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The U.S. Treasury Dept reported that Japan's holdings of Treasurys increased to $1.12 trillion in August 2012, compared to China's holdings of $1.15 trillion. Japan increased its holdings as it continued its effort to stem the yens rise. China's holdings are declining.

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China's perception of the US as a declining power is a miscalculation, yet it appears to influence Chinese policy in 2010-2011.

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David Cote, CEO of Honeywell International, says U.S. corporations have $1 trillion sitting on the sidelines ready to be invested if business can be provided with more certainty about U.S. finances through successful deficit reducion negotiations. He is the most active CEO behind the Fix the Debt organization and is respected by both sides. In the fiscal cliff negotiations he has taken messages in both directions from Democrats and Republicans. Cote is a former executive of General Electric, who has led a turnaround at Honeywell. Large business stayed out of the deficit negotiations in 2011 which brough on the fiscal cliff arrangement of deep cuts in defense and automatic tax increases if no agreement is reached by Jan. 1, 2013. Cote and CEO's behind Fix the Debt have decided to engage with both political parties in the negotiations in 2011-2013.

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In 2000 student debt in the U.S. was at $200 billion. In 2010 student debt at 1 trillion dollars will surpass credit card debt. Student debt is now become a serious macroeconomic factor. Budget cuts will also increase the level of student debt as fewer grants are available and tution goes up. It is expected to shape when young people can afford to buy a home, start a family, or save for their kids education. This would have serious economic implications for the future.

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The situation in Boise, Idaho. Home to many electronics and high tech companies like Micron Technology, Boise has weathered many downturns with unemployment rates well below the national average. This time things are not looking at all like previous downturns, as the unemployment rate in Boise climbed to 6% from 2.7%- it has already approached the national average of 6.7%, and is climbing. This suggests that high tech is also being affected seriously. Unemployment is expected to reach 8% in 2010, about the same as the national average forecast according to Moody's Economy.com. Goldman Sachs forecast is for the 2009 savings rate to be between 6% to 10% by 2009. Families like the Capps and Muirs that have young children or children in teenage years, are now serious savers, as profiled in this description. Down to getting their meat from a calf grown on a family farm in the Rocky mountain region where Boise is located, cutting their own wood in the mountains, buying 11 dozen eggs and freezing the insides of the eggs, buying on deals like $8 winter coats at Old Navy's store, bulk purchases of sugar and staples, growing and canning vegetables, handcrotcheting hats and scarfs for sale on Craigslist and local bazaars. All this from Mrs and Mr Muir including starting a Moneysavers Club, an email group of 30 people. The Muirs are a young family with their first child 5 years ago, who have stable employment, with Mr Muir working as a grape researcher for the state Dept of Agriculture, and his wife a dental assistant. But having taken 2 mortgages to buy their $144,000 home because they could not afford the 20% down payment. The wife's 401K of $3000 going for insulation and fence , and the husband's 401 K savings down to $13,000- reduced to half by the stock market. Suggesting poor decisions on housing debt with low savings for a couple in their thirties. The Capp couple in its forties has also low savings, having $40,000 in student loans, and credit card debt of $11,000 just paid off by using the $10,000 severance package for Mr Capp. The Capps are economizing on everything from skiing to using washable rags instead of paper towels. He worked as a field service engineer for Electroglass, a semiconductor equipment manufacturer based in San Jose which fired two thirds of its field service engineers, including Capp. They also used a $25,000 line of credit on their home to buy a used Toyota 4Runner. Considering their economizing skills, their responding to the downturn by paring down debt as quickly as possible, the information of Mrs Muir's skills at saving, the Capps continuing to use their 253,000 miles Toyota Corolla- these are families that were not crazy spenders, but just families that did not take saving seriously. The Capps made $65,000 from Mr Capps salary and $10,000 from Mrs Capps work at a mental health clinic (after getting a BS in psychology), yet their $2700 in savings suggests no effort was made to save for a rainy day. What this saving and economizing means is that restaurants are closing in large numbers in Boise. Retail stores, including electronics and clothing, are shuttering, All this is leading to higher unemployment, leading to saving measures like those used by the Capps and the Muirs. Meanwhile the numbers for savings accounts at Home Federal Bancorp in Boise, Idaho, a $725 million bank with 15 area branches, shows savings accounts up 26% in December from the previous year. And says the banks consumer banking head, the balances are increasing even as the unemployment rate is going up. Which suggests that Rodriguez and Goldman Sachs may be right (seee link) that the savings rate may reach 10%, and even higher, from what is happening in Boise. Views on currency valuation and the dollar as indicated in the analysis of the article about Rodriguez /Grantham/Scheiff, WSJ, January 2, 2009, may have to be separated from the analysis of what is happening in savings, as the weakening of the dollar relates also to the weakening of other economies and currencies. This steep upturn in saving is likely to affect Chinese exports severely and the Chinese economy. This also affect the German economy, as China imports less from Germany, especially its midsized manufacturers. See links. What is happening on saving, on the other hand, is very real, and happening before our very eyes....

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The problems with a second phase of quantitative easing, go back to asking why the first phase hasn't worked to prevent the economy from sliding back. So far the Fed has engaged in buying $1.7 trillion in bonds in that first phase. This shows the limitations of this approach. A lot of money was injected into banks. And the banks have $1 trillion on their books that is not being used for lending. The reason being its hard to find borrowers, as borrowers are cautious and concerned about the economic future. The Quantitative Easing in this second phase is supported by the reasoning that deflation risks remain. But this raises another question, what level of quantitiative easing would work, and would such enormous levels itself cause bigger problems.

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In a Senate hearing Dr. Fauci, head National Institute of Infectious Diseases, Dr. Redfield, head of CDC, and Dr. Hahn, head of the FDA, answered questions from U.S. Senators including committee chairman Lamar Alexander and Senator Murray. Dr. Fauci told senators that with some states reopening without meeting federal guidelines that include seeing an extended period of falling numbers of cases and deaths, "there is a real risk you could trigger an outbreak ... that could set you back rather than going forward."  Dr Fauci is concerned about the situation in the fall when schools and colleges reopen with possible spread. In other comments Robert Redfield the CDC head told the committee- "timely testing is vital to reopen America, increased contact tracing is critical." Redfield says CDC has created a state by state assessment of contact tracing and was working with states on these surveillance systems. This contact tracing effort is one of the less developed areas in which the focus is being shifted to along with testing capabilities. Admiral Giror who heads testing capability buildup says 40 to 50 million tests should be available by September 2020, so that hotspots could be addressed quickly. ...

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An August survey by Japan's Ministry of Economy, Trade and Industry, shows 40% of the country's manufacturers saying they would shift production and R&D facilities overseas if the yen remains at 85 to the dollar. It has dropped below that. Nissan will make 71% of its cars overseas in 2010, compared to 66% in 2009. Murata Manufacturing plans to double its foreign output to 30% by March 2013. By buying Dutch printer maker Oce NV in March, Canon Inc., saw its overseas output jump to 48% for the first half of 2010. Toyota is on track to produce 57% of its output overseas in 2010 , compared to 48% in 1995. The popular Prius will now be built at a plant in Bangkok, Thailand. Sony did 20% of its television manufacturing in Japan in 2010, it is aiming to do 50% in 2011. As a result Sony showed a profit for the April-June quarter, after 6 straight years of losses. Its also important to note that when inflation is taken into account the yen has not strengthened the way it appears, which reduces domestic pressures to dampen the yen's rise. Tohru Sasaki, head of foreign-exchange research at J.P. Morgan Chase & Co. in Tokyo, says that in inflation-adjusted terms, the yen is 30% below the rate it reached in April 1995. U.S. consumer prices have risen by 69% since 1990, in Japan the prices rose only 8.5% during the same period. In inflation adjusted terms the April 1995 exchange rate of 80 yen to the dollar would be 56 yen to the dollar today. Japan's exporters can also benefit from the fact that a large part of Japanese trade is denominated in yen- according to Japan's Ministry of Finance 48% of exports to Asia were paid for in yen in 2009. Like China and Germany, Japan remains highly dependent on exports for growth- which provide two thirds of its growth. The yen's strength increases the outflow of production facilities. In July 2010, 10.3 millon workers were employed in manufacturing in Japan, down from 12 million in 2002. Japan's unemployment rate was 5.6% in 2009....

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As Japanese prime minister Noda prepares to restart the Oi nuclear plant in June 2012, former prime minister Naoto Kan, who was premier during the Fukushima nuclear disaster, answers questions in a parliamentary inquiry. He says he realized how dangerous nuclear power can be when it got to the point where the evalcuation of Tokyo was being considered, Japan was then on "the verge of national collapse." His fears were that a number of meltdowns could together " release into the air and sea many times, no, many dozens of times, many hundreds of times the radiation released by Chernobyl." The Japanese public has focussed on the parliamentary hearings because the previous inquiry is thought to have been perfunctory, and not really examined in depth all the issues the Fukushima disaster had raised, and the general feeling is that a proper public dialogue had not taken place. In contrast in Germany the issues had been discussed openly, and the Angela Merkel government which had been receptive to nuclear power reversed its stand on nuclear power. Germany is phasing out dependence on nuclear energy. Kan pointed out that the "nuclear village," the network of nuclear power companies, bureaucrats, and researchers, had hijacked national nuclear policy and was putting Japan back on the same path. He went so far as to compare it with the situation facing Gorbachev in Russia after Chernobyl: "Gorbachev said in his memoirs that the Chernobyl accident exposed the sickness of the Soviet system. The Fukushima accident did the same for Japan." In his assessment of what happened Kan said: "It is impossible to ensure safety sufficiently to prevent the risk of a national collapse. Experiencing the accident convinced me that the best way to make nuclear plants safe is not to rely on them, but rather to get rid of them."...

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China raises objections to the setup of the U.S. THADD missile defense system to protect South Korea, but the South Korean government of president Park Geun-hye is determined to go forward. The U.S. and South Korea say the North's missile tests have created conditions for the Terminal High Altitude Area Defense System to be setup to protect South Korea.

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Former Senator Jim DeMint lays out his reasoning for the Republican fight to defund ObamaCare, as the healthcare legislation is now called by Republicans. He points to problems with the legislation with issues about how much the added entitlements will cost in the future( more than the $250 billion by 2023 estimate of CBO insists DeMint based on the general lowballing of projections), and higher premiums for the young and elderly on exchanges. He says the 2012 elections were fought on economic issues not ObamaCare, and that the public he has met in visits to different states as president of the Heritage Foundation continues to be skeptical about ObamaCare. He sees the correct role of the Opposition party to point out the deficiencies in the law and call for corrections in the path for healthcare.

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The Economist points to a second hit from bad debt in the post 2008 stimulus binge of spending in China. This is after an earlier hit, that was absorbed as a result of high growth rates and high savings. About $420 billion was injected into 5 state owned banks since 1998, according to one estimate, as a result of the first hit to China's banks from bad debt. In this second round of bad debt, covered in more detail by David Barboza in the New York Times, and merely alluded to here, many bad loans to infrastructure projects were rushed through by local governments. The Economist considers this one of the successes of the state directed banking system, that loans were quickly made and projects started in the post 2008 crisis period; and expresses the view that this hit will be absorbed just like the last hit. However the more detailed account by David Barboza and in Business Week, points to the working of a system of incentives gone astray in a capitalist system without the necessary controls or regulation. Local governments used investment companies to take on loans, which were then used to prepare properties to be auctioned off at a profit and speculative prices to state owned companies in different industrial sectors. This is part of rampant speculation in China in real estate markets. Can China with its high savings and growth absorb a second hit? This depends on the magnitude of the hit and the size of the bad debt, which depends on how long this speculative market continues to operate, and how bad debt is hidden in the books. The difference this time is that large state owned companies in different industrial sectors are engaged in this speculation. The other difference is that the high growth rates in China depend on continued large trade deficits with the USA and Western Europe, something which is not likely to continue for long, as consumers in Europe and the USA with high debt are becoming cautious spenders. This suggests that China, like the US with the mortgage crisis, faces the same effects of unregulated or uncontrolled speculative behaviours, that can endanger the banking system....

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Senator Patrick Toomey (Pa.) and Rep. Jeb Hensarling (Tex.) are lobbying Republican party members in Congress behind the scenes to accept $300 billion in taxes as the only way to get an agreement on debt reduction in the Supercommittee. This would be part of a plan that addresses entitlements, and changes the tax code to lower rates and reduce tax expenditures by closing deductions and loopholes. This is leading to an intense debate in the Republican party about the wisdom of a purely ideological position on taxes that does not take into account current realities, and risks letting markets take control of the nation's future.

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Jeb Bush calls for comprehensive immigration reform. He is against small fixes and says the problem is that the law is broken and new laws are needed. As an example he says the chain migration from the provision for family preferences in the current law is not in the U.S. best interest. By comparison visas are in short supply for talented, well educated immigrants from other countries, something that is in the best interest of the U.S.

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Nouriel Roubini has proven correct on global financial issues. He said in an interview on the sidelines of a symposium in Malaysia, that China needs to revalue its currency for its own sake. China will see a growth collapse in the next 2-3 years if it fails to do so. His point is that China can still maintain growth by shifting to domestic consumption and less infrastructure spending and exports. In his view growth should not be affected if China exports less and consumes more. He points to the decrease in consumption as a share of GDP from 45% to 36% in the last ten years- this ratio is 70% in the USA. A cheap yuan keeps foreign goods unaffordable and protects state owned companies which also get cheap credit, as keeping the yuan low requires China to keep interest rates artificially low. What this does is make a massive transfer of income from the household sector to the state owned companies, just at the time when China needs to do the very opposite of this. And compounding the problem is that the 25% of China's GDP that is made up of retained earnings of mostly state owned companies, goes into real estate and production facilities. See the link to David Barboza in the New York Times who points to the wasteful spending and real estate speculation by state owned companies. Roubini cites the automobile sector where capacity has doubled in the last year to 20 million, when the domestic market increased by 50% to 10 million vehicles. The stimulus only increased the effect of surplus capacity and misallocation of investment, with highways to nowhere and brand new airports that are three quarters empty. The Chinese leadership is beginning to grasp this, but the state owned companies and other interests who benefit fromm the old model, may make it difficult to reverse the trends. A lot is at stake in this, as it affects the U.S., as well as countries dependent on China's imports such as Australia, Canada, Brazil and Germany. ...

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This opinion piece in DW.com says India's prime minister should not isolate prime minister Sharif of Pakistan, as he had no part in the escalation of tensions in Kashmir. Foreign and military affairs are now run by the Pakistan Army, and isolating Sharif only entrenches the Army it says, which has kept up tensions similar to the situation in 1999 with the Kargil crisis when the Pakistan Army initiated a conflict in Kargil region. At that time Indian premier Vajpayee and Pakistan premier Sharif were improving relations.