Some good news today as the TED spread dropped significantly. But, this is not good news.

At first glance, the declining Chinese appetite for U.S. debt – apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days – comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of “trillion-dollar deficits for years to come” as he seeks to finance an $800 billion economic stimulus package.

Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities.

But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows.

Link: U.S. debt is losing its appeal in China – International Herald Tribune

Innovation often causes increases in productivity, which can temporarily displace jobs in an economy. This NYT article has some good points on innovation overall…

“If you invest in a technology that makes something more efficient, the fear is that people will be put out of work,” says Kevin Efrusy, the venture capitalist whose firm Accel Partners is the lead funder of several important Silicon Valley start-ups, including Facebook. “But it’s just the opposite. When anything becomes cheaper, we consume a lot more of it. The overall economic effect is, you create and expand entire new industries and employment goes up.”

According to a 1995 study by the Organization for Economic Cooperation and Development, periods of high productivity — often achieved through automation — were correlated with periods of high job growth throughout the last half of the 20th century. “Innovation leads to job growth directly and clearly,” says Robert D. Atkinson, president of the Information Technology and Innovation Foundation.

Link: Unboxed – Innovation Should Mean More Jobs, Not Less – NYTimes.com

This is an old misconception. Yes, individual jobs are lost, but at the macro-level jobs are created and optimized in other areas.

Also, government can perhaps set up an innovation framework and not try to pick and choose who the winners should be.

“Innovation is the lifeblood of the American economy,” says Jim Hock, a spokesman for TechNet. “We’re only as good as our next innovation. TechNet believes we shouldn’t be picking and choosing technologies to back with a tax credit. We should be technology-neutral and create an atmosphere of innovation that will let a thousand flowers bloom.”

And, finally it is all about the messy world of innovation…

“America is probably the best culture in the world at failing,” he said. “We’re willing to navigate in a fog and keep moving forward. Our competitive advantage tends to be at the fuzzy front end of things when you’re still finding your way. Once the way has been found, we’re back at a disadvantage. So, yes, investing in innovation is critical.”

The Reckoning – WaMu Built an Empire on Bad Loans – Series – NYTimes.com:
“SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.”

“It was just disheartening,” said Sherri Zaback, a mortgage screener for Washington Mutual. “Just spit it out and get it done. That’s they wanted us to do. Garbage in, garbage out.”

Over the Christmas holiday my dad told me stories from decades ago of Mississippi farmers moving to Michigan to get jobs in the auto industry. The agriculture industry still remained, but many moved to Michigan pursuing good jobs and opportunity. Large auto companies were booming there, and the workers went to where the work was located. Success in the US comes not from our ability to keep things the same. Our legacy of success comes from our ability to change.

The American economy is the story of inventing the new thing, growing the new thing, maintaining it, and letting it die. In our rush to prop up and re-organize current valuable industries, let’s not forget to make sure we keep a free and open society and a infrastructure that facilitates the creation of what is next. The next big industries are small now. Some of the next big companies are on the back of napkins right now. So, what’s next?

Greg Mankiw’s Blog:
“The above figure (reprinted from my favorite textbook) shows government revenue as a percent of GDP. The most noteworthy feature of these data is the substantial growth of government from 1929 to 1945. It is easy to understand why the size of government grew so much during this period: The nation was responding to the crises of the Great Depression and, especially, World War II. But what is noteworthy is that while these crises were transitory, the increase in the scope of government was permanent.”

As the Fed lowers rates and the government prepares to spend a trillion next year on a stimulus package (most likely much of it to go to infrastructure) Keynes comes to the top of mind to most of us that are business thinkers.

Keynes would do these two things (cut rates and spend government money) to stabilize an economy in severe decline where demand is drying up fast. There are risks in what we are embarking on. The risk is that government spending crowds out private spending and that centrally-planned spending is not smart spending. Also, there is risk that once the government gets heavily involved in the private sector, they may get comfortable there – and temporary, emergency actions could become permanent. Powerful Federal legislators could argue, for example, that the private businesses “got us into this mess” and that permanent heavy management of the economy is needed so that things are done “right” from now on.

But we are about to re-test Keynes on a massive scale. We are all Keyneseians now. The Financial times had a piece on Keynesian thought. And, since we are about to experiment with his ideas again, it is good to review.

FT.com / Columnists / Martin Wolf – Keynes offers us the best way to think about the financial crisis:
“Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman, either. Now, 62 years after Keynes’ death, in another era of financial crisis and threatened economic slump, it is easier for us to understand what remains relevant in his teaching.

I see three broad lessons.

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. ‘A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.’ Not for him, then, was the notion of ‘efficient markets’.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

This same moralistic debate is with us, once again. Contemporary ‘liquidationists’ insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.

Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. The election of Mr Obama surely reflects a desire for just such pragmatism. Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere. So the task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront.

The urgent task is to return the world economy to health.

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. At the same time, a big effort must be made to purge the balance sheets of households and the financial system. A debt-for-equity swap is surely going to be necessary.

The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.

No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers

As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.”

With tongue in cheek, Fred has an amusing take on the economy.

Solar and ocean-hydo are probably my favorites, but in 2007, the US rocked in creating new wind power.

Eco-Economy Indicators: WIND ENERGY – Data: “”