The Danger of Government Banking Control

Notice the spikes up of inflation...
...is it by chance that the cost of living went up following the goverment financed wars of 1812, the 1860s (the Civil War), World War I (around 1918), and againg in the 1940s (WWII), then again in after Vietnam (1960s).....and then the last point...1973, when the US left the gold standard.

The two duties of the Fed are to 1) retain a stable value of our currency, and 2) keep prices stable....how have they done?....if you look at the same chart but of the value of the dollar during this time period, it is about the same but the opposite direction....since the creation of the Federal Reserve in 1913....the value of the dollar is down about 90%.

The worst market crisis in 60 years
By George Soros
Published: January 22 2008 19:57 Last updated: January 22 2008 19:57

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.

Boom-bust processes usually revolve around credit and always involve a bias or misconception. This is usually a failure to recognise a reflexive, circular connection between the willingness to lend and the value of the collateral. Ease of credit generates demand that pushes up the value of property, which in turn increases the amount of credit available. A bubble starts when people buy houses in the expectation that they can refinance their mortgages at a profit. The recent US housing boom is a case in point. The 60-year super-boom is a more complicated case. Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit.

Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced. The US current account deficit reached 6.2 per cent of gross national product in 2006. The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk. Since 1980, regulations have been progressively relaxed until they have practically disappeared.

The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.
Everything that could go wrong did. What started with subprime mortgages spread to all collateralised debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks’ commitments to leveraged buyouts became liabilities. Market-neutral hedge funds turned out not to be market-neutral and had to be unwound. The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing. The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties. The central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before. That made the crisis more severe than any since the second world war.

Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable. The ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves. Until recently, investors were hoping that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions. Now they will have to realise that the Fed may no longer be in a position to do so. With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy comes to an end.

Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession or worse.

The Credit Crisis Grows
By Mortimer Zuckerman
Posted December 13, 2007
www.usnews.com
Yes, there are weapons of mass destruction. They are "financial weapons of mass destruction," to quote the famous investor Warren Buffett as he surveyed the morning-after wreckage of the subprime mortgage lending crisis. The continuing destruction can now be called a credit crisis—a significant escalation because credit has been the high-octane fuel powering the American economy for the past half dozen years.
A whole galaxy of credit instruments has now been downgraded to the tune of hundreds of billions of dollars of paper losses. If those losses were incurred by individuals it would be bad enough. But leveraged lenders have a different problem. Many of them, such as commercial banks, have to maintain capital in reserve to protect against unexpected losses. If banks wish to maintain reserves equal to 10 percent of their assets, they either have to bring in new capital or shrink their balance sheets and reduce their lending accordingly. A dollar of real losses would mean scaling back lending by $10. Translate that to the whole financial sector, where the aggregate credit losses are estimated at $200 billion as of now. Ten times those losses could result in lending cutbacks of as much as $2 trillion. Such a huge hit to the credit supply will have a dramatic macroeconomic effect and could well produce a severe recession. Some major banks have literally shut their lending windows until they can repair their balance sheets.
Vicious cycle. The repair effort is further complicated because even the most sophisticated financial institutions do not know how to price many of the securities they hold and therefore cannot predict how much they will have to cut back on their loans, as the giant bank UBS said last week. This uncertainty compounds the credit crunch. So, too, does the decline in net worth of many borrowers due to a drop in house prices. In some markets, prices are down 20 percent from their mid-2006 highs. The average 10 percent drop in home values already incurred is tantamount to a $2.1 trillion loss in home equities. This threatens a vicious cycle with falling homeownership lowering house prices and forcing more defaults, causing ownership and prices to decline even more. Research suggests that for every dollar decline in home equity, spending will go down by about 9 cents, so this could lead to a $200 billion hit to consumer spending.
Another immediate effect has been a collapse in cash-out borrowing from home equity from about $700 billion in 2005 to $100 billion to date. At the same time, tighter lending and mortgage standards have contributed to a dramatic decline in residential construction from a high of over 2 million units to about 800,000 predicted for next year, with a concomitant decline in employment. A slowdown in consumer spending seems inescapable.
What is now seriously in question is the capacity of our financial system to provide enough credit to support the scale of investment that has maintained our long economic expansion. Coming at a time of soaring oil prices, we may have a simultaneous decline in consumer spending, residential investment, and business investment. The economy was strong in the third quarter but clearly dropping off by the end. We may be at the finish of not just the long-term borrowing bubble but the long-term spending bubble.
What should our economic policy be? The Federal Reserve must get ahead of the curve. Its priority must be to maintain the viability of the credit system and the flow of credit; our postmodern economy is dependent on an ongoing flow of credit.
A start—and it is no more than that—is the proposed federal effort to help the mortgage industry deal with subprime mortgages. It will help if the banks forgo their higher "reset" rates in the coming months. Banks would have to accept the lower income stream, but that of course is better than taking a write-off from the foreclosures with all the legal costs and the downward effects to the value of abandoned homes.
The problem for the Fed is that monetary policy may be no match for the deep structural contradictions that plague the financial system. We are dealing here with a whole new set of credit instruments that are little understood and therefore extremely difficult to price.
The economy is clearly transitioning to much slower growth, sharply tighter lending standards, a declining housing market, and pressure on consumer spending. People and companies are trying to cope with the debt accumulated during several years of profligate lending and spending. The real danger from a credit crunch is that everyone, from banks to corporations to households, may retrench simultaneously.
The collapse of values and the risks of the credit squeeze are the worst since the Great Depression. We are going to put the economy's resilience to a severe test.

The Growth of Cities in the Fourth District
by Tim Dunne

When the boundaries of the Fourth District were drawn in 1914, three district cities— Cleveland, Pittsburgh, and Cincinnati—ranked among the top 20 most populous cities in the United States. Today, none of these cities ranks in the top 35, and the only district city in the top 20 is Columbus. Including the surrounding suburban areas along with these cities (the so-called metropolitan statistical area, or MSA), doesn’t change the picture much: Population growth in these areas has also lagged, with Pittsburgh, Cleveland, and Cincinnati all dropping out of the top 20 largest MSAs over the last half century.

A number of factors are behind the decline. For starters, cities in the Fourth District have been affected by the same broad trends that have influenced the population growth of other large, older cities across the United States. Recent research also suggests that population growth is linked to the educational attainment of residents, and this link is especially strong for cities located in the Northeast and Midwest.

Trends in Population Growth
The decline in the population of many Fourth District cities is part of a broader national trend that represents a shift in the population from the Northeast and Midwest to the West and the South. Figure 1 illustrates this point. The figure plots city population growth from 1950 to 2005 for the 100 largest cities in 1950 against the average January temperature of the city. One can think of the January temperature as a proxy for the location of the city within the United States. The colder cities are in the Northeast and upper Midwest. The pattern is unmistakable—colder cities grew, on average, much more slowly than their warmer counterparts over the period. Even cities such as Minneapolis and Boston experienced population declines of almost 30 percent over this period. This pattern is true for colder metropolitan areas and colder suburban areas, as well.

The different patterns of population growth for warm and cold regions reflect a long-term trend in the movement of the population away from the original core population centers in the Northeast to the West (see Edward Glaeser and Jesse Shapiro, 2003, for a description of the basic developments that have influenced population growth in U.S. cities across regions). When the country was expanding into the Midwest, this aided Fourth District cities. But as the population moved further west, growth in Midwest cities slowed. More recently, southern cities have experienced higher growth, and it is argued that technological changes, such as the invention of air-conditioning and the eradication of malaria, allowed for the successful expansion of these locales.

An alternative view is that the economic advantages that fostered the growth of the older Northern cities have waned. In particular, low transportation costs and access to raw materials offered by proximity to the Great Lakes or navigable rivers such as the Ohio became less important as trucking became the dominant shipping mode. New transportation technologies allowed manufacturing and distribution firms to consider sites away from traditional water and rail transportation hubs as feasible locations. This is not to say that transportation costs have become unimportant in determining firm location. There are still benefits to being near customers, suppliers, and other firms in an industry. It is just that the particular transportation advantages offered in the Great Lakes region have become less important as transportation technology and networks have evolved and the economy has shifted away from manufactured goods that are natural-resource intensive. The decline in manufacturing-intensive cities is shown in figure 2. Cities that had a high share of manufacturing employment in 1970 have experienced low subsequent population growth. Except for Columbus, the other large Fourth District cities are found toward the lower middle and right-hand corner of the chart, with Cleveland, Dayton, and Youngstown having very high manufacturing shares in 1970.

Clearly, all these stories play some part in explaining the recent population growth histories of Fourth District cities, but there is more to the story than location or industrial specialization. Another broad trend influencing the growth of older cities is a general fall in population densities. In 1950, the population density of 13 out of the top 20 most populous cities exceeded 10,000 persons per square mile; this list included Cleveland and Pittsburgh. Only 5 cities in the top 20 today are this dense, and fast growing, large cities such as San Antonio and Phoenix have densities of about 3,000 persons per square mile. The drop in density is due to a number of factors. Household size has fallen: In 1950 households used to average 3.4 persons; now they average 2.6. Access to cars has allowed workers and firms to move outside the central city. As transportation networks evolved, especially ring roads and highway systems, the cost of moving people within and around most cities fell.

Moreover, cities experiencing population inflows in the South and West often expanded their borders, lessening density. This was not the case for many of the large Fourth District cities, where city boundaries have remained relatively fixed over the last half century. One exception is Columbus, a city that has grown from 39.4 square miles in 1950 to 210.3 square miles in 2000. Although cities such as Cleveland and Pittsburgh had relatively fixed boundaries, this did not result in above-average population growth in the surrounding suburbs over the period. Cleveland’s suburbs grew weakly compared to other major cities, and Pittsburgh’s suburbs actually contracted from 1970 to 2000. In fact, cities that had relatively high population growth rates from 1970 to 2000 tended to have relatively high suburban population growth rates, as well, and cities with low growth rates tended to have low suburban growth rates.

Education and City Growth
Many analysts identify the education level of the populace as a key factor in city and metropolitan growth. Figure 3 depicts the relationship between city population growth and the share of a city’s adult population that had four or more years of college education in 1970. Two striking patterns emerge. Population growth is generally higher in cities with a greater initial share of college-educated residents, and the college shares of some Fourth District cities are extremely low. This is especially true for Cleveland and Youngstown. College shares in these two cities were less than 50 percent of the average in 1970. In contrast, Columbus, with its more highly educated workforce, experienced solid population growth over the last 30 years. The patterns observed in figures 2 and 3 are related—cities that had high manufacturing shares in 1970 tended to have low college shares, as well.

However, not all Fourth District cities fit the standard story. In 1970, Pittsburgh’s share of college graduates was roughly twice that of Cleveland’s, and over the last 30 years, it has risen markedly. In 2005, Pittsburgh had the highest share of college graduates of any large Fourth District city with the exception of Lexington, Kentucky. Nonetheless, Pittsburgh has had roughly the same relative decline in population as Cleveland over the past 50 years. One possible reason for the difference in growth patterns between the two cities may have to do with the geographical distribution of educated people within the respective metropolitan areas. In the Pittsburgh area, the city has a slightly greater college share than the suburbs. In the Cleveland metropolitan area, the opposite is true—the suburbs have a much larger college share than the city. In fact, the share of college graduates in Cleveland’s suburbs exceeded the city’s share by 2.4 times in 2000—one of the largest differences in the nation, and this gap has existed for decades. These differences in suburb-city shares balance out at the metropolitan level, and the Pittsburgh and Cleveland metropolitan areas each had college shares of about 27 percent in 2005, which is slightly under the national average for large metropolitan areas.
While the overall share of college graduates rises when one incorporates the suburbs into the calculations, the same general story regarding education and growth occurs when the unit of analysis is the metropolitan area. Populations grew faster, on average, in more educated metropolitan areas.

There are a number of theories as to why a city with a more skilled populace may grow faster than a less skilled locale. Robert Lucas argued in 1988 that cities with high human capital generate significant knowledge spillovers. In this theory, cities facilitate the interaction of skilled workers, and such interactions foster new ideas and new innovations, which lead to higher growth. The physical proximity of skilled individuals to other skilled individuals is central to this story. Recent empirical work by Enrico Moretti supports this view. He shows that firms located in cities with skilled workforces have higher productivity, even after controlling for the skill level of their own workforces, suggesting such spillovers exist. However, the overall importance of such human capital spillovers is still an open question.

Edward Glaeser and Albert Saiz also consider the possibility that cities with more skilled inhabitants are more flexible and, in their terms, can “reinvent” themselves in response to negative shocks. They argue that older northern-city growth is more closely linked to education because of a greater need to reinvent in these cities. In particular, these cities and metropolitan areas experienced particularly severe shocks to their manufacturing sectors beginning in the 1970s. Cities with relatively skilled workforces adapted better than those with unskilled workforces. This point is illustrated in figure 5, which plots population growth and education separately for warm and cold cities (here a cold city is one where the average January temperature is below freezing). In the case of cold cities, the share of college-educated adults is positively correlated with growth, and initial education explains a significant share of the variation in cold-city growth rates. For warm cities, the correlation between education and growth is much weaker, and education explains little of the difference in growth rates in the warm-city sample. Glaeser and Saiz report that the same patterns apply for metropolitan areas, as well. The implication for Fourth District cities is clear. Fourth District cities had few of the growth advantages offered by the warmer locales but, at the same time, many were poorly positioned in terms of workforce skills to take advantage of the technological shifts that occurred in the last two decades of the twentieth century.

Although many analysts believe that a highly skilled workforce is an important factor in the city-growth equation, it may also be the case that cities and metropolitan areas on a high growth trajectory or poised to grow simply attract more educated workers. That is, the causality could be reversed. It is reasonable to think that the relationship between city growth and education runs both ways. Educated workforces lead to higher growth, but high-growth cities also attract educated workers.

Research that attempts to sort out these confounding effects finds support for the idea that an educated workforce leads to higher city growth. It is probably safe to conclude that cities and metropolitan areas looking to foster long-term growth should consider policies that increase educational attainment and attract and retain educated workers as important tools for local economic development.

Wile E. Coyote Economics, by Christopher Bounds

It is amazing to me how the intertwined world of politics and economics work. They lack of economic insight by the Congress and Bush Administration, evidenced by both the Federal and State Governments…further by the Federal Reserve…printing money until the world runs out trees, illustrates that bad centralized (or near-socialist) economic policy leads to political failure. The Republicans managed to lose power of the Congress not by being out witted or scandalized by an intelligent, aggressive opponent, rather, by losing power de facto to the only group there to take it. Now as the next election comes about, the democrat frontrunners probably would have been a shoe in if it wasn’t for them making the old political mistake of talking too much.

As when you play the board game Monopoly, America has been buying properties, but then reaching back into the bank for more money to replenish it’s coffers. Only in reality the player pays interest, but in Government, when the interest comes due, they print more money to pay it. Next year the Federal Government will need to pay well over $1 billion per day in interest alone, before even touching the $8 trillion of debt. How do they afford that? They print money. What does that mean to us? Just as in Monopoly, when so much “fake” money is floating around the board, landing on Boardwalk with a Hotel does not have a big impact on a player if they can reach into the bank for new money to pay their rent. Eventually so much money is around the table; players will offer thousands of dollars to by hundred dollar properties. Why? Because who cares, if you can borrow the cash from the bank, overpay for a property and still make money because the other players borrow from the bank to pay their rent, you are better off, than having your opponent doing the same against you. And what if you mess up, and almost go bankrupt? The Monopoly Man…the Chairman of the Federal Reserve or the President…will come and either buy your hundred dollar property for the thousands you paid for it or they will lend you even more money to pay your debts.
The same as when a person lives above their head by paying for everything with a credit card, when the card is maxed out, they get another one, and then another and another. Eventually your financial state will be so strain with debt, and your credit options exhausted, a day of reckoning will come. Although history shows it does not happen in one day, usually over several years. So what is a sign of the reckoning? Just as in the Monopoly game, eventually players will use cash to overpay for the properties. Sound familiar…the Tech boom, the housing boom, higher oil & gas prices, metals, grains, meats, stocks, electricity, soda, chewing gum, etc. Why? Are we driving our cars 10 times as much as we did in the late 1990’s? No. Is their 90% less gas than in the late 1990’s? No. Well, why is the price up so much if the demand is not up and the supply not down? Because when centralization (government) interferes in a market, the pricing mechanisms change. As in Monopoly, the game changes when the bank hands out new money to everyone. Oil was seriously underpriced during the 1990’s given the upcoming growth of China & India. The market chose to use its funds to finance the tech boom, forgetting the fundamentals, of less “promised performance” investment opportunities. Had the government then not printed money like water coming out of a hose, who knows, the market may not have seen the cheap opportunity in oil & other sectors. But, likely it would have, as it finally did around 2002, coincidentally at the trough of the market bust, when most of the weak players also went bust and only skilled “real money” players were there to make new investments. Alan Greenspan of the Federal Reserve, who had the sole power to arbitrarily print new money, unfortunately has not had his actions demonstrate belief in the Monopoly or credit card analogies of the impact money & credit has on the economy. The Fed may have an argument that their chart and data reading abilities are sufficient, but the fundamentals and history do not support them.
Had the democrats done nothing, said nothing, and only changed in not supporting the finances of the Republicans & the Federal Reserve. He or She would easily have won…or more likely accepted…the Presidency do to the default of the other party. But instead, the democrats went the other way in promoting even worse, off the wall, centralized schemes, to “better” the nation and win support. Hillary Clinton’s Baby Bonds and Universal or Socialized Health Care, depending on the terminology you choose, and the dictated tax policies of Obama & Edwards will prove to be problem making mistakes for the trio. The ups & down of the rollercoaster markets are just the people preparing the economy and sharp eyed politicians for what is to come if the Greenspan-Bush policies are continued, and now to a greater extent, if the absolute economic disaster that is to come through further centralization of industry by government is realized.

The Russians, the Chinese, & the people of India, have proven to the world that centralization does not work well. After all, is democratic-capitalism coming back to those nations because socialism worked well for them? You can go back further in time, the communists & imperialists, feudalism, the Romans, the power of Catholic Church and now the embrace of Islam, why did these institutions fail? The arching opinion of history illustrates is that the failure was caused by too much power in the hands of a few, centralization. Sure in times centralized power is good, but only in through the structure of freedom. Not when the mass public is dependent on its government or its monopoly industry. The one who accepts the Presidency will do it easily if they reject the ways of the last 70 years and demand a fundamental restructuring of government activity. Otherwise they will end up like Bush, Clinton, & Greenspan to name a few, in having continued economic & political disasters happening because of (in) action. Just remember that like when Wile E. Coyote runs off a cliff, he doesn’t fall immediately, usually floating in mid air awaiting a response. Right now America is the Coyote flying into the sky on a rocket with enough fuel to last maybe at most another 5 years, as if we are back in 1925. If changes aren’t made, we know the outcome 1929 produced, the similarities to that time are scary, but then again, a real crash, more than a 10% pull back won’t mean it’s over, as the Great Depression was largely caused by the actions and inactions of the Federal Reserve & the Government.

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The Golden Age Is Ending
By Mortimer B. Zuckerman
Posted 7/29/07
http://www.usnews.com/usnews/opinion/articles/070729/6edit.htm

We have been enjoying a golden age. In the latter part of the 1990s and the first part of the 21st century, every indicator of economic health that should be up has been up: employment, income growth, stock market profitability. And everything that should be down has been down: inflation, interest rates, and unemployment. Inflation in the United States was contained by a fortuitous combination of a glut in global productive capacity, foreign competition, technological innovation, and the soaring dollar, which made imports cheaper. Everything that China exported went down in price (and everything that China imported went up in price). So we had more productivity here, more jobs, more growth, and pay rises without inflation.

Today, many of these benign forces are still in play—but to a much lesser extent. The dollar is no longer soaring but slumping, as the world engine for growth moves from the United States to the East. To get a sense of how critical Asia has become, consider that our economy is expected to expand by $526 billion this year. The Chinese economy, which is a fraction the size of the U.S. economy, is expected to grow by $420 billion. That divergence will persist as China, as well as India, grows at a 10 percent annual rate.

This is the story virtually everywhere in the developing world-tightening markets for labor and product, with inflation pressures waxing. Central banks in Europe, China, and Japan are responding with rate hikes and hawkish rhetoric. Stronger growth around the world will portend even higher interest rates.

Prices rise. A collateral result of tighter money and higher interest rates is that the currency exchange rates of these booming countries have appreciated. The dollar has plunged roughly 4 percent just in the past few months and on a trade-rated basis compared with a basket of major currencies is now down some 30 percent from its 2002 peak. Import prices have risen, which now adds rather than abates inflationary pressures here. Wage costs in foreign countries have given another twist to the spiral, not dramatic yet but noticeable: In the past several months we have been paying about 2 percent more for consumer imports, excluding autos, the fastest such advance in more than a decade. This time last year, these prices were falling.

There is no prospect of these global inflationary pressures easing. Emerging nations are enjoying rising aspirations, higher living standards, and rising incomes. Demands for food, consumer goods, automobiles, and trucks are increasing, and so are the demands for improved education and labor training. The result is increases in costs that are rising more rapidly than technology can reduce them.

Our ballooning trade deficit is a function of these global forces. Fortunately, foreign investors have been happy to underwrite our red ink by pumping nearly $800 billion into our financial markets annually. Asian banks especially have been buying large quantities of dollars and dollar-denominated securities. The big question is how much these accumulated savings will be siphoned off by our trading partners for their own domestic growth. Clearly, rising global real yield will put a floor under U.S. interest rates, limiting our ability to manage our monetary policy.

The "golden age" has therefore resulted in an immense rise in foreign ownership of all American securities. Foreigners own more than half the federal debt, about a third of corporate bonds, and 13 percent of the U.S. stock market. This represents an accumulating claim on the future output of the United States and foretells an increasing flow of dividends and interest payments abroad.

It doesn't help that Americans save so little. Personal saving rates over the past 15 years have gone down from 7 ½ percent to zero. The aggregate national saving rate, which includes the public sector and private corporations, has dropped from 13 percent in the 1960s to 0.8 percent last year. The average American with an income of about $40,000 saves virtually nothing, while the average Chinese, earning somewhat above $2,000 a year, puts away about 20 percent of his income. Compound a low savings rate with a trade gap that has nearly doubled to 7 percent of gross domestic product over 20 years, and we can understand why the net international investment position of the United States has declined from what was a modest plus-5 percent of GDP in the mid-1980s to its current minus-20 percent.

In short, we are no longer as dominant in the world's economy as we were. Everybody's lives will be affected by that. That includes both national and individual rates of growth, as well as inflation and interest rates. The trend of gradual disinflation here and around the world that we have enjoyed for the past 25 years under the pressure of price competition from imports is drawing to an end. We are now looking at a period of rising inflation driven in good part by the economic successes around the world.