Since mid ’06, informed observers and market participants have fretted about recession, particularly in light of relentless fed tightening and an evident housing bubble.

Separate from the subprime and subsequent credit crisis, since mid ’07, transports, a leading indicator, have experienced in clear and frightening slowdown.

Today, economic numbers, specifically the uptick in December unemployment, all but confirmed that which is already knew and the market, which had even as late as 3Q07, defied all odds and soared to record highs, finished the first/abbreviated trading week down, effectively losing ’07 gains for the S&P. The insatiable American consumer, as this disappointing retail season seems to suggest, is finally tapped out.

With slowdown and inflation fears, one can’t but help be in a quandary with visions of stagflation running rampant.

It’s worth revisiting, however, a normative perspective. Of course an economic slowdown is in no one’s interests (except maybe for bankruptcy lawyers/advisors and wily investors). Prosperity does not cure all, but it does alleviate much suffering, providing meaningful work, food for families and resources for other human endeavors (charity, the arts, basic scientific research, etc).

That said, the business cycle is a normal and healthy part of society – the undulations of economic activity ultimately serve to provide more stable long-term prosperity through periods of investment, consumption and weaning. It is no different than other cycles (water, nitrogen, carbon, psychological). I’m sure that even sunny SoCal residents can agree than perfect weather every day isn’t all it’s cut out to be – warm and sunny every day will get you to drought sooner or later.

What’s the point? First, the housing bubble (which arguably was simply a transfer of excess from the tech bubble to another asset class) should never have occurred. While homeownership is unequivocally the American dream (and a good one), a distinction must be made between a ‘dream’ and an inalienable right. It is as much injustice to make/receive improper loans as it is to deny them. For example, with my meager salary, I have no business buying a Park Ave penthouse, even if some buffoon loan officer is willing to lend it. Likewise, NINJA (no income/job/asset) applicants have no business buying a modest house (what’s wrong with renting?). Should we strife to increase the income level, wealth and well being of all? Absolutely! But even then, we ought not live beyond our means (or encourage others to do so), yet we have and the bill is finally coming due.

Second, the government absolutely is facing a moral hazard as it explores bailouts for the millions of families that [dare I say it] foolishly took out loans that they could not afford (informed or not). Likewise, central banks such as the Fed are faced with a mirror situation in their determination to bail out lenders. Repeated, unprecedented injections of liquidity have not resolved the credit crisis, and maybe that’s a good thing in the long term (but man is it going to hurt in the short term). It should bother us that talking heads are pounding the table on easing – it’s not their job to sustain asset prices… and even if it were, they can’t! And what happened to inflation concerns?

Finally, living in the richest country in the history of human civilization should provide us with some measure of comfort. A) it’s not that bad, B) each one of us will be okay even if it were (basic needs will be met) and C) life goes on.

freebie - The Case for Inflation (draft)

Google/Open Handset Alliance

What’s possibly more depressing about our ‘me’ culture, is the explosion of said worldview in China. As James Mann observes, American policy towards China has long been predicated upon the assumption that economic success will necessarily lead to democracy in China._­­­­ That is, we’re willing to maintain a close relationship with an overtly brutal regime with the hope that its rising middle class will assert democracy, human rights, transparency and justice for the rural/poor in order to ensure a stable and prosperous future. But Simon Elegant notes that the beneficiaries of the unprecedented wealth creation in China, her young middle class, generally doesn’t care for politics. Economic independence and the opportunity to pursue hedonistic ends, it appears, is too intoxicating – they’ve then no reason to challenge status quo.

Sociologists can point to the one-child policy, China’s newfound prominence, disregard of traditional values, horror stories of the Cultural Revolution and lack of religion as explanations for this phenomena; but all the same – there exists a genuine challenge for Western policymakers to engage China while not being complicit with their abuses (condemning would be asking too much).

Some numbers to chew on (not alarmist, more people is always better, but for effect): the under 30 crowd represents 200 million adults today, a number that is growing to 500 million in 2015 (EU’s got 494 million). This year, 37 million of those will travel internationally (more than the U.S. and Europe combined). Talk about headcount!

Is this not the classic definition of oppression, where the very policies set by the Communist regime, ultimately for self-preservation, are ones which stoke economic development (and hence placate the apolitical but potentially influential middle class with prosperity) at the expense of the rural peasant and environment?

We are already witnessing record numbers of demonstrations over the growing income disparity, healthcare and education gap between the middle class and poor. To be sure, the ruling party is aware and taking moderate steps – but even those fall woefully short. I truly hope my contemporaries in the motherland will realize that they can and should change before social unrest is manifest on too grand a scale.