And don't forget to include Brazil in the list of countries officially in recession.

And now Hong Kong is officially in recession as well as the eurozone, the city's third in six years.

The run-up to the WTO ministerial in Cancun is in a near crisis after a host of Southern countries revolted against the pharmaceutical deal worked out with the United States.

A deal to provide cut-price copies of life-saving drugs for the world's poorest people was on the brink of collapse yesterday in Geneva, after developing countries objected to a last-minute compromise worked out to pacify the US pharmaceuticals industry.

A marathon session of negotiations ended early yesterday morning with no deal amid bitter recriminations and accusations of sabotage.

Delegates failed to bridge their differences over relaxing global patent laws when they reconvened last night despite an impassioned warning from the World Trade Organisation director general, Supachai Panitchpakdi, that the stalemate could jeopardise the Cancun summit of trade ministers which begins in less than two weeks.

It looks like the Southern back benchers, led by the Philippines, came out strongly against the tentative deal with the US (which torpedoed a previous agreement in December) and implicitly against the leadership of Brazil and India who, together with South Africa and Kenya, worked out the compromise with the US.

Interestingly, The Guardian reports that "Kenya . . . held up talks for six hours until its Geneva representative was overruled by Nairobi." Clearly there was a lot of pressure on the Southern countries to accept the deal, a settlement which was to ensure that Southern countries didn't 'take advantage' of the magnanimity of the US to allow countries which didn't produce drugs themselves to import generics produced in countries like Brazil and India under compulsory licenses. According to the BBC, Southern countries were to be held responsible for "ensur[ing] cheap versions of drugs do not make their way onto markets in rich countries." Does this mean Mexican border guards need to inspect the handbags of every old lady crossing back into Arizona from a day trip to Nogales?

The Guardian also reports that the sub-Saharan countries, clearly the most desperate for any deal at all, are pressing everyone they can to accept the compromise. It looks like I jumped the gun a bit on proclaiming the unity of the South behind the leadership of Brazil and India. But this time, disunity plays to the South rather than to the North. No compromise on drugs means the Cancun ministerial will likely collapse, and the North isn't about to let that happen.

The new reality for the American worker.



The General blogged lots of comparative details on this subject back on August 3. My comments back then make a nice companion text to this graphic.

I guess this is what you call "political purple prose".

Mark Morford, a columnist for the San Francisco Chronicle's website, wrote yesterday: "It's true. It's real. The Bush action figure is a genuine serious item and not, as you would fully expect, a joke, not a parody ...

"There he is, all faux manly and squinty and artificially buffed up, his gull-wing ears toned down and the thin-lipped brow-furrowed monkey confusion so common to his scrunched little face apparently erased by expert doll craftsmen and/or a drunken 50-cents-an-hour sweatshop employee somewhere in China."

Gosh, the one on the right is almost life-like . . .

Does anybody else see a bit of a problem with these trends?

The Commerce Department said consumer spending, which comprises about two-thirds of U.S. economic activity, grew 0.8 percent in the month, in line with expectations of analysts polled by Reuters. June personal spending was revised up to 0.6 percent from 0.3 percent.

Personal income grew 0.2 percent in July, less than the 0.3 percent growth rate expected by economists.

Remarkably, wage and salary disbursements actually fell $500 million as workers in all but the service industries took a hit. Personal consumption has been rising faster than disposable personal income for some time now; in five of the seven months this year, consumption rose faster than income. The big 1.5% rise (in current dollars) in disposable personal income was bought in July with Bush's one-off tax rebate. The underlying trends for consumption, however, don't look good -- unless we get annual tax rebate checks in perpetuity.

The Big Picture cuts right to the chase -- as one would expect.

Zero % financing amounted to channel stuffing; After nearly a year of those aggressive sales tactics, the auto sellers have exhausted all demand at the margins. There is now zero pent up demand for autos, and we are approaching zero pent up demand for homes . . .

Maybe the gluttonous American consumer really has reached his limits? At least on big ticket items?

Initial unemployment insurance claims seem to have leveled off recently, and the bulls are interpreting this as another sign of the "recovery".

"The jobless claims were a fairly positive number," said Phil Flynn, head financial analyst for Alaron Trading Corp. "It is not the type of number that will knock your socks off, but it was pretty much in range of what was expected."

. . . It marked the fourth consecutive week in which the moving average was below the key 400,000 mark viewed as a sign of an improving job market.

"It's encouraging that we've been at or below that psychologically important 400,000 jobless claims level for several weeks now," said Patrick Fearon, an economist for AG Edwards and Sons. "There's no question that there's been a modest improvement in the labor market recently."

As the below chart shows, jobless claims in July and August have indeed come down off of particularly high figures in the spring. That being said, we've seen this fluctuation under Bush before, including a rather sustained period last summer below the magic number of 400,000.



The black line is the four month moving average. For a larger picture, click here.

The left turn throughout much of Latin America is having salutary effects on the region's international clout as well.

The presidents of Venezuela and Brazil called for creating a powerful South American trade bloc this year before continuing talks on a U.S.-backed hemispheric free trade zone.

Brazil's Luiz Inacio Lula da Silva and Venezuela's Hugo Chavez said Tuesday that integrating South America's two largest trading blocs, Mercosur and the Andean Community, comes before any hemispheric deal. They set a Dec. 31 deadline for a regional trade union.

Silva and Chavez argue the Free Trade Area of the Americas � a proposal to create the world's largest trading zone � will deepen Latin poverty by forcing local industry to compete against developed nations.

"We're not saying that we don't want to negotiate with the United States, because it is very important for Brazil. But we must integrate first to negotiate with that country," Silva said at a news conference.

South American nations can create "a power bloc" to confront the FTAA, Chavez said. "Only united can we break the chains that oppress us.

. . . Brazil has warned it won't continue with FTAA negotiations unless Washington relaxes trade barriers on Latin American exports such as oranges and sugar. Chavez claims the FTAA is the latest incarnation of economic "colonialism" and vows to put any deal to a popular vote.

The possible unification -- at least politically -- of Mercosur and the Andean Community is big news. Once the WTO ministerial in Cancun is behind Bush, he will start pushing the FTAA hard again. Latin American looks ready for the fight.

Proof positive that the Global South is more united than it has been since the 1970s and playing hardball at the WTO.

The United States said today that it was close to accepting an agreement, which it had rejected last December, to help poor nations buy generic medicines through exemptions from trade rules.

The reversal by Washington � meant to improve the access of millions of people in those countries to expensive patented medicines for AIDS and other diseases � could enhance the Bush administration's international standing and prevent the collapse of global trade talks to be held in Mexico next month.

. . . Faizel Ismail, the permanent representative of South Africa to the World Trade Organization, who was part of the private negotiations, said the United States accepted the deal because of new assurances that it would not be abused by the countries in need of generic drugs to fight diseases like AIDS, malaria and tuberculosis.

It remains to be seen what "abused" actually means in the text of the agreement. But suffice to say that the South isn't lying down any more.

Remember when considering the revised GDP figures today that the two biggest contributors by far were consumer durables and military spending. These two sources of economic growth probably won't do a repeat performance in 2003:III. Spending on consumer durables was driven largely by the refi boom. The spending splurge made possible by homeowners refinancing their mortgages and spending the 'savings' on furniture, refrigerators and toys for the garage may have spilled over into July, but don't count on a quarter-wide contribution.

Military spending will continue to be very large and is the real wildcard. In 2003:II it went up by $47.5bn, and in light of the comments of Paul Bremer and the Republicans in Congress, the spending could continue to rise and rise. Defense spending could keep this economy chugging all summer long. And who cares -- the day of reckoning is far off -- unless, of course, you're a federal worker.

One final note. GDP revised upwards thanks to smaller than expected trade deficits. With the rising dollar since June, these deficits should return to all-time record territory in no time.

The revised GDP figures for 2003:II came out today, and on the face of it, the US economy was clipping along quite nicely this spring.

Gross domestic product, or GDP, grew a revised 3.1 percent in the second three months of the year, the Commerce Department said -- a figure broadly in line with Wall Street expectations for a 3.0 percent gain. That was up from the 2.4 percent rise estimated a month ago and followed anemic 1.4 percent growth in each of the two prior quarters.

It was the fastest expansion since the third quarter of last year and is likely to bolster hopes for strong growth in the current quarter.

As many regular readers know, the General blogged on July 31,

Also, did somebody say "military Keynesianism"? The General reported today that the #1 contributor to the US GDP rise in 2003:II was federal defense spending. Let's pretend that the US had had no war in Iraq and defense spending had stayed steady. In 2003:I it was $409.7bn (in chained 1996 dollars), so let's plug in a nice round figure of $410bn of imaginary defense spending for 2003:II (for those of you keeping score at home, the real number was $448.9bn).

Lop off the $40bn difference and what do you get? A 0.67% growth rate in 2003:II!!

I revised my number crunching in light of the likelihood that some of these billions would have entered into the economy anyway, and thus on August 6 the General said

While probably not all the $45.6bn was generated out of 'thin air' (through foreign borrowing or printing money), a goodly proportion certainly was. If just half of it came into GDP this way -- say, $23bn -- that would mean GDP growth in 2003:II without the occupation would have been a mere 1.5%. Surely this is a conservative estimate as well.

With the revised numbers out today, things still look unbalanced.

In current dollars, US GDP rose $105.5bn in 2003:II. Of that, $47.5bn was in national defense. As a first (simplistic) cut, US GDP in the second quarter without the Iraq war/occupation would have risen not 3.1% but 1.38%. As a second (more sophisticated) cut, assuming only half of the defense contribution to GDP came from foreign borrowing and growth in the money supply -- a conservative estimate in the General's opinion -- second quarter GDP would have risen just 2.23%

Now I grant you, 2.2% is better than the 1.4% of 2002:IV and 2003:I. That being said, it's still a pretty anemic level of growth.

The refinancing share of total mortgage loan activity in the US fell last week below 50% for the first time since mid-June 2002.

More evidence that the US current account deficit will be skyrocketing in the near future -- and that the country's economic debate in the 2000s will increasingly look like that of the 1980s.

By spending trillions of yen to buy dollars in the foreign exchange market, Japan has limited the yen's rise against the dollar this year to no more than 2.3 percent, while the euro has jumped as much as 13.5 percent. The yen is now up just 1.3 percent against the dollar while the euro is up 3.8 percent, almost three times as much.

Japan's success in keeping the yen from gaining significant strength against the dollar � and other currencies � is helping the country's economy rebound by keeping its exports more competitive abroad. But, at the same time, it is a drag on American economic growth and is making it more difficult for the United States to reduce its troublesome current account deficit, which is now over $500 billion.

Apart from the US, East Asia is the only growth spot in the global economy today. But much of this growth is premised, as we see in the cases of both Japan and China (the two largest economies in East Asia), on selling to the United States. East Asia has trillions of dollars in reserves and has shown no reluctance to use them. Watch for the dollar to rise even further in the near future, and global balancing to fall right off the table.

The costs of empire just keep going up.

Iraq will need "several tens of billions" of dollars from abroad in the next year to rebuild its rickety infrastructure and revive its moribund economy, and American taxpayers and foreign governments will be asked to contribute substantial sums, U.S. occupation coordinator L. Paul Bremer said yesterday.

Bremer said Iraqi revenue will not nearly cover the bill for economic needs "almost impossible to exaggerate."

. . . A State Department official said the Bush administration is preparing to seek a "huge" supplemental spending bill from Congress. Administration sources also said the U.S.-controlled Coalition Provisional Authority is running so low on funds that the White House is considering seeking an emergency infusion next month to cover the organization's bills.

Unlike the troop costs, which are variable from providing country to providing country, rebuilding Iraq's electricity system will cost $13bn regardless of who pays. Considering the lackluster follow-through on the big promises in Tokyo of $4.5bn in aid to Afghanistan in January 2002, I wouldn't expect to see donors scrambling to line up behind Viceroy Bremer's request. If "several tens of billions" of dollars can't be squeezed out of Iraq any time soon, the US will pay the bulk of the costs -- on credit, of course.

Or perhaps the US Congress can pass a special "Iraq tax" or run a special "multistate Iraq lottery game"?

So, how many Eastern Europeans exactly will it take to stabilize Iraq? James Dobbins, who helped to manage the reconstruction of Bosnia and Kosovo, and also served as a special envoy for George W. Bush in Afghanistan, tallied the numbers.

Using the Bosnian model, he concluded that to be effective in Iraq the US would need 258,000 troops on the ground. Using the Kosovo model, that figure rose to 526,000. The current deployment in Iraq of some 170,000 troops, of which 148,000 are US forces, suggests a serious shortfall.

So we're looking at least at another 80,000 Poles, Ukrainians and Bulgarians needed on the ground, because we know these boots won't be filled by American soldiers.

Although neo-conservative dogma favours the all-American option, the US does not have troops to spare, and training more would take time and money. Seeking to expand the army for a war that was supposedly won four months ago also would be far too hazardous politically as a presidential election approaches.

It's too bad Brian Whitaker reviews all the troop options for Bush without analyzing the VVV (very valuable vassals) route. This can be done without a UN resolution or a UN authority over the entire operation. NATO has taken over filling many of the foreign boots in Afghanistan, so why not VVVs -- lots more VVVs -- in Iraq?

India and Brazil seem to be teaming up on more issues than just pharmaceuticals for the upcoming WTO ministerial in Cancun.

Developing countries yesterday expressed dissatisfaction with the latest proposed outline for a trade agreement to be considered at the upcoming meeting of World Trade Organization ministers in Mexico, saying the document failed to fully reaffirm the group's commitment to eliminating farm subsidies.

The countries, led by Brazil and India, pledged to present their own proposal at the meeting next month in Cancun of the 146-member Geneva-based organization

There are three somewhat distinct issues wrapped up in the negotiations over agriculture: market access, domestic support and export subsidies. While most liberal free-trade bloggers focus on the first two, the third is the most destructive to agricultural production in the Global South. Don't cry too many tears for the Brazils and Chiles and Argentinas of the world who use more or less the same massive capital-intensive methods as do the Europeans and Americans. Cry for the small farmers of the Philippines or Kenya or Mexico instead who are swamped by Northern grain overproduced and dumped on the world market.

Aside from the moral aspects of the trade negotiations, the politics of the ministerial are especially volatile. India and Brazil seem to have really taken up the mantle of leadership for the Global South as a whole. In the past, Brazil (under Cardoso) had been happy to play US lap dog and India had largely abandoned its leading role won under Nehru in favor of isolationist Hindu nationalism. These more docile days seem to be behind us now.

The General blogged on this topic a week ago. Now it's made the Washington Post.

Homeowners who rushed this summer to refinance their mortgages at super-low interest rates are finding that the volume of applications is choking the financing system. This means that the rate locks they counted on to protect them against rising expenses are expiring before their loans can close.

The result: Costlier loans, angry borrowers and climbing numbers of complaints to regulators.

In the land of life-time employment, now part-time or temporary employees make up roughly a quarter of the Japanese work force.

In the 1980s Japan was strong-armed into reducing its trade deficit with the US by starting Honda, Toyota and Nissan auto manufacturing plants in the US rather than keeping producting in Japan and shipping the cars across the Pacific. In 1982 Honda became the first, opening a plant in Ohio, and thus today all those Honda Accords zipping down US freeways are built in Marysville, OH and the Civics in East Liberty, OH.

Of course, auto production had the (then) powerful auto workers union going for it, and even Republicans back in the 1980s cared about union votes. Will Bush listen to the voice of UNITE today? International labor standards are an eminently worthy goal and a non-protectionist means to advance the interests of workers both in the US and in China. Will Bush advance their cause at the WTO?

You know, it's already permissable per the WTO to block the import of goods made with prison labor (see the General Agreement on Tariffs and Trade, Article XX, para. e). Thus international labor standards of a sort are already on the books. Yet the American public, addicted to cheap goods made with exploited labor and helped along by liberal economists providing ideological cover for their habit, will most likely be happy to sell their brothers and sisters for twenty pieces of silver.

The renminbi rumble is really starting the heat up now. Much as Japan was the target for American industrial ire in the 1980s, China is the target in the 2000s.

In South Carolina, the Republican governor, Mark Sanford, cites the currency, the yuan, as posing a major threat to his state's struggling textile industry by making Chinese exports unreasonably cheap.

In Erie, Pa., executives and workers at scores of industrial companies are planning a loud protest on Labor Day over "unfair competition" � and one of the biggest targets will be the seemingly obscure matter of the yuan.

And in Washington, the Bush administration is gearing up to put direct political pressure on China next week when Treasury Secretary John W. Snow makes a highly publicized trip through Asia. The subject was near the top of the agenda when President Bush met with his economic team two weeks ago in Crawford, Tex. . . .

In a blunt letter to President Bush last month, 16 Republican and Democratic senators and representatives complained that China was undercutting American factories by intentionally keeping its currency undervalued.

The lawmakers, from Democrats like Senator Charles E. Schumer of New York to Republicans like Mr. English and Senator Elizabeth Dole of North Carolina, demanded that Mr. Bush press China to adopt a free-floating currency and to let the yuan rise in value.

There certainly is cause for concern in the manufacturing sector. Imports from China in current dollars doubled in just five years, from $62.6bn in 1997 to $125.2bn in 2002. In 2002 the goods and services balance with China weighed in at -$103.1bn, also doubling since 1997.

The sectors hit hardest by this imbalance are apparel and footwear, computer accessories and household goods. Tens of thousands of people in the US depend on textile, electronics and furniture manufacturing for their livelihoods, particularly in the American South. Already hard hit by decades of (from their perspective) an overvalued currency and a government policy to undermine manufacturing, it looks like many of these folks aren't going to take it anymore.

"In the Textile Belt, there are a number of governors who are acutely aware of the problem," [South Carolina Governor] Sanford said in an interview. "But our ability to impact currency rates halfway across the globe is frankly nonexistent."

Free traders usually step in to offer the fig leaf of "trade adjustment assistance" to smooth over the rough patches, but these policies are little more than salves for their troubled consciences. If you want the truth about adjustment, read the series "No end in sight to N.C. job losses" in the Raleigh News & Observer, 18-20 August 2002.

As the head of the Gaston County (NC) Economic Development Commission said in that series, "On a macro-level, we understand the need to have open and free trade for the overall economic health of the United States . . . but a lot of that will come on the backs of workers in North Carolina. I think we're going to have a whole generation of workers that is lost."

Oh well, I'm sure there's a nice chicken processing plant they can work in for $7/hr.

Treasury bond prices fell sharply today, and that means

Analysts suspect that much of the rest of the week's economic data will surprise on the upside and see 10-year yields testing recent highs above 4.60 percent.

Remember, we here at the Globblog are watching for the 10-year to cross the 5.0% line -- the point at which interest rates may very well begin pulling back on the US "recovery".

There are some interesting stats in the latest issue of Time magazine on the increasingly loudly asked question "Is the army stretched too thin?".

America's military has been shrinking for the past 35 years. Since the height of the Vietnam War in 1968, the number of American men and women in the Army, Navy, Air Force and Marine Corps has fallen, from 3.5 million to 1.4 million today. The active-duty Army, the service most needed for labor-intensive peacekeeping missions, has fallen from 1.6 million troops in 1968 to 480,000 today. All four services have been cut in strength, and leaders of both parties have overseen this decline. President Bush's father reduced the number of Army divisions from 18 to 14; Bill Clinton cut it further, to 10.

One might think that in light of the US "mission" in Afghanistan, Iraq and elsewhere, an increase in the number of US troops -- possibly via a renewed military draft (although this is still unacceptable talk in polite company) -- would be the answer, as many senators such as Kay Bailey Hutchinson, Dick Lugar and Joe Biden have indicated.

And yet the colonial logic is unerring -- "boots on the ground" wearing the American flag are far more costly than boots wearing the flag of somebody else.

But with the price of the Iraqi occupation running $1 billion a week, the Administration is reluctant to do anything that would boost that bill. And adding soldiers of any kind is not cheap. While young G.I.s earn about $16,000 annually in base pay, fringe benefits and bonuses can drive the actual cost as high as about $60,000.

Compare this to the rough cost of $40,000 to maintain a Polish peacekeeper in Iraq for a year (and that includes deployment costs), or roughly $10,000 for a Ukrainian one. I've got to believe the cost of a Pakistani peacekeeper would be much less still.

One way or another the US will be paying for the boots on the ground in Iraq. But like any responsible businessman, Rumsfeld wants value for his money. When the European powers ran out of cheap home-grown troops to fight in Europe during the world wars, they imported the necessary forces from the colonies. The US is keeping up the same fine tradition.

Remember back to 1996 when Boutros Boutros Ghali was not-so-subtly nudged out of his post as Secretary General of the United Nations (technically, ineligible for another term due to a US veto) and replaced at the behest of Bill Clinton by the much more amenable Kofi Annan? Looks like the US really knew what it was doing.

Mr Boutros Ghali, speaking on BBC Radio 4's Broadcasting House yesterday, said the UN was perceived as an extension of the US state department.

"Many countries of the third world see a basic discrimination adopted by the United Nation system," he said. "The resolutions which are not respected by the Iraqis deserve the bombing of Baghdad. The same resolutions which are not respected by the Israelis deserve nothing.

"So the perception in a great part of the third world is that the United Nations, because of the American influence or because of any other reason, is a system which discriminates [against] many countries of the third world." . . .

Mr Halliday [Fred Halliday, former UN assistant secretary-general], meanwhile, said the UN security council had been taken over and corrupted by America and the UK.

"The UN has been drawn into being an arm of the US - a division of the state department," he said. "Kofi Annan was appointed by the US and that has corrupted the independence of the UN. The UN must move quickly to reform itself and improve the security council. It must make clear that the US and the UN are not one and the same."

I really despise most advertising, but the ones which truly stir disgust are those which appropriate spiritual symbols in the service of commercialism and material avarice. You know the ones. Corporations using pristine natural settings to peddle their gas-guzzling SUVs. Or using primitive peoples to endorse high-tech products, as in the credit card commercial (VISA, I think) which showed Masai herders in their traditional dress exchanging the hilarious joke about how to stop an elephant from charging. Or an especially obnoxious one from IBM which ran about three years ago before the dot com bubble burst which showed a hip twenty-something businessman wearing his ultra-cool mobile computer headset with voice recognition software and screaming "Buy!" and "Sell!" over and over, oblivious to the disturbances he was causing to a flock of nearby pigeons (nature).

But the worst of all are those which use religious symbols to hustle products. Monks, it seems, are now turning up everywhere in commericials.

The men in hoods and robes are marketers' darlings, having starred lately in campaigns for America Online's broadband service, General Mills' Oatmeal Crisp Fruit 'n Cereal Bars and PepsiCo's Pepsi Blue brand. These followed appearances in commercials for companies like I.B.M., Nintendo and Sony.

"They're lovable," said Len Short, executive vice president for brand marketing at America Online in Dulles, Va., part of AOL Time Warner. In the pantheon of widely appealing stock figures, "you have dogs, babies and monks." he said. "Who hates monks?"

. . . Many times the monks' role in advertisements is . . . to show that the product is fabulous enough to entice even an ascetic, said James Twitchell, professor of English and advertising at the University of Florida in Gainesville.

"Here's a group that owns contemplation," Professor Twitchell said. "So anything that gets them to throw it over must be a miracle."

Great. Men and women who have devoted their lives to the service of God and the Church have achieved the status of "lovable" right up there with dogs and babies, and become so through the act of abandoning their life of simplicity and embracing the worldly pleasures which only consumption can deliver. It reminds me of something a friend said to me over the summer -- Americans are unable to figure out Islam because they simply cannot comprehend why anyone would turn down the opportunity to consume alcohol and engage in promiscuous sex.

Capitalism is stunningly skilled at making every sacred thing it touches profane.

More evidence of the very valuable vassalage (VVV) of Eastern Europe for the US occupation of Iraq.

Eager to have more Iraqis take responsibility for their country's security, American officials here are planning to ferry as many as 28,000 Iraqis to Eastern Europe for an intensive police training course.

Bernard B. Kerik, a former New York City Police commissioner in charge of the Iraqi Interior Ministry, said in an interview that American officials had secured permission from the government of Hungary to set up a large police academy inside an old Soviet military base there.

Mr. Kerik said the extraordinary measures were necessary because the existing police academies in Iraq were not large enough to train that many officers in the next several months.

His plan is part of a larger effort by senior American officials here to press the Iraqis to take a greater share in running the country. The Bush administration is also under growing political pressure at home to lighten the load on the American forces here.

This importance of this small agreement goes far beyond Iraq. It points up the continuing struggle between the US and UK (with Spain and for the moment, Italy) on one side, Germany, France and Belgium on the other, over the future of Europe. The former groups wants Europe to remain a vassal to the United States as it was throughout the Cold War, while the latter group seeks both a more autonomous role globally and a domestic path independent from Texas-style capitalism. Eastern Europe is proving the battleground between these opposing visions and forces, and so far the US-UK side seems to be winning.

More Poles, coming right up!

Here are a few recent tidbits of interest from the world of bankruptcy.

• June's credit card delinquency rate, which reflects the percentage of credit card accounts with a monthly payment that is more than 30 days past due, rose to 5.12 percent from 4.93 percent a year ago, Moody's said. Moody's credit card delinquency index has risen from year-earlier levels in 10 of the last 11 months, it said. . . . For the second quarter, the charge-off rate was 6.97 percent, matching the record high set in the second quarter of 1997.
  
• The total number of bankruptcies and the total number of non-business (personal) bankruptcy cases filed in the 12-month period ending June 30, 2003, once again broke records, according to data released today by the Administrative Office of the U.S. Courts. Filings increased 9.6 percent from 1,505,306 bankruptcy cases filed in the 12-month period ending June 30, 2002, to 1,650,279 filed in the same period ending on June 30, 2003, the largest number of cases ever filed in any 12-month period.
  
• At its current growth rate, the total number of personal bankruptcies filed in the U.S. will eclipse 1 million petitions around mid-August, the earliest that milestone has been achieved in a calendar year.
  
• Research by the Federal Reserve indicates that household debt is at a record high relative to disposable income. Some analysts are concerned that this unprecedented level of debt might pose a risk to the financial health of American households.
  

Since the "do more with less" approach has worked so well with the North American power grid, Don Rumsfeld thought he'd make it the Pentagon's motto, too.

A senior Defense Department official said Mr. Rumsfeld would order the Pentagon's senior leadership, both civilian and military, to rethink ways to reduce stress on the armed forces, fulfill recruitment and retention goals and operate the Pentagon more efficiently.

In essence, Mr. Rumsfeld will ask the service secretaries and chiefs and his under secretaries to address how the Pentagon can more efficiently use its troops at a time when the armed forces are spread thin by global deployments.

"More efficiently" is mostly a euphemism for "privatization" and "outsourcing", something Republicans have been doing for a long time. Rather than have uniformed soldiers doing lots of jobs, Rumsfeld figures the private sector and foreign militaries can do lots of the scut work instead. But the funny thing about private corporations and foreign militaries is that if they don't want to show up to support the latest imperial adventure, they won't.

U.S. troops in Iraq suffered through months of unnecessarily poor living conditions because some civilian contractors hired by the Army for logistics support failed to show up, Army officers said. . . .

One thing became clear in Iraq. "You cannot order civilians into a war zone," said Linda K. Theis, an official at the Army's Field Support Command, which oversees some civilian logistics contracts. "People can sign up to that -- but they can also back out." . . .

For almost a decade, the military has been shifting its supply and support personnel into combat jobs and hiring defense contractors to do the rest. This shift has accelerated under relentless pressure from Defense Secretary Donald Rumsfeld to make the force lighter and more agile.

"It's a profound change in the way the military operates," said Peter W. Singer, author of a new book, "Corporate Warriors," a detailed study of civilian contractors. He estimates that over the past decade, there has been a ten-fold increase in the number of contract civilians performing work the military used to do itself.

"When you turn these services over to the private market, you lose a measure of control over them," said Singer, a foreign policy researcher at the Brookings Institution, a think tank in Washington.

Go figure. You can't count on patriotism to motivate capital or mercenaries (and in the end, what's the difference between the two?). Who woulda thunk it!

International intellectual property rights are one of the two Big Issues for the Global South at the upcoming WTO ministerial meeting in Canc�n. Everyone thought the North and South had reached a compromise on the question of global drug access back in Doha in 2001, but the US lobbying group PhRMA (Pharmaceutical Research and Manufacturers of America) made sure that didn't happen. Now, just two-and-a-half weeks away, the word on the street is that a draft deal between the US and several key Southern countries is in the works.

Trade diplomats and industry executives said negotiators from the US and several developing countries were in sight of a compromise to end a deadlock that has divided the WTO for almost two years. A draft deal must still be approved by governments of the developing countries involved.

If they all accept the plan in time, it will be submitted to a meeting of the WTO's ruling general council next week, where broader support will be sought.

"We are optimistic of finding a solution," said Fazil Ismail, chief WTO representative of South Africa, which has played a pivotal role in the talks.

The WTO ambassadors of Brazil and India, also crucial figures, declined to predict whether a final agreement would be reached.

The chattiness of South Africa versus the stoicism of Brazil and India is notable. South Africa is a country which does not have its own drug industry and therefore must import its pharmaceuticals from abroad -- preferably generic drugs from other Southern countries which are much cheaper than from the North. Brazil and India, on the other hand, are successful producers of generic drugs and often use compulsory licensing to force pharmaceutical corporations to work their patents locally rather than force these poor countries to import from the US or Europe. With the US on one side and Brazil and India on the other, importers like South Africa are the fence-sitters. Which way they go will heavily influence the politics of this entire issue.

Back when the United States was a developing country, folks like Thomas Jefferson simply stole intellectual property valuable to the advancement of the country. Of course, the US Founding Fathers didn't have the WTO to worry about back then. As recently as the 1970s most countries did not recognize product patents on pharmaceuticals. India, for example, recognized only process patents until forced by the WTO in 1998 to recognize product patents. Back then, only processes could be patented, so if some innovative firm could produce an existing drug in a novel way, they were rewarded rather than crushed by monopolists.

Unfortunately, the prospect of simply eliminating pharmaceutical patent regulations for the poorest countries in the world is not on the table -- but it should be. Patents, after all, are government enforced monopoly rights which must be balanced against the interests of the public. The poorest countries in the world should not have to pay anything at all to monopolists for the "privilege" to purchase drugs. If Brazilians can do it cheaper than Americans, I say let the Brazilians do it. Or is this fight really about the US government and PhRMA trying to stop the growth and development of the pharmaceutical industry in the Global South except on their own terms -- in short, about keeping the South continually dependent on the North?

The General is not one to frequent the Washington Times, but this recent op-ed by Senator Kay Bailey Hutchison (R-TX), chair of the Senate Appropriations Subcommittee on Military Construction, caught the General's eye.

Our recent operations in Afghanistan and Iraq reinforce those very lessons. We prosecuted a very successful war, but if we are going to bring freedom and democracy to the Iraqi and Afghan people while preserving the peace elsewhere, we will need young men and women with their boots on the ground. I am increasingly concerned we don't have enough soldiers and Marines to do all the jobs that must be done.

. . . the Army's active strength [is now at] 491,000 � too low for our current requirements. Today, in addition to the 491,000 active-duty Army soldiers, there are 550,000 members of the Reserve and National Guard. In order to keep 370,000 of our soldiers deployed to more than 100 countries, we have called to active duty an unprecedented 136,000 members of the Reserve and National Guard. . . .

Our guard members and reservists signed up to defend our nation in times of national emergency and stand ready to do just that. They never expected to augment the day-to-day missions of active-duty forces. . . .

We need more troops or fewer missions. Before we lose too many trained and qualified reservists, I hope we address the critical issue: Do we have enough Army and Marine active- duty members for the post-September 11 era of national security? My view is: We do not.

This is a heavy-hitting piece by a person with real power in the Senate. Has there ever been an empire than operated without a military draft? I don't think so (but I'm happy to be corrected). "More troops or fewer missions" indeed.

Abu Aardvark has offered the General a kind word of instruction on liberal Islam. If you recall, last week the General opined,

Kristof is typical of those liberal atheists who want to imagine religion in a way which [1] makes it completely consonant to their own world view and [2] subsequently drains it of all meaning and power. In this article, Kristof does to Christianity what Tom Friedmann does every day to Islam. Friedmann want desperately to find the elusive "liberal Muslims." He routinely scours the Islamic world for them, champions the two or three he runs across and prescribes their amazingly unpopular and insincere religion for the millions who actually hold to the tenets of Islam -- all while Freidmann himself is not Muslim.

Now, the General knows a lot about Christianity, and not much at all about Islam. Here is what Abu says.

While the Good General is right about Friedman, I think he is on shakier ground with his dismissal of liberal Islam. There really is a strong intellectual trend of liberal Islam, and a strong popular trend of Islamists who hold views far, far from the rigid Salafi extremities of an Osama bin Laden. For a start, the General might check out the work of Yusuf al-Qaradawi, who is probably the single most popular and influential Islamist public intellectual today, in part due to his regular appearances on al-Jazeera. Al-Qaradawi is an Islamist who came out of the Muslim Brotherhood milieu, but has written and preached extensively for the values of tolerance and against extremism. Where Friedman goes wrong - and GG is right about this - is to assume that these liberal Islamists share the same beliefs and preferences as Western liberals. They don't. Many of the goals of a Qaradawi, or a Tariq al-Bishri, or an Abdelkarim Soroush, or many other luminaries I could name, are firmly grounded in a religious worldview and absolutely aim to propagate the faith and to improve the religious practice of Muslims. But they are also sympathetic to democratic political forms and have fought vigorously for a range of civil and political freedoms, preach tolerance and co-existence, and represent a centrist, moderate, and popular stream within societies otherwise trapped between intolerant Islamist radicals and repressive, authoritarian secular states.

I am happy to accept all these comments, although I think the Aardvark has a rather different definition of "liberal" than does the General. I was using the term theologically while Abu seems to be using it in a political sense -- linking it to "tolerance and against extremism" for example. I don't know if there are any "liberal Muslims" who deny that Gabriel delivered the Koran to Muhammed, deny the resurrection of the body, or claim that Muhammed did not in fact ascend into heaven. But there are lots of "liberal Christian" clergy even who deny similiar aspects of Christianity.

The Conference Board reports today that everything is still coming up roses for the US economy.

A widely followed measure of U.S. economic activity rose in July for the fourth consecutive month, providing another sign that the pace of the recovery is picking up.

The Conference Board, an independent New York business research group, said its gauge of leading economic indicators rose 0.4 percent last month, to 112.5 percent, compared with a 0.3 percent increase in June. . . .

Goldstein and other economists attributed the improved business conditions primarily to tax rebate checks, an increase in military spending and low interest rates that have been a catalyst to the home-buying boom.

Of the ten components of the leading indicators index, five were in a positive direction. However, the two that really matter, making up together over 60% of the total index, are interest rates and the money supply.

After running negative or turning in miniscule positive contributions all year, the interest rate spread (10-year minus federal funds) jumped remarkably in July. Clearly the Conference Board assumes that rising interest rates mean a growing economy in the future, but as the General has argued, rising long-term interest rates are clearly a mixed bag, at least as negative as positive. In particular, the rise in the ten-year has been driven as much by the collapse of the refinancing boom as by expectations that the economy will turn around.

The other big contributor is the money supply; the Conference Board uses M2. This has been a big contributor all year as M2 has been swelling well beyond the pace of economci growth. In fact, M2 is up over 8% since July 2002 and up over 12% annualized since April. Is this a sign of good times to come or a credit bubble? As Doug Noland at the Prudent Bear said recently,

We face these days a fundamental problem: our Credit system is already extremely unstable, owing to unprecedented mortgage debt growth. Destabilizing consequences include the explosion in mortgage-related securities, financial leveraging and (trend-reinforcing) derivative hedging. Furthermore, housing inflation has been excessive for years, with boom-time conditions only sustained by massive Credit growth. And, finally, it is simply difficult to envision how manic buyers� enthusiasm can be sustained for too long in this post-bond Bubble rate environment.

Apart from these two numbers, there really isn't much good news to report from the Conference Board. The other Big Number, average weekly manufacturing hours (which together with interest rates and the money supply make up a full 81% of the leading indicators index), fell again in July.

So interest rates are rising and the Fed is churning out money like there's no tomorrow. Celebrate!

Some interesting comments on the concomitant decline of manufacturing and rise in inequality in London.

The transformation in the occupational structure of London (and other major cities) has been paralleled by changes in its earnings structure. The past 25 years have seen a major growth in high paid jobs, particularly in finance. As a result, the distribution of earnings has shifted sharply upwards. According to the New Earnings Survey, in 2002 average gross annual earnings for full time workers on adult rates in the UK as a whole was �24,500. In Greater London it was �34,760 and in the City of London it was a remarkable �59,000.

Averages are just that, however, and in London in 2002 10 per cent of full-time workers earned less than �260 a week whereas 10 per cent earned more than �1,070 a week. In the City, the top 10 per cent earned more than �1,670 per week, or almost �87,000 a year. One consequence of the gains at the top end has been a sharp increase in inequality. The ratio of the top 10 per cent of earnings to the bottom 10 per cent has risen sharply since the 1970s. The rich are now much richer and London is a much more unequal city than 25 years ago. Dick Whittington was part right: the streets of London are paved with gold, but only for some.

Earlier this month Angry Bear was on a tear over housing prices in the "red states" (voting for Bush in 2000) versus in the "blue states" (voting for Gore in 2000), making the argument that liberal politics makes for higher housing prices, which for some reason is inherently good. The experience of London sheds a different light on the phenomenon.

Not surprisingly, the growth of the well paid professional and managerial middle class has had an impact on the housing market. The size of the owner occupied sector has grown rapidly in recent decades, and prices have risen dramatically. Land Registry data show average prices in London in the second quarter of 2003 were �246,000 but they varied between �642,000 in Kensington to �142,000 in Barking.

Perhaps the biggest impact, however, has been on the growth of gentrification. Forty years ago most of inner London was white working class. Today, middle class home ownership has pushed steadily outwards into Islington, Hackney and the East End. What remains of the traditional working class has either moved out to the suburbs or become more concentrated in the council and social housing sector where unemployment and economic inactivity is high.

So, sure, new middle class professionals voted Gore in 2000, as they voted Labour in 2001. Yet the story of the rise of this liberal class is hardly good news. It is contributing handsomely to the dramatic rise in inequality across all the industrialized countries, reflected in home ownership trends where this class dominates. This class is the one which keeps the Republican lock on the governor's office in Massachusetts despite it being a virtual one-party state (not a single Republican serves in Congress from MA), the same class which has nearly destroyed social democratic politics in its old bastion of Minnesota. As the new middle class has risen, the Twin Cities metropolitan region (Minneapolis--St. Paul) has grown richer, more suburban and more Republican. Neither MA nor MN -- signature "liberal" states if there is such a thing -- have had Democratic governors since the 1980s, even though both voted Gore in 2000.

Let's not sing the praises of the latt� set too loudly.

If it walks like a duck and quacks like a duck, it's a duck. If it floats like a bubble and swells like a bubble . . .

Wow, they're even cutting interest rates in Brazil.

Brazil's central bank made a larger-than-expected cut in the country's key interest rate Wednesday, hoping to keep South America's largest economy from sliding in recession. . . .

The bank lowered its benchmark short-term rate to 22% from 24.5%. It was the third rate cut in as many months and the deepest in four years.

Loose money seems to be everywhere these days. But if Brazil -- the second largest economy in Latin America -- were to fall into recession, that would be clear evidence that the global economy is really on the ropes -- it's not just a European thing.

It's funny how the business media make such a big deal about the supposedly magic number of 400,000 when speaking of new jobless claims in the US.

The number of Americans filing first-time claims for jobless benefits fell last week, a government report said on Thursday, with the power blackout having a ``minimal effect'' on the data.

Initial claims fell to 386,000 in the week ended Aug. 16, down 17,000 from an upwardly revised 403,000 in the prior week and below analysts' expectations for 395,000 claims. . . .

The running four-week average, which is viewed as a better gauge of the labor market because it smoothes volatility, was below the key 400,000 mark for the third week in a row.

The moving average dropped 1,250 claims for the four-week period ending Saturday to 394,250, pointing to a strengthening job market.

Hmm, 400,000 is bad but 394,000 is a sign of growing strength??

You may recall that the "magic number" lurked under 400,000 for most of the early winter of 2002-03, and the summer of 2002, and late winter 2002, and summer 2001. Since the magic threshhold was first breached under Bush in April 2001, the lowest it's been was 368,000 new claimants the week ending January 11, 2003. Wake me up when we get to this figure again.

What's the solution? Order more Poles.

But the diplomatic maneuvering today suggested that some officials in the administration, particularly in the State Department, believe that the bombing demonstrates that military reinforcements are needed. There are now 139,000 American troops in Iraq and 21,700 troops from other countries, half from Britain.

Some experts say it is unrealistic to think that Iraq can be secured with troops at the current level. A debate over this subject flared in May, when Gen. Eric K. Shinseki, then the Army chief of staff, said hundreds of thousands would be needed to secure Iraq after the war.

James F. Dobbins, an expert in peacekeeping operations who was the Bush administration's special envoy to Afghanistan, said in an interview today that the United States might need 300,000 to 500,000 troops to maintain stability in the country.

"Whatever the right number is, it's significantly larger than what we have," said Mr. Dobbins, director of international security and defense policy at the Rand Corporation. "But, let's face it, we're going to be driven by what can be deployed rather than what the situation calls for."

When US Congressman Charles Rangel tried to broach the subject last winter of reintroducing the military draft in the United States, he didn't get far, but this possibility just can't go away so long as the US is committed to empire.

Just as the French had hundreds of thousands of soldiers from West Africa, the West Indies and Indochina fighting for it in Flanders during World War One, so, too, does the US have Poles, Danes, Bulgarians and Hondurans serving in Iraq today. But how many colonial subjects can the Bush administration really force to the front of this war?

Matthew Yglesias likes the new piece by Jacob Levy (a Volokh Conspiracy blogger) in The New Republic on agricultural subsidies. But is there really much to like there?

Levy is way off-base on much of his commentary. In short, he really doesn't know what the hell he's talking about.

Agricultural protectionism--the combination of quotas, tariffs, and subsidies for farm products--may be the purest example of destructive special-interest politics ever created. Rich countries--with a few exceptions, such as Australia--burden their own populations three times over. The policies cost taxpayers directly--the atrocious 2002 U.S. farm bill is slated to cost $180 billion over ten years. (Worse, annual unbudgeted "emergency" farm spending during the late 1990s accounted for a great deal of the spending boom that squandered much of the predicted budget surplus long before the first Bush tax cut took effect.) In return for their largesse, taxpayers get the privilege of paying higher prices as consumers (and, of course, inflated prices for basic foodstuffs hit the poorest proportionately hardest). And, by locking up an excess of labor and capital in an agribusiness sector that couldn't turn an honest profit on its own, agricultural protectionism inhibits productivity growth, preventing shifts in employment and investment to more productive parts of the economy.

First, let's ask why farm subsidies exist in the first place. In the US, these things took off after the 1996 "Freedom to Farm" bill was passed which scheduled the elimination of all production controls on US agriculture. Without production controls, overproduction occurred and prices went through the floor. Farm subsidies then came in to compensate for these ultra-low prices -- prices farmers had not seen since the Great Depression. Sure, the General agrees, these massive farm subsidies are bad policy and bad economics. But they don't come out of nowhere. They are the direct result of the rule of the market in agriculture.

What next from Levy? Higher food prices? Please! The US is the master of malbouffe -- "junk food" in the sense of mass-produced crap with low nutritional value, even less cultural value, standarized, laced with pesticides, additives, fillers, preservatives, artificial flavors and colors. The intensive agriculture system which the US has mastered has produced the cheapest food on the face of the planet -- cheap malbouffe. Adam Drewnowski of the University of Washington has done an interesting study that suggests Americans are so obese precisely because our food is too cheap, not too expensive. What costs less, a malbouffe box of Twinkies or a head of lettuce? Calorie for calorie, Drewnowski found, in the words of the Seattle Times,

the less-convenient foods recommended by most experts for all-around good health and weight control particularly fresh vegetables, fruits, fish and lean meat tend to cost more than packaged convenience foods when measured on a cents-per-calorie basis, even when including the costs of processing and packaging convenience foods.

What next from Levy? Subsidies keep too many Americans in agriculture? Now he's moved straight from the sublime into the ridiculous. In 1990, just 3.9 million Americans lived on farms -- a mere 1.6% of the country's population. And this is too many for Levy?? Give me a break.

Levy continues:

By shutting off access to developed countries' markets for the goods that developing countries are most likely to produce competitively, agricultural protectionism forecloses the most likely route to development and poverty alleviation. Moreover, the artificially high prices in the rich countries encourage overproduction there; the surplus gets exported at cut-rate prices, which not only makes it hard for developing countries to compete in export markets, it typically makes poor farmers uncompetitive in their home markets as well.

Not exactly. The US produces no coffee at all, must import every bean, and yet coffee farmers around the world are in desperate poverty and the ones in Ethiopia are dying. Did the colonies in Africa or Latin America get rich off of sugar, palm oil or tobacco? No. Farmers in the global south need most of all for the US and the EU to stop dumping, much less do they need access to US and EU markets.

At least Levy recognizes that many in the Global South overproduce, too. Brazil, Argentina and most of the rest of the Cairns Group are no saints in this story. They are as desperate to dump their overproduction as are the US and the EU. In fact, they are using many of the same methods as the rich countries use. The Cairns Group is no story of peasant agriculture on the ropes. They're as much a part of the problem as anybody.

Levy's argument is so weak because he hasn't the slightest idea why overproduction occurs. It doesn't occur because of subsidies. Subsidies are an effect, not a cause, of overproduction.

The causes are several. First, technology is the biggest culprit. The US, the EU and many other governments as well as corporations now such as Monsanto pour billions of dollars into research to produce crops, animals and techniques which boost production with no thought as to whether we need to boost production in the first place. In fact, there is rampant overproduction in the US and yet agriculture research institutes continue to fund research to produce more and more.

Second, the nature of agribusiness today is not far behind as a chief culprit. The Cargills, ADMs and Tysons of the world make their money off of volume. They have driven farmgate prices so low through overproduction that the profit margin is extremely thin. In order to make profits, therefore, they need volume, volume, volume! Then the game becomes one of trying to stick "the other guy" with the costs of overproduction. Currently this largely means US agribusiness trying to stick it to the EU, and vice versa. As long as we have a policy of ultra-cheap food, we will have rampant overproduction.

Third, consumers in the Global North themselves are party to this madness, and especially Americans. US consumers want cheap food. They pay the least amount relative to their incomes in the world, they like it that way, and they demand it persist. And whether they realize it or not, the path to cheap food is overproduction. Eric Schlosser's fantastic book Fast Food Nation demonstrates very clearly the wide ramifications of the American food culture on society at large. As this culture moves not just to Japan and Europe but to the cities of Mexico, Brazil and even Vietnam, obesity and all its health problems follow. Did you know that there are more overweight people worldwide today than underweight people?

The piddling libertarian move of Levy will get the world nowhere. History shows that crop acreage changes very little in relation to price. Prices can tank and production will fall just a little. Daryll Ray of the University of Tennessee shows that since 1985, "a one percent change in the index of prices received by farmers results in a 0.15 percent change in total harvested cropland acreage". So much for the market solving our problems.

Yes, help the world's poor, but don't do it by 'unleashing the market'. Do it through promoting food security and food sovereignty, and get over the libertarian whining.

For those visitors looking for some comments on Christianity, try my recent commentary here.

A little currency update to hold you over.

On Tuesday the 19th, the broad dollar index closed at 120.68, the highest level for the dollar since April 29.

First Germany, then Italy. Now it looks as if France, too, may be slipping into recession.

The French economy shrank by 0.3% during the April to June period, official figures revealed. France's economy, the second largest in the eurozone, steadily weakened during 2002.

However, marginally more upbeat figures in the first three months of 2003 had raised hopes of an improvement. But the latest contraction will dash hopes of a turnaround

The GDP figures for France are abysmal. The country's best quarter over 2002-03 was 2002:I when GDP growth totalled a mere 0.7%. France is only avoiding a recession call on a technicality, anyway, since GDP contracted both in 2002:IV and 2003:II while eeking out a meagre 0.2% growth in 2003:I.

Thus for all practical purposes, Germany, France and Italy are all in recession. If Japan stays in the doldrums, prepare for the US current account deficit to skyrocket later in the year.

The US balance of payments numbers for 2003:II don't come out for another month, but a close estimate is -$136.3bn -- i.e. 111% of the 2003:I goods and services deficit (in 2003:I the figure was -$136.1bn -- 112% of the goods and services deficit). If so, the US would have a current account deficit again at 5.1% of GDP, and this in a quarter in which GDP was growing and the trade deficit moderating. In the second half of 2003 GDP will probably grow, but the current account deficit will surely grow more as the US becomes the global growth engine yet again.

In case you just weren't sure about the impact of Wal-Mart on the retailing world, here's what a Merrill Lynch analyst has to say.

Wal-Mart's impact has been "like the Black Death," said Mark Husson, a retail analyst for Merrill Lynch. "The plague comes to your village, and everybody gets sick, but not everybody dies."

Well, when you look at the big picture, that is comforting, isn't it? The Black Death only killed about 40% of Europe, after all. So Wal-Mart won't wipe out everybody with delirium, blood infections and swelling, puss-filled buboes! Take heart!

The refinancing boom continues to bust.

U.S. mortgage applications last week fell 10.7 percent to their lowest level in more than a year, an industry survey said on Wednesday, as rising rates cut into demand for buying a home or refinancing a loan. . . .

With rising rates, the number of mortgage applications filed in the week ended August 15 was more than 60 percent lower than in the last week of May, when mortgage applications peaked, according to the group.

That decrease has come mainly from a decline in refinancing. Refinancing applications last week were over 70 percent lower than in the last week of May.

According to the Mortgage Bankers Association of America, the refinance share of mortgage activity fell to 53.4% of total applications, down from 77.3% in mid-June. Considering the MBAA's chief economist suggests the bottom of this decline is around 20-25%, we've got quite a long ways yet to fall.

While some economists who will remain nameless are constantly crowing about the big productivity numbers the US economy has been putting up recently, an interesting op-ed in today's Financial Times puts a valuable new spin on the data.

But starting in 1995 something extraordinary happened. America's productivity growth speeded up while Europe's slowed. A host of research studies attributed most, if not all, of the US's surge to its dominance in making computers and developing software. Intel and Microsoft are familiar names that symbolise US dominance in the information and communications technology (ICT) sector. . . .

Two weeks ago the productivity puzzle suddenly deepened when the US government revised upwards its productivity numbers for the past two years and provided its first release for the second quarter of 2003, which came in at an unbelievable 5.7 per cent. The underlying long-run trend of productivity growth is currently running at about 2.8 per cent a year, fully double the pre-1995 growth rate.

So we face a new paradox. Those research studies that attributed the 1995-2000 revival of US productivity growth to the ICT investment boom of the late 1990s have some explaining to do. After 2000, the ICT investment boom collapsed along with the stock market but productivity growth accelerated. If ICT growth collapsed but productivity growth increased ever faster, something else besides ICT investment must have been behind the American miracle.

Aha!

The General crunched some numbers and the results are quite fascinating. The below chart shows quarterly growth rates in private non-residential fixed investment (blue line) and worker productivity (red line) since 1992. The growth rates are seven quarter centered moving averages, and the productivity line is lagged nine quarters.


[If you can't see the image, clicking here should work]

Throughout the roaring '90s, investment and productivity gains are shadow one another in an amazingly tight way. The nine quarter lag sort of surprises me, but there the data is.

As we approach 2000, investment growth starts to fade, and by 2000:IV (remember, these are 7-quarter centered moving averages) investment begins to actually fall. What is stunning, of course, is how productivity begins to take off like a rocket just as investment begins to wane. These post-2000 gains -- that is, the really big productivity gains -- are not built on technology.

What then are they built on? The FT piece today suggests it's

"intangible" productivity-yielding activities. These comprise such things as reorganising and reinventing business practices, and both formal and informal training of computer and software users. . . . especially [in] retail trade, which just happens to be where the US's productivity showing is strongest. America's retail productivity performance has all been achieved in stores newly built since 1990, not in existing stores.

The new stores are the "big boxes" such as Wal-Mart, Home Depot and Best Buy, large new buildings set up on greenfield sites at interstate highway junctions, in suburbs and, increasingly, in inner cities. As these new stores reap the rewards of their size, openness and accessibility and drive smaller stores out of business, they bolster the average productivity of the US retail sector as a whole.

Yes, ladies and gentlemen, "modern retailing" is the answer.

If true, this analysis fits nicely into the exploitation argument the General has been pushing all along. After all, Wal-Mart is synonymous with "exploitation," both of its workers and its suppliers. "Modern retailing" gives corporations big profits and gives consumers cheap goods. It also supplies low wages and low benefits, battles union activity, acts as a huge accelerator on the US current account deficit, destroys smaller businesses (which notably funnel much more of their revenue into local communities), undermines democracy and aggravates deflation.

"How beauteous mankind is! O brave new world, that has such people in it!"

Yesterday this ridiculous report put out by the World Markets Research Center was all the rage. It claimed that the United States was the fourth most likely target of terrorists in the next year, behind only Colombia, Israel and Pakistan. All the nightly news programs ran with it.

Um, did these jokers just forget the obvious -- or did they intentionally "overlook" -- you know, like, IRAQ!!

How is it that mortgage rates are rising rapidly -- up over 100 basis points since June -- and yet the Homebuilders Association's housing index rose for its fourth straight month, hitting its highest level since December 1999? Justin Lahart at CNN/Money has some ideas.

First off, if the slowdown in mortgage activity is going to hit housing (or consumer spending, for that matter), it's going to happen with a lag . . .

Second, its important separate out mortgage refinancing, where people who already own a home get a more favorable rate on their mortgage, from mortgage purchases aimed at buying a home. According to the Mortgage Bankers Association new mortgage application has moderated only slightly since June and is still above where it was through April.

Good points. Let me offer a third.

The General's brother was in the market for a new home a few months ago, precisely to take advantage of the ultra-low mortgage rates. The General's banker kept delaying and delaying, slowing down the application process, asking for more information, ignoring phone calls, and the like so much that weeks went by before my brother finally gave up and went to find another banker. With rates rising since June, bankers have every incentive to draw out the application process as much as possible. The General heard a story on Marketplace (on NPR) a few weeks back on how lots of people who thought they had locked in the ultra-low rates found out later to their dismay that they hadn't locked in a thing. The banker gave them a quote, but one without guarantees -- of course, that was only stated in the fine print. The longer it takes to actually lock in the rate, the higher the rates go, the more money the banker makes.

Brad DeLong has what appears to be a nice little discussion of the US current account deficit. Unfortunately it falls painfully short precisely because the Good Doctor is a liberal economist and thus has no real appreciation for either structure or history.

The analysis starts off badly, trying to imagine away most of three decades worth of large and engorging current account deficits:

Some of these large trade deficits are the result of domestic economic mismanagement (the very large trade deficits of the mid to late 1980s were, in large part, consequences of the disastrously-botched fiscal policy that was the Reagan deficit). Some of these large trade deficits are the result of foreign economic mismanagement (the very, very large trade deficits of the late 1990s and early 2000s are in large part the result of insufficient demand and high unemployment in many of our major trading partners). Some of these large trade deficits are simply not there: the result of errors and omissions in the data that fail to capture a substantial amount of U.S. service and other exports

It gets better when DeLong begins to take the data seriously and inquire why it is that the US alone seems immune to the laws of international financial gravity.

there is a portion of the persistent U.S. trade deficit that is not due to domestic macroeconomic mismanagement, not due to foreign macroeconomic mismanagement, and not the result of errors and omissions in the data, but instead reflects three exorbitant privileges that the U.S. has as a result of its key role in the world economy.

The first exorbitant privilege is that foreign central banks prefer to hold their reserves in dollar-denominated assets--and as the world economy expands, they want to hold more and more of such dollar-denominated assets.

Excellent point that central banks prefer to hold dollars. This is not so much because "the world economy expands" as it is because of the structural position of the United States in the global economy -- namely, as the world's consumer market of last, and increasingly first, resort. Countries like Japan and China need to hold dollars to keep their currencies stable so as to maintain their price advantages exporting to the US market. One need look no further than early 2003 to see the heavy management of the East Asian currencies compared to the real economic costs incurred by the Europeans who have allowed theirs to float.

The second exorbitant privilege is that rich people in many foreign countries think that dollar-denominated assets--large sums of money in the Vanguard funds or somewhere in Citigroup--are an important part of their political risk insurance portfolio.

Very good again. Especially elites from the Global South use the US as a nice safe haven for their ill-gotten gains. Economists James K. Boyce and L�once Ndikumana wrote a very interesting article last year documenting the amount of capital flight from Africa -- much of it winding up in the US.

In a study of 30 SSA countries, we estimate total capital flight for the period 1970-1996 to have been about $187 billion in 1996 dollars. Including interest earnings, the stock of capital flight for the sample stood $274 billion, equivalent to 145% of the total debt owed by the same group of countries in 1996. In other words, we find that SSA is a net creditor to the rest of the world in the sense that external assets, as measured by the stock of capital flight, exceed external liabilities, as measured by the stock of external debt. The difference is that while the assets are in private hands, the liabilities are the public debts of African governments.

So crooked Latin Americans and Africans park their money in Miami and Los Angeles and New York, helping prop up the US current and enabling the enormous current account deficit. True, but nothing to be proud of.

The third exorbitant privilege is that even if the rich abroad are confident about the political stability and economic prospects of your native land, the United States is still a very, very nice place to live in many, many ways. Lots of people living elsewhere know this, and think that even if they don't want to live in America, the odds are very good that some at least of their children or grandchildren will.

This one is just silly, and more a subset of privilege #2 than something that can stand on its own. Why not park the money in Europe, then? In fact, many Southern elites do park their money in Europe, and with the US war on terrorism seeking to crack down on the finanical network of al-Qaeda and similiar groups, more of this money is likely to go to Europe in the future. It's contribution to the ability of the US to maintain its deficit is negligible and not worth mentioning.

What does DeLong miss, however?

First, the growing negative net investment position of the United States. This is the most important point and DeLong completely ignores it.

Second, the ballooning US federal deficit.

Third, the growing current account deficit as a percentage of GDP: 5.1% of GDP in 2003:I.

Fourth, the existence of the euro as a real global challenger to the privileges of the dollar.

Yes, de Gaulle was right. The US does enjoy "exorbitant privilege" which no other country on earth can have. Yet even the US economy does not walk on water. In the cartoons, some characters hover in mid-air after they run off the cliff longer than others. The US is amazingly adept at hovering, but even this cartoon character needs to face up to the laws of gravity.

Waiting for petro.

The three months since full-blown hostilities ended have been a hard lesson for markets which had hoped to see oil exports from Iraq climb swiftly towards the 2m barrels a day the US promised to deliver by the end of the year. Southern refineries have been plagued by power cuts, the north-south "strategic pipeline" had already been sabotaged, and the weekend's attacks brought exports from the north of the country to a complete standstill. . . .

With anti-coalition guerrillas having discovered economic terrorism, few now believe the 2m barrel objective is achievable. "There are a lot of factors out there supporting the oil price right now, but the overriding question is when Iraqi production comes back," said Razia Khan, of Standard Chartered bank. A prolonged period of $30-a-barrel prices is not the prescription central bankers and finance ministers would have written for the world economy right now.

Here is the General's favorite part:

Hawks in the Bush administration had hoped before the war that oil revenues of up to $15bn a year would offset the $4bn a month cost of keeping troops in Iraq. But far from profiting from the war by seizing a cheap source of energy, Washington is having to throw money at securing Iraq's oil sector, at a time when its finances are already showing a record deficit.

As Mick Jaggar so ably crooned, "You can't always get what you want, but if you try sometimes you might find you get what you need." The neocons particularly, but also the country as a whole, needs this collective reality-inducing slap upside the head. Brent crude is at $28.80/barrel today and moving higher.

In the last week the General has seen more than a few articles discussing the steady but sure erosion of manufacturing in both the US and the UK by China. In the UK,

a report published yesterday by the Institute for Public Policy Research (IPPR) has such a depressingly resigned view of the outlook for British manufacturing industry, suggesting as it does that manufacturing might shrink to as little as 10 per cent of GDP and 5 per cent of employment by 2050. Interestingly for a left-leaning think-tank, the IPPR thinks there is little the Government can or should do about this phenomenon, which it thinks is both global and inevitable.

And in the US,

The proportion of the work force employed in manufacturing has fallen to 11 percent from 30 percent in the mid-1960's. Two of the 19 percentage points disappeared in just the last 28 months. On another level, manufacturing's share of real gross domestic product � representing all the goods and services produced in the United States � has edged down, even including in the count the output of foreign manufacturers operating here. The share of real G.D.P. has dropped to between 16 and 17 percent, from 18 to 19 percent in the 1950's.

Given manufacturing's importance in maintaining our status as a world power, the downward trends are alarming.

Alarming? Technocrats and new middle class types like Robert Reich will celebrate the rise of the "symbolic analyst" and insist the US and UK can get along just fine selling legal services and insurance and haircuts to one another while the Chinese make all our toys and the Mexicans make all our clothes. Isn't that how the Western countries got to rich, anyway, by casting off lowly manufacturing onto the Global South and turning to the "new economy"?

Maybe not.

Both the UK and the US article mention the social and especially cultural importantance of manufacturing.

it would be wrong to abandon manufacturing entirely to its fate. There are key strategic and social reasons for maintaining at least some kind of a multi-layered manufacturing base. Societies that forget how to make and grow things will eventually lose touch with the very basics of human existence. There has always been a big and vibrant market in individually customised products, but it has tended to be confined to the relatively wealthy. Technology is likely to transform it into a mass market phenomenon, but to work local production is essential. That's why it is so important that Britain continues to maintain a modern skills base in manufacturing.

Over at the NYTimes,

the essence of a great world power is its edge in producing not services but manufactured products that other people want � Boeing's airliners, for example, Intel's semiconductors and Caterpillar's earth-moving equipment. To the extent this output passes to foreign manufacturers, or even to Americans operating abroad, we lose the means to buy what we, in turn, want from others.

More than half of the manufactured goods that Americans buy are made abroad, up from 31 percent in 1987. If we continue on our path of ceasing to make merchandise that others want to buy from us, the danger is that these imports will be unaffordable for our descendants.

What both articles ignore is the role of manufacturing in promoting a more equal democratic society in both the UK and the US. Manufacturing produced the middle class we know today. As manufacturing dies in both countries, so does the middle class. Gaps of inequality are gaping in both countries now as the new middle class takes up law and business consulting and graphic design while the working class slips into jobs as janitors, security guards, retail clerks and telemarketers.

History suggests that democracy depends upon manufacturing.

Cancun will surely not be a full repeat of Seattle. Yet we do know that history always repeats itself, first as tragedy, second as farce.

Hope is fading fast that this latest World Trade Organisation jamboree will lead to a deal to unlock billions of pounds for both the rich and poor nations.

It is a staggering 21 months since the talks were launched in Doha, Qatar, amid scenes of jubilation. That optimism has all but evaporated and there is scant sign of progress. . . .

most NGOs believe there is a real danger the talks will simply rubber stamp a deal under which rich countries exploit the wealth of the developing world but give little in return. Adriano Campolina Soares, head of the rights campaign at ActionAid, said globalisation has "completely failed" poor people and the WTO's trade rules have made things yet worse.

He said: "If Cancun fails to deliver genuine changes on key issues such as agriculture and access to essential drugs, developing countries may well start questioning the existence of an organisation that seems constantly to work against us."

Believe it or not, the US is still trying to prevent the override of drug patents in the Global South despite the apparent victory for the South at Doha in 2001. Back on November 14, 2001, the WTO declared by consensus

We agree that the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO Members' right to protect public health and, in particular, to promote access to medicines for all.

Things looked good for the rights of countries like Brazil, South Africa and India in particular to grant compulsory licenses to local manufacturers of pharmaceuticals and to decide for themselves what constitutes a "national emergency" in public health. It even looked good for smaller, much poorer countries in the South to import generics from countries like Brazil or India since they couldn't produce the drugs themselves.

Even since then, however, the Bush administration has used every gambit in the book to block the flow of generic drugs across international boundaries. In particular, the US uses its "Special 301" trade powers to bully any country failing to live up to the patent standards which US pharmaceuticals -- represented by the Pharmaceutical Research and Manufacturers of America (PhRMA) -- deem necessary. The use of bilateral trade agreements is also prevalent. Just as the US has won exemption from the jurisdiction of the International Criminal Court via so-called "Article 98 agreements," so too is it winning "TRIPS-plus" patent protections via the same kind of bilateral strongarm tactics.

The majority of 'global rebalancing' scenarios require the US dollar to fall significantly -- if slowly -- so as the begin to dig away at the stunningly enormous US current account deficit (at 5.1% of GDP in 2003:I) and direct capital away from the US and into other economies. With the US economy appearing to return to some respectable if not vigorous level of GDP growth, toss the rebalancing scenarios out the window.

The dollar neared a 3-1/2-month high against the euro and rallied broadly against all major currencies on Monday as technical patterns accelerated a dollar uptrend fueled by recent solid U.S. economic data. . . .

According to dealers, relatively weak economic reports from the euro zone have given U.S. data additional significance, as traders see reason for optimism that the economy is poised for sustained growth.

"Right now, the focus is just shifting a little bit to the U.S. economic picture being a bit stronger than the European picture," said Cyrus Whitney, head dealer with Commerzbank in New York. "Now that the euro has broken (below) $1.1215/1.1220 support ... the euro could ultimately try $1.10 over the next couple of days."

Get this. The euro is down from its all-time high of $1.1870 on June 5 to $1.1135 this afternoon -- a big 6.2% drop in just over two months. That of course means a big 6.2% rise in the dollar. Per the broad dollar index, the US dollar is up 2.5% since its recent low on June 16.

A stronger dollar is likely to keep capital flowing into the country, keeping interest rates low and the "recovery" on track. It is also likely to exacerbate disinflation, continue to crush the US manufacturing sector, and will surely blow the current account deficit up like a balloon. Global recovery seems premised, as always, on US growth. Yet in the early 1990s when the world did the same thing, the US current account deficit nearly balanced in the face of US recession. This time around the world continued to loan and loan and loan to the US, and must continue to loan and loan and loan continually.

Good for the US perhaps (too bad if you're hoping to get recalled to the factory after that layoff). Bad for the home countries having their capital sucked out of them. Global rebalancing without somebody's real economy paying the price looks to be impossible -- and that's where the politics will play themselves out.

And you thought Arnold was California's biggest problem.

Growing fiscal problems in U.S. states are becoming more difficult to resolve quickly, and California's crisis might require painful remedies, the International Monetary Fund's top economist said Thursday.

In an interview with Reuters, Kenneth Rogoff said California's massive $38 billion deficit was going to prove especially hard to turn around without tough budget cuts.

If California were a country, the size of its primary deficit, not counting interest payments, would rank in the top five in the world, he said. . . .

"It is going to be very hard to turn this around quickly," Rogoff said. "Looking at the California situation it's hard to recall any region that's terminated a deficit of that size without a lot of pain and growth steroids."

This comment of Rogoff's really stunned me, however.

Turning to another deficit that is a worry for the IMF, Rogoff said the growing gap in the U.S. current account, the broadest measure of trade, thus far has been gradual, letting steam out of "what was an overvalued" U.S. dollar.

Huh?? The gap has been growing all year and six of the seven largest monthly deficits ever have been in 2003. The US current account deficit is so far 25% larger than this time last year. How exactly is this letting off steam?? Particularly since the dollar has been rising the past two months??

We really need the rest of this story.

U.S. industrial output in July posted its biggest gain since January, boosted by a big gain in utilities output and a third straight monthly rise in factory activity, the Federal Reserve said on Friday.

Production at factories, mines and utilities jumped a larger-than-expected 0.5 percent, the Fed said, its biggest rise since January's 0.7 percent gain. Firms also ran at a faster 74.5 percent of full capacity in July, up from 74.2 percent in June. . . .

factory activity, which accounts for almost 85 percent of total industrial production, rose 0.2 percent. Utilities output surged 3.9 percent as a warmer July spurred demand for electricity while production in the mining sector dipped 0.4 percent.

So, let's get these numbers straight. In July, manufacturing output rose 0.2%. Yet over the same month, manufacturing capacity use rose 0.1%; manufacturing houly earnings rose 0.1% (actually 0.06%, but we're rounding); manufacturing weekly hours (per the BLS's index of aggregate weekly hours) fell 1.1%; and manufacturing employment fell 0.5%.

So we have more output with fewer workers working fewer hours. Increased capital use can only account for a portion of this story, since output has risen 0.64% since April while capacity use is up just 0.3%. The other half of the equation has to be work speed-up. This fits the rising productivity story as well, since capital spending was tanking while productivity growth kept chugging along, as well as the weak wage growth over the last three years, especially in comparison with productivity gains, since the reserve army of the unemployed does its job well of holding wages down and keeping profits up.

The bottom line: this "recovery" is being built off of good old fashioned exploitation.

Bad news for Bush from the National Association for Business Economics. When your own class intellectuals start having serious doubts about your competence to manage the environment for generating profits, you know it's time to worry.

The soaring U.S. budget deficit worries economists for some of the nation's top business firms more than any other single issue, the National Association for Business Economics said on Friday.

"The increasing federal deficit is the top risk NABE panelists see facing the U.S. economy, although the threat is more a long-term than short-term concern," said association President Tim O'Neill, who also is the chief economist for BMO Financial group.

Rising unemployment also was cited as a concern for the economic future while worry about homeland security and war was fading.

After a brief pause, long-term interest rates keep going up. On Wednesday the 10-year treasury bond hit 4.58% and maintained that height into Thursday at 4.55%. Rates seemed to be coming down two weeks ago, dipping from 4.40% the week ending August 1, to 4.43% the week ending August 8. Now they continue their northward hike.

Back on August 3 the General reported that many economists think the 10-yr. at 5% is the tipping point, when interest rates become "high" and start cutting into demand and thus the economic "recovery" or whatever it is the US is experiencing. Since then the 10-yr. is up another 11 basis points. And with inflation so low, real interest rates will have a much easier time floating up and up.

OK, back to economics. Paul Krugman cuts to the chase nicely today.

while the growth and new claims numbers were good news, they didn't tell us that the economy is improving. All they said is that things are getting worse more slowly.

Couldn't have summed it up better myself.

As regular readers of the Globblog know, the General is a Marxist political economist. When it comes to politics, however, the General is all populist. You may be surprised, but the General is also a Christian -- and a pretty (small-o) orthodox one at that.

When liberal atheists start commenting on Christianity, as they have done quite often in the recent past (especially over the Episcopalians new gay bishop and Mel Gibson's new film Passion), the General usually squirms but keeps his fingers away from the keyboard. You're reading the Globblog to hear about the global economy, after all. But today's op-ed by Nick Kristof in the NYTimes sent me over the edge. If liberals want to chime in about gay marriage, fine -- this is a democracy. When they start debating what is and is not Christian doctrine, I get itchy. When they start slamming doctrine, however, it's time to say "enough".

The Virgin Mary is an interesting prism through which to examine America's emphasis on faith because most Biblical scholars regard the evidence for the Virgin Birth, and for Mary's assumption into Heaven (which was proclaimed as Catholic dogma only in 1950), as so shaky that it pretty much has to be a leap of faith. As the Catholic theologian Hans K�ng puts it in "On Being a Christian," the Virgin Birth is a "collection of largely uncertain, mutually contradictory, strongly legendary" narratives, an echo of virgin birth myths that were widespread in many parts of the ancient world.

Jaroslav Pelikan, the great Yale historian and theologian, says in his book "Mary Through the Centuries" that the earliest references to Mary (like Mark's gospel, the first to be written, or Paul's letter to the Galatians) don't mention anything unusual about the conception of Jesus. The Gospels of Matthew and Luke do say Mary was a virgin, but internal evidence suggests that that part of Luke, in particular, may have been added later by someone else (it is written, for example, in a different kind of Greek than the rest of that gospel).

Yet despite the lack of scientific or historical evidence, and despite the doubts of Biblical scholars, America is so pious that not only do 91 percent of Christians say they believe in the Virgin Birth, but so do an astonishing 47 percent of U.S. non-Christians.

Kristof sums up his observations with these comments.

I'm troubled by the way the great intellectual traditions of Catholic and Protestant churches alike are withering, leaving the scholarly and religious worlds increasingly antagonistic. I worry partly because of the time I've spent with self-satisfied and unquestioning mullahs and imams, for the Islamic world is in crisis today in large part because of a similar drift away from a rich intellectual tradition and toward the mystical.

Kristof is typical of those liberal atheists who want to imagine religion in a way which [1] makes it completely consonant to their own world view and [2] subsequently drains it of all meaning and power. In this article, Kristof does to Christianity what Tom Friedmann does every day to Islam. Friedmann want desperately to find the elusive "liberal Muslims." He routinely scours the Islamic world for them, champions the two or three he runs across and prescribes their amazingly unpopular and insincere religion for the millions who actually hold to the tenets of Islam -- all while Freidmann himself is not Muslim.

Kristof's "rational Christians" who reject(ed) the virgin birth two generations ago have become today's rational atheists. The "mysticism" Kristof claims to find has been at the core of Christian doctrine since the beginning. Certainly liberal Biblical scholars of the late 19th century and 20th centuries have sought to drain Christianity of every numinous ounce of doctrine. They have at the same time de-Christianized those denominations which have accepted their approach -- the Episcopal Church being the best example. Liberal "Christians" who reject points of doctrine like the virgin birth are not Christians at all -- they are "post-Christians," and Kristof demonstrates this excellently. Kristof's grandfather was on the path to post-Christianity, and Kristof himself has arrived at its logical conclusion. People like Kristof are happy to have Christians around so long as they aren't really the Church but instead a liberal club that just happens to have its meetings on Sunday morning.

The "rich intellectual tradition" Kristof alludes to is hardly rich nor is it much of a tradition. Pelikan was a conservative Lutheran theologian before he converted to Eastern Orthodoxy very late in life (and always accepted and taught the virgin birth) -- hardly the liberal ally Kristof tries to make him into. If Kristof wants rich tradition, he should read Irenaeus, Tertullian, Ambrose, Augustine, Ildefonsus, Bernard, Luther -- and stay away from the Jesus Seminar.

And liberals should be careful about commenting on something -- Christian doctrine -- they know absolutely nothing about.

More on the political economy of electricity and the blackout, from today's NYTimes:

While energy experts disagreed on the precise cause of today's power blackout, they were in agreement that the extensive failure betrayed the age of the region's transmission system and its failure to keep up with demand. . . .

"We've got excess power in upstate New York, but there's no way to get it to New York City because of the bottlenecks," said Denise VanBuren, vice president of Central Hudson Gas & Electric, which supplies power to eight counties north of New York City. "It's very difficult in this economy to get financing for a major transmission line, and we've been concerned for a long time about the region's transmission capacity."

With only a limited number of high-voltage lines, a power failure can spread more quickly when generators try to send their power to areas that need it, overloading the lines that remain. . . .

The problem of preventing such power failures has been that, for the most part, no one has an incentive to invest billions of dollars in new wires, new towers and new transformers. The old utilities have sold off their power plants but still hold a highly regulated monopoly on the network of lines, and they would only invest in new transmission if state regulators would guarantee them rate increases to pay for it.

That is the last thing the regulators, who deregulated much of the industry in hopes of lowering rates, would be willing to do. The entrepreneurial power companies that have bought up power plants have decided against building new transmission lines that would compete with existing ones, possibly driving down transmission charges, and would, at most times, be nothing more than "excess capacity."

And here's the kicker:

Analysts said additional disruptions are quite likely as the economy begins to strengthen and demand for electricity increases.

"If the economy grows at 3.5 percent a year for the next several years, I would not be surprised if we don't have interruptions on a scale that is not acceptable to most Americans," said Irwin Stelzer, director of economic policy studies at the Hudson Institute, a conservative research institute.

Ah, the contradictions of capitalism.

Some excerpts from the Buffalo News article cited by the WSWS:

So this is what we get from deregulation: A rate increase that will push up bills for most Niagara Mohawk residential customers by 8.2 percent.

Isn't the free market just grand?

It wasn't supposed to turn out this way.

The grand plan hatched by state regulators five years ago was supposed to provide a cure for the sky-high electric rates that have sapped some of the life out of the Upstate economy and burdened its residents. Make the state's utilities sell off their power plants and create a wholesale market for electricity that would reward innovation and efficiency and push prices lower. Open up the utility's monopolistic control over its customer base so new electricity suppliers can jump in with innovative offers that save consumers even more. . . .

deregulation isn't working out quite the way state regulators had hoped.

"The idea was that new competitors would come on the scene and be the salvation," says Gerald A. Norlander, the executive director of the Public Utility Law Project, an Albany advocacy group for low income consumers. "That's not happening."

. . . The PSC [Public Service Commission], however, says passing on the actual cost of electricity to customers, which is standard practice with natural gas utilities, is essential to avoid a California-type crisis. To have a free market that functions properly, consumers need to know how much their electricity really costs, whether that's through rates that are adjusted monthly, as with the NiMo plan, or with rates that change daily or by the hour, as some big businesses now pay. That way, they can react by reducing their power consumption when prices are high or shifting their electricity use to a time when demand -- and prices -- are lower.

Energy officials say those market signals helped reduce the need for power by as much as 400 megawatts during the August heat wave and help avert blackouts at a time when the demand for electricity was at a record high.

Well, maybe not after all.

Source: "Deregulation of electricity isn't working out as hoped," Buffalo News, 2 September 2001: B5.

More on the political economy of the blackout, from the World Socialist Web Site.

Privatisation, mergers, costcutting and restructuring have resulted in a lack of investment in new plant and maintenance. As a consequence, the various power grids across the US have become increasingly unstable, particularly at times of high demand such as during heat waves. Any fault in one plant or at one point in the transmission system creates a cascading effect as one station after another shuts down automatically to avoid dangerous overloading.

That is precisely what happened in the latest blackout. . . .

Bill Browning from the Rocky Mountain Institute, a thinktank in Colorado, told CBC News Online: �Everyone is pulling power and there�s lots of big stations on the grid. All you need is one tenuous problem and it cascades throughout. . . .

�At one time, the grid system seemed logical. If you have to do maintenance on one plant, then the grid connects everyone so the power keeps up. But that is also a fragility in the system. The system, as we have designed it, is brittle. The only way we can make it resilient is to [have] a mixture so that if a portion of it goes down we can have islands of power still operating.�

What is rational as far as providing a stable electricity supply, however, cuts directly across the interests of corporations that have sought to make big profits by buying and restructuring power plants or, as in the case of Enron, through outright speculation. Costcutting at individual power stations, the failure to build new ones to meet growing demand and the lack of planning and coordination have produced a system that has become distinctly more than brittle.

One of the possible triggers for yesterday�s blackout--the Niagara Mohawk power grid--was the subject of a merger between Niagara Mohawk Holdings and the British-based National Grid Group in 2000. The new company indicated at the time that it planned to achieve annual cost savings of around $90 million across its operations in New England and New York through the destruction of hundreds of jobs. The following year, power rates for corporate users were slashed while those to small businesses and residential customers increased.

Two years ago an article appeared in the Buffalo News warning of the dangers of deregulation. �Instead of the [New York] state having a surplus of power that would last until at least 2005, supplies are getting uncomfortably tight today, especially downstate, and power consumption is expected to keep growing by 1.2 percent to 1.4 percent a year. At the same time, private companies haven�t built any new power plants yet, even though the agency that manages the state�s power grid says New York needs to increase its generating capacity by about 25 percent over the next four years to avoid electricity shortages and higher prices.�

Whether or not the Niagara Mohawk power grid was the immediate cause for yesterday�s massive blackout, the above warning points to the underlying problems that made such a breakdown somewhere in the system inevitable.

Why the big power outage in the Northeast yesterday and today? You'll read upteen thousand stories about the complex facts of power generation, distribution and consumption over the next week or so. Make sure you keep all this in its political-economic context.

The country's halting moves toward electricity deregulation over the past decade have dramatically increased the volume of power flowing on the grids.

But the transmission towers themselves remain the stepchildren of the nation's energy infrastructure. People don't want them in their back yards or on their farms. Energy companies aren't interested in building them. And while the system is linked together with advanced computer systems, much of the equipment that opens and closes connections around the nation's three major grids is 1950s vintage, officials said.

"We're a superpower with a Third World grid," New Mexico Gov. Bill Richardson, a former energy secretary, said yesterday.

Cook's organization, the North American Electric Reliability Council warned last year, "The nation is at . . . a crisis stage with respect to reliability of transmission grids." It calculated that $56 billion was needed to upgrade the nation's grids, but only $35 billion was likely to be invested. . . .

The Electric Power Research Institute in Palo Alto, Calif., estimated that while power demand has shot up 30 percent in the past 10 years, transmission capacity has increased by just 15 percent. . . .

As deregulation flourished, investment dwindled in transmission lines, whose profits are limited by regulation.

So as the Enrons of the world were speculating on the newly deregulated utility system in the 1990s, they poured money into places where a quick buck could be turned -- energy trading, as it turned out. Don't forget the booming stock market either, which drained capital away from boring things like electricity transmission lines and fed it into exciting ventures like eToys and Pets.com instead.

When you leave the essentials up to capital, prepare to either get taken to the cleaners or burned.

The deflation dragon looks to have been held at bay in July. The BLS reports the inflation data and its more of the same.

Rising energy prices, higher tuition and gains in lodging and housing costs pushed U.S inflation up moderately in July, the government said on Friday in a report that could ease lingering worries on deflation.

The Consumer Price Index, the best-known U.S. inflation gauge, rose 0.2 percent in July, the same as in June, the Labor Department said. Energy prices rose a solid 0.4 percent.

The so-called core CPI, which strips out volatile food and energy costs and gives a better read on underlying trends, also increased 0.2 percent, up from June's unchanged reading.

This was the second highest rise in core CPI-U for the year. Perhaps all that liquidity really is doing its job? Nonetheless, core CPI-U over the last 12 months is still running at a very low 1.5%, same as June's figure.

There continues, of course, to be a big split between commodities and services. The commodities inflation rate is running at just 0.5% annually, while services chug along at a 3.3% annual clip. Stripping out energy, services drop to 2.9%, while stripping out food and energy leaves commodities running at -1.8% -- outright deflation in this sector.

Thus despite the maintenance of some inflation in services, "core services" CPI is still quite low at 2.9%. It ran at 3.8% in 2002 and 3.1% annualized in the first half of 2003. "Core commodities" are in outright deflation and have been since January 2002. In fact, price leverage for commodities outside the food and energy sectors is only getting worse, not better. Running at -1.8% annualized now, it was -1.6% in the first half of 2003 and -1.1% in 2002.

What does all this mean?

First, the deflation dragon is far from being slayed. In fact, the continuing slide in services prices should be especially worrisome in that services are the real hope for keeping overall deflation at bay. It will take a few more months of 0.2% or 0.3% month-to-month change to really start pushing the dragon back from the castle door.

Second, the recovery of the manufacturing sector is running up a pretty steep price hill. As most of the jobs destroyed under Bush have been in the manufacturing sector (since February 2001 the manufacturing sector has lost 2.4 million jobs, three-quarters of the national job loss total), and with core commodity prices continuing to fall every month, there won't be any substantial job growth here for some time.

So, the latest numbers to cheer "huzzah!" over are supposedly the June 2003 trade figures.

The U.S. trade deficit narrowed sharply in June, as improving economic growth overseas propelled exports to their largest monthly increase in three years and imports were unchanged, the government said on Thursday.

The smaller-than-expected trade gap totaled $39.5 billion, down from a revised estimate of $41.5 billion in May. Analysts surveyed before the report had expected the monthly trade deficit to narrow only marginally to $41.6 billion, from the Commerce Department's earlier estimate of $41.8 billion in May.

Well, certainly -$39.5bn is better than -$41.6bn, but let's not lose our heads now.

First, this monthly deficit is still the sixth largest ever, and all six have occurred during the past seven months. The trade deficit for the first half of 2003 is -$244.3bn, fully 25% larger than 2002 which itself was a record.

Second, the trade deficit has come down every month since peaking in March. Good news. However, the dollar slid all through these three months. The broad dollar index hovered around 124 all January and early February, then headed straight south until bottoming out at around 117 in June. Since June the dollar has gone up, where it now sits around 120. The moral of this story? Falling trade deficits coincided with falling dollar. Falling trade deficits to disappear now that dollar rising. We may still get another drop for July (currency movements take some time to work themselves out in the trade figures, after all) but that should be it. Then it's back to record-breaking territory.

And by the way, despite the big news that exports rose in June, they're still below in current dollars where they were two years ago.

The General reported on Sunday that Italy has officially entered a recession. Now the official numbers are in for Germany, and it's the same story but on a much bigger stage.

German economy gross domestic product (GDP) contracted by 0.1 percent in the period from April to June from the preceding three months and declined by 0.6 percent compared with the figure for the second quarter of 2002, the Federal Statistics Office in Wiesbaden calculated.

The German economy had already contracted by 0.2 percent on a quarterly basis in the first quarter of 2003 and clocked up a "red zero" -- a minimal contraction -- in the last quarter of 2002.

That's three quarters now of GDP contraction in Germany, and the best the German government can forsee is 0.75% growth on the entire year.

In even more dour news, European economists are predicting stagnation in France for 2003:II, which would tip the entire eurozone into the beginnings of recession.

This is more evidence of incredibly weak global demand.

Now Chile turns out its first general strike in 17 years and the first under the post-Pinochet democratic constitution.

The wave of workers' protests continues to roll ashore. For the summer, the General's general strike count is up to six countries: Austria, France, Israel, Peru, Germany and now Chile.

The US import price index rose a healthy 0.5% in July, suggesting at least an externally induced source of inflation for the disinflationary economy. But is this really the case?

In fact, rising petroleum prices and imports drove nearly all this inflation. Petroleum import prices rose a big 3.7% in July, whereas all other imports rose a meager 0.1%. Over the last year, non-petroleum import prices have risen just 1.2%, much of that number accounted for by an unusually sharp 1.0% rise in March 2003. Consumer goods import prices continued to fall in July, especially consumer durables. Japan and the Asian NICs are the main sources of import price deflation, and coincidentially they all either peg to the dollar or heavily manage their currencies' floats against the dollar. Vis-a-vis the US's other major trading partners, a not just steadying but strengthening suggests core import prices overall may very well return to a deflationary trend as in 2001.

On the export side, prices dipped 0.1%. This was the third out of the last four months that export prices fell, a sign of soft demand abroad. Non-agricultural export prices have been falling steadily since April. When the strongest and largest economy in the world is exporting deflation -- and in the face of a strengthening currency no less! -- you know the global economy is still very dicy.

According to the Mortgage Bankers Association of America,

The contraction in mortgage activity continued last week with the level of refinance applications falling to about a third of what they were when they peaked in late-May and early June.

That's a mighty big drop.

The MBA's Market Composite Index has now fallen to 824.6, from 1856.7 on May 30 -- a 56% drop in 10 weeks. This is the lowest level the index has sat at since July 2002.

Much of that is due to the refi market drying up like a puddle on a sunny sidewalk. The Purchase Index (which measures mortgages for purchasing homes) is now at 409.6, bouncing unevenly down from 460.5 on May 30. More notably, the Refinance Index (which measures mortgages for refinancing existing mortgages) stands at 3238.4, dropping like a stone from 9977.8 on May 30 -- a big 68% plummet.

As a consequence, the refi share of mortgage activity is down to 55.8% of total applications. The high was 77.3% of total applications on June 13, but as recently as July 18 -- just three weeks ago -- the tally was 68.7%.

According to the MBA's chief economist, the refi boom will be over when the refi share gets all the way down to 20-25% of applications. But it looks already like the reverberations of the boom have dissipated and we just wait for the debris to start raining down on us.

The straight dope on Japanese growth, from today's Yomiuri Shimbun:

The embryonic trend toward economic recovery is by no means as robust as it may appear, in fact, the economy remains in a feeble state.

The seasonally adjusted real gross domestic product in the April-June period rose 0.6 percent from the previous quarter, or a 2.3 percent increase on an annualized basis.

While the economy has posted stronger-than-expected growth, we should not take it at face value because the growth figure has been inflated by several special factors. If these factors are excluded, it can be seen that the economy grew only slightly or remained almost static. . . .

One of the special factors buoying the economy is heavy demand for replacement trucks ahead of October's introduction of stricter controls on exhaust gas emissions. The purchase of trucks will be regarded as capital investment by companies. Affected by this demand, corporate capital investment posted a real 1.3 percent increase from the previous quarter.

The second factor is a sharp drop in the number of Japanese going abroad, partly due to the SARS epidemic. . . .

The increase in consumption was chiefly due to brisk sales of liquid crystal display televisions and digital cameras. Another factor was the last-minute demand for cigarettes before a tax increase in July.

The real question of the current "global recovery" is its sustainability. The stars all look rightly aligned to deliver decent growth figures in 2003:III. Can it last? Particularly in the US, the center of the global economy? If so, where are Americans going to get all the money to consume the world's commodity glut?

The fact that the Fed kept the federal funds rate steady at 1.0% is no news. Even a blind man could see that slow-moving elephant coming.

No, the real note of interest is buried in the press release:

Business pricing power and increases in core consumer prices remain muted. . . .

the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future.

See, I told you the deflation watch wasn't over. The July inflation numbers don't come out until Friday, but I wonder if Alan & Co. got a little peek at the data.

Forbes magazine has an interesting article out in which it ranks the "most overpriced places 2003" in the US as a function of the local cost of living, average local salary growth (or lack thereof) over the last 12 months and five years, and local median home sales prices in 2002:IV. The results present a list of US cities ripe for a housing bubble collapse. The top 10 overpriced cities in order are:

1. San Jose, CA
   
2. San Francisco, CA
   
3. Honolulu, HI
   
4. Bergen-Passaic, NJ
   
5. New York, NY
   
6. Boston, MA
   
7. Chicago, IL
   
8. Milwaukee, WI
   
9. Los Angeles, CA
   
10. Seattle, WA

Except for Chicago and Milwaukee, all these cities are on the coasts, exactly where the housing bubble exists in the United States. What makes this index so interesting is that it isn't simply a measure of housing prices, but of affordability -- that is, it takes the local cost of living and local salaries into account. Maybe the 57% rise in housing prices in Denver over the last five years, or the 56% rise in Miami, or the 70% rise in Minneapolis-St. Paul are not too worrisome because they are matched by rising salaries. But in five of the seven largest metro areas of the country (New York, Los Angeles, Chicago, San Francisco, Boston), the story is much more grim.

Don't count on that Iraqi oil windfall dropping the price of gas for your end-of-summer vacation any time soon.

Flames shot 200 feet into the air from a burst oil pipeline north of Baghdad on Tuesday, and U.S. forces fired warning shots to keep people from approaching the scene. . . .

The blaze was burning about three miles north of a big refinery. It erupted in a grove of date palms less than 100 yards from a highway, sending a huge black cloud drifting south over the capital for several hours Tuesday afternoon.

Military spokeswoman Nicole Thompson said there was a pipeline fire but had no further details.

I guess only George Bush could have turned Iraq into Nigeria.

The price of oil may tell the story of whether the US "recovery" becomes real or sinks back into the mud. As The Guardian pointed out last week, recessions tend to coincide with oil price spikes. The neocon dream of oil at $15/barrel is about as realistic as all their other Iraqi fantasies. They should commission Rowena Morrill for some new artwork for the Pentagon.

Now that NATO has taken over the duties of propping up the government of Hamid Karzai in Afghanistan, some are starting to think this might be a good model for getting some US troops out of Iraq.

Not so fast.

Canada does not have the troops in Afghanistan to expand its peace-support role outside the capital, the top Canadian soldier in the country said today as NATO took command of the 5,000-member international security force in Kabul.

Brig.-Gen. Andrew Leslie said that with 1,950 Canadian soldiers committed to helping secure the interim government of President Hamid Karzai, Canada is already making the single largest contribution to the 31-nation International Security Assistance Force, or ISAF.

Leslie said Canada would have to bring in more troops or another country would have to chip in if ISAF heeded Afghan government calls to expand its operations area outside Kabul.

"If we go outside the box, we'll have to contribute more soldiers or get someone else to do it," said Leslie, commander of Canadian Forces in Afghanistan and deputy chief of ISAF.

"I think we're contributing enough right now." . . .

So far, however, no other country has backed the idea of expanding ISAF's responsibilities.

If the country contributing the most troops to the NATO force can't (or won't) send any more, how in the world is NATO going to replace tens of thousands of Americans in Iraq?

George, I guess it's time to order some more Poles. Who would have thought that NATO enlargement would primarily be a nice clean way to buy mercenaries?

Has the Japanese economy finally come out of the doldrums?

Japan's economy grew faster than expected between April and June, reinforcing the impression that business investment and a steady stream of exports have kickstarted a cyclical recovery.

The world's second-largest economy grew 0.6 per cent in the quarter in real terms according to preliminary government data released on Tuesday, surpassing the consensus forecast of 0.2 per cent. That represents annualised growth in gross domestic product of 2.3 per cent.

Note that this growth is just as good as US GDP growth in 2003:II, and the Japanese did it without a war, too.

Amazingly enough, because of Japan's inflation rate (or should that be deflation rate?) of -2.5%, the economy actually didn't grow at all in nominal terms. Consumption even went up, about 1.2% annualized, although there are some unsustainable practices driving this figure.

But Yoshihiko Senoo of the Cabinet Office said special factors were largely behind the positive results. Japanese rushed out to buy cigarettes before taxes went up nearly 1 yen (1 cent) a cigarette on July 1, inflating consumer spending, he said.

Damn, that's a lot of cigarettes. When people stocking up on smokes can affect your GDP, you know you've got one serious national nicotine habit.

While the Fed and the financial markets don't want to think about deflation any more, the financial press hasn't given up on the story just yet.

Three months after the Fed began hinting about its readiness to nip any trend toward declining prices before it started, even if it meant reducing short-term interest rates almost to zero, officials have made it clear they are now less worried than they were before and more reluctant to jump in with unconventional tactics. . . .

Fed officials have made it clear they are less worried now about deflation than they were just a few months ago. Alan Greenspan, the Fed chairman, told a Congressional hearing last month that he did not think it would be necessary to fight deflation with unconventional tactics like buying up longer-term Treasury notes.

Yes, deflation is off most folks radar screen now, based on the completely faulty assumption that financial markets are fully rational and prescient. If stocks and interest rates are going up, that means the economy is heating up and thus prices will begin to rise again. Right?

The rosy scenario seems to rest on a few choice bits of data:

• Rising business investment -- Indeed, nonresidential fixed investments rose 6.9% in real terms after falling nine of the last ten quarters. The big gainer in the category was computers and peripheral equipment, making up a whopping 65% of the gross rise in GDP for the entire quarter! Why such a huge rise? As Stephen Roach pointed out on Friday,
  

  it turns out that fully 83% of that gain is traceable to a collapse in IT pricing, according to Commerce Department assumptions. Indeed, in current dollars, last quarter�s growth in computers and peripheral equipment accounted for only 7.1% of the total gain in nominal GDP.

  Without that shot in the investment arm, nonresidential fixed investment growth would have been nonexistent. While everyone thinks they see rising business investment, they may be staring at a distant mirage.
  
  
• Rising commodity prices -- The Journal of Commerce-ECRI Industrial Price Index, a measure of world commodity prices, is up 14.4% on an annual basis. Of course, in mid-May it was falling. Rising production not met by rising consumption is, of course, the classic deflationary formula. News out of China shows that industrial production is soaring again. This may be food for fighting Chinese deflation, but it may only exacerbate it in the US as corporate profits are squeezed and firms lay off more workers or at least refuse to hire any new ones.
  
  
• Low short-term interest rates -- Cheap money, indeed. The one-year treasury bill is up from its mid-June low and now hovers around its February figures. What matters, of course, are real interest rates which have been negative since October 2001 (1-yr. T-bill minus core CPI). But as inflation abates, it becomes harder and harder to keep real interest rates negative. Core CPI-U in June ran at a 1.5% annual rate and core CPI-W at a 1.3% annual rate. Disinflation continues unabated. We'll see the July figures on Friday.
  
  
• Tax cuts/rebates -- I'll let Citizens for Tax Justice fight this battle for me. The effects of the big Bush tax cut of 2001 are for the most part long gone -- see here and here. Moreover, one-third of Americans will get "a big fat zero" from the acceleration of some of those cuts and new ones on dividends for 2003 while "the median tax reduction is only $289". Maybe spending on Mercedes and marble shower stalls will revive the economy, but looking at how the dollar stores are leading the growth in retail sales in the US today, somehow I doubt it.

This takes the old phrase "You break it, you bought it" to a whole new level.

More than three months after Bush declared an end to major combat operations in Iraq, even the cost of the ongoing U.S. military campaign remains clouded in confusing numbers.

Defense Department officials have said U.S. operations are costing about $3.9 billion monthly. But that figure excludes indirect expenses like replacing damaged equipment and munitions expended in combat.

Dov Zakheim, the Pentagon's top budget official, has said that when all the costs are combined, he expects U.S. military activities in Iraq to total $58 billion for the nine months from last January through September. That includes part of the buildup, the six weeks of heaviest combat that began March 20, and the aftermath.

That sum, however, is what Congress provided this year for Defense Department activities not only in Iraq but also against terrorism worldwide � including Afghanistan, where U.S. military costs are running about $1 billion a month, according to officials.

In a report last month, the nonpartisan Congressional Budget Office projected that Pentagon costs in Afghanistan and Iraq plus other U.S. military efforts against terrorism around the globe could reach $59 billion next year.

So apparently, the Pentagon's punch line to Congress is: "you ain't seen nothin' yet!"

This is truly stunning. At a minimum, the war/occupation will cost the US government $70bn in 2003 and another $45bn or so in 2004. Private think tanks put the long-run sums at truly staggering levels.

Brookings Institution fellows Lael Brainard and Michael O'Hanlon said in a Financial Times article this month that military and reconstruction costs could be from $300 billion to $450 billion.

Taxpayers for Common Sense said postwar costs over the next decade could range from $114 billion to $465 billion. The American Academy of Arts and Sciences projected 10-year expenses from $106 billion to $615 billion.

The low-ball figures for both these latter groups are already passe. And with the US strategy of rent-an-ally combined with the unexpectedly slow return of Iraqi to the world market, the billions coming out of the US Treasury will continue to flow like water downhill.

It seems undoubted now that the GDP figures for 2003:III and probably 2003:IV will be heavily skewed by this military spending, just as the numbers from 2003:II were. But I've got to believe that sooner rather than later the House Republicans will really start to feel that "budget discipline" itch.

Light blogging today since [1] lots of blogging last night on the Monday papers; and [2] it's a slow economic news day (the top wire service story categorized under 'Economy' is "June Machine Tool Demand Up 3.3 Percent" -- zzzzzzzzzz). One comment on an interesting story over at CNN/Money, however.

Oil prices have surged lately to their highest levels since before the start of the war with Iraq, but most economists aren't yet worried about them drowning a nascent economic recovery in the United States.

If that recovery's not self-sustaining, however, higher prices could become more of a problem.

Crude oil futures on the New York Mercantile Exchange were trading at more than $32 a barrel Monday morning, down a bit from last week but still near their highest level since mid-March, when prices were driven by fears about how war in Iraq, the world's No. 8 crude producer, would disrupt global crude supply.

So, the big rise from around $25/barrel in November to around $38/barrel was all due to the impending war in Iraq. Now the rise from around $25/barrel in May to around $32/barrel today is due to . . . what again? Here's a nice hint.

Many economists had hoped a dramatic, post-war drop in oil prices would be just what the doctor ordered for a U.S. economy still struggling to sustain growth after the 2001 recession . . . "At this point I would have expected more of a boost from lower oil prices," said Goldman Sachs economist Jan Hatzius. "If you'd told me before the war that the military action would go as smoothly as it did and that Saddam Hussein didn't blow up his oil facilities, I would have thought oil prices would be lower."

Ah, yes, good ol' undershooting and overshooting. Or maybe it's because

they could be interpreted as an early sign of economic spring -- just as higher interest rates, which tend to slow down economic growth, are tolerable as long as the rest of the economy is surging, too.

Oh, just admit it! The economists haven't the slightest damn idea why oil prices are doing what they're doing. All they can tell us is that they're going up. Hell, a computer can do that for me. Too bad it can't win a Nobel Prize.

Good stuff from Barry Ritholtz, a commentator at Brad DeLong's blog site.

This is the "New Productivity Paradox."

We are confronting the dark side of productivity: Companies need less laborers to produce more goods and services; Less workers means less consumer spending, lowered tax receipts, weaker corporate profits -- a not-too-virtuous cycle. Consider:

-Since 1995, labor force productivity has been increasing at least 2.25% per year, double the annual rate of the previous two decades.

-At the same time, the labor force itself is growing at ~1.3% per year.

-Real GDP has to increase at 3.5% per year just for the economy not to hemorrhage any more jobs.

One of two things will needs to occur for job growth: Either GDP must improve dramatically, or productivity gains must tail off, if not reverse. If neither of these events occur, the U.S. could continue to lose jobs at a disturbing rate.

Maybe it's time to quote Marx on the "reserve army of the unemployed" about now?

On the same theme, DeLong opines

this business cycle has been different. There was no sustained decline in productivity growth during the recession--there was little if any labor hoarding, and thus little slack of employed-but-underutilized labor to fuel rapid productivity growth numbers as the recovery begins. But it is very hard to look at the figure and think that we are still in the long productivity-growth slowdown period that began in the mid-1970s.

What piques the General's interest is not the post-1995 secular trend in productivity, but instead the huge take-off since 2000. My suspicion is that the secular trend is mostly due to technology, but the post-2000 spike is mostly due to work speed-up.

Kate Burgess opines in Monday's Financial Times that the specter of deflation is causing folks to abandon the whole idea of saving in favor of spending.

Kate Barker, a member of the Bank of England's monetary policy committee, has pointed out the risk that individuals think "it is not worth saving today" because low nominal interest rates and investment returns on almost any savings products from annuities and pensions to with-profit bonds seem so unattractive.

Meanwhile, consumer debt has risen to some �860bn - four-fifths of it secured on houses - from around �398bn a decade ago. The Bank of England calculates that debt has risen from around 90 per cent of household disposable income in 1989 to more than 120 per cent.

Instinctively, investors believe that the time to borrow is when the interest rates quoted on the high street are low. Few of us are bothered how much we owe, with unemployment and interest rates at record lows and house prices still rising.

But this is money illusion and it is distorting rational economic behaviour say the economists, who worry that consumers will find it increasingly difficult to pay off their steep debts.

A good point well made. In a low-growth low-inflation environment, huge debt loads are a flailing albatross around the necks of millions of UK and US consumers. This is especially clear when compared to the 1950s and 1960s -- the so-called "Golden Era" of capitalism.

Moreover, money illusion disguises the real cost of debt. Strip out inflation and the "real cost of borrowing is not particularly low," says Kalyan.

Since 2000, the real cost of mortgage debt, stripping out inflation, has averaged around 3.6 per cent. Real mortgage rates rarely reached more than that until 1980.

Take the loss of mortgage interest tax relief (abolished in 1999) into account as well as inflation and "the real cost of borrowing is higher now than in the 1950s, 1960s and 1970s, and is only marginally lower than in the 1980s and 1990s," says Capital Economics.

When Brits and Yanks refuse to save, they depend heavily on all those diligent hard-working Asians to ship their savings to the Anglo world. In the US particularly, with a current account deficit now over 5% of GDP and likely to go far higher, that deal will look less and less appealing. And then the profligacy of the baby boomers will truly be meted out to the third and to the fourth generations.

Rounding out our Sunday evening / Monday morning survey of the Big Boys' economic fitness, Japan continues to be running as if under water. I guess that's better than drowning.

Japan will report second quarter gross domestic product growth figures on Tuesday. HSBC expects Japanese GDP to be unchanged from the previous quarter as a result of weakness in private consumption, public investment and net exports. Weak domestic demand has left the Japanese economy dependent on exports to drive growth and the National Institute expects that for 2003 as a whole, Japanese growth will pick up to 0.7 per cent, from 0.1 per cent in 2002.

If the US really does end up growing at around 3% for 2003 while Japan grows at 0.7% and the eurozone at 0.6% (per the same FT article), we could see the global economy completely blow a gasket in early 2004 as the US current account deficit hits 6% of GDP. Yes the US economy can walk on water some of the time, but George W. can't defy gravity forever. And the bigger those deficits go, the harder . . . well, you know the rest.

Things don't look so peachy in the UK, either.

First, The Independent says the Bank of England will report this week

that Britain's economic growth may reach only 1.8 per cent this year instead of 2.3 per cent. The Treasury's official forecast is still a relatively buoyant 2.25 per cent.

In the first half of this year, the economy has grown by only 0.4 per cent, so the latest projection will still require a rapid acceleration for the rest of 2003. The first three months were the worst since the 1992 recession and the second three months grew at half the rate predicted by the Bank in its May inflation report.

Combine that with the analysis of the Financial Times that

for UK manufacturers input prices have been rising faster year-on-year than the prices of goods leaving the factory gate, renewing the squeeze on profit margins. The latest UK CIPS report for July showed output and orders improving but output prices had continued to decline compared with the previous month.

The corresponding Reuters/CIPS European purchasing managers� index showed an easing in the decline for output and orders accompanied by further weakening for prices.

Rolf Elgetti of Commerzbank says: �A key conclusion is that, very untypically, the recent upswing in demand and new orders has not been met with rising prices. This means profit margins are weaker than in a normal recovery.�

So even in the "booming" UK, deflation still haunts the economy. Producer prices are rising not only in the UK but globally, especially in commodities, but retail prices are barely rising at all. So just as in the US, profitability must come from squeezing labor. In a deflationary context, this is the only way one can make profits.

One of the premises of a US economic revival in the second half of 2003 is a rise in not simply US demand but global demand. This is especially necessary in light of the enormous US current account deficit. If there is no expansion in the rest of the world, the only sustainable expansion in the US will be in debt levels.

And on that note, Italy officially fell into recession on Monday.

Italy's economy contracted by 0.1% over the three months, according to the national statistics agency said.
An identical performance in the first three months of the year means Italy has now met the traditional definition of recession - an economy shrinking over two successive quarters - for the first time in 11 years.

A sharp fall in Italian exports -- thanks to the supercharged euro -- hit the Italian economy hard. The US wants a weak dollar so as to begin correcting the current account deficit, but a weak dollar in a deflation-prone European economy only means exporting US deflation to Europe, cutting into European growth and -- presto! -- eliminating the chances that a weaker dollar will have any effect at all on the current account deficit.

And that's not all. Readers of the Globblog already know that Germany is teetering on the brink of an official recession as well. The country's unemployment rate rose to 10.4% in July and formal recession is just an announcement away. If Germany tips over the edge, it will leave France and Spain as the primary economic engines of the eurozone. Yikes!

More evidence that the big productivity gains for 2003:II are based on speed-up and increased exploitation -- Stephen Roach's "bad productivity":

But a look at one leading technology company, Internet gear maker Cisco Systems Inc., shows that it's still relying heavily on cost cuts to boost results. Cisco's earnings jumped 27 percent to $982 million in one of the best profit performances by any company in the quarter . . . [even though] Cisco's sales declined by 2.7 percent from last year's already sluggish level.

It's nice when the big boys repeat the General's analysis.

The root of the problem is sluggish demand. Companies have been slicing and dicing to get the most out of meager sales during the slowdown. And they've been reluctant to invest in new product development because they won't get any immediate payback.

"There's a lot of concern on the revenue side," said First Call's Hill. "It's hard to get a warm and fuzzy feeling."

In the most recent quarter, Hill said, revenue for the Standard & Poor's 500 companies rose 6.6 percent on average, which sounds good until you start to dissect the number. The weak dollar accounted for 2 full percentage points of the gain, and energy companies accounted for another 1.3 percentage points as fuel prices gained 46 percent. A refinancing boom contributed $50 billion to consumer spending, economists estimate, another one-time lift.

After the corporate accounting scandals of the past two years, investors are keenly aware of how one-time gains like asset sales and tax benefits are used to pump up profits.

But the same is true with sales, which are getting a big boost from a number of nonrecurring items -- and that's causing concern among investors. Without improved revenue, they worry, how will corporate profits continue their much-forecast rebound? Cost cuts can only go so far, and raising prices isn't a serious option. With unemployment still high, companies are reluctant to hike prices, and there is little of the pent-up demand of past recoveries since consumers have never really stopped spending.

The straight dope on the revenue gains for the S&P500 in 2003:II are especially interesting. Transnational corporations are just fine with a falling dollar, especially when they can make money in euros and trade them in for greenbacks. Domestic firms can't do this and so are at a distinct disadvantage in the stock market game, unable to show these deceptive revenue gains to shareholders.

even if consumers don't rush out to the malls, Feinman said, there are a range of factors to boost demand: Tax incentives and fiscal stimulus will help as will the end of the Iraq war.

Where to begin on this line? The "Iraq war" will not be ending anytime soon. US generals even admit that American troop levels will remain near the 150,000 mark for many months (years?) to come. Considering how GDP is now desperately dependent on continued military spending just to tread water, a near-term reduction will only wreak havoc on, not boost, general demand.

And continuing to cut taxes (even if sadly mistargeted) and boost government spending might be good in isolation for boosting demand, but these enormous deficits are sure to be felt in the bond market sooner or later, raising interest rates and depressing demand.

This "recovery" will be nip and tuck for some time to come, and pose some real spin challenges to Karl Rove next year.

OK, is Brad DeLong a complete nitwit? Or am I missing the humor here?

Ah. I thought--from GDP and aggregate hours data--that we would have a 4% per year productivity growth quarter in the spring of 2003. I was wrong: we had a 5.7% per year productivity growth quarter. It is amazing that nonfarm business hours worked can fall--and fall at a 2.2% annual rate--in a quarter in which nonfarm business output can rise at a rate of 3.4% per year. If only we had demand rising fast enough to employ more rather than fewer people, the performance of the American economy would be truly amazing.

Can't the esteemed economist look a little deeper into these numbers and come up with something more profound than "truly amazing"? Sheesh, if a lowly Political Scientist (there, I've come out of the closet) like the General can see this as work speed-up rather than a "real" productivity increase, why can't a guy who writes Macro textbooks??

I do believe Stephen Roach at Morgan Stanley is channeling the same spirits as am I -- either that or he reads the Globblog! From Roach's commentary today:

• On defense spending -- "there was more than the usual amount of statistical noise in the latest GDP report. A 44% annualized surge in defense outlays accounted for fully 70% of the total increase in national output. Barring the outbreak of another war, that source of growth is probably tapped out."
  
• On consumer spending -- "personal consumption expenditures did increase at a 3.3% annual rate in 2Q03, well above the anemic 1.9% average annualized growth pace in the preceding two quarters. However, the bulk of those gains occurred for purchases of durable goods, whose share of real GDP has now risen to a record 11% -- so strong that it provides little scope for further improvement."
  
• On jobs (or the lack thereof) -- "Since the economy bottomed in November 2001 (as per the recent cyclical dating of the National Bureau of Economic Research), private nonfarm payrolls have contracted by 1.2 million workers. By contrast, in the first 20 months of the past six business cycle upturns, the private-sector job count increased, on average, by 2.8 million workers. That means the current hiring trajectory has fallen fully 4 million workers short of the cyclical norm -- taking the concept of 'jobless recovery' that was first coined in the early 1990s to an entirely different level."
  
• On wages and salaries -- "over the first 19 months of the current cyclical recovery, real private-sector wage and salary disbursements have recorded a cumulative increase of just 0.3%, far short of the 6.8% average gains that have occurred by similar junctures in the past six business cycle upturns."
  
• On productivity -- "It all boils down to the essence of productivity enhancement -- whether efficiency gains are driven by synergies between human capital and technological innovation or by hard-nosed cost-cutting. . . . I must confess to being worried once again that the pendulum is swinging from good to bad productivity in the United States."

Roach thinks that 2003:III will probably look good on paper, but that this economy's "recovery" has the staying power of Bob Dole before Viagra.

Here is some nice analysis of the latest productivity numbers by Patrick, a commentor over at "It's Still the Economy, Stupid".

Let's say that you had a factory with 100 workers producing 120 units/quarter, when suddenly demand drops to 100 units per quarter.

So you accumulate inventory, and/or slow down production, but demand stays at 100 units per quarter, so eventually you have to let go twenty workers.

Astutely, you keep the most productive workers and let go the least productive workers. But you can't take advantage of the higher productivity until the excess inventory is cleared out.

A few quarters later, your production line is back up to "normal" speed, but now you actually have higher productivity than you used to.

There's no productivity growth involved, despite the 5% increase in productivity.

There's no recovery, either, demand is still stuck at 100 units per quarter.

And if the ultimate goal is high employment, then dramatic economy-wide increases in productivity are *not* what you are after.

Behold the power of debt. From the City Editor of London's Daily Mail today (sorry, no link):

Cambridge economist Wynne Godley, a veteran observer of the mistakes of Britain's economic past, has come back to haunt FT readers. He argues that the danger at present arises not because debt is too high, but because lending is too high.

During the past five years, net lending has risen from 5% to 15%, giving a supercharged boost to personal spending. Godley suggests that this has been enough to account for the entire growth in gross domestic product since New Labour took power in 1997.

He believes this will eventually become dangerous because the collateral against which the borrowing has been done will "eventually be exhausted".

The result will be that the burden of repayments will eventually lead to the precipice of bankruptcy and collapse.

Monetary policy in the US has been far looser than in the UK, so one might think the danger is higher on this side of the Atlantic. However, the world is dying -- literally in some cases -- to lend to the American consumer in order to keep this dysfunctional global engine running. Will the Fed, US bankers or global financiers really pull the plug? It's not in their interests to do so, after all. As the old saying goes -- if you default on $1000, that's your problem. If you default on $500bn dollars, that's the bank's problem.

On Tuesday, the General noted how some voices out there on Wall Street (and K Street) felt Greenspan & Co. had let them down in June, cutting the federal funds rate down only to 1.0% instead of the much more ambitious 0.75%. Now it seems everyone has given up on any more rate cuts, disappointed or not.

After a year and a half of a disappointing recovery from the 2001 recession, U.S. economic growth has finally begun to strengthen in a sustainable way, according to many economists and policymakers. As a result, Federal Reserve officials, who cut interest rates 13 times to fight the slump, aren't going to slash rates again when they meet next week, analysts and investors widely agree.

Instead, the Fed has decided to lean against any rate hikes as (if?) the economy heats up. With the core consumer price index running at a mere 1.0% annualized for 2003:II -- notably, the quarter with all the "growth" when one would expect disinflation to end -- raising the federal funds rate would be suicidal.

But if long-term interest rates keep going up, will the Fed try its magic one more time?

"There appears to be some possibility that the recent trend toward disinflation will continue, primarily because of the potentially large amount of economic slack in the system," Fed Governor Ben S. Bernanke said in a speech late last month.

And because Fed officials see the risk of further declines in inflation as outweighing the dangers of a surge in inflation, they will probably keep short-term rates low "for a considerable period," he said. . . . "In my view . . . we should be willing to cut the [overnight] rate to zero, should that prove necessary to provide the required support to the economy."

Remember, Bernanke was the one Fed Governor who voted for 0.75% back in June. Clearly another rate cut is not out of the question. If it comes, however, it will be out of desperation -- a sign that deflation is haunting this "recovery".

The new retail sales data out today from Bank of Tokyo-Mitsubishi puts an interesting spin on the deflation story. While retail sales overall are up nicely in July year-over-year (y-o-y), the biggest winners are the big-time discounters who make their money off of high volume and low prices.

Department store sales rose just 1.5% y-o-y while discounters went up 4.3% and wholesale clubs a big 5.9%. Interestingly, the biggest gainers in the discounters category were two dollar stores: Dollar General and Family Dollar, both up 4.9% y-o-y. Wal-Mart was up 4.5% and Target stores up 4.3%.

Over in department store land, things are not so rosy. Sears hasn't seen a positive number since 2001, Federated Stores (Bloomingdale's and Macy's) haven't seen sales growth y-o-y since October 2002 and Marshall Fields & Mervyns (both owned by Target) haven't had a positive month since February 2002. Two big department stores -- May Co. (first time since April '02) and JCPenney, however, seem to have their noses above water for now.

"And a dollar store shall lead them."

Not sure how the Bushies are going to get the oil out of Iraq just yet. But it looks like they fully expect to be doing it illegally.

An executive order signed by President Bush more than two months ago is raising concerns that U.S. oil companies may have been handed blanket immunity from lawsuits and criminal prosecution in connection with the sale of Iraqi oil. . . .

According to the order,

"any attachment, judgment, decree, lien, execution, garnishment or other judicial process is prohibited, and shall be deemed null and void, with respect to the following:

"(a) the Development Fund for Iraq and

"(b) all Iraqi petroleum and petroleum products, and interests therein, and proceeds, obligations or any financial instruments of any nature whatsoever arising from or related to the sale or marketing thereof, and interests therein, in which any foreign country or a national thereof has any interest, that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of United States persons."

The order defines "persons" to include corporations, and covers "any petroleum, petroleum products or natural gas originating in Iraq, including any Iraqi-origin oil inventories, wherever located."

When the colony has to pay its own way as soon as possible, you can't have obstacles like criminal laws mucking things up.

Wow! Is Reuters now admitting to the existence of economic exploitation?

Companies Squeeze More Out of Workers

"It is interesting that we got the one two punch: a report that shows very little rehiring, and a report that shows why -- companies don't need new labor when they can squeeze every last bit of productivity out of the operations they are already running," said economist Lara Rhame of Brown Bothers Harriman in New York.

This little tidbit from the same report also can't be ignored.

The Labor Department report reflected an annual benchmark revision of data that showed national productivity, or output per worker, grew at the most vigorous rate in more than half a century last year.

The revised 5.4 percent increase in productivity in 2002 -- up from a previously reported 4.8 percent rise -- was the strongest for any year since a 6.7 percent jump in 1950 during the Korean War era.

Considering the near total lack of capital investment in 2002 combined with the destruction of over 400,000 jobs in just that one year, it's pretty clear these great productivity numbers of the recent past are all being achieved through work speed-up.

Not good news by a long shot.

Did you catch a whiff today of the existence of class struggle in the NYTimes op-ed pages?

The simple truth is that the interests of the Bush administration's primary constituency, corporate America, do not coincide with the fundamental interests of workaday Americans. On the business side of this divide, increased profits are realized by showing the door to as many workers as possible, and squeezing the remainder to the bursting point. Productivity (based primarily on improvements in technology) is way up. Hiring, of course, is down. Part-time and temporary workers are in; full-time workers with benefits are out.

And then there's the ominous trend of sending higher-skilled jobs overseas to low-wage places like India and China, an upscale reprise of the sweatshop phenomenon that erased so many U.S. manufacturing jobs over the past quarter century.

Working Americans need jobs just to survive. But the Bush administration equates the national interest with corporate interests, and in that equation workers can only lose.

Today's job market in the US resembles that of the 1930s. Why not reproduce its politics, too?

The General should be fair today. The 2.9% rise in real hourly compensation for 2003:II was the highest since 2000:III. Especially compared to the last four quarters (+0.3%, -0.2%, -0.4%, +0.2%), this jump is welcome news.

See, the Globblog isn't all gloom and doom.

The big economic news for today seems to be the productivity numbers for the US in 2003:II.

America's business productivity soared in the second quarter of 2003 and new claims for unemployment benefits dropped to a six-month low last week, a double dose of good news as the economy tries to get back to full throttle.

Productivity � the amount that an employee produces per hour of work � grew at an annual rate of 5.7 percent in the April to June quarter, the best showing since the third quarter of 2002, the Labor Department reported Thursday. That marked an improvement from the 2.1 percent growth rate in productivity posted in the first three months of this year.

In the long run, of course, rising productivity is good. Ideally it would allow people to work less and have more in qualitative terms, but usually it just means people work more and have more cheap plastic crap around the house.

But of course in the long run, as Keynes observed, we're all dead. We live in the short term, especially the working class, and for them, rocketing productivity numbers aren't necessarily good news at all.

In the 1930s and 1940s labor in the US gave up trying to control the production process. Before this time unions like the AFL tried to maintain the craft standards of their trades and unions like the CIO tried to control the shop floor and the pace of the assembly line so as to generate a working environment fit for humans rather than mules. But by the late 1940s, unions in the US gave up their dreams of self-government in the workplace and agreed instead to whatever the boss demanded -- if workers got a cut of the productivity gains.

Today's report out of the BLS tells us even that bargain is being strongly breached.

According to the BLS, productivity rose 5.7% in 2003:II. Per the same report, real compensation per hour rose just 2.9%. So workers in the US are being compensated at just half the rate at which their labor productivity rises. Before the late 1970s, these two numbers always rose in a roughly 1:1 ratio.

This news is even worse when applied to the deflation front. Back in the 1950s and 1960s, big productivity gains produced low but constant inflation because there were Americans with money to buy all the goods and services they were producing (not to mention foreigners, since the the US ran a trade surplus then). In the 1990s, however, high productivity combined with low or stagnant real wage growth meant disinflation. In today's enonomy, disinflation can easily turn to deflation.

Much of this productivity gain is coming from work speed-up. In 2003:II, output rose 3.4% while hours fell 2.2%. Unit labor costs also fell 2.1%. No wonder profits are up!

In the face of rising output, falling hours, net job destruction, tepid real wage growth compared to productivity, a towering trade deficit and a steady if not slightly rising dollar, all the pieces seem to be falling into place for home-grown deflation.

Blogger seems to be messed up and won't publish my blogs properly today. Stay tuned.

UPDATE: Some strange problem with my password. Oh well, all seems to be in order now.

A very interesting piece in today's NYTimes suggest the refi-financed consumption boom was hardly American at all. While folks in the Bay Area, Boston and New York City binged off refi loans, housing prices in most of the country haven't moved much at all.

But while the boom has become the subject of daily conversations among the middle class and affluent in New York, San Francisco and Los Angeles, people in much of the country have little housing bounty to tap for home improvements, retirement or other needs. From Fort Wayne to Rochester to Salt Lake City, the prices of typical homes across most of the country's vast middle have risen just ahead of inflation � and more slowly than incomes. The cost of homes in the most expensive cities is now about six times that in the least expensive, up from a ratio of three to one two decades ago. . . .

households in the middle of the country that fall behind on mortgage bills cannot rescue themselves by dipping into their rising home equity and making up for a series of missed payments in one swoop. The states where home foreclosures have spiked most sharply since 2000 � including Indiana, which tops the list � are in the Midwest or Southeast. . . .

Over the long term, house values tend to increase at roughly the same rate as incomes in any region, economists say. Because prices have outgained incomes on the coasts the last two decades, many analysts expect the housing gap to narrow eventually � but they were saying the same a decade ago.

Stirling over at "It's Still the Economy, Stupid" has an interesting blog today on the US's so-called "recovery".

The three props of the economic stabilization - the word recovery is inaccurate to the point of being mendacity - have been cheap oil, cheap money and cheap government. The problem is that these three pillars are mutally exclusive in the long run. Cheap money comes from low interest rates, particularly residential real estate. Cheap government from massive tax cuts. Cheap oil came from the hope of US stabilization of Iraq and being able to quickly pump the very inexpensive to produce oil out of the ground.

Without the cheap oil - which is now clearly not coming in time - either the cheap money or cheap government pillar has to crumble. Either interest rates must go up in order to borrow, or the government must raise taxes dramatically. Since even the OMB - a department that produced numbers in January that can only be politely called fascinating fiction - admits that 23% of the current increase in the estimated deficit between then and now comes from what they euphemistically term increased costs of "tax relief" - the clear choice between cheap money and cheap government is now at hand.

Indeed both oil and money have been getting progressively more expensive since mid-June. The 1-year T-bill is up from 0.95% almost two months ago to 1.24% on Monday; the 10-year has jumped from 3.20% to 4.35%; and Brent crude oil is up from $26.16/barrel to $30.22 yesterday.

Of course, there's always shooting for a $600bn federal deficit for 2005!

The esteemed Kevin Drum, owner/operator of CalPundit and a kind link-up supporter of the Globblog, has gotten some heat lately from passing on my analysis of the affect of the Iraq war and occupation on second quarter GDP.

A few days ago I wrote a post suggesting that if you removed the $40 billion cost of the Iraq war from the second quarter GDP numbers, GDP growth would have been only $16 billion, an annual rate of .67%. Bill Sjostrom took me to task for treating the problem too simplistically, and I've been meaning to post a correction ever since.

So what exactly is Sjostrom's complaint?

Kevin is doing arithmetic here, but not economics. Defense spending rises by $40 billion. How does it get paid for? Given Kevin's assertion that it additional deficit spending, then it comes from the sale of bonds. People who buy those bonds have $40 billion less, which means they do not buy the things they otherwise would have bought. This could mean that the extra military spending had no effect on GDP at all, and the war made no difference. Suppose alternatively that the $40 billion spent on bonds came from people who, because of economic uncertainty, had kept the cash hidden in their mattresses. In this case, the money is now being spent that otherwise would not have been, and the spending raises GDP by $40 billion. My point is that how the money would have been spent otherwise determines how much the military spending contributes to GDP.

Fair enough. Let's do a some further thinking on the matter.

How exactly is the Iraq occupation being paid for? We all know it isn't out of current revenues, so the government has two choices: by borrowing or by printing money. If it's Americans buying the T-bills for war, we can't say exactly how much of this $45.6bn was dragged into GDP. Perhaps all of it would have been spent or plowed into productive investments (i.e. building up society's means of production and reproduction, not into debt instruments alone) and contributed to GDP anyway. Perhaps not.

What we can say for sure is that any amount of money supplied by foreigners is a clear addition to GDP. And since foreigners currently hold almost 40% of US treasury securities, we could estimate that at least $18bn went straight to the 'bottom line' as it were.

Or maybe Bush is paying for the occupation by printing money? M1 is up around $53bn -- about 15% annualized -- over the last 15 weeks (April 7 - July 21) after rising 8% over 2001 and just 3% over all of 2002. This free money, if paying for Iraq, would also go straight to the bottom line.

While probably not all the $45.6bn was generated out of 'thin air' (through foreign borrowing or printing money), a goodly proportion certainly was. If just half of it came into GDP this way -- say, $23bn -- that would mean GDP growth in 2003:II without the occupation would have been a mere 1.5%. Surely this is a conservative estimate as well.

Or perhaps we could use the estimates of a guy who's written for Business Week and thus supposedly knows what he's talking about.

The evidence is that economic activity expanded during each war but by less than the amount of wartime spending. My estimate is that each $1 worth of military outlays led to a 60 cents-to-70 cents increase in GDP. To put it another way, while military spending raised output, there was no free lunch. The spending had to be paid for by decreases in other forms of spending, especially business investment (and by more work effort).

If we go with Barro's figures, the net effect of the extra $39.2bn (in 1996 dollars) in military consumption in 2003:II was between $23.5bn to $27.4bn in GDP growth. Replace the $39.2bn with these figures and you get a 2003:II growth rate of between 1.7% and 1.9%.

Thus to be more an "economist" than an "arithmetician" the General would happily back off 0.7% for 1.7% -- and thus but for Iraq, 2003:II was a near repeat of 2002:IV and 2003:I.

So, the Institute for Supply Management is telling us today that, in the words of the AP, "Service Economy Sees Big July Gain".

The Institute for Supply Management said its non-manufacturing index moved to 65.1 from 60.6 in June and 54.5 in May. Readings above 50 indicate growth in activity, while those below 50 point to contraction.

The strength of the report served as confirmation for economists that the economy is finally embarking on a path of sustained economic growth.

Let's hear the rest of the story.

This ISM Non-Manufacturing Report on Business puts two components of the overall index in the driver's seat: new orders (66.9) and inventory sentiment (60.9). Backlog of orders (54.5) and imports (54.0) weren't doing too badly either.

Now again, as with the ISM Manufacturing Report out last week, what's driving the big numbers in this report is newfound "confidence" and predictions of the future. Note the two biggies are future orders and "sentiment" about whether inventories are too big or not. Maybe the future really will be rosy, but as we all known, it aint the future just yet.

Two interesting numbers are buried in this report. Non-manufacturing employment turned in a rather unimpressive figure of 50.7, but it was up from June's 50.3. The employment index for manufacturing is still trapped at 46.1. So we have a few more service jobs being added, but stress "few".

The other interesting number was on prices. In June the index stood at 51.4 and now in July it's fallen to 50.6. Thus there is notable disinflation in the services sector and we're hovering just above outright deflation in US services.

Pundits have long thought that even if there is deflation in goods flooding the US market from East Asia, the strong bias in the US toward services which are supposedly much more impervious to falling prices will always rescue the country from overall deflation. Stephen Roach questioned this conventional wisdom back in 2002 and he looks to be largely right. Piggy back this onto a story from USA Today that

office and professional jobs are being shipped out raising the specter that skilled white-collar workers could face the same devastating job losses that decimated the manufacturing industry

and you get a nasty little snapshot of a possible US economic future.

Some good analysis from Philip Coggan over at FT today.

Those who believe markets are the source of all economic wisdom will also point to US Treasuries. The yield on the benchmark 10-year issue rose by almost a percentage point in July, the fastest turnround in 20 years. Bond yields normally shoot up when investors feel economic growth is returning.

Not everyone is convinced, however, that the economy is simply following the familiar cyclical upswing. The best news has tended to come from the business sector, with sentiment indicators such as the US Institute of Supply Management index and the German Ifo survey showing a rebound in July.

However, the latest survey of US consumer confidence showed an unexpected drop, perhaps connected to the weakness of the employment market. When an economy starts to pick up, a surge in consumer spending is normally one of the primary driving forces. But US and UK consumers have barely stopped spending through the slowdown of the past three years, fuelled by a record build-up in debt. They could hardly spend any more enthusiastically.

That leads many to believe that, if a recovery does come, it will not be as rapid as most previous economic cycles. The consensus forecast for US gross domestic product growth next year is 3.4 per cent, barely faster than the trend rate. Such a recovery would do little to bring down unemployment and would put hardly any upward pressure on prices.

Indeed, most signals suggest that production is gearing up -- but where will the consumption necessary to soak it up come from? In 2003:II, disposable personal income rose just 0.8% -- 0.6% in real terms. Wages and salaries rose a paltry 0.5% (0.37% in private industry), but transfer payments shot up a healthy 1.8%. With jobs continuing to disappear and thus employers holding nearly all the bargaining chips with employees, wages and salaries are unlikely to rise much at all in the near future. We can't count on refi money any longer. As Coggan points out,

First Global estimates that US consumers withdrew as much as Dollars 110bn from their homes in the first half of this year. As yields rise, refinancings will stop, and First Global calculates that withdrawals could drop by as much as Dollars 60bn in the second half.

So I guess it's Social Security and unemployment insurance which will buoy the economy throughout the rest of 2003? Or shall we look for another stock market bubble?

Or more disinflation/deflation?

As you know, the General doesn't usually blog electoral politics. I'll let DailyKos to that bit to death. However, the infighting in the Democratic Party between DLC poster boy Joe Lieberman and "extreme left" Howard Dean is just too ridiculous to ignore.

Saying he is in a fight for the heart and soul of the Democratic Party, Lieberman said policies rooted in the "vital center" of the political spectrum, not what he termed the antiwar and big government policies of his rivals, provide the only hope of defeating President Bush. He warned Democrats that abandoning the policies that helped elect Bill Clinton in 1992 and 1996 would result in a terrible setback for the party.

OK, let's get this straight. Dean is "extreme" because why? This guy has "New Democrat" written all over him. Lieberman has one issue and one issue only -- the war. So apparently, if you are against the war in Iraq you are "extreme left" in Lieberman's book.

Yah, tell Pat Buchanan that one.

Lieberman and Gephardt are different enough to matter. The fight between Lieberman and Dean, or Lieberman and Kerry, is just posturing, pure and simple.

And this fight is simply more evidence that all the liberal Republicans from the 1960s and 1970s (remember them?) have simply migrated into the Democratic Party. Compare John Anderson, Republican congressman and independent candidate for President in 1980, and Joe Lieberman, and I bet you'll find Anderson the more liberal of the two! In fact, if you can find any daylight between the DLC and liberal Republicans from the 1970s, let me know.

Back in the 1970s the countries of the Global South unified behind the leadership of OPEC and pressed the New International Economic Order against the Global North. Think of it as a global magnification of the rant from Network: "I'm mad as hell and I'm not going to take it any more!"

With the debt crisis of the 1980s, the Global South entered the doldrums. Richer countries in East Asia abandoned the bloc, OPEC lost its power as the cartel crumbled, and poorer countries in Latin America and Africa entered a "lost decade" (or for Africa, "lost decades"). The towering personalities of Nehru, Nkrumah and Nasser disappeared.

It's been a long time since the Global South got organized to exert it's power over any issue. But the tide may finally be shifting.

India should pull out of the World Trade Organisation if the current talks do not produce the results developing countries want, a hardline Hindu group close to the ruling coalition has said.

Talks in Montreal aimed at finalising the agenda for key negotiations in Mexico in September have just wrapped up without agreement on key issues including the opening up of agriculture.

Now the Swadeshi Jagaran Manch (SJM), a group with about 15 million members - and one of a number of Hindu groups allied to the ruling Bharatiya Janata Party (BJP) - says that is not good enough.

It is planning a mass protest outside parliament in Delhi on 3 September to pressure the government into threatening a pullout.

"It is time for the WTO to mend itself or become acceptable to all developing countries," said SJP leader Muralidhar Rao at a news conference in the southern hi-tech centre of Bangalore.

Now India has long been able to be the rallying point for the Global South. With an enormous population, developed advanced manufacturing and now high-tech sectors, a middle class in the hundreds of millions, strong anti-colonial past and democratic, it is really the perfect leader of a Southern coalition. Yet under the BJP, India has had little interest in anything beyond its own borders.

If the BJP is finally being roused to oppose the WTO and lead the South against it in Cancun later this year -- that the South is not just "mad as hell" but now might have the power to actually do something about it -- this would be big big news indeed.

You may not remember, but it was India which held out until the bitter end in Doha in November 2001. Under WTO rules, every country must agree to launch a new round of trade talks for those talks to go forward. The US and the EU, after hammering out their differences, figured to steam roll over the rest of the world, but India was about the only country that was powerful enough to stand up and say "no more". Only at the very last moment did India relent. India's track record suggests it is not afraid to stand up for itself. If the rest of the South stands with it, and India knows it, the fireworks in Cancun in September may be visible worldwide.

The big question of the US economy today is whether capital spending can pick up the slack generated by the end of the refi boom. GDP growth in 2002:IV and 2003:I was a paltry 1.4%, and without the Iraq occupation would have been a pathetic 0.7% for 2003:II. Thus what little real growth there has been for the last 9 months has relied heavily on the ultra-low mortgage rates which spurred a refinancing-induced consumer binge. Now that refinancing is receding sharply, will capital spending take its place?

Rising interest rates are not just a sword of Damocles hanging over the American consumer. As the NYTimes observes today,

Higher rates could also lead to more expensive loans for automobiles; robust car sales have been another pillar of the economy the last few years.

Businesses, meanwhile, still gun shy about spending money on new factories and equipment, may have to contend with higher borrowing costs as well. So will the federal government itself, just as tax cuts and spending increases are forcing it to borrow huge sums to cover the largest deficits in history.

It remains to be seen whether last week's surge in longer-term interest rates is just a blip or the start of a trend. Either way, however, it is remarkable as a demonstration of the limits of the Fed and its chairman, Alan Greenspan, to force the hand of the nation's financial markets.

Wait a minute -- "last week's surge"?? The 10-year treasury bill wound up the week ending August 1 at 4.4% and the 30-year conventional mortgage at 6.14%. But these have been shooting skywards ever since mid-June. This is no one-week blip, friends!!

The country's cheeky mortgage lenders just don't seem too keen on taking Greenspan's cue and keeping long-term rates down down down.

To protect themselves from borrowers' paying back their loans early, mortgage lenders hedge their loan portfolios in part by buying up Treasury bonds. But as interest rates began to creep up, the nation's biggest players abruptly adjusted their strategy and started selling bonds or derivative securities tied to them. Lower prices for Treasury bonds translate directly to higher interest rates earned on those bonds. . . .

as rates began to creep up last month, mortgage lenders expected a big drop in mortgage refinancing activity and began to sell off Treasury bonds. That helped push interest rates higher, creating what amounted to a vicious cycle of rising rates.

Now we hear from the financial markets how "disappointed" they are that the Fed didn't drop rates to 0.75% back in June. Right-wing stalwarts like the American Enterprise Institute complain that the Fed isn't putting the economy on "full throttle".

But consider that if the Fed does drop the federal funds rate down to 0.75%, the average money market fund in the US will suddenly be turning a profit of zero and sending a $2 trillion market out into extremely choppy waters. Cut interest rates down to 0.5% and the Fed would all but wipe out the money markets -- and you've got to believe the Fed hears the voice of the AARP on this one!

Time to start rolling out the "unorthodox" policy prescriptions again?

While most Americans have let their eye roam and are no longer closely watching for signs of deflation, the end of the dollar's sharp fall earlier this year suggests it's far too early to relax.

As Stephen Roach points out today, a falling dollar is an essential part of a global readjustment strategy, but without higher demand in the rest of the world, a falling dollar is likely to simply export deflation rather than spur realignment.

But there is probably little chance of either since the dollar has stopped falling. In February 2002 the broad dollar index hit its peak of 130.45. Then it began its long slide down to 117.16 on June 16. This was a meager 10% decline, and since mid-June the dollar has not just stabilized but actually risen, to 120.14 on August 1 -- cutting the overall decline to just 8%. The major currencies index fell a much sharper 20% (due to factoring out many East Asian currencies which are fixed or heavily managed vis-a-vis the US dollar), but has since risen, too, and cut that fall to just 16%.

Without a much more significant decline in the relative value of the dollar, there is no hope for any reduction of the massive US current account deficit. No reduction means more and more capital needs to flow into the US, which will only place further pressure on US interest rates to rise as foreign capital demands more and more 'insurance' against currency risk in light of the ballooning current account deficit. Higher interest rates mean less demand, and in the midst of rising production, that signals more disinflation.

Without a falling dollar, US deflation will stay right at home. Don't take your eye off falling prices just yet.

Way back on July 3, the General blogged:

The Poppy Bush recession began 1990:III and it took until 1991:IV for GDP to recover in real terms. At the start of the Bush I recession, unemployment stood at 5.9%; it took until September 1994 for unemployment to be that low again -- about 33 months between GDP recovery and employment recovery. By comparison, employment recovery from the Reagan recession was downright rapid. The Reagan recession began in 1981:IV and it took until 1983:II for GDP to recover. At the start of the Reagan recession, unemployment stood at 8.5%; it took until November 1983 for unemployment to be that low again -- about 6 months between GDP recovery and employment recovery.

So far for Jr. it has been about 18 months since GDP recovery. In 2001:I unemployment was 4.2% and it's going to take a hell of a long time to get back to that kind of territory.

In light of the new job numbers released last week, I thought I'd do the same thing not with the unemployment rate but with the number of jobs in the economy.

For Nixon/Ford, the pre-recession employment high was in June 1974: 64.4 million jobs. The employment numbers bottomed out after 10 months with a whopping 4.19% of US jobs having disappeared. It took until June 1976 for the economy to return to the pre-recession level, a total of 24 months.

For Carter, the pre-recession employment high was in March 1980: 74.7 million jobs. The employment numbers bottomed out after just 4 months with 1.71% of US jobs having disappeared. It took until February 1981 for the economy to return to the pre-recession level, a total of 11 months. Oh, if recessions could only be like this again!

For Reagan, the pre-recession employment high was in August 1981: 75.4 million jobs. The employment numbers bottomed out after 16 months with 3.54% of US jobs having disappeared. It took until October 1983 for the economy to return to the pre-recession level, a total of 26 months.

For Poppy Bush, the pre-recession employment high was in March 1990: 91.2 million jobs. The employment numbers bottomed out at 23 months with 1.94% of US jobs having disappeared. It took until May 1993 for the economy to return to the pre-recession level, a total of 38 months!

For George W., the pre-recession employment high was in February 2001: 111.6 million jobs. It has been 29 months and the employment numbers have still not bottomed out. So far, 2.91% of US jobs have disappeared -- and counting.

Amazingly, the Bush Jr. jobs recession has combined the worst of both previous ones (both under Republican presidents, I might add). George W. has had the longest jobs recession since the 1930s, longer even than his fathers when comparing bottom-out rates. He is also pushing Reagan territory in terms of the depth of the jobs recession. But at least the Nixon/Ford and Reagan jobs recessions were short -- 10 and 16 months respectively to bottom-out time. Remember, this economy is at 29 months and counting!

As far as jobs go, it's fair to say this one is easily the worst since the end of the "Golden Age" in the 1970s and even the worst recession for work since the 1930s.

After a month behind bars, Jos� Bov� accepts community service and limited home detention and is released from prison. Good to see Bov� is just as ready to fight on as ever!

"I am very happy to be among all those who came out in support for me. Prison has not changed my convictions," Bove told Reuters. . . . "Locking me up won't help the government to get people to accept genetically modified foods or multinationals controlling agriculture."

Remeber the WTO? Before 9/11 it's all anybody was talking about. Since then it's fallen completely off Americans radar screens.

Lori Wallach of Global Trade Watch reminded us on Friday what's at stake, and why even Dr. Frankenstein (corporate America) is now getting fidgety as it's monster starts to run wild.

The case causing the corporate outcry involves the FSC, a tax benefit to corporations that exempts exports made by subsidiaries overseas from their corporate earnings for U.S. tax purposes. The FSC has long been decried by budget critics as corporate welfare �- a $5 billion annual tax break for large U.S. corporations.

In 1998, the European Union (E.U.) challenged the FSC at the WTO, claiming that the FSC violated subsidy rules. In 1999, the WTO sided with the E.U., finding that the FSC did constitute an illegitimate export subsidy and recommended the United States eliminate FSC provisions in the tax code by October 2000. The United States appealed, but the WTO ruled again in February 2000 that the FSC be removed, and allowed the E.U. to slap $4 billion in retaliatory tariffs against the United States.

It was then that the U.S. corporate business lobby really kicked into a frenzy over FSC. The corporate business lobby comprised the �FSC 2000� coalition (thanks to a loophole in the federal lobbying law, the public does not know the corporations that make up these ever-popular �coalitions�) and paid PricewaterhouseCoopers nearly $1 million to write a new tax bill that was supposed to be WTO-legal. The bill passed Congress and was signed by President Clinton but was still found by a trade tribunal to be WTO-illegal.

The U.S. corporate lobby got even more fidgety and urged the Bush administration to come to an agreement with the E.U. to avoid the retaliatory tariffs. The United States decided to again appeal the latest WTO ruling, and lost again. In August 2002, the WTO ruled that the E.U. was entitled to impose the full $4 billion in sanctions, and in February 2003, the Bush administration urged Congress to rewrite the tax code to come into compliance with the WTO.

So, the dog has come back to bite the owner. While lawmakers are scrambling and lobbyists are sweating, the FSC case illustrates the blatant hypocrisy of the corporate-managed trade lobby that has dominated U.S. trade policy, and attacked labor, consumer and environmental critics. U.S.-based multinationals embrace the WTO when it attacks public interest regulatory policies they view as impeding their �free trade.� But if the WTO strikes at corporate welfare provisions of the tax code, talking heads on business news shows and the editorial page of The Wall Street Journal howl about the WTO�s infringement on democracy.

The WTO continues to grow into an unelected global government -- who will stop it?? Instamoron seems to care about unelected Eurocrats. Think he'll speak up for democracy in his own country, too?

The friendly financial reporters at the Financial Times are certain that rising interest rates in the US are the result of "mounting confidence that the US economy is finally poised for a period of strong growth."

Whether this is the cause or not, rates are certainly shooting skywards. The 10-year Treasury note stood at 3.13% on June 13. At the end of July it is at 4.49%. That's 136 basis points in 7 weeks, a remarkably rapid turnaround in "confidence" if there ever was one!

But is this all really about renewed "confidence"? Have the financial markets suddenly taken Paxil en masse?

Maybe the boys at FT should try some more concrete analysis on for size:

The announcement from the Treasury that they would need to raise $450 billion over the course of the next year started to reverse the process.

With that announcement, the bond market realized they were going to get stuffed with a lot more bonds for the sake of reviving the economy, and more parochially, for the sake of re-electing the president.

That started to push interest rates up, and all that derivatives-related activity suddenly went into reverse.

The Federal Reserve also played a role. Alan Greenspan testified in Congress last month that some research showed that alternative methods of conducting monetary policy, like buying 10-year Treasuries to bring rates down, wasn't a good idea. That didn't help.

Too much debt chasing too few borrowers. Didn't Republicans used to care about stuff like this??

if rates went up another half a point in the next six weeks, that would be a cause for worry, and might be too much of a shock for the economy and the stock market.

I guess it's time to mount an interest rate watch. The 10-year above 5.0% means bad news for the Iraq-driven "recovery". Stay tuned.

Stephen Roach is preaching fire and brimstone again this Friday.

It�s a nightmare scenario, even for me. Sharply rising real long-term interest rates are the last thing an economy on the brink of deflation needs. Such an outcome would depress an already weakened state of aggregate demand, conjuring up notions of the dreaded deflationary spiral. The extraordinary correction in the bond market over the past seven weeks tells us not to dismiss such a possibility out of hand. . . .

long-term US interest rates are now on the rise -- and not just in nominal terms but even more so in real terms. After hitting a low of 1.6% in September 2002, the inflation-adjusted yield on 10-year Treasuries currently stands at around 3% (nominal yield of about 4.5% as of the July 31 market close, less a core CPI inflation rate of 1.5% y-o-y). Moreover, with core inflation having slowed to just 0.9% in the first six months of 2003, the risk to real long-term interest rates remains very much on the upside -- even if nominal yields don�t back up further. That risk hints at the toughest outcome of all -- the potentially lethal combination of low and falling inflation in conjunction with a back-up in nominal interest rates. Needless to say, should America�s current-account adjustment begin in earnest as the US continues to slide down the slippery slope toward deflation, the real interest rate outlook could be exceedingly treacherous. And that would be terrible news for a nascent recovery in the US economy -- raising the risk of a relapse in the interest-rate segments of aggregate demand that could lead to an intensification of disinflation and an even sharper back-up in real rates. It would be the ultimate vicious circle for US economy that is already close to the brink of deflation.

Not exactly time to get out the "economic recovery" party hats just yet, eh?

The July employment figures put the cost of the Great Bush Job Destroying Machine at 3.2 million jobs.

At the start of the Bush tenure in January 2001 there were 111.6 million jobs in the US. In July 2003 there are now 108.4 million. In only five of Bush's 31 months in office has the number of jobs in the US actually risen, and the economy is currently on a six month losing streak.

Surely this has something to do with the interesting GDP figures released Thursday which shows that disposable personal income increased 3.3% in 2003:II while personal outlays rose 4.4% and personal savings fell 0.3%. American consumers are certainly consuming, but these figures suggest they're doing it with borrowed money and tapped savings. In light of stagnant real wages and disappearing jobs, what other answer would we expect?

The Globblog's central theme of overproduction got another boost today with the combination of expanding factory outputs and continued job losses.

The Institute for Supply Management said that the US manufacturing sector began to expand in July for the first time since February. Interestingly, the elements of the ISM index which were expanding most rapidly, and thus those contributing most to the overall evaluation of manufacturing expansion in the US, were: new orders (56.6 -- anything over 50.0 is expansion, under is contraction); imports (56.0); and new export orders (53.8).

Now call me a wet towel, but this doesn't exactly sound like booming economic activity in manufacturing. Two of the measures are prospective, predicting future activity, and the third measures imports, which is not domestic economic activity at all! Nonetheless, the sector does seem to think sunnier days are ahead.

But are they? While the unemployment rate dropped in July to 6.2%, everyone noticed the number-fudging going on.

The nation's unemployment rate dipped to 6.2 percent in July, but businesses cut jobs for a sixth month in a row, still wary despite signs the economy is on the mend. With jobs scarce, close to half a million people gave up looking.

As of July, 9.06 million Americans were "unemployed" and 1.57 million "marginally attached" (according to the Bureau of Labor Statistics, "persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past", which includes the "discouraged"). If we combine the unemployed with the marginally attached, we get an unemployment rate of 7.3%, down slightly from June's 7.4%.

Interestingly, the civilian labor force participation rate has been trending slightly downwards since 2000. It hit a recent high of 67.4% in April 2000; for July 2003 just 66.2% of Americans age 16 and over were working or looking for work.

So as American businesses start ratcheting up production again, there are fewer jobs and fewer jobholders out there to soak up production. Overproduction and disinflation are the likely short-term consequences. Unless, of course, the federal government will be buying up all this excess supply -- and with our war economy, maybe just that will happen.

It took a few hours, but the wire services finally picked up on the General's observation that federal military spending is driving the 2003:II "recovery".

The strongest wave of federal defense spending since the Korean War helped fuel U.S. economic growth at a stronger-than-expected 2.4 percent annual rate in the second quarter, the Commerce Department said on Thursday. . . .

Spending on defense, much of it to support the war in Iraq, shot up at a 44.1 percent rate -- the strongest since 110 percent in the third quarter of 1951 -- after falling 3.3 percent in the first three months of the year. That accounted for much of the unexpected surge in GDP expansion.

"Without the voracious winds of government spending, the USS Economy might have been a rudderless dinghy," said Rich Yamarone, an economist at Argus Research Corp. in New York.

So let's return today to unpacking yesterday's GDP numbers.

In current dollars, net government spending and investment went up $33.6bn (all figures are in annualized terms). Federal spending went up a whopping $43.5bn while state and local government spending actually dropped $9.9bn. This was only the second time since 1976 that state and local government spending fell in nominal terms. The first time was 2001:III -- during the depths of the Bush recession. Looks like the George W. administration is a killer for state and local governments.

Of the extra net $43.5bn the feds spent or invested in 2003:II, all of it was in defense. Military spending rose $45.6bn while non-defense spending fell $2.2bn.

Let's come to the punch line.

The Bush administration spent an extra $45.6bn annualized in 2003:II on military spending. On a quarterly basis, that's $11.4bn.

In early July, Don Rumsfeld put a monthly price tag of $3.9bn on the occupation of Iraq. On a quarterly basis, that's $11.7bn, almost exactly the Iraq contribution to 2003:II GDP growth (amazingly, the war will likely prove cheaper than the peace!). We can look forward to many more military-driven "spikes" in US GDP in the quarters to come, I am sure.

Without empire, this economy would be virtually stagnant. Recall yesterday the General computed that without this imperial boost, the US economy would have grown an anemic 0.67% in 2003:II.

In 1895, the famous British imperialist Cecil Rhodes said, "The Empire, as I have always said, is a bread and butter question. If you want to avoid civil war, you must become imperialists."

Words to ponder.