bizzXceleration: Performance, Value and Profit

The rest of the readings review the lessons from Japan's political and policy failures that led to a "lost decade". That's the danger we need to worry about and the Fed is doing everything they can to avoid it. However the aftermath of all the cumulative screwups over the last nine years will be with us into the next administration. We strongly suggest you use grounded economic policy as a major decision-making criteria for picking your candidate - if we can fantasy that good economic sense is an option of course.

The other fantasy that's been put to bed is the decoupling notion but what's still not come out is that the coupled downturns may also put pressure, perhaps severe ones, on the developing economies of China and Russia especiallly. Thought Brazil, India, et.al. won't be immune. So two final excerpts point to some of the major fault lines that are beginning to show. Another thing to start factoring into your long-range business, investing and other plans, e.g. if somebody offers you a job which depends on the health of these economies you'd better have a failsafe option.

General & Special

Don’t Rerun That ’70s Show If history is any guide, we should be looking at an extended period of economic weakness, probably extending well into 2010 or beyond. Will the next president be the second coming of Jimmy Carter? Given Thursday’s economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so. Realistically, though, the parallels between the problems facing the U.S. economy now and those of the late-1970s aren’t that strong. That’s the good news. The bad news is that the economy probably will look similar to, but worse than, the economy that undid the first President Bush. And it’s all too easy to see how the next president could suffer a political fate resembling that of both the elder Mr. Bush and Mr. Carter. That said, I don’t believe we’re really facing anything comparable to 1970s stagflation. For one thing, we’re less dependent on oil: America has more than twice the real G.D.P. it had in 1979, but consumes only slightly more oil. For another, there’s no sign of the wage-price spiral that once drove inflation into double digits — in fact, wage growth has been declining even as inflation rises. What’s much more likely is that we’ll have an economy like that of the early 1990s, only worse. The difference is that the problems look a lot worse this time: a much bigger bubble, more financial distress, deeper consumer indebtedness — and sky-high oil prices added to the mix. So if history is any guide, we should be looking at an extended period of economic weakness, probably extending well into 2010, and quite possibly even longer. Can the next president do anything to avoid that outcome? In terms of straight economics, the answer is a clear yes. To this day, it’s not clear what Mr. Carter could have done differently: stagflation is a problem with no good solutions. But weak spending is a treatable condition. A serious fiscal stimulus plan — one that emphasized public investment and aid to Americans in economic distress rather than across-the-board tax rebates, which many people won’t spend — could do a lot to ease the country’s economic pain.

Politically, however, it’s hard to see this happening.

• Summers on Stagflation Inflation must be monitored carefully, but were a long way away from the stagflation of the 70s, says Lawrence Summers, former Treasury Secretary and former Harvard University president.

• America’s economy risks mother of all meltdowns, Washington’s rescue cannot end crisis

• Who Are These People Surprised by Economic Data? The WSJ on gross domestic product and initial jobless claims: "Stocks fell Thursday after weaker-than-expected economic readings and earnings reports underscored the potential for a recession." Weaker than expected? WTF? I keep hearing people talk about this "negativity bubble" -- but from where I sit, the media, traders, analysts are still too optimistic -- perhaps way too optimistic. We have had 4 rallies over the past few weeks of nearly 200 Dow points in a given day. That doesn't sound like excessive pessimism to me. Ask yourself this: Is the greater fear getting stuck with stocks that move lower -- or missing any rally?

INTERNATIONAL ECONOMY 

Lessons from Japan's 'Lost Decade' Washington and the financial sector would do well to study the past — to avoid repeating the errors of 1980s bad-loan crisis in Japan. With profits at U.S. banks and thrifts at a 16-year low in the fourth quarter and U.S. consumer expectations at a 17-year low in February, financial headlines often read more like history lessons. As American banks dig out from under their mountain of bad debt, analysts say policymakers would do well to remember Japan's string of mistakes as it grappled with its own bad-loan crisis, after the late 1980s bubble economy burst and left financial institutions burdened with massive levels of bad loans. The bungled cleanup plunged Japan into its so-called "Lost Decade" of stop-and-go recession. There are no quick fixes, say bankers. And counting on one could well make matters worse. "Lessons of what not to do from it are far more plentiful than the what-to-do sort," said James Malcolm, now a London-based strategist at Deutsche Bank. He was a Tokyo-based economist with a different investment bank at the height of Japan's crisis in the late 1990s. "Basically, it's inevitable that people want a quick and painless fix, but the reality is, it's going to be slow and painful so you've got to provide a supportive policy environment, and push forward with restructuring the markets." It's critical that U.S. banks and government policymakers face up to facts, analysts say. Recent data make it hard not to.

Policy challenges mount for China But making investment bets on the stated policy of the People's Bank of China requires much more than just a leap of faith. After being told to expect lending curbs as bank reserve ratios were hiked to 15%, instead loans grew at blistering 16.7% year-on-year in January, up from December's 16.1%. Put another way, China's commercial banks lent 803 billion yuan or two thirds of their lending quota for the first quarter in January. This has left investors and analysts scrambling for answers. Has the tightening policy been ignored, abandoned or is plain not working? Have we gotten to the stage where policy by dictate is now a blunted instrument as China's newly commercialized banks chase profit? Official word remains that there has been no policy shift and there is likely to have been some front loading of loans, but more answers are needed. The NPC meeting in March is expected to provide some more policy detail.  In the meantime, the fiscal, trade and lending policy challenges facing China's leaders are piling up whither growth, inflation, exchange rate? On the one hand, Beijing is facing renewed calls to relax spending and trade policies. The construction, transport and agricultural sectors hit by the recent monster snow storm that caused $15.4 billion in damage need emergency funding. Meanwhile exporters are feeling the pain of a weaker U.S. market and rapidly appreciating yuan squeezing margins even though China racked up another strong trade surplus in January. On the front page of the South China Morning Post over the weekend was a story of factories fleeing the Pearl River Delta as new labor contract laws added to existing financial strains. One estimate said 10,000 processing factories could leave this year. Meanwhile, the gorilla in the room for Beijing is still inflation. This week, January inflation data will be released and is expected to top 7%.

• Crash course The long slump in China

Putin Makes Medvedev Suffer Inflation Jolt as Wage, Price Pressures Mount The shadow of inflation is threatening Russian President Vladimir Putin's economic legacy and complicating the decisions facing chosen successor Dmitry Medvedev. Russia's prosperity is built on nine successive years of expansion, a sixfold increase in average incomes and almost $500 billion of currency reserves. They contribute to Putin's inability to contain consumer-price growth, which overshot its target in every one of his eight years as president except 2003. Medvedev, 42, the likely winner of the March 2 election, must find ways of containing inflation that accelerated to 11.9 percent in 2007. Failure to do so may trigger unsustainable wage demands, squeeze consumer spending and dent company profits. At the same time, Medvedev will have ``no real tools'' for meeting an annual inflation target of 8.5 percent, said Anton Struchenevsky, an economist at Moscow's Troika Dialog brokerage. Monetary policy isn't effective because, 17 years after the collapse of the Soviet Union, Russia hasn't developed a fully fledged consumer-credit market. Mortgages are few and credit-card use is in its infancy outside the biggest cities.