03/12/2004 The Current Account Deficit and the Bane of Inflationism *

For much of the week, U.S. equities were hit with the most intense selling in awhile. For the week, the Dow and S&P500 declined 3%. The Transports dipped 1% and the Utilities were down 2%. The Morgan Stanley Cyclical index was hit for 4%, and the Morgan Stanley Consumer index fell 3%. The small cap Russell 2000 and S&P400 Mid-cap indices declined 3%. Technology stocks remained under pressure. The NASDAQ100 sank 3%, and the Morgan Stanley High Tech index dropped 4%. The Semiconductors and NASDAQ Telecom indices were down 4%. The highflying Biotechs and Broker/Dealers were hit for 5%. The Banks declined 3%. With bullion sinking $6.0, the HUI gold index fell 4%.  The Treasury melt-up proceeds. For the week, 2-year Treasury yields declined 5 basis points to 1.51%, and 5-year Treasury yields sank 10 basis points to 2.70%. Ten-year Treasury yields declined 8 basis points to 3.75%, while long-bond yields dipped 4 basis points to 4.72%. Benchmark Fannie Mae mortgage-backed yields dropped 8 basis points, with a 2-week decline of about 19 basis points. The spread on Fannie’s 4 3/8 2013 note narrowed 1 to 27, while the spread on Freddie’s 4 ½ 2013 note was unchanged at 27. The 10-year dollar swap spread declined 2 to a 2-month low of 37.5. Corporate spreads continued their moderate widening. The implied yield on the December 3-month Eurodollars declined 1 to 1.56%. Corporate debt sales slowed to $11.6 billion (from Bloomberg). Investment grade issuers included Wal-Mart $2.0 billion, Met Life $1.0 billion, Rouse $850 million, Abbott Labs $500 million, Berkshire Hathaway $500 million, Dai-Ichi Mutual Life $500 million, American General $500 million, Allstate Life $400 million, Corning $400 million, Rogers Cable $350 million, Toll Brothers $300 million, Loews $300 million, MGM Mirage $300 million, Lennar $250 million, Peabody Energy $250 million, Panhandle Eastern $200 million, National City $200 million, and Chelsea Property $100 million. Junk bond funds saw $308 million of inflows for the week (from AMG). Junk issuers included Norske Skog $250 million, Bowater $250 million, Amkor Tech $250 million, Pharma Intermediate $220 million, Mack-Cali Realty $200 million, Team Health $180 million, California Steel $150 million, Standard Pacific $300 million, Grand Communications $135 million, Tech Olympic $125 million, Mrs. Fields $115 million, and Eschelon $100 million. Convert issuers included Host Marriott $450 million, Ivax $400 million, Veritas $155 million, Apex Silver $150 million, and Covad $125 million. There was $10 billion on new Asset-backed securities issuance this week, with home equity loan securitizations accounting for $6.8 billion (from JPMorgan). Foreign dollar debt issuers included Philippines $500 million, AES Gener $400 million, Industrial Bank of Korea $300 million, EMP Nacional Del Petrole $150 million, and Turanalem Finance$300 million. Freddie Mac posted 30-year fixed mortgage rates sank 18 basis points to 5.41%, the lowest since the first week of July. Fifteen-year fixed-rate mortgages dropped 19 basis points to 4.69%, only 9 basis points off the low set last June. One-year adjustable-rate mortgages could be had at 3.41%, down 6 basis points to a new low. One-year adjustable-rate mortgages dropped 5 basis points in the West to 3.27%. The Mortgage Bankers Association Purchase application index rose 1.4% last week. It was up 23.8% from one year ago, with dollar volume up 41.6%. The Refi application index was up 1.0% last week. Fed Foreign “Custody” Holdings of Treasury, Agency debt increased $8.1 billion. Custody Holdings were up $93.1 billion during the first 10 weeks of the year (45% ann.), with 52 week gains of $258.0 billion (28.6%). Broad money supply (M3) rose $10.0 billion for the week of March 1. M3 is up $136.4 billion (8.9% annualized) over the first nine weeks of the year. Demand and Checkable Deposits were about unchanged, while Savings Deposits gained $12.1 billion. Savings Deposits were up $93.7 billion over nine weeks (17.1% ann.), with one-year gains of $403.7 billion, or 14.1%. For the week, Small Denominated Deposits dipped $0.9 billion and Retail Money Fund Deposits declined $3.4 billion. Retail Money Fund deposits were down $134.5 billion, or 14.8%, over the past year. Institutional Money Fund deposits added $5.0 billion and Large Denominated Deposits were unchanged for the week. Repurchase Agreements were also unchanged, while Eurodollar deposits declined $2.7 billion. Total Bank Credit declined $18.1 billion. Securities holdings dropped $10.8 billion and Loans & Leases dipped $7.3 billion. Commercial & Industrial loans declined $3.0 billion, while Real Estate loans jumped $10.4 billion (up $31.1 billion in 5 weeks). Consumer loans declined $3.6 billion and Securities loans fell $6.8 billion. Elsewhere, Total Commercial Paper (CP) jumped $11.1 billion ($20.1 billion in two weeks) to $1.33 Trillion. Financial CP increased $12.2 billion, while Non-financial CP dipped $1.1 billion. For the first 10 weeks of the year, Total CP is up $62.1 billion, or 25.5% annualized. Year-to-date, Financial CP has gained $51.7 billion to $1.212 Trillion. Currency Watch: Currency markets remain unsettled and volatile. The dollar index gained 1% this week. The highflying New Zealand dollar dropped 4.5%, the Australian dollar 3.4%, and the British pound 2.4%. Commodities Watch: March 10 - Bloomberg (Meggan Richard): “World energy consumption may jump 50 percent by 2020 as economic growth in Asia boosts demand for electricity and rising car sales in China cause gasoline use to surge, the Institute of Energy Economics Japan said in a report. Global energy demand will increase to the equivalent of 13.6 billion metric tons of crude oil by 2020, from 9.1 billion tons, the institute said in its 2000-2020 global and Asia energy outlook report, released in Tokyo. ‘To meet demand, Asia’s energy resources will shift to coal-fired generation and natural gas,’ said Kokichi Ito, the institute’s managing director for research. Consumption of electricity in Asia will more than double in the next 20 years…as companies build more factories in countries such as China and India. China, with five times the population of the U.S., has a third of the generating capacity… The country’s electricity consumption grew 15 percent last year. Asia’s demand for oil, including auto fuel, will rise 84 percent to 35 million barrels a day by 2020 from 19 million barrels a day…” March 12 - Bloomberg (Pratik Parija): “Chinese steelmakers paid on an average $45 a ton for imported iron ore in December, 74 percent more than a year earlier, the Tex Report said, citing customs department statistics.” The CRB index declined marginally this week, while the energy-heavy Goldman Sachs Commodity index dipped 2%. Platinum rose to a 24-year high Asia Inflation Watch: March 12 - Bloomberg (Jianguo Jiang and Robert Delaney): “China’s money supply growth slowed in the first two months of this year… M2, the broadest measure of the money supply, at end-February was a record 22.7 trillion yuan ($2.7 billion), 19.4 percent more than a year earlier, the central bank said… Growth slowed from 19.6 percent in December.” March 9 - Bloomberg (Rob Delaney): “China’s government is shipping more rice, corn and other grains to eastern cities such as Shanghai, the nation’s largest commercial city, to help stem a rise in prices caused by lower output and hoarding, the government said. China’s rice harvest will fall to 126 million metric tons in the crop year ending Sept. 31, a 12-year low, prompting grain traders to hold out for higher prices…” March 10 - Bloomberg (Rob Delaney): “Wholesale prices that Chinese manufacturers pay for machinery, electricity and other raw materials rose 5.7 percent form a year earlier in February, the central bank said. Prices for parts used in the production of home appliances rose 12 percent, while metals prices rose by as much as 64 percent… Grain prices rose 22 percent in February, with the cost of rice surging 24 percent and that of wheat jumping 26 percent…” Global Reflation Watch: March 9 - Bloomberg (Xiao Yu): “China posted a trade deficit for the first two months of this year after the government cut exporters’ tax rebates and stepped up imports following U.S. criticism of mounting surpluses. The two months of deficits totaling $7.9 billion deficit were China’s first since March 2003. Exports rose 29 percent from a year earlier to $69.9 billion and imports jumped 42 percent to $77.8 billion…” March 8 - Bloomberg (Stephanie Phang): “Malaysia’s industrial production rose 16.7 percent in January from a year earlier, its fastest pace in more than three years… Production at factories, mines and utilities rose faster than the median 13.3 percent growth forecast in a Bloomberg survey…” March 8 - Bloomberg (Koh Chin Ling): “Taiwan’s exports rose in February at their fastest pace in 3 1/2 years as electronics exporters shipped more semiconductors, flat-panel displays and laptop computers. Overseas sales jumped 35 percent from a year earlier to $13.23 billion after climbing 18 percent in January, the Ministry of Finance said in Taipei. That’s their biggest gain since September 2000 and beats the median 21 percent increase forecast in a Bloomberg News survey…” March 8 - Bloomberg (Anuchit Nguyen): “Thailand’s economy grew at its fastest pace in more than four years as manufacturers such as Aromatics (Thailand) Pcl boosted investment and consumers spent more on houses and goods, adding pressure to raise interest rates.” March 12 - Bloomberg (Cherian Thomas): “India’s industrial production accelerated in January after record harvests boosted farmers’ incomes, spurring demand for Honda Motor Co.’s cars, televisions made by LG Electronics India and the materials used to make them. Production at factories, utilities and mines rose 7.4 percent from a year earlier compared with growth of 7.2 percent in December. Analysts had expected output to gain 6.5 percent.” March 10 - Bloomberg (Aloysius Unditu): “Indonesia’s economy this quarter may expand at its fastest pace in more than three years as low interest rates and a steady currency boost consumer spending, the central bank said… Southeast Asia’s biggest economy may grow between 4.2 percent and 4.7 percent in the first quarter from the same period a year earlier…” March 10 - Bloomberg (Linus Chua): “Singapore’s economy will probably expand at the ‘top end’ of the government’s forecast of between 3.5 percent and 5.5 percent for 2004, Deputy Prime Minister Lee Hsien Loong said…” March 10 - Bloomberg (Clare Cheung): “Hong Kong’s economy may grow 6 percent this year after expanding 3.3 percent in 2003, Financial Secretary Henry Tang said in his first Budget speech. That’s more than the 3 percent growth predicted by the government and the median 3.1 percent expansion forecast in a Bloomberg News survey of 17 economists.” U.S. Bubble Economy Watch: March 8 – U.S. Newswire: “More than 8.7 million (“plastic surgery”) procedures were performed on people who took action to proactively manage signs of aging or enhance their appearance by choosing cosmetic plastic surgery in 2003, according to statistics released today by the American Society of Plastic Surgeons, up 32 percent from nearly 6.6 million in 2002.” March 9 – “Residential Funding Corporation today announced that its total mortgage-backed securities (MBS) and mortgage related asset-backed securities (ABS) issuance in 2003 reached a record-high total of $50.1 billion, the highest in company history and a 45.1 percent increase over 2002 levels. Record-breaking volumes were issued in several product categories in 2003.” From Countrywide Financial: “Loan fundings for the month of February grew by 13 percent over the prior month to $23 billion, despite a shortened 19 working-day month. Average daily fundings of $1.2 billion grew by 19 percent over January 2004.” And while Non-purchase/refi fundings were down 42% from February 2003, Purchase fundings were up 39%. Home Equity Fundings were up 49% and Subprime fundings were up 136% from February 2003. It is also worth noting that Adjustable-rate Fundings were up 156% from one year ago and now comprise 44% of total fundings. “Total assets at Countrywide Bank rose to $22 billion, up 199 percent over February 2003.” “February ended with a $44 billion pipeline of applications in process, an increase of 14 percent over January and an indication of continued robust production performance for the near-term.” March 7 – Washington Post (David Cho and Sandra Fleishman): “Camping out to get tickets for a Justin Timberlake concert or the first showing of ‘The Lord of the Rings’ is old. Now people are queuing up for days in tents and under tarps for the chance to buy expensive new homes. Louie Guimmule is among hundreds of people who want to buy into Chatham Square, Old Town Alexandria’s newest townhouse development, where prices start at $560,000 and reach $1.1 million. When he stopped by the construction site last Saturday, dozens of prospective buyers, sleeping bags in hand, were lined up -- a full seven days before the developer was planning to accept contracts on the first, still-unbuilt units. So Guimmule rushed to his apartment a few miles away, grabbed his North Face tent, staked a spot in line and hunkered down for the cold nights ahead. ‘I was not prepared. I had to run home [to get supplies] and pay somebody to stay in my spot,’ Guimmule, a network engineer, said with a tinge of regret in his voice… Tents spread along a street of historic homes in Old Town are one of the more public manifestations of the hot real estate market in the Washington area, where prices in some neighborhoods have doubled in the past few years. Aaron Kilinski, an information technology consultant, said he has slept out on the streets of Arlington County twice: once to buy a million-dollar townhouse and once to buy an investment condo that cost more than $500,000. If he had purchased later, he said, prices would have jumped by tens of thousands of dollars.” February Retail Sales were up 0.6% from January. Sales were up a notable 7.9% from February of last year. By major category, Motor Vehicle sales were up 9.6% y-o-y, Furniture 12.3%, Electronics 12.3%, Building Materials 14.7%, Food, Beverages 3.7%, and Eating, Drinking 10.9%. The Current Account Deficit and The Bane of Inflationism: The January Trade Deficit rose to a record $43.1 billion. Year-over-year trade gains were impressive, with Imports up 8.1% and Exports up 8.3%. The problem is that Imports rose $8.3 billion from January 2003 to $110.3 billion, while Exports increased $4.75 billion to $61.9 billion. Exports would need to rise 78% to match Imports. Looking back to February 2002 – when the dollar was near its highs – it would have required a 67% increase in Exports to match Imports. There will be no growing our way out of this imbalance. The 2003 Current Account Deficit rose to $541.8 billion. Despite the weaker dollar, the Current Account Deficit jumped 13% from 2002’s record and was up 38% from (King Dollar) 2001. That we have posted a combined Current Account Deficit of $1 Trillion over the past two years is an astonishing and historic development that, nevertheless, garners scant consternation and hardly a public protest. Yet, truth be told, these deficits are a direct manifestation of one of history’s great Credit inflations. And, importantly, recent ballooning Deficits should be recognized as a global escalation of the U.S. Credit Bubble. Yet with today’s low interest rates and expanding GDP, the complacent notion that Current Account Deficits no longer matter has become the overriding consensus view. After all, arguments underscoring the risks of U.S. Trade Deficits have been around for 20 years! Yet much of the commentary regarding our incessant Trade and Current Account Deficits misses some key analytical points. Today, as has been the case historically, large Trade Deficits are first and foremost indicative of indulgent monetary conditions - loose Credit conditions and resulting borrowing excess foster over-spending. Sound analysis then requires us to dig beneath the surface for clues as to the character of the finance involved and the nature of spending effects. First of all, from a macro viewpoint our Current Account Deficit is an aggregate measure of the excess dollar claims in existence after “settling” international (largely) trade transactions. It is an accounting convention – electronic debits and Credits tabulated amongst institutions comprising the global financial system. Some like to refer to financial flows as “savings” and “capital,” but they’re merely electronic journal entries – too easily created in overabundance. And these “entries” long ago lost their approximation to tangible wealth and wealth-creating capacity. For years (and perhaps to a lesser extent lately), bullish propagandizers asserted that our Trade Deficits were a consequence of foreign demand for U.S. investment – we simply had little alternative than to buy something with the massive influx of foreign invested “capital.” The truth of the matter is that our Trade Deficits can be largely traced directly to household debt growth (and, increasingly, federal govt. borrowings). More specifically, the 80% increase in mortgage debt during the past six years is largely responsible. New dollar financial claims (Credit) are created and then used as payment for imports. Our imported goods are not financed by balances created by our foreign creditors. Instead, our foreign financiers attain dollar balances originally issued by U.S. financial sector (liability) expansion, largely in the domestic lending process. There is no chicken or the egg dilemma here (Overly accommodative Credit conditions to lending excess to over-spending to trade deficits to excess global dollar balances to price distortions). As we have witnessed, extreme Federal Reserve accommodation fosters unprecedented household borrowing and spending, along with the consequent inflation of financial claims. That a significant amount of this augmented demand is being satisfied by imported goods is the direct cause of mushrooming Current Account Deficits. And these ballooning deficits are a direct reflection of inflating quantities of dollar liquidity deluging global financial systems and economies. It must also be noted that the major 1998-2001 expansion of King Dollar Current Account Deficits was significantly mollified by rampant global speculative inflows. Acute asset inflation made for easy recycling of global dollar balances. “Hot” money flows were in a near buyers’ panic to participate in inflating U.S. asset markets, especially NASDAQ and, later, U.S. Credit market instruments. Especially following the various nineties’ domino emerging market collapses, the Greenspan-governed American asset inflation evolved into the best game in town. But King Dollar is today a distant memory, as is the global environment characterized by systemic financial stress, restrained (non-dollar) liquidity, and constrained general Credit Availability. The rejuvenated financial and economic landscape is evidenced by the CRB commodity index’s rise from about 180 in October 2001 to almost 280 recently, crude oil’s ascent from $17 in October 2001 to $37, and copper’s surge from $60 to $140. It is been a precipitous, momentous change, and it has not been difficult to view it with skepticism and antagonism. What was not all too long ago seemingly massive excess capacity of about everything has suddenly given way to various price spikes, radically altered supply and demand dynamics for many things, and even shortages for some things. But, then again, there has been the unprecedented 24-month $1 Trillion U.S. Current Account Deficit, along with a (Post-King Dollar) reversal of speculative flows in search of gains from equity, debt, currency and commodity markets around the globe. A truly historic wall of liquidity was unleashed. Furthermore, the reversal of global liquidity flows (and strengthening domestic currencies) has unshackled previously tentative Credit systems around the world. Easy money all the time, everywhere, for everyone. To extrapolate the momentous (past 24-month) changes that transformed the global financing and pricing environments raises some truly riveting issues. Considering the capricious backdrop, I find today’s complacency rather fascinating. It has become popular to assert that U.S. Current Account Deficits are sustainable for years to come. This recalls similar end-of-cycle ballyhoo, such as junk bonds always outperform and tech stocks always go up. The hopeful view on the U.S. Current Account is certainly buttressed by recent massive central bank purchases of U.S. securities. As the thinking goes, (espoused by Pimco’s Paul McCulley) “The global economy has massively unused and underutilized resources, particularly human resources.” (When did the global economy lack human and other resources?) “Accordingly, the world faces no danger whatsoever of corrosive inflation – too much money chasing too few goods… As long as this is the dominant risk case, there is no rational limit to foreign central banks’ ability to buy dollars…” Such a viewpoint may on the surface seem reasonable. Yet, beware; it is part of an increasingly “sophisticated” inflationist dogma that is permeating economic discourse these days (see any of Dr. Greenspan recent speeches!). More from Mr. McCulley: “The beauty (or bane) of a fiat currency is the power to create nominal purchasing power for nothing! And when there is a shortage of global purchasing power, as manifest in unemployed and underemployed global labor resources, it is the duty of central banks to create nominal purchasing power by creating money out of thin air.” First of all, I do not believe it does justice to reality to refer to the current environment as one of global “fiat currency.” This implies traditional government control over the supply of a prevailing monetary instrument – fiat “money” - used to procure goods and services We have no such system today, with regard to either governments as the major issuers or the issuance of money as the creation of additional purchasing power. Instead, myriad financial institutions enjoy the unconstrained capacity to “create nominal purchasing power” through the issuance of private (and GSE!) liabilities (Credit creation). What we have today are actively traded global markets in various Credit instruments (the “moneyness” of contemporary Credit), issued in excessive quantities, within the backdrop of central bank assurances of liquid markets. Moreover, much of contemporary monetary expansion originates from the process of asset-based lending (as opposed to goods & services or productive investment). There is, then, anything but a direct link between government control of the supply of “fiat money” and pricing within goods markets. Especially after years of institutional and marketplace evolution, there is today a very strong interplay between general monetary conditions and asset prices. Indeed, asset Bubble dynamics play an integral role in (self-reinforcing) monetary expansion, as well as the allocation of resources and the structure of real economies. I would strongly argue that we operate in an anomalous system of unfettered global Wildcat Finance – with its attendant wild lending and speculating excess. Inflate today and the consequences (as we are witnessing) will be, first and foremost, rising asset prices, with only spillover effects for goods, services and labor markets. Especially in the late stages of a Credit Bubble – where excess capacity, “by definition,” has developed within key sectors – the Inflationists will undoubtedly employ the argument that some extra “money” would stimulate demand and alleviate “over-capacity”/”insufficient demand” without adversely impacting the general price level. Such notions are as seductive today as they were several hundred years ago (even before John Law!). But are we to ignore the consequences of the ballooning pool of financial claims and the consequences of the surging tide of speculative financial flows? And once such inflationary forces are set loose, how and to what effect are they eventually reined in? Importantly, massive U.S. Current Account Deficits are today the predominant manifestation of Unconstrained Global Wildcat Finance. And I would strongly argue that the key issue today is not so much the sustainability of U.S. deficits, but the ramifications for sustaining underlying excesses. The Fed’s failure to rein in gross financial excess – and foreign central banks’ accommodation/monetizaton of surfeit dollar liquidity – only exacerbates myriad asset Bubbles and economic distortions, in the U.S. and, increasingly, abroad. There is today clearly no “general price level” for central bankers to manipulate. Instead, inflationary effects are uncertain and wildly divergent. There may be excess capacity in a wide range of manufactured goods, but there is notably less available supply of residences throughout California and in the more appealing cities and neighborhoods throughout the country. Inflationary policies today impart a muted impact on most goods prices and even CPI, but at the same time fuel a precarious real estate buyers’ panic. Yes, there may be underutilized workforces globally, but there is notably less available supply of copper, platinum, and crude oil. Going forward, continued accommodation of rampant Credit inflation will surely incite panic buying and shortages in many key commodities markets. There may be enormous available capacity to produce additional goods, but procuring raw materials and transportation will, in many cases, prove increasingly costly and challenging. The flaws in the Inflationists’ theories are many. There is no control today over the system of Global Wildcat Finance’s creation of new claims, nor is there the capability to direct how this augmented purchasing power is expended. In the current environment, newly created liquidity will almost surely chase inflating asset markets – California real estate, energy markets, emerging markets, commodities, or U.S. Credit market instruments. And inflating asset markets beget only more destabilizing Credit and liquidity creation, along with attendant destabilizing speculation. And this gets right to the heart of the overriding problem with out-of-control U.S. Current Account Deficits: Acute Financial Fragility. At this point, the risk of destabilizing Asset Bubbles and Boom & Bust dynamics overwhelms any potentially positive impact inflation may impart on goods and labor markets. The inflationists are fighting a losing war. Systemic risk only grows (exponentially) over time, as increasingly distorted asset markets and imbalanced economies become gluttons for only greater amounts of Credit excess. And speculative excess expands, evolves, and disperses to more markets. So far global central bankers have sustained the massive requisite Credit inflation and accommodated reckless speculation, but the resulting unstable financial, economic, and political landscape becomes more conspicuous by the week. Thursday’s Financial Times ran the front page headline, “Bush takes outsourcing battle to US heartland.” The top of page two read, “Falling dollar fails to narrow US trade gap.” Well, I would strongly argue that these two related issues go right to the heart of the Bane of Inflationism. There will be no inflating out of our Trade imbalances, while the distorted U.S. economy becomes a heated issue – politically and otherwise. As was noted above, an 8% increase in both exports and imports only feeds ballooning deficits. Inflate global wages, and U.S. competitiveness suffers further. And I would also strongly argue that years of Credit inflation are a major unappreciated cause of our nation’s “outsourcing” and "jobless recovery" problems. The inflationists like to view today’s problems in terms of excess capacity and insufficient demand – both amenable to a shot of monetary chain lightening. And as debt levels become increasingly burdensome, some hair of the dog inflation becomes the effective routine. But there will be the inevitable day of reckoning. Beyond the more obvious issues, the U.S. today has a major problem not unlike Japan after their eighties inflationary boom. While CPI may have remained seductively quiescent throughout the Bubble, years of Credit excess profoundly inflated the underlying cost structure of the real economy. Even with a meaningful decline in the dollar, the U.S. is an increasingly high-cost economy. As Credit Inflation runs amuck, California becomes only a more prohibitively expensive place to do business. Sure, our less-skilled workers have undoubtedly enjoyed the combined fruits of low-cost foreign goods and surging home prices. But there will be the inevitable day of reckoning. The cost has been an only widening gap in our ability to compete globally – in our capacity to produce real economic wealth and not just perceived financial wealth. And it is certainly no coincidence that the Inflationist Alan Greenspan has devoted considerable attention of late to the shortcomings of our educational system, our government’s over-commitment of future benefits, as well as warning repeatedly of the possibility of a protectionist backlash. At the same time, he is too eager to extol the virtues of “globalization” and “creative destruction.” And from Mr. McCulley: “…the leaders of sovereign countries rationally respond to exigencies beyond the economic doctrine of comparative advantage through free trade. This is nowhere more clear than in considering the political hot button of today called ‘outsourcing’ – the creative destruction of American jobs in the (capitalist!) pursuit of profits through lower labor costs beyond America’s borders.” “Creative Destruction” may provide rather nifty cover, but it’s definitely not the issue. We are in the midst of a truly pathetic case of inflating our way to a financial debacle and economic impoverishment. And, damn right, there will be a backlash. Not only are many of our workers being priced out of the global marketplace, they are taking on enormous debts in the process. Come the unavoidable bust, there will be the natural search for scapegoats and villains. There will be a move toward protectionism, isolationism, and nationalism. And the inflationists will surely be quick to point blame at inept politicians, shortfalls in our education system, and powerful global forces outside of our control. And we will be challenged not to let them get away with it.