. Notice that the interest paid on such debt is now so low as to be almost negligible. But if the Fed buys back such debt then the market will simply respond to it in the same way by overvaluing the asset.

So what could happen? A US dollar boom the likes of which history has never seen. Faced with a booming currency, deflation will increase, forcing the Fed to pump more money into buying debt, causing the market to value government debt even more, and the cycle continues...

Until one day the market eventually realises that the US Dollar is just another dot com boom and housing bubble, and will crash. Alternatively the market may react to the Nuclear option straight away and begin devaluing.

The only way this could be prevented is if foreign central banks enacted similar policy - print money and pay back government debt in a deflationary environment. I can't see that happening any time soon.


A Dollar Crash is coming

With a deep economic contraction reducing demand and with Wall Street in tatters, where in the US should you invest?

Buy Yen, Euro and Gold. Now.

Neoliberalism Down Under

Don't throw the baby out with the bathwater.

That's one of the adages we need to keep in mind as we approach the current economic crisis - and one of those babies is the practice known in economic and political circles as neoliberalism.

The term is used often, but is also often misunderstood. It doesn't refer to liberal as an alternative to conservative. Rather, it focuses upon the importance and power of the free market - liberal meaning "free".

There are many different shades of neoliberalism that countries have experienced over the years. A good American example is NAFTA.

Neoliberalism has many names. In America it is associated with "Reaganomics" and in the UK with "Thatchernomics". In New Zealand it is known as "Rogernomics" while here in Australia it is known as "Economic Rationalism" with a notable subheading called "microeconomic reform".

Strangely enough, of all the nations that have benefited from neoliberalism, the one which seems to have benefited least is the United States. There are reasons for this - one being that American Neoliberalism has been closely associated with Supply Side economics while the UK, New Zealand and Australia have been mercifully free of this brand of populist "Voodoo" economics.

I would probably hazard a guess, though, that the US has not travelled down the neoliberal road as far as have other countries. In the UK, New Zealand and Australia, unions have been historically more powerful and social policies more left wing than anything experienced in the US. In fact, Britain, New Zealand and Australia were downright socialist in the 1970s compared to what America was then and is now.

And it was the socialism of the 1970s that was being abandoned in favour of neoliberalism. While America experimented with some aspects of liberalisation (airlines, for example), the trade protected, union dominated UK, New Zealand and Australia abandoned entire policies and practices wholesale in the name of economic progress.

At the time, such progress often produced more harm than good. The power of unions was broken either through direct conflict with the government (eg Thatcher verses the miners) or through negotiation with business owners (which was what happened in Australia and New Zealand). The form that neoliberalism took in each of these three English speaking countries depended upon the political climate of the time. Neoliberalism in the UK was harsh and combative, not least because the British Labour Party had committed itself to Democratic Socialism and promised a return to nationalising industries while the majority of Britons weren't interested. The result was that the Conservatives stay in power was long and deeply influential. By contrast, neoliberalism in Australia and New Zealand was implemented by Labour parties who were able to negotiate union compromises with business leaders - the idea being that their political success depended upon making neoliberalism a benefit to blue collar workers.

It was through the Australian and New Zealand experiences of neoliberalism being implemented by worker friendly political parties that helped give rise to "Third Way" economics. It was not until British Labor abandoned hard-line socialism and embraced "third way" politics that they were able to convince enough voters to deliver them government under Tony Blair (though that has hardly been a success).

As regular readers know, I am a fan of the Washington Consensus. Created as a "to do" list for developing economies needing help and support from the IMF, the Washington Consensus has since fallen out of favour. Partly this has to do with the harsh treatment of developing nations during the Asian Economic crisis (which was one of the main reasons why the IMF and the World Bank ended up being so hated by both sides of the political fence in 1997 and the 5-6 years or so following).

But the main reason why the Washington Consensus has fallen out of favour is that the United States doesn't even practice it. It is supremely ironic that Washington is one place where the Washington Consensus has been ignored. This is one of the major points of a recent article by Michael Hudson and Jeffrey Sommers:
Washington’s idealized picture of how free markets operate (as if such a thing ever existed) promised that countries outside the United States would get rich faster, approaching U.S.-style living standards if they let global investors buy their key industries and basic infrastructure. For half a century, this neoliberal model has been a hypocritical exercise in poor policy at best, and deception at worst, to convince other economies to impose self-destructive financial and tax policies, enabling U.S. investors to swoop in and buy their key assets at distress prices. (And for the U.S. economy to pay for these investment outflows in the form of more and more U.S. Treasury IOUs, yielding a low or even negative return when denominated in hard currencies.)

The neoliberal global system never was open in practice. America never imposed on itself the kind of shock therapy that President Clinton’s Treasury Secretary (and now Obama’s advisor) Robert Rubin promoted in Russia and the rest of the former Soviet bloc, from the Baltic countries in the northwest to Central Asia in the southeast. Just the opposite! Despite the fact that America’s own balance of trade and payments is soaring, consumer prices are rising and financial and property markets are plunging, there are no calls among its power elite to let the system self-correct. The Treasury is subsidizing America’s financial markets so as to save its financial class (minus some sacrificial lambs) and support its asset prices. Interest rates are being lowered to re-inflate asset prices, not raised to stabilize the dollar or slow domestic price inflation.
This is a fair criticism, but it simply points out that America never really embraced neoliberalism for itself. Getting other nations to drop trade barriers and liberalise their economies was fine... but not for America.

Yet it is very hard to read Hudson and Sommers' article without pointing to the Australian and New Zealand experiences of neoliberalism. While the economic changes we have experienced were far from perfect, many of them were much needed and have served these two nations well.

One of the most important phases of neoliberalism in Australia was banking deregulation during the 1980s. Though this was chaotic in places and led to some shady financial characters (Alan Bond and Christopher Skase to name just two) the eventual result was the creation of the "big four" Aussie banks - Commonwealth Bank, Westpac, National Australia Bank and the ANZ Bank. The "big four" do operate a sort of oligopoly of banking services in Australia yet they are tightly regulated by the Federal Government. While a banking crisis is not impossible in Australia, it is much more unlikely to happen than in the US. In fact, a few months ago I remember hearing a financial commentator speaking of US banking regulations being "archaic" in comparison to Australia's. Bottom line - Australia's tightly regulated banks are some of the best and safest banks in the world.

In terms of international trade, both Australia and New Zealand have some of the least restrictive practices in the world. Both Australia and New Zealand have significantly large agricultural sectors and historically these two nations have protected and subsidised this sector to protect farmers. This changed during the 1980s as well, with trade barriers and subsidies removed, forcing farmers to compete directly with overseas competitors. The initial result was less than encouraging - lots of family farms sold up and moved to the city because they couldn't compete. But as time went by, agribusiness developed strongly, with farmer-entrepreneurs buying up large tracts of land to use economies of scale while planting crops determined not by tradition or government edict but by market demand. This is light years beyond anything experienced in the heavily subsidised American and European agricultural sectors. The Cairns Group arose out of this period, and is one of the main international lobby groups arguing for free, unrestricted agricultural trade.

Fiscally, the governments of Australia and New Zealand have managed their finances well. Australia is unique in the industrialised world in having negative government debt levels - a situation brought about not by government oil revenues but through plain and simple accounting principles applied to government spending (ie spend less than you get in tax). This removal of government debt has meant that the government has no interest repayments on loans it took out to fund deficits, allowing tax revenue to be directed 100% towards government spending programs rather than debt servicing. It has also led to incremental tax cuts over the years. New Zealand's debt levels are small too. The United States and Europe, by contrast, already have unsustainable levels of debt and are about to experience massive loss of tax revenue, adding to their already sizeable debt levels.

Of course, I am Australian, and so I am biased in many ways towards my own country's economic achievements over the years. Moreover, I am realistic as well - market reform has not been all good and many people, especially the poor, are worse off as a result. Workplace Reform, undertaken by the Howard Government in its later years, was also deeply unpopular with ordinary people and eventually led to his electoral defeat in 2007.

Yet there is one thing which you can say about neoliberalism in Australia and New Zealand - it worked, and continues to work. The Washington Consensus, now so out of fashion, was the blueprint for Australia's and New Zealand's success. Fiscal prudence, deregulation, removal of subsidies and trade barriers, positive real interest rates, privatisation of government enterprises - all these things have been the basis of economic reform in these two nations.

And yet the neoliberalism experienced by these two nations never moved into supply-side stupidity or a strong pro market ideology. Both Australia and New Zealand continue to have universal health care and a generous pension system to help those who cannot help themselves. The neoliberalism experienced was thus more centrist than right wing.

For us here in Australia, the term "deregulation" means to free up a sector of the economy to allow market forces to dominate what is produced and at what price. In America, however, "deregulation" means a continual relaxation of laws to allow businesses to become more profitable while having less regulations holding them back, such as safety and environmental laws. The difference is obvious - Down under, deregulation was "market friendly" and takes into account various stakeholders while in the US, deregulation was "business friendly" and only helps one or more companies. There is a world of difference between the two - the former allowing the market to work effectively, the latter being a form of "you scratch my back I'll scratch yours" mentality.

The current economic crisis will inevitably drive America away from its ideological and fiscally irresponsible actions. That is good. But what will replace it? The populist solution - and one which is increasingly being touted by American economists and econ-bloggers - is to renege on the principles of free trade and to abandon neoliberal principles and such things as the Washington Consensus for... whatever Obama and congress will do presumably.

Of course, one of the more common complaints that free-market ideologues make these days is that "capitalism has never been tried", the implication being that the current crisis is actually due to government and regulation and that the solution is less/no government and less/no regulation. The same sort of complaint was made by Communist ideologues back in the 1970s and 1980s when the Soviet Union was decaying - if only Communism was "more pure", things would be better.

I am not either of these people. I am not a free-market ideologue. Yet I support many principles of neoliberalism and, to be honest, the USA has not implemented many of the important neoliberal principles. Had the US actually abided by the Washington Consensus, for example, it would not be in as much trouble as it is now. And the reason why I support many principles of neoliberalism is because I have seen them work in my own country and in neighbouring New Zealand. In many ways, how Australia and New Zealand survive this current crisis will, in turn, prove just how important neoliberalism and the Washington Consensus are in economic stability and growth.

Time will tell.


An alternative stimulus

One of the structural problems that has brought the American economy (and, as a result, the world economy) into crisis is its dependence upon consumption. This problem is also exacerbated by the fiscal and monetary tools that are used to regulate the economy which are able to constrict or stimulate domestic consumption but not external demand.

America has an unsustainable current account deficit. This was always an indicator of troubles brewing. Borrowing overseas money to fund its overseas purchases is not necessarily a problem - but its comparative size is. In America's case, it was worth about 5% of GDP for the past few years. That is unsustainable, even for a large economy like America.

China and Japan, by contrast, are not economies that are consumption based, but production based. In other words, America's consumption is matched by China and Japan's production, and America's borrowing is matched by Japan and China's saving. Now that America is in recession and consuming less, the demand for Japanese and Chinese goods has dropped, leaving these economies in recession too.

So far the only thing the US Congress has done - and has promised to do - is to stimulate consumption. Yet while this may have the short-term effect of boosting the economy, it strengthens the consumption/production imbalance between the US and Japan/China. The US economy may certainly experience some form of relief while congress stimulates consumption - and this relief will also be experienced in Japan and China as production orders for American-bound goods increase. But the problem remains.

Balancing the current account is essential if future problems are to be avoided. This means that America needs to produce more, save more and consume less while China and Japan need to consume more, save less and produce less.

Here is my solution:

  1. The US Treasury sells US dollar bonds and purchases Yen and Yuan. This will result in the devaluation of the US dollar and the appreciation in value of the Yen and Yuan. This process will be agreed to by the treasuries and central banks of all three nations.
  2. As this occurs, the central banks of China and Japan aggressively lower their interest rates while their national governments stimulate demand and consumption through deficit spending.
  3. As a result, there will be a increase in demand for American industrial products, thus helping to lower unemployment in the US. Similarly, in China and Japan, there will be a demand for consumer products, leading to lowered unemployment in China and Japan.

The beauty of this alternative stimulus is that it takes into account both the short term (the need to limit short term economic contraction) and the long term (a balancing in the current account, which is an indicator of structural problems in the economies of Japan, China and the US).

The idea of entrusting Japan and China with America's economic well-being may stick in the throat of many. The fact is, however, that the world economy is linked and that the fiscal and monetary tools used by central banks to regulate the economy are limited to adjusting consumption rather than production.

Of course, this "alternative stimulus" doesn't take into account important things such as government debt (which is too high in both Japan and the US) or investing in reducing oil demand and greenhouse gas outputs. They can be added on at some point.