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Wasatch Economics

Germans realize their banking system is in trouble

Credit Writedowns tells us that

"On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets...This new account has been all over the news in Germany because Germans are becoming quite frightened about the health of their banking system and are angry because the German economy was largely absent from the bubbles of the past decade. Germans are beginning to ask quite openly why banks like Commerzbank and the state-owned land banks as well as institutions like Hypo Real Estate are being rescued with taxpayer money."

If the populace is just beginning to demand answers they are a long way from resolution of the problem. Perhaps the alleged absence of bubbles in the German economy was actually reckless lending preventing precipitous decline in the health of Germany's economy. German banks have been highly leveraged...as I have mentioned here several times.

Virtual think tanks?

Found at Haft of the Spear:

THE THINK TANK IS DEAD
Long Live the Think Tank

By Michael Tanji

Whither the brick-and-mortar think tank in an age of free information and globally accessible intellectual discourse? Very well, thank you. While virtual intellectual efforts are taking place on-line, the "virtual think tank" that is able to compete with its physical-world brethren is still in beta release. This is not, however, a situation that will remain static. Early efforts that assembled people virtually for intellectual pursuits have produced promising results, and as people become more comfortable working in virtual environments such successes are likely to grow. Virtual think tanks have distinct advantages and disadvantages over traditional think tanks that extend beyond the technical and into the political and social, and it will take more than a generational shift to bring about meaningful change. The immediate future is likely to produce a synergy between traditional houses of public policy production and the emerging "Think Tank 2.0" approach.

See Calculated Risk and offshoots for an example of what Tanji is talking about.

Factoid of the day

" In 2002, the total number of undergraduate degrees granted in Arabic in all U.S. colleges and universities—yes, all of them—was six."

Bizarre...that would make doing business in the Middle East for US companies rather difficult.

On the other hand, there's this(from the same link):

"In 2003, two alleged Iranian agents caught photographing the No. 7 subway line beneath the East River were surprised to find themselves confronted by a cop who spoke fluent Persian. They quickly left the country. In 2003, a young undercover officer born in Bangladesh penetrated a small group of angry young immigrants, two of whom had started plotting to blow up targets in Staten Island and the subway station at Herald Square.

When it comes to disrupting potential terrorist plots, cops can use simple techniques out of bounds to the CIA or even the FBI. Cohen's detectives, for instance, might follow a suspect onto a subway and have a uniformed cop collar him for an infraction as minor as sitting on two seats at a time. Once he's taken down to the station, he may be faced with the threat that his friends will find out he was there and think he's talked. "Mostly, we don't hear from those guys again," says one of Cohen's senior operatives."

Crisis in the making?

CDC says too late to contain U.S. flu outbreak

"WASHINGTON, April 24 (Reuters) - The U.S. Centers for Disease Control and Prevention said on Friday it was too late to contain the swine flu outbreak in the United States. CDC acting director Dr. Richard Besser told reporters in a telephone briefing it was likely too late to try to contain the outbreak, by vaccinating, treating or isolating people. "There are things that we see that suggest that containment is not very likely," he said. He said the U.S. cases and Mexican cases are likely the same virus. "So far the genetic elements that we have looked at are the same." But Besser said it was unclear why the virus was causing so many deaths in deaths in Mexico and such mild disease in the United States."

Essentially, US cases could turn deadly any time...people with weakened immune systems will be at great risk.

Foreign holders of US Treasuries - Feb 2009

Here is a list derived from the US Treasury's data at the above link(in billions):

	Feb
Country	2009
	------
China, Mainland	744.2
Japan	661.9
Carib Bnkng Ctrs	189.1
Oil Exporters	181.7
Brazil	130.8
Russia	130.1
United Kingdom	129.1
Luxembourg	92.3
Hong Kong	76.3
Taiwan	72.6
Switzerland	68.2
Germany	56.6
Ireland	54.5
Thailand	39.7
Singapore	39.4
Mexico	37.9
India	34.6
Korea	33.3
Turkey	32.4
Norway	21.1
Egypt	19.1
Israel	17.4
France	16.8
Italy	16.5
Netherlands	16.1
Chile	15.2
Belgium	14.5
Sweden	12.7
Philippines	12.6
Colombia	11.4
Canada	10.9
All Other	173.4
Grand Total	3162

It's fairly remarkable how heavily the holdings are concentrated in a few countries, while other countries such as Germany, France, and Canada with large economies have relatively trivial holdings of US Treasuries.

Interesting exchange at Calculated Risk regarding Indian culture

Bob Dobbs

" El Cliffo wrote on Mon, 04/20/2009 - 9:49am.
Headline in the UK Telegraph: Indian business students snap up copies of Mein Kampf .

"Sales of Mein Kampf, Adolf Hitler's autobiography and apologia for his anti-semitism, are soaring in India where business students regard the dictator as a management guru."

Well, that explains tech support."

"I have a friend, a retired lawyer-turned-mediator who lived in India for a couple of years. Year before last he and his wife were invited to return and give a couple of workshops on mediation techniques in Bangalore and another town -- one to a chamber of commerce, another at a law school. He noted after that "trying to see the other guy's point of view" was considered weakness by most Indian males! Who would say so openly in class. A couple of women came up to him afterwards and said "We've been waiting years for this!"

http://www.talesfromthecoast.blogspot.com

--------------

It would appear that certain aspects of 20th century history are missing from the Indian educational system, at least in some places. Not to say that the US doesn't have its share of neo-Nazi's; but Hitler's written words aren't getting mainstream publication.

The second anecdote is worth noting if you might be doing business in India.

Dropping prices

This website is reporting that

"As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners."

That would result in a significant drop in dollar imports for China should the price cuts take place; which the article indicates is likely. Also, theoretically Japanese carmakers could reduce prices for their product in the near future as a means of increasing unit sales. There is a lot of iron tied up in auto inventory sitting in ports around the world.

Availability of credit in the US

The New York Federal Reserve Board released earlier this week it's Empire State Manufacturing Survey:

Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.

So credit is available to businesses that can demonstrate a capacity to repay...

Sandpile model of earthquakes and economic instability

Dr. Steve Keen discusses this here and gives a clear description of a power law distribution:

"The pattern of movements you get from such a process can look superficially like a Normal distribution–the famous Bell Curve–but it differs from it in two fundamental ways. Firstly, there are many more movements near the average; secondly, there are also many more movements way, way away from the average–so many more that, in what is known as a pure “Power Law” distribution, the standard deviation is infinite: any scale event can occur, and will occur given enough time."

The standard deviation is infinite...here's a picture of what this looks like from Wikipedia:
The main point is that if you are using a normal distribution to model something that is actually is a power law distribution, your model is going to give incorrect results. Key to the normal distribution is the idea that factors contributing to the frequency of results are independent. The dice rolling example is commonly used because it's obvious that each roll of the dice doesn't have any influence on the next roll of the dice. The financial results of companies listed on the NYSE are definitely not independent of each other; for example most are dependent on a relatively small number of banks for routine financing.

Also, generally 68% of values drawn from a normal distribution are within one standard deviation σ > 0 away from the mean μ; about 95% of the values are within two standard deviations and about 99.7% lie within three standard deviations. This is called the "68-95-99.7 rule" or the "empirical rule." That's clearly different from the power law distribution.

More background on Larry Summers

This is from the NY Times editorial page:

"I was less shocked by the White House’s disclosure of Summers’s recent paydays than by a bit of reporting that appeared deep down in the Times follow-up article on that initial news. The reporter Louise Story wrote that Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard.

That the highly paid leader of arguably America’s most esteemed educational institution (disclosure: I went there) would simultaneously freelance as a hedge-fund guy might stand as a symbol for the values of our time. At the start of his stormy and short-lived presidency, Summers picked a fight with Cornel West for allegedly neglecting his professorial duties by taking on such extracurricular tasks as cutting a spoken-word CD. Yet Summers saw no conflict with moonlighting in the money racket while running the entire university. The students didn’t even get a CD for his efforts — and Harvard’s deflated endowment, now in a daunting liquidity crisis, didn’t exactly benefit either.

Summers’s dual portfolio in Cambridge has already led to one potential intermingling of private business and public policy in his new White House post. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts. But again, Summers’s potential conflicts of interest seem less telling than the conflict of values that his Harvard double-résumé exemplifies."

Double standards...

Explosive

This is really amazing...quant finds job at Harvard after Enron collapse, blows whistle, gets fired. You can't make this stuff up:

"A former quantitative analyst at Harvard Management Company, the university’s once-vaunted endowment manager, tells the Harvard Crimson she was fired for voicing concern to then-university president Larry Summers’ chief of staff about the money manager’s risky use of derivatives the traders didn’t understand.

The episode dates back to 2002, when analyst Iris Mack, whose website identifies her as the second African American woman to earn a Harvard PhD. in applied math (and someone who likes primary colors) joined the much-venerated Harvard Management Company, which invests the university’s then $18 billion endowment, to find what she termed a “frightening” state of affairs.

“The group I was working for had no background whatsoever to be working on [derivatives],” Mack says, adding that, to her knowledge, several of her colleagues were not licensed securities traders. “Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling.”So Mack took inventory of the abuses — high employee turnover, lax risk management practices and a “low level of productivity in the workplace” were among others, and detailed them in an email to Marne Levine, Summers’ chief of staff and a Treasury staffer on the Obama Transition Team. (Summers was the only person to whom Meyers reported, and according to a recent Forbes story he personally ordered the university’s biggest derivatives trade, a purchase of interest rate swaps that cost the university billions this year.)

A month after sending her email, Mack was fired after a meeting in which the endowment fund’s then-chief furnished her the emails and castigated her for making “baseless accusations.” She later sued for wrongful termination and settled out-of-court with the university. But she claims the practices “shocked” her, and — the punchline is — she had joined the company from Enron.

Which is also to say, lest you dismiss Mack as an opportunistic snitch capitalizing on Summers fateful opposition to regulating the derivatives that wreaked havoc on the financial system, she had a pretty valid reason to believe in the importance of whistleblowing.

“I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,” Mack says. “I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.”Mack is doing her part to affect change: she’s a vociferous advocate of better math education for minorities and like FDIC chairman Sheila Bair, the writer of a children’s book. It’s called Mama Says Money Don’t Grow On Trees (sequel idea: *…Unless You Are A Monstrously Overleveraged Bank With Access To The Federal Reserve Discount Window!).

If Mack’s allegations are true Harvard certainly paid the price for its recklessness: Summers’ swaps sowed the seeds for a financial disaster at HMC:

It doesn’t feel good to be borrowing at 6% while holding assets with negative returns. Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. The one category that has done well since last June is conventional Treasury bonds, and Harvard appears to have owned little of these. As of its last public disclosure on this score, it had a modest 16% allocation to fixed income, consisting of 7% in inflation-indexed bonds, 4% in corporates and the rest in high-yield and foreign debt.For a long while Harvard’s daring investment style was the envy of the endowment world. It made light bets in plain old stocks and bonds and went hell-for-leather into exotic and illiquid holdings: commodities, timberland, hedge funds, emerging market equities and private equity partnerships. The risky strategy paid off with market-beating results as long as the market was going up. But risk brings pain in a market crash. Although the full extent of the damage won’t be known until Harvard releases the endowment numbers for June 30, 2009, the university is already working on the assumption that the portfolio will be down 30%, or $11 billion.

Mack’s boss at HMC, Jack Meyer, parted ways with the university in 2005. His bets were still paying off but his relationship with Summers had reportedly cooled — among other things, over alumni outcry led by the university’s Class of 1969 over the hedge fund-sized bonuses being awarded to employees of a supposed nonprofit. But if there’s anything we’ve learned from the past year, gratuitous compensation and gratuitous risk go hand-in-hand.

“The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed,” says a spokesman for the [Class of 1969], which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. “Even now we don’t really know how well it has done in the last ten years.”"

Credit Writedowns is where I found this...

Analysis of gas price trend

The EIA's analysis this week:

"the bottoming of the gasoline market in early winter, with very low or even negative margins between gasoline and crude oil prices, led refiners to bring forward maintenance activity and cut their operating rates to minimize surplus inventories. At the same time, those prices were low enough to generate a rebound in demand, even as the economy struggled.

Along with rising crude prices, the tighter balance between supply and demand in the gasoline market brought retail gasoline prices from the mid $1.60s to above $2 per gallon. Retail gasoline prices approaching $3 per gallon, however, are probably not reachable, let alone sustainable, this summer due to continuing surplus refining capacity and the continuing effect of the economic downturn on fuel demand.

Furthermore, with over 4 million barrels per day of excess crude oil production capacity, any surge in demand on a recovering economy could be met by increased production, mainly from OPEC countries. So, while gasoline consumers may be irked at paying over $2 per gallon for much of this summer, it doesn't look like 2009 will produce a spike in prices that comes anywhere close to what occurred last summer."

Adjusted for inflation, $2 per gallon is still a fairly low price for gasoline.

Roubini on emerging world capital flows

Reversal of Capital Flows in the Emerging World

RGE Lead Analysts | Mar 18, 2009

"The reversal of capital inflows due to deleveraging or losses in financial markets has been one of the most significant effects of the financial crisis on emerging and frontier economies. After a period in 2007 and 2008 when many emerging markets faced the problem of dealing with extensive capital inflows, now capital flows have reversed. Private capital flows in 2009 are expected to be less than half of their 2007 levels, posing pressure on emerging market currencies, asset markets and economies. Countries that relied on readily available capital to finance their current account deficits are particularly vulnerable. Furthermore, capital outflows pose the risk that governments may react with some type of capital controls or barriers to the exit of foreign investments."

Another unsettling analysis from Brad Setser

A bit more to worry about; foreign demand for long-term Treasuries has faded

He states "I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months." Then he adds this chart:
If the US Treasury is going to sell a lot of long term debt, it is going to have to find some new buyers(other than the US Fed).

AIG: unstable reactor at the core of shadow financial system

The following is being quoted all over the place, and with good reason:

"What is equally striking, however, is the all-encompassing list of names which purchased insurance on mortgage instruments from AIG, via credit derivatives. After all, during the past decade, the theory behind modern financial innovation was that it was spreading credit risk round the system instead of just leaving it concentrated on the balance sheets of banks.

But the AIG list shows what the fatal flaw in that rhetoric was. On paper, banks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding credit risks on mortgage loans, and much else. Unfortunately, most of those banks have been shedding risks in almost the same way – namely by dumping large chunks on to AIG. Or, to put it another way, what AIG has essentially been doing in the past decade is writing the same type of insurance contract, over and over again, for almost every other player on the street.

Far from promoting “dispersion” or “diversification”, innovation has ended up producing concentrations of risk, plagued with deadly correlations, too. Hence AIG’s inability to honour its insurance deals to the rest of the financial system, until it was bailed out by US taxpayers."

Setser adds:

"many European banks were growing their dollar balance sheets so quickly that many started to rely heavily on US money market funds for financing. And if an institution is borrowing from US money market funds to buy securitized US mortgage credit, in a lot of ways it is a US bank, or at least a shadow US bank. Consequently I think it is possible to think of AIG as the insurer-of-last resort to the United States’ own shadow financial system. That shadow financial system just operated offshore."

If these flows of capital had been exposed earlier, the shadow financial system would have come apart earlier. US investors in money market funds would have pulled their cash out.

US historical oil imports

Frome the US EIA:


Compare that to this chart:


How do you square a spike in imports occurring roughly at the same time as the OPEC embargo?

There is this:

"The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer."

That would represent a strong negative incentive to domestic production and exploration. Truly a colossal policy blunder. From the same source:

"In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less."

Exactly.

US DOE oil projection

In a release today, the EIA states

"In the latest Short-Term Energy Outlook (STEO), just released yesterday, EIA is projecting 2009 global oil demand to be 3 million barrels per day lower than we projected as recently as six months ago, in our September 2008 STEO."

As to why this is the case, the EIA states(bolds mine)

"The downturn in the world economy that became apparent in the second half of 2008 curbed, and ultimately reversed, world oil demand growth, something that rising oil prices between 2004 and 2008 did not achieve. While consumption in the Organization for Economic Cooperation and Development (OECD) began to react to higher oil prices in late 2005, non-OECD consumption continued to rise unabated. Demand growth in large non-OECD oil consumers seemed immune to higher oil prices, because: 1) growth was largely driven by their rapidly expanding economies, and 2) many domestic consumers were shielded from world market prices by domestic price controls and subsidy programs."

The existence of price controls and subsidies was conveniently ignored by many claiming that this demand growth was permanent/secular.

So what does this mean for oil producers? EIA states that

"members of the Organization of the Petroleum Exporting Countries (OPEC) currently hold roughly 4.8 million barrels per day (bbl/d) of surplus production capacity, while they held an average of 1.5 million bbl/d from 2004 to the peak of the market in 2008."

Wait, they had 1.5 million barels a day of excess capacity during the price run-up? They were obviously sitting on that capacity and profiting.

Also,

"the lagged impact of high oil prices in recent years will continue to affect oil demand in the short term. During 2007 and 2008, WTI averaged $86 per barrel; these historically-high prices will influence the decisions that individuals and firms make going forward, which will tend to dampen the rise in world oil demand engendered by the return of global economic growth."

I know of individuals who have switched to diesel vehicles and run on waste cooking oil produced in their own mini-refinery. That is permanent demand destruction with respect to crude oil. There have been many improvements in fuel efficiencies such as consumers switching to hybrid vehicles and ditching SUV's, that will suppress demand as well.

Finally, the chart of US gasoline prices shows stabilization at around $2.00 a barrel. I think on an inflation adjusted basis that is a reasonable price and will be a new medium term average.

Modern finance and pensions

"The real crime is claiming 7.75% return is achievable over the long term. "
I Heart CRbot | Tue, 03 Mar 09 18:03:25 -0600 | #

Unfortunately, finance textbooks have been saying that that's the equity premium over the risk-free rate of return for at least 20 years. I can see how people might get confused. Two problems; I don't think there has been statistically meaningful validation of the equity premium:), and at some point market timing comes into play, when the pension has to start paying out.

The state of economics as a field of study

The unfortunate uselessness of most ’state of the art’ academic monetary economics

by Willem Buiter

"The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member ... contained, like its successor..., quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity.; Indeed, it may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding .; It was a privately and socially costly waste of time and other resources.

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best.; Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes; rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability.; So the economics profession was caught unprepared when the crisis struck."

I agree...

Worthwhile links

The Oligarchs' Escape Plan Michael Hudson, CounterPunch

The US government frozen in the headlights Michael Pettis

Chocolate Covered Cotton

While Rome Burns

Generational personal finance and the current bust

Mish has an excellent post Wealth Does Not Pass Three Generations which describes what is sometimes referred to as "tired-blood" syndrome referring to the tendency of heirs of wealth to squander it.

"This is how I see it:

Few alive remember the great depression. Most boomers headed into retirement have seen rising asset prices all their lives. Those boomers thought they could live off their houses and/or investments in the stock market, expecting prices to rise forever, even though it was mathematically impossible for that to happen. Now, headed into retirement, boomers are realizing they are actually savings poor given that asset prices have crashed.

Moreover, children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did. Expect to see more frugality from parents and their children alike.

Three generations from now the lessons of today will have again been forgotten and the cycle will repeat."

Update on BoJ share purchases

BOJ may buy $111.5 billion in shares held by banks

"a midday announcement that the Bank of Japan will resume buying shares held by financial institutions, with plans to spend up to 1 trillion yen ($111.5 billion) through April 2010...The BoJ did not say when it would begin buying shares. It plans to halt the buying by the end of April 2010 and dispose of all shares it acquires by autumn 2017...

The last time the central bank had run a similar share purchase, it spent 202 billion yen purchasing shares from financial institutions during the 22 months ended in September 2004. At the time, the central bank had pledged to buy as much as 3 trillion yen of shares.

The BoJ began disposing of its holdings in October 2007 but suspended the program during the market slump last autumn. The central bank held 1.273 trillion yen of shares as of September 2008, it said in the statement."

This does nothing but distort equity markets and hinder rationalization of the country's economic structure.

Re emergence of states' rights movement ?

As a result of financial crisis and the federal government response:

New Hampshire Throwing Down the Gauntlet to the Federal Government

(from Jesse's Café Américain)

"a copy of House Resolution 6 being discussed by the New Hampshire Legislature....

That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America. Acts which would cause such a nullification include, but are not limited to:

I. Establishing martial law or a state of emergency within one of the States comprising the United States of America without the consent of the legislature of that State."

Very interesting...nullification was at the core of the Confederate secessionist doctrine.

Demographic update

Tracking Trends in Low Fertility Countries

"Over the long term, TFRs below 2.1 children per woman can eventually lead to population decline because couples are not replacing themselves in the population. Many European countries have been far below the 2.1 replacement level for years and some are experiencing population decline as a result."

"Many reasons are given for very low fertility and the causes certainly vary from country to country. The rise in living costs and the need for two-earner families play a large role, particularly where childcare needs of two-earner families have been neglected. Changing values that place more emphasis on consumer goods and travel play some role. In Eastern Europe, economic collapse following the breakup of the Soviet Union and the Warsaw Pact in 1989 caused among the sharpest declines in TFRs."

"While countries certainly differ, the overall story seems to be the same. Countries whose policies recognize the need to accommodate two-earner families so that having a child is not an economic disaster appear to have had some success in raising TFRs. But the cooperation of society is also required. In Germany, it is often not socially acceptable to leave one’s child in someone else’s care the entire day; women who do are referred to as rabenmutter (raven mother). Such attitudes will have to change for Germany's fertility to increase significantly. In Japan, the cooperation of employers in lightening work schedules and introducing more flexibility as well as childcare has been mandated by the government. But even these measures can be overshadowed by recessions and a lack of confidence in the economic future."

Severe economic contraction in Japan

Veneroso: Japan on the Edge of the Abyss

"1)The Japanese industrial production data and METI forecast was bad beyond all imagining. Industrial production might fall by 1/3 in the 12 months ending in January. It could fall in a mere four months between November and February by more than half the U.S. Great Depression decline which took almost four years....December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.

If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression."

"3) The trade weighted yen is by far the strongest currency in the world. Japan is losing competitiveness fast. Given the lags in trade matters will get worse."

I will add comments when I have some time available...

Conditions in Japan

Japan's Grim And Bear It 2009 Outlook

Perhaps they could sell some of their holdings of Treasuries? Setser today details how private and government investors have been flocking to Treasuries...the BoJ could cash in without causing a shock to the market, possibly. Of course, I presume the net debt figures in the linked post are net of those Treasury holdings, so it is a facetious suggestion.

Another possibility would be to follow Bernanke's proposition and "helicopter drop" cash in some fashion directly to consumers. That would possibly stimulate domestic consumption and conceivably weaken the yen versus the dollar; both desirable for Japan's financial leadership.

I spoke with Japanese coworkers about why Japanese don't loosen their pocketbooks given their high savings rates, and the answer was the force of habit and memory of hard times kept people's wallets in their pockets.

Economic fallout

Excerpted from Setser:

-"Moving from a budget that balances at $70 oil to a budget based on $41 a barrel isn’t fun even if Russia uses its fiscal reserve to adjust gradually. Eastern European economies that relied on large capital inflows rather than high commodity prices to support their growth aren’t doing any better."

-" $40 a barrel oil requires the Gulf to dip into its foreign assets, but most countries still have plenty of spare cash (though not as much as before). Still, all of the Gulf is slowing. And the most exuberant bits of the Gulf – Dubai in particular – are in real trouble."

-"China is really slowing. Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998."

-"The fall in Korea’s output in the fourth quarter was quite large. Even larger than the fall in output in UK, or Japan."

-"Singapore and Taiwan are also contracting sharply. Singapore’s economy contracted an annualized rate of 12.5% in q4, and the huge fall in Taiwan’s exports cannot be good for its economic performance. Japan isn’t an emerging economy, but it too saw a sharp fall in output. It isn’t a stretch to think that Asian output could fall more in 2009 than in the 1997-98 Asian crisis."

Mercantilism works, until the consuming country runs out of the ability or desire to keep consuming. Every country listed above targeted the US as their primary export market.