Near Futurecast X

The no longer so almighty dollar:

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No nation has ever prospered with a weak currency.
Restoration of the strength of the dollar is the absolute prerequisite for sustainable prosperity for the U.S. - and for much of the rest of the world as well.
There can be no financial stability until the dollar is restored as a strong currency.
As long as the dollar remains weak, U.S. influence abroad and military strength will decline and its adversaries will strengthen.

As in the 1970s, the situation will continue to worsen until austerity is forced on a reluctant government.

Any economist who does not understand these basics thereby confesses total ignorance of economics. Such a level of ignorance is of course typical of the professional incompetence that has come to be expected of a major segment of the profession.
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And then there is China - with a rapidly modernizing and confident army. There is an eerie similarity between the 2008 and 1936 Summer Olympics. Will the former be like the latter - a showpiece prior to a period of aggressive pursuit of expansionist ambitions? Only the U.S. can provide effective deterrence to such ambitions - and the U.S., with its wounded finances and overstretched military commitments in the Middle East, is increasingly poorly placed to deter such adventuresome ambitions.
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No matter how bad the resulting recession, an austerity program rigorous enough to restore the strength of the dollar is the highest obligation of U.S. economic policy. But of course, politics is more important that the national interest.
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As in the 1970s, the situation will continue to worsen until austerity is forced on a reluctant government - only by then the situation will have considerably worsened and the recession that must be suffered may be comparable in severity with the 1980-1982 depression.

Volatility, with inflation, recession, or stagflation:

Expectations have become reality.

The 1970s began to make their return engagement in 2007, just as FUTURECASTS has been forecasting now for over five years. See, 2008 Annual FUTURECASTS Review. Indeed, so accurate have FUTURECASTS forecasts been that, to a substantial extent, they need only be repeated as being confirmed for 2008. However, the process is now further along. Expectations have become reality, and the significance of those expectations as they are realized has to be emphasized.
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The Fed's Keynesian stabilization efforts have resulted in economic instability that is heading towards crisis proportions.

The longer recession is delayed by aggressive monetary expansion, the worse it will ultimately be.

Volatility is the name of the game during such unstable times. Since 2002, Congress has abandoned budgetary discipline. The ancient inflationary vice of monetization of the debt has been pursued under the Keynesian guise of "monetary policy" since 2000, as the Fed has strenuously tried to maintain financial stability. Unfortunately, reality continues to perversely refuse to conform to the stupid expectations of Keynesian theory. So it should be no surprise to anybody that the Fed's stabilization efforts have resulted in economic instability that is heading towards crisis proportions.
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Volatility is now sufficiently obvious that even the TV financial talking heads and other financial media commentators are finally taking note of it. Thus, FUTURECASTS need no longer spend much time on it - other than to emphasize that it will get much worse.
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The prospects for recession, too, are now being recognized even by the mass media. However, the media remain ignorant of the reality of the situation that FUTURECASTS has been for years explaining. The longer recession is delayed by aggressive monetary expansion, the worse it will ultimately be. A slowing of economic expansion or a short recession determinedly fought by monetary expansion and deficit spending - the likely prospect at present - will provide nothing more than a temporary pause in inflationary developments.
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However, today's volatility and economic difficulties are now merely today's news today. What about tomorrow?
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The Fed can give us accelerating inflation, or a serious recession sufficient to stabilize the dollar, or the beginnings of stagflation if it attempts to split the difference.	All eyes must now be glued on the Fed. The Fed is now in the sort of tough spot that it was in during the 1970s. [ The Fed can only be as strong as the dollar, and the dollar is in an inflationary swoon. Thus, the Fed can no longer provide stability, but it can choose our poison. The dollar is now fluctuating rapidly enough to increase risks substantially. The threat of economic dislocation is rising all around the world. The Fed can give us accelerating inflation, or a serious recession sufficient to stabilize the dollar, or the beginnings of stagflation if it attempts to split the difference. [ These are the limits to its choices. Stability and prosperity are no longer feasible options. [
The real villains, it must repeatedly be emphasized, are the gallant legislators in the Congress. They are the boys and girls who can't say "no."	So, what's the Fed going to do? [ 2008 is a presidential election year - just in case you didn't notice it. Fed Chairman Ben Bernanke has emphasized that the Fed will do whatever is necessary to prevent a recession this year, and recent actions confirm that intent. The Fed may in fact succeed - but the American people will pay dearly for the effort. [ FUTURECASTS would love to be proven wrong on this one, but Bernanke is currently charging in the wrong direction. Bernanke is no Paul Volcker - and Pres. Bush (II) will not give him the political cover so bravely provided to Volcker by Pres. Reagan. [ The real villains, it must repeatedly be emphasized, are the gallant legislators in the Congress. They are the boys and girls who can't say "no" to even the most harebrained spending schemes. Only significant spending restraint as part of a determined austerity program can now limit the damage. [ Instead of spending restraint, the Bush (II) administration and the Congress have made it clear that they are determined to stupidly attempt to spend their way out of the problems of inflation. They are positively drooling at the prospect of additional Keynesian deficit spending "fiscal policy," and they are never devoid of reasons for spending increases. [ FUTURECASTS takes them at their word on this, even though Congress and the Bush (II) administration are currently showing some remarkable restraint - so far. The "stimulus" package is enough to give the appearance that they are doing something about the economic slowdown but not so much as to do real damage - so far. However, they have left no doubt that additional "stimulus" will be provided if the economy does not quickly snap back into rapid growth. [ Always remember that deficit spending does not actually provide any real stimulus. That is just another stupid Keynesian myth. The increase in the deficit from such spending just forces the Fed to monetize more debt to keep the new deficit spending from pushing up interest rates. It is the increased rate of expansion of the money supply, needed to monetize the extra debt, that provides all the actual stimulus. And that directly undermines the dollar and the nation's international accounts and strengthens inflationary forces. [
Inflation doesn't prevent recessions, it causes recessions.	A recession in 2008 would not be an ordinary business cycle recession. It would be an early version of the inflationary recessions of three decades ago. Inflation doesn't prevent recessions, it causes recessions. See, "Capital as Purchasing Power" at segment on "The determinants of purchasing power." Indeed, the recessions of an inflationary period are much worse than those of the ordinary business cycle. [ You can't spend your way out of the problems of inflation. You can't inflate your way out of the problems of inflation. The relief obtained by such efforts will be short and must make matters much worse. [

Inflation is in fact a tax by which governments take valuable goods and services from the economy in return for nothing more than expansion in the fiat money supply.

Governments love inflation. They want as much as they can get away with, just as they want as much tax revenue as they can squeeze out of the economy. Inflation is in fact a tax by which governments take valuable goods and services from the economy in return for nothing more than expansion in the fiat money supply. See, Understanding Inflation.
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Sanctimonious assurances of commitment to a "strong dollar" are thus revealed to be an essential diplomatic lie - employed to fool the credulous who are to be left holding the inflationary bag. Pres. Bush (II) repeatedly lies about the current underlying strength of the economy. A nation with substantial chronic deficits in its national and international accounts does not have a "fundamentally sound" economy.
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The inept economic policies of the Bush (II) administration and the Republican Congress during the administration's first six years amply justifies their low ratings in the popularity polls and would amply justify a major electoral reversal for the Republicans in 2008. Unfortunately, a liberal Democratic government is likely to provide a repeat of the Carter administration - driving the economy mindlessly back into the depths of inflationary problems similar to those during the worst of the 1970s.
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Bernanke's inflation fighting credentials are thus revealed to be a lie - similarly employed to fool the credulous. The credulous, of course, include foreign governments that continue to take dollar denominated assets into their reserve accounts. Since the dollar is the world's principle reserve currency, the credulous include the vast majority of people worldwide.
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As was seen with housing, inflation hedges are inherently bubbly. Volatility means heightened risks for inflation hedges as well as for ordinary commodities.

It is a safe bet that, until the election is over, inflation and a falling dollar will be disregarded.

Thus, the standard inflation hedges remain in play. However, as was seen with housing, inflation hedges are inherently bubbly. Volatility means heightened risks for inflation hedges as well as for ordinary investments. The uncertain economic conditions could spell trouble for them in 2008 or 2009.
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With inflation rising and the dollar falling, the Fed could surprise everybody and shift its emphasis to fighting inflation. Inflation hedge prices - even oil and gas - could collapse with great rapidity - as they did in the mid-1970s and even more so in the early 1980s.
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But it is a safe bet that, until the election is over, inflation and a falling dollar will be disregarded. There are great profits still to be made in the inflation hedges. One need only remember the surge in gold and other commodity prices during the Carter administration during the last part of the 1970s. Even real estate prices recovered from a mid-1970s swoon. But vigilance - and an itchy trigger finger - are now essential.
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There are all manner of bubbles waiting to burst

No nation has ever been able to indefinitely live with inflation.

A recession at present, even without consideration of the election, would indeed be a scary event. There are all manner of bubbles waiting to burst during any significant economic reversal. Some are likely to burst even as the Fed aggressively strives to prevent recession. As one might expect after a long period of prosperity, many economic and political entities are loaded to the gills with debt. The news is already littered with accounts of collapsing houses of cards. More will crumble during any substantial recession. They did not heed FUTURECASTS' warnings of an increasingly virulent business cycle.
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What could possibly induce the Fed and Congress to get serious about inflation, adopt an austerity program, and undergo the rigors of a recession under such circumstances?
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The answer is, obviously, fear for incumbencies. As inflation worsens, a new reality will impress itself on incumbents. Almost 100% of the electorate is seriously discomfited as inflation approaches double digits, while only 10% to 15% are discomfited by even the unemployment levels of a serious recession.
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Regardless of the pains, all nations that suffer from inflation ultimately opt for austerity policies. No nation has ever been able to indefinitely live with inflation. However, for the present, the U.S. government is determined to give it another try. Inflation will have to get yet significantly worse before the U.S. government is forced to pull its head out of the sand.
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The nation will need another Paul Volcker. It will need another Pres. Reagan brave enough to provide the needed political cover for an austere monetary policy and strong enough to discipline Congressional spending proclivities.
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Measuring inflation:

So, how bad is inflation right now?

The commodity markets provide an unvarnished picture of the current virulence of inflation.

It is the inflationary expansion of the dollar - not growth in China and India - that is responsible for the vast majority of those commodity price increases.

The jobs lost to globalization are a small percentage of those gained and maintained because of globalization.

The government has rigged the thermometer in several ways so that it understates inflation rates. This makes comparison with the 1970s difficult. However, the pain can't be so easily disguised. Even at current modest reported rates of inflation, people are already feeling the pain. It might come as an unpleasant surprise how quickly the electorate begins to punish its representatives for this inflation.
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Consumer prices in the U.S. reportedly rose 4.1% in 2007. That is a significant increase from the previous year, but is actually understated. It was held down by substantial productivity gains and a substantial decline in rents, both of which are weighty factors in the index.
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The commodity markets provide an unvarnished picture of the current virulence of inflation. Commodity prices have been surging upwards at double digit rates for several years already. They rose almost 17% in 2007 despite a significant decline in industrial metals prices of about 9%. Food was up around 37%. Oil was up around 58%. Food and energy are things people have to buy every day.
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The government's statistics look more foolish all the time. Gold rose over 30%, clearly demonstrating the real weakness in the nation's fiat currency.
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The politicians try to deflect blame from themselves by pointing to the economic expansion in China and India as the cause of this inflation in commodity prices. However, in a variety of ways, it is the inflationary expansion of the dollar that is responsible for the vast majority of those price increases. The current explosive, seriously unbalanced growth in developing nations would be considerably more constrained and much better balanced if the world's primary reserve currency were not being sharply devalued.
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Globalization has been a big factor in restraining the growth of prices for manufactured items. Globalization has thus kept down price inflation. It has thus kept down long term interest rates. It has thus kept down unemployment in the advanced nations.
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The jobs lost to globalization are a small percentage of those gained and maintained because of globalization. Globalization has been a magnificent economic engine that has lifted billions of people out of grinding poverty worldwide. The left wing ideologues who sanctimoniously continue to campaign against globalization in the name of these people would actually reverse all the economic progress these people have made.
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However, the productivity gains from globalization may be at a somewhat lower rate in the future. As the Chinese currency appreciates against the dollar and some segments of the labor markets tighten even in China and India and across Southeast Asia, production costs will no longer declining so rapidly. Even the twisted statistics generated by the U.S. government will soon have to reflect rising inflation rates if a recession is now successfully avoided or minimized.
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Wanted: A bright young economist to do some interesting comparative analysis:

It would be interesting and useful if some bright young economist were to attempt to recalculate recent inflation rates using the statistical methodology of the 1970s. That methodology had its own problems - probably overstating inflation a bit. This would make a great PhD thesis and facilitate analytical comparison. Given changes in the way such important factors as productivity and housing costs are currently calculated, the difference might be quite substantial.
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Until there is some substantial improvement in the international accounts, there can be no soft landings.

It is in the balance of trade and balance of payments that the fundamental weaknesses of Keynesian policies always first become evident. Despite more than two years of relative monetary restraint by the Fed up until the middle of 2007, the nation's trade and payments balances remained in chronic deficit, and the dollar remained under pressure against the world's primary hard currencies - the euro and the British pound - and gold. Now, that restraint is at an end.
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Until there is some substantial improvement in these international accounts, there can be no soft landings. Until there is some substantial improvement in these international accounts, instability and volatility remain the key factors in the FUTURECASTS near forecast. Thus, much of what was written during the last two years need only be repeated.

Economic policy:

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The 2000 recession made resort to Keynesian palliatives politically irresistible. As a result, the nation is hurtling towards financial and economic problems similar but not quite identical to those that afflicted it during the 1970s. See, "Government by Crisis."
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Social security, Medicare, Medicaid, student loans, food stamps, farm subsidies and other entitlements now cost over $1.3 trillion - and will cost more than $2.5 trillion in 10 years even though most baby boomers will not yet be retired.

Pay as you go pension schemes and rigid one-size-fits-all third party payer health care systems without substantial deductible and co-payment levels don't work. Complex systems of administered prices don't work.

The current Bush administration is the most Keynesian administration since that of Jimmy Carter

France and some other European states have become "blocked societies." The power of their establishment interest groups has destroyed the flexibility needed to adjust to changing times.

The differences between now and the 1970s must be kept in mind. Here once again are some of them - both those for the better and those for the worse - many of which have been noted now for several years.

Floating exchange rates mean that the crisis will arrive sooner and more gradually rather than later and suddenly in full bloom when reserves fail and currency devaluation can no longer be put off. Hopefully, this will force even political leaders to accept the need for corrective actions - for making the hard choices - before things get as bad as in the 1970s. (So far, this has not occurred.)
The Federal Reserve Board conducted a slow, delicate effort to keep inflation under control - but without discipline on the budget side, this effort has not gone smoothly. It never does. It never can.
The burdens of today's War on Terrorism are far less than those of the Cold War. However, such burdens cannot be evaluated in a vacuum. The total of government burdens on the economy are today much more than in the 1970s - during the infancy of the War on Poverty entitlements.
The costs of entitlement welfare benefits has increased exponentially since the 1970s. Nevertheless, Congress has mindlessly enacted a dramatic increase in entitlement welfare benefits. Social security, Medicare, Medicaid, student loans, food stamps, farm subsidies and other entitlements now cost over $1.3 trillion - and will cost more than $2.5 trillion in 10 years even though most baby boomers will not yet be retired. (Two years have elapsed since these figures were generated.)
The entitlement problem is not the bankruptcy of these systems decades hence, but the immediate loss of the payroll tax surplus on which the government has become dependent for its ongoing expenditures. Pay-as-you-go pension schemes and rigid one-size-fits-all third party payer health care systems without substantial deductible and co-payment levels don't work. Complex systems of administered prices don't work, and they can't work in health care. (See, Administered Prices and Health Care Entitlements.)
This Republican administration is the most Keynesian administration since Jimmy Carter was in the White House. The Republican Congress increased discretionary spending faster than at any time since the heyday of the Johnson administration and the initiation of the War on Poverty. Nevertheless, Democrats insist that it isn't enough. The "government sector" is NOT an equivalent of the "private sector." Much of it may be necessary, and much desirable, but - Keynes to the contrary notwithstanding - growth in the government sector is NOT a substitute for private sector activity. It is overhead for the economy.
The U.S. economy is today far more flexible than in the regulation encumbered 1970s, and productivity gains - although undoubtedly less than indicated by the statistics - are undoubtedly at impressive levels. This absorbs inflationary pressures before they impact prices. Four percent price inflation probably reflects inflationary pressures of about 7%. By means of monetary inflation, the U.S. government is eating up most of the initial benefits of productivity increases. Price inflation is an implicit tax on the world's dollar money supply. (Congress responds to environmental concerns and to every major financial scandal by measurably increasing regulatory burdens. The economy is thus not as flexible and resilient as it was just eight years ago.)
The euro now provides a more than credible alternative to the dollar as the world's primary reserve currency. This is good news for the world, but a threat to the U.S. of loss of the huge benefits it derives from the dollar as the world's reserve currency. For the rigid economies of Europe, it raises a question as to whether the burdens will outweigh the benefits, and whether the euro can be kept hard.
France and some other European states have become "blocked societies." The power of their establishment interest groups has destroyed the flexibility needed to adjust to changing times. Rigid economic systems cannot make the required adjustments to reap the benefits of currency appreciation. A major example is the rigid labor markets in Europe that leave the young unemployed at twice the rate of their elders. A few years ago, unemployed Muslim youths made known their displeasure at this state of affairs in a manner most displeasing to those who benefit from and vote to maintain protectionist rigidities. (It remains to be seen how much the new administrations in France and Germany can change these matters.)
Tax levels are considerably lower now than in the 1970s. It is always better to be going into a crisis period with low tax levels than already encumbered with high tax levels. Revenues have soared - especially those from the "wealthy" who are inevitably always the major beneficiaries of broadly based tax reductions. This exuberant revenue increase is just as promised by the advocates of lower marginal tax rates. Nevertheless, the tax statutes of this and most other major nations impose a host of noxious incentives and heavy burdens on economic systems. And, even exuberant revenue growth has trouble keeping pace with political spending proclivities.

The magic of capitalism:

Other factors noted in previous forecast articles continue to be relevant to current conditions.
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Average expenditures for households in the lowest quintile were almost $18,500.

After tax income is up 47.5% due to the Bush (II) tax cuts.

The magnificent engine of U.S. prosperity keeps steaming ahead. About 60% of those in the bottom quintile early in the 1990s were no longer there after ten years - replaced as might be expected by immigrants and young people just getting started and the temporarily unemployed. A substantial proportion of the rest are those who will not - or physically or mentally can not - engage meaningfully in economic activity - or who prefer only part time employment.
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By every measure, the creature comforts even of the poor keep improving in quality and quantity. Objective criteria, such as the average floor space of homes and apartments, and availability of air conditioning, keep improving at all levels. With the advance of technology, and the magic of capitalism, many of the poor today enjoy better quality cars and household appliances than did the wealthy half a century ago. They typically possess two TV sets with cable or satellite reception and a VCR or DVD player. Indeed, they possess many appliances that didn't even then exist.
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Reported average household income for the lowest quintile was in recent years just $8,200. However, average expenditures were almost $18,500. Grey market activities and such benefits as food stamps, housing assistance, tax credits, Medicaid and welfare benefits make up much of the difference. However, these are just a part of the problem with erroneous government income statistics. Small changes in productivity and inflation estimates change these statistics significantly. Inclusion of people with high asset values but low incomes in the poverty statistics leads to some ridiculous results. See, "Economic Statistics: The Figures Lie."
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The middle class, too, benefits massively from this magic of capitalism. As of 2005, wages were up 4% in real terms since 2000, but total compensation was up 7.5% due to an increase of 16% in the costs of benefits. Household income was at about $52,600, and after tax income is up 47.5% due to the Bush (II) tax cuts. These figures all substantially improved in 2006 and the first half of 2007. And these are just the official figures. They do not include sweat equity and gray market activities.
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Inequality is undoubtedly much greater than ever before - but entirely because of how much the wealthy have advanced - not because the poor are getting poorer. Net worth was increasing at all levels until the middle of 2007 - so we were not falling deeper into debt as individuals. (Of course, this all changes during a recession.)
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The Bush (II) administration has been especially successful with its bilateral trade initiatives.

Developing nations like Mexico that are included in lucrative markets still have to get their economic policy ducks in a row to benefit fully from their opportunities.

Unfortunately, multilateral free trade liberalization - as feared - still founders on the rocks of wealthy nation agricultural politics. However, regional liberalization continues - especially with the expansion of the European Union. Systems of bilateral agreements centered on the EU and the U.S. continue to expand. The Bush (II) administration has been especially successful with its bilateral trade initiatives.
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Over 3 million U.S. jobs are now supported by exports to NAFTA countries - more than double the low-tech jobs believed lost. Canada and Mexico were reporting even larger percentage gains - although Mexico continues to be held back by other dysfunctional aspects of its economic and political policies.
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Globalization and free trade is of immense benefit, but it is not a magic wand that cures all economic ills. Reasonable economic policies are still required. Developing nations like Mexico that are included in lucrative markets still have to get their economic policy ducks in a row to benefit fully from their opportunities.
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Moreover, globalization can't help thoroughly mercantilist nations. Just about all of the poor nations being left behind are not victims of globalization, but of their own dysfunctional and mercantile government policies. Those developing nations that are most open to international trade and finance grow the fastest. Mercantilist policies hold back the others. Most serious are the trade barriers imposed among the poor countries themselves.
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Developing nations must grow through the growth of their people - not through the growth of their governments and the politically influential. Governments must facilitate the people's commerce, open their markets to world commerce, politically and economically empower their civil societies, and educate their young, so the people may prosper.
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Futurecast:

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Crunch time came as expected when the economy turned sufficiently sluggish so that unemployment began to rise. The last time that happened - in 2000 - the budget was in substantial surplus and the dollar was strong - the unquestioned reserve currency for the entire world. The Fed thus had tremendous strength with which to influence economic and financial events and deal with the unexpected crises that are always to be expected.
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The euro is increasingly viewed as the world's most reliable reserve currency.

A weak dollar means a weak Federal Reserve. A weak dollar leaves the U.S. increasingly vulnerable to the unexpected crises that are always to be expected.

This next period of sluggish economic performance takes place while the budget is in substantial deficit and the dollar remains weak. The debt and asset price bubbles that are a perennial worry for most economists - and for FUTURECASTS as well - have become increasingly dangerous - as they always ultimately do. The artificially low interest rates of the last years of artificial Keynesian monetary stimulation induced a vast increase in the prices of housing and other inflation hedges as well as in borrowing - both private and government - the refinancing of which is now proving burdensome - in some cases, unsustainably burdensome.
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Numerous houses of cards grew in the permissive environment of the recent seven year period of economic expansion. Some of these are inevitably being revealed as unsustainable. There are more shoes still to drop in this regard. (As predicted, they are still dropping.) They are the ultimate manifestation of the "moral hazard" economists have been warning against.
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The Fed can only be as strong as the dollar. A weak dollar means a weak Federal Reserve. A weak dollar leaves the U.S. increasingly vulnerable to the unexpected crises that are always to be expected. The increased seriousness of the troubles that will arise during this next turn in the business cycle is indisputable - but the exact nature still will depend on how the Fed reacts to them.
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The Democrats are now having their day. Their return to power in the Congress now imposes on them considerable responsibility for the future fate of the economy.
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The productivity gains from outsourcing and imports have helped keep down price inflation, have permitted maintenance of lower interest rates, and have thus saved far more jobs than have been lost to the outsourcing.

On the positive side, productivity gains and flexibility remain the strong points of the U.S. economy. The economy is capable of rapid adjustments to conditions - and continues to benefit from rapid globalization and advances in technology. The productivity gains from outsourcing and imports have helped keep down price inflation. They have thus permitted maintenance of lower interest rates - and have thus saved far more jobs than have been lost to the outsourcing.
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Most important, as a hard currency nation, all U.S. debts are dollar denominated. There can be no financial collapse such as is always a threat for soft currency nations.
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Analysts must be careful never to underestimate the resiliency and inherent strength of the economy of the United States. Essentially healthy capitalist systems can always grow their way out of debt problems. Indeed, they have been doing this since the days of Adam Smith and David Ricardo. All that is needed is a period of discipline in the handling of the government's budget - and the end of Keynesian monetary expansion.
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Continued prosperity in 2006 should bring further substantial increases in government revenues - so Congress is not being asked to do that much.

All that is needed is a period of discipline in the handling of the government's budget - and the end of Keynesian monetary expansion. For a return to healthy economic prosperity, an austerity-induced recession of significant depth must first be suffered - something the politicians will dearly wish to put off as long as possible. (This prediction is now being energetically fulfilled.)
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And don't forget about state and local governments. Some have used this period of prosperity to straighten out their budgets. However, as always, there are others that have been spending like drunken sailors. New Jersey has been benefiting from a rapid increase in tax revenues, but state spending rose astoundingly almost 20% in 2007.
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California is the poster child for this latter group. A liberal legislature with liberal spending proclivities has undermined the finances of even this inherently wealthy state. The state and many California local budgets are now falling off a cliff, as FUTURECASTS predicted. The unions spent about $150 million to defeat Gov. Schwarzenegger's reform initiatives, and he has since decided to join them rather than fight them. But the problems have not gone away. The real losers are the people of California, not the Governor. (Next year's deficit is predicted to be more than $14 billion. If and when a recession actually develops, the deficit will be much worse.)
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But thank god for the federal system provided by our founding fathers. Massachusetts has volunteered to teach the rest of the nation the stupidity of the mandatory health insurance approach to universal health care. See, Gratzer, "The Cure," Richmond & Fien, "The Health Care Mess," Porter & Teisberg, "Redefining Health Care." Romney's health care program will continue to descend into its morass of rapidly rising costs and declining benefits
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This prediction, of course, has been a no brainer from the beginning. Anyone who did not see this coming is a moron. Even the numbskulls in the California legislature have gotten the message.
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Trade and payments accounts are widely favorable for these second world rapidly developing nations.	However, the status of the rapidly developing nations - one economist now refers to them as a new "second world" in the post-Cold War era (see, Reynolds, "New Regionalism: How Globalization Reorders the Three Worlds of Development,") - are a mixed bag. Heavy reliance on debt capital rather than equity capital creates inherently unstable financial conditions, even with the laudable reduction in reliance on foreign dollar and euro denominated debts. Invariably, some mercantilist policies are pursued, and the pegging of currencies to the dollar is causing noxious distortions that are already becoming troublesome - and will become much more troublesome as economic and dollar monetary conditions become increasingly volatile. [ For nation's that peg their currencies to the dollar, U.S. inflation is their inflation, and U.S. austerity will become their austerity. When the U.S. does - inevitably - suffer the substantial recession of a determined austerity policy, commodity prices will plummet worldwide. Russia has been through this experience before and is now prudently accumulating vast financial reserves to deal with that event. Oil despotisms in Iran and Venezuela, however, are spending like drunken sailors. It will be interesting to see how they fare during that time. [ China, too, is accumulating vast financial reserves. However, even autocratic capitalist systems are subject to a business cycle. Despite impressive reform efforts, there are still many weaknesses in the Chinese economic system, and cyclical problems are visibly accumulating. It will be interesting to see how China handles its first substantial economic reversal since achieving substantial rates of economic prosperity for its growing middle class. On the other hand, trade and payments accounts are widely favorable for these second world rapidly developing nations. Much real progress has been made. Life expectancy is now well over 70 years, literacy rates are over 80%, calorie intake has risen 20% in the period of globalization, and the number of doctors per thousand people has more than doubled. Ideologues who continue to rail against globalization are idiots. Many of them are disgruntled socialists who cannot forgive capitalism for proving the stupidity of their leftist ideals. Their ideological blindness drives continued efforts to undermine capitalist systems although they no longer have anything to offer in place of capitalist markets. Those "second world" developing countries with the strongest economic policies will - as usual - best weather the coming storms. Those still laboring under mercantilist or socialist or industrial policy systems - many dependent on oil or other commodity exports - are in for major economic falls. [
The Middle East:	Finally, a reminder of FUTURECASTS' dim outlook for peace in the Middle East in general and between the Palestinians and Israelis in particular. See, Middle East Futurecast. [
	Only one picture has come through with terrible clarity - and has been included in FUTURECASTS forecast articles. For the tropical latitudes stretching from Morocco on the Atlantic to Indonesia and perhaps the Philippines on the Pacific - where warm climates, strongly held religious beliefs, and large families predominate - there will be conflict. For the Holy Land in particular - where two peoples divided by strongly held and antagonistic religious beliefs live in the same small territory - they will fight. Unfortunately, this forecast continues to remain true. [
The conditions for peace simply do not exist.	A new push for peace between Israel and left bank Palestinians is now underway. It is only the success of that much maligned security wall that makes this prospect worth even contemplating. Unfortunately, there remain militant fundamentalist forces on both sides powerful enough to prevent a peace agreement and/or capable of undermining any agreement reached. [ Crude inaccurate rockets fired from Gaza into a sparsely populated region of southern Israel is one thing. All it would take for peace to be shattered is for such rockets to begin flying over the wall along the long border with the west bank. [ There will inevitably be disputes between a west bank Palestine and Israel. There will inevitably be reasons for war sufficient to provoke militants. The prospects for some lasting peace thus remain grim. The conditions for peace simply do not exist. [ However, peace efforts must continue. Some day, even this forecast may come to its end. [
All it takes for such evil to triumph is that good men stand aside. The U.S. must not stand aside in the Middle East.	The Middle East is now having its period of religious warfare similar to that which afflicted Europe a few centuries ago. The peoples of the Middle East thus prove themselves to be as stupid as the Europeans. There is no telling how much bloodshed and suffering will be required to convince them of the benefits of tolerance and peace. Unfortunately, there are now modern weapons with which to more efficiently kill more people. [ Al Qaeda, the Taliban and other Muslim militant groups continue to kill far more Muslims that non-Muslims. Their targets now even include other Sunni who happen to disagree with them. [ As FUTURECASTS has repeatedly emphasized, these are Muslim civil wars. The militants do not really care about the West or even about Israel at this time. Agitation against the West and Israel is just a propaganda ploy to generate support for their real effort - to grab power in Muslim lands where they can dominate Muslims and dictate what Muslims can do and what they can say and even what they can think. [ The militant theologians succeeded in Iran. All it takes for such evil to triumph is that good men stand aside. The U.S. must not stand aside in the Middle East.