The ISM (Institute for Supply Management) index fell to 49.3 percent in January, the lowest level since April 2003 and below the key 50 percent line, indicating that most firms in the factory sector are not growing. The index had stood at 51. The decline in US inventories was breathtaking. In January, inventories dropped by the largest amount since 1984, dropping to 39.9 percent in January from 48.5 percent the previous month. This is the lowest level of inventories since February 2002. The ISM survey committee said the “major sign of weakness” was the low level of order backlogs which fell to 43.5 percent from 45.0 percent in December. The National Association of Purchasing business barometer fell to 48.8 from 51.6 in December. The REAL numbers are all negative.

The US savings rate has been negative for an entire year only four times in American history - in 2005 and 2006 - and back in 1932 and 1933. In December 2006, the US savings rate descended to a negative 1.2 percent compared to a negative 1.0 percent in November. The US savings rate has been in negative territory for the past 21 consecutive months. Personal spending in the US has jumped in December by the most in five months! The 0.7 percent rise in purchases followed a 0.5 percent increase in November, the US Commerce Department said on February 1 in Washington.

US personal consumption increased 4.4 percent in the fourth quarter, the Commerce Department reported on January 31. Confidence among US consumers approached a five-year high in January in the latest national surveys. But their actions belie their words. 2006 saw existing US home sales decline by 8.4 percent (the biggest drop in 17 years) while new homes sales fall by a stunning 17.3 percent (the largest in 16 years). US house prices are falling slowly and more houses are now being taken off the market.

General Motors Corp. and Ford Motor Co.'s US auto sales plunged in January as the two US automakers yielded market share while scaling back on low profit deliveries to rental-car companies. Ford’s sales fell 19 percent and GM’s dropped 17 percent, prompting a deeper cut in GM's North American production.

But the investment banks that fuelled the craze of lending to borrowers with weak credit histories look like they are escaping relatively unscathed. Amid increasingly ominous signs of a shakeout in the subprime mortgage industry, investors in securities backed by these risky mortgages have seen the value of their holdings slide this year. Risk premiums - or the spreads over government bonds - on the lowest-rated cash securities have risen by up to 400 basis points, while the cost of insuring such deals against losses through the derivatives market has doubled.

The problem for investors who bought last year’s crop of high-risk mortgage originations was that, after several years of booming house price appreciation, the US housing market last year hit a wall. In response, mortgage lenders - financed by the Wall Street banks that can sell this debt into capital markets - relaxed their standards to prop up sagging origination volumes, lending to ever-riskier borrowers on ever more favourable terms. Last year, 38 per cent of new subprime mortgages were for 100 per cent of the value of the home. ‘Years ago, the banks had to live with what they underwrote, so if they got too aggressive they had to bear the consequences,’ says David Hendler, analyst at CreditSights. ‘Now the worst losses will be held by a handful of hedge funds who thought they knew better.’”

This is news to me but I was thinking, who is going to hold the bag when the housing market goes bust? I found this and basically started laughing. The article is below...

China's financial clout

Testimony of Brad Setser (Roubini Associates) to USCC

(page 14 of USCC link above gives the breakdown in Chart format... had to get another source to confirm, the excerpts from below where they tout sophistication had me laughing a few months ago)(excerpts below)

"As the pot grows, the secretive and sophisticated portfolio managers at China's central bank are trying gradually to boost their country's returns on its foreign-exchange holdings, at least in part by making somewhat riskier but higher-yielding investments. "

"As China's reserves balloon, markets and many U.S. officials believe it to be buying less U.S. Treasury debt, which is explicitly guaranteed by the U.S. government, and more debt issued by U.S. mortgage lenders Fannie Mae and Freddie Mac, which carries an implicit government guarantee.

China's shopping list also is said to include somewhat riskier but higher-yielding mortgage-backed securities and U.S. corporate debt."

Here's an alarming fact about Sacramento's housing market: About one of every five existing homes (20%) on the market is a "short sale." That means the home is worth less than the value of the mortgage, and the lender is willing to accept less than full repayment of the loan to avoid foreclosure, says Tracey Saizan, president of the Sacramento Association of Realtors.

That, in turn, puts pressure on the remaining 80% of sellers, who have equity in their homes, to cut prices.

So far, defaults and late payments have remained very low on prime mortgages, which are made to lower-risk borrowers and account for the bulk of home loans. But late payments have risen swiftly over the past year on subprime mortgages -- those made to risky borrowers with spotty credit histories -- and on "Alt-A" mortgages, a category between prime and subprime which includes many loans for which borrowers haven't documented their income. According to trade publication Inside Mortgage Finance, 13% of mortgages outstanding are subprime.

In November, payments were at least 60 days overdue on 12.9% of subprime loans packaged into mortgage securities, up from 8.1% a year earlier, according to First American LoanPerformance, a research firm in San Francisco. For Alt-A loans, the delinquency rate jumped to 2.1% in November from 1.1% a year earlier.

Adjustable rate mortgages, loans in which the interest rate is adjusted periodically according to a pre-selected index, accounted for 31 percent of mortgage originations in 2005, up from 12 percent in 2001.

Nothaft estimates that $500 billion in variable rate mortgages will reset, or rise, sometime this year, leaving many with a payment they can no longer afford. “Those would be the candidates for … delinquent status,” he said.

Foreclosures had been at historic lows in the past three years as rapidly appreciating home prices gave financially strapped owners the option to refinance, sell their house at a profit or take out a cheap home equity line of credit. But with the pace of appreciation slowing in many markets and interest rates rising, for many, these avenues have been cut off.

“You’re really out of options,” said Susan Wachter, professor of real estate at the Wharton School at the University of Pennsylvania.

The number of vacant homes waiting to be sold surged 34% to 2.1 million at the end of 2006 compared with the end of 2005, by far the fastest increase ever recorded, the Census Bureau reported Monday.

"We have more than a million housing units of excess supply," said James O'Sullivan, an economist for UBS. "If you are looking for evidence that the worst is over for housing, you're not going to find it in this report. This argues that housing starts need to go down more."

The total value of US residential property is now around $19 trillion, according to the Joint Center for Housing Studies at Harvard University. The US Census Bureau calculates that there are around 123.9m housing units in the US. (ED: this includes condos and rental apartments)

What BGI (Barclays) does is what every technical trader attempts to do: develop a trading model with a statistical edge. The statistics sited are constant with the Pareto Principle (see below). I have found that what limits the trivial many investors and traders is an unwillingness to turn off the news, learn something about statistics, develop and rigorously test trading models and money management models and to understand the process of Group Rotation.

The trivial many don’t understand the level of commitment it takes to succeed in what is a very Darwinian environment. While the trivial many is making decisions based mostly on funny-mentals (ED: traderspeak for 'fundamentals') they hear on CNBC and from government hacks, or worse, their gut or tips, the vital few are using applied mathematics and the power of computers to take the lion's share of returns in the market. However, in the sphere of finance and all other areas, it is and always will be the vital few that cause the most pain for the trivial many. In this instance, it will be the vital few hedge funds within hedge funds that will wreak havoc for the trivial many (LTCM). It must work both ways.

I still don't quite understand what unregulated" means, it is federal regulation that does not allow hedge funds to advertise and confines their client base to "accredited investors". There is a quagmire of accounting and reporting regulation (in most large firms the trading dept. is the smallest and accounting the largest). The only thing I found to be unregulated is in what hedge funds can invest, direction (short or long), and how much they charge their clients for their services.

I do agree that unregulated derivatives pose a threat to the global financial system and there should be performance guarantees as afforded by a regulated exchange.

How much of the alpha that makes it into investor’s hands is it up to the investor. Being a rational being means that if a service or good is too expensive one will actively seek out alternatives. When the market finds these fees unbearable hedge funds will adapt or they will close their doors.

This is a special case of the wider phenomenon of Pareto distributions. If the parameters in the Pareto distribution are suitably chosen, then one would have not only 80% of effects coming from 20% of causes, but also 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on (80% of 80% is 64%; 20% of 20% is 4%, so this implies a "64-4 law").

This year's bonus pool for Wall Street executives hit $23.9 billion, the New York State Comptroller's office estimates. That's a 17% jump from last year's bonus pool of $20.5 billion, and it works out to an average bonus of $137,580 for every person employed in the financial services industry.

In 2005, the top hedge fund manager took home $1.5 billion in pay while the price of entry to be on the list of the top 25 paid managers, compiled by Institutional Investor’s Alpha magazine, was $130 million.

The average pay of the top 126 hedge fund managers last year was $363 million, up some 45% from the year before.

Transaction costs run to 4 per cent of the $1,300bn of hedge fund assets under management. Manager salaries and performance fees take another 4-5 per cent, meaning hedge funds need to generate average annual returns of close to 20 per cent to keep everyone happy (including their investors).

Over the last five years the S&P 500-stock index has outperformed 71% of large-cap funds, the S&P MidCap 400 has topped 83.6% of mid-cap funds, and the S&P SmallCap 600 has bested 80.5% of small-cap funds, according to Standard & Poor's, a unit of The McGraw-Hill Companies.

Over the last five years (hedge fund) BGI has generated a colossal $19.9 billion above the market return—or "alpha," in investment parlance—for the 2,800 pension funds and other institutional investors that are its clients.

Recently, Duke University's David A. Hsieh, a leading hedge fund scholar, theorized that only $30 billion in alpha is realizable annually from the $30 trillion market value of all stock and bond markets worldwide. It was intended as a very rough estimate, but if BGI is extracting $4 billion to $5 billion a year, what chance do the rest of us have to top the averages?

Have you seen the cover of the recent Businessweek magazine (low, low, low rates)? Wouldn't you say that that is a contrarian indicator?

! enjoyed your blog on the problem of the public pensions. A good friend of mine, who happens to be a retired Major from the San Diego Police Dept. was shocked to learn how little I make a year (I'm an Idaho State Trooper). I was stunned to learn what he makes in retirement, a little over twice what I make a year!! I remember telling him, "now I understand why California is going broke!"

While the public employee didn’t get any stock options, he also didn't work more than 40 hours. Gets paid overtime, gets a bazillion weeks of paid vacation, real health, retirement and………..

HE CAN’T BE FIRED.

No matter how poorly he does his job, he’ll get a raise, he’ll get his stuff and he can never, ever be fired.

Any government job is like that.

And now (last 15 to 20 years) they make as much or more than private sector employees to do the same job (pick any job you want, public sector makes more plus all the benefits) with utterly no risk.

That was originally the point of capitalism that those who take risks are rewarded, that’s not true.

THEY ALL game the system and they don’t even see it.

It used to be that government workers made less money and in return for that got a lifetime job. Now they have a lifetime job, get paid better and have better benefits. Hmmm, who doesn’t want to go into government work?

Sad.

Social Security is / was meant to be a supplement to a pension. I think that Social Security could be converted into a pension system if we ended the Social Security and Medicare taxes limitation to the first $120K of income. Then we could fund a full pension and national health care system. The payroll taxes could be reduced for all workers since more would be contributing. The payroll tax is one which wage earners pay. I have never had anyone explain to me why the wage earner under $120K should bear so much of the financial tax burden.

Higher income workers could get a guaranteed pension up to a certain amount set by law, based on their pay during their lifetimes. To make the conservatives happy, you could even allow a percentage (based on age) to be invested in a index fund. As a worker gets older less and less should be invested in stocks and more toward bonds. Management fees could be set by statute and reduced due to the economy of scale.

I agree with the point about scale-invariance, and that basic insight has given me a lot of insight about the economy in the past year. Further, I live in Atlanta, which would probably win a contest for the best "Everytown, USA", so I take note of what goes on around here. Here are some things I've noted:

rising crime: in the past year, auto breakins have occurred with greater frequency at my (gated) apartment complex; escalating to the first apartment breakin within the past couple months.

housing slump:the housing market froze up here early last spring and hasn't recovered. In my neighborhood (inside the perimeter, a choicy district), it seems every fourth home is for sale. When a home sells, it seems one or two new ones on the same street take its place.

retail squeeze: the local cluster of shops, serving this affluent residential neighborhood, a major university, the headquarters of a major health care complex, a major CDC facility, and the American Cancer Society (to name a few), has essentially become a blighted ghost town. About half the shops in the past year and a half storefront have closed and remained vacant.

Solution to the retail squeeze? "Upscale it". They're going to say "to hell with the students" and move to a more upscale motif so that businesses can cover rents. I hope there are enough locals who have money leftover after paying inflated mortgages.

vagrants: I'm running into more panhandlers and sundry vagrants (even some who claim they are not vagrants but just "down on their luck" and need bus fare etc.), even out in the residential areas. Indeed, in Atlanta, panhandling has been banned from downtown -- pushing the problem around.

gini effect: everyone seems to either have tons of money or none. The large number of those I know involved in defense contracting have a relative plum.

strained public infrastructure: roads are crumbling, bus and rail schedules are getting cut back even though they're already insufficient; water, sewage, and power networks are all in dismal condition. It's too bad the tax base for all these things has been sucked up and shipped out by Washington. On a related note, counties are warring here, trying (and sometimes succeeding) to secede from the central counties, which are a huge sink for scarce tax dollars.

rising costs: File this in the "yet another example of inflation" category -- the other day I looked in the paper and noticed that basic cable rates had been increasing for about 6% per year for the past half-decade. No one has put two and two together on this -- how a tightly-regulated utility which in theory benefits from technological advance has had to raise costs twice as fast as the official level of inflation. One party is lying.

small cars and scooters: there is a huge contingent of mostly young people that have gone to light and more energy-efficient transportation with the fuel price surge last year and never gone back. Still plenty of SUV and Hummer holdouts, of course.

Because of all this evidence, I've known for quite some time we were headed for recession (or were already in it, in my opinion). I think a lot of people see the evidence around them and agree, maybe subconsciously. It's probably why consumer sentiment numbers never recovered to the pre-2000 stock market crash levels.

Of course, on a global basis, we still don't have it "bad", but the direction of the trend is clear. I've travelled enough to know the US is rapidly falling behind some places (like Hong Kong or the UK) and slouching towards Brazil.

I'm a long-time reader of your column and I have to take issue with your characterization of public employees. I agree that there are some egregious examples of greed in some of the public sector - and you didn't even get into the perks that politicians and office holders grant themselves - but there are many public employees that don't fall into that category.

When I was an electronics technician in the late 80's there were several job options open to me and other techs; Silicon Valley was booming, there was a lot of money to be made, perks like stock options, free espresso, etc. The drawbacks were the 60-80 hour work weeks, hellish commute, and the pressure of staying on the bleeding edge of the technology. I chose to take half the salary, no stock options, cafeteria coffee, and the less than bleeding edge technology working for a college. Not as an instructor but as a 'classified employee', which means a 40-hour work week, 52 weeks a year with 3 weeks vacation after 5 years. Good retirement package? Good health plan? You bet. Gold-plated? I don't think so. Would I have gone into the public sector without the health plan and retirement? I'm not sure but 20 years ago when I started the idea of retirement was not foremost in my mind. I did very much like the idea of working for a college and supporting the academic system. I felt like I was doing a small part in contributing to the society. A little jealous of my buddies down in Silicon Valley making a fortune in stock options? Sure, but I've never regretted my decision. Some of them may be regretting theirs, especially when they didn't put any of the fortune away for retirement. That retirement package is looking better to me all the time, as is the health plan, but that was a choice I made and a choice my buddies made. And I'm sure not going to feel guilty about having a good retirement income especially when I was paid so little for so many years.

Public sector employees for the most part make less money than those in the private sector, that's usually been the case, and offering a decent retirement and health plans - which used to be a standard in all big companies BTW - is one way of getting people to work in the public sector.

The central argument is, a minority group can find it to its advantage to impose on society as a whole costs which are many hundreds or thousands of times the benefits the group itself gets.

The classic example I know of in Britain (apart from the Bar) was the British Leyland unions. For years everyone in Britain paid one third more than the going rate in Europe for their cars, just so we could keep those guys with their antiquated demarcation rules, making cars in the same way they had in 1952. How it worked, all company cars had to be made in Britain, which at the time was 75% of cars bought new, and the Governments of the day winked at price fixing among importers. Basically, prices in the UK were fixed at levels which allowed British Leyland to continue to manufacture.

No sooner had it been sold off to BMW than the Government started to demolish price fixing....and it went bust.

Well Olson has detailed historical argument backed by empirical evidence of the accretion of such arrangements with long periods of peace. And this sheds light on why France in the 19c could grow faster than Britain, despite the latter having 100 years of total peace, whereas France underwent several revolutions and a catastrophic defeat in war.... Compare also Germany after WWII. Or the South in the 20c.

The parallels to modern America are striking. And the link to the success of Thatcherism, despite (or because of?) a totally destructive first few years of idiotic economic policies is also illuminating.

Thought of this reading your recent columns.

Between 2004 and 2010, the voracious costs of San Diego's municipal pension fund are expected to almost triple -- from $85 million a year to $242 million. That additional $157 million in taxpayer contributions to city retirees is more than enough to wipe out the entire annual budget of the Fire Department.

For the current fiscal year, a very healthy general fund increase of nearly 10 percent was still not enough to cover the sharply rising demands of employee pay raises and pension benefits. Consequently, the City Council closed swimming pools and libraries and imposed a raft of fee hikes just to meet the steep jump in labor expenses.

Worse still, the retirement system debacle, brought on by a lavish expansion of benefits sought by City Hall's politically powerful public employee unions, is only now beginning to pinch. In future years, the budget adjustments required to meet the city's mounting pension obligations will be far harsher.

Declaring Chapter 9 also would exert pressure on the public employee unions to yield some ground on their extraordinarily generous pensions. At present, many workers actually retire as early as age 55 with significantly bigger monthly checks than they earned while on the city's payroll -- a perk unheard of in the private sector.

Earlier this year, when City Manager Lamont Ewell asked the unions to give back part of the pay hikes contained in their contracts in order to help balance the budget, he was summarily rebuffed. Considering the overweening influence of the unions, bankruptcy might be the only way to blunt their rapacious raid on the city treasury.

I have a friend who became a firefighter at 20 after taking a few classed at the College of San Mateo. He “works” for a department in the East Bay (I put work in quotes since in his suburban district with “paramedics” the “firefighters” rarely go on a call and he will often go a full month without going on a call).

Since my friend has only had to “work” (go in to the station) 10 days a month over the past 20 years he had a lot of free time to start an apartment investment company. Over the past 3 years he has only gone in to the station on average 6 days a month making lost of guys happy since they get paid overtime to work his shifts.

He has decided to retire at 41 and let the taxpayers pay him just over 50% of his last years salary (plus medical and dental an vision for his entire family) for the next 40 to 50 years. He is working hard to push his “last years” salary well over $200K playing what is called the “overtime game”. The guys will pull out favors and get co-workers to call in sick when they are next on the overtime list so they work as much overtime as possible their last year often doubling their last year salary (and retirement pay for the next 50 years).

Forgot a couple other games they get to play, the “retire” and get a new job game.

You can “retire” as a captain at one department and take a new job as the chief of another department and get retirement pay + your new salary.

They can also retire with a “stress” disability and get almost all their retirement pay tax free. Google around and you will get sick to your stomach.

Below is a link to a guy that did the double dip and stress game:

'Chief's Disease' rife at CHP: pursuit of injury claims boosts top officers' retirement benefits.

In 2000, the 57-year-old CHP employee was awarded a $39,000 settlement (for his stress claim), medical care for life for his injuries, and a state industrial disability pension of $106,968 a year - half tax-free.

Barely two years later, Gomez was hired by the federal government to be security director at San Francisco International Airport, a position described as "on the front lines of the war on terrorism." It's a job he holds today.

Great post today - I like the way you extrapolated the scale invariance concept. We have much the same issues in the UK with the public service getting inflation linked, gold plated, cast iron, copper bottomed pensions.

Every year the center of the town in which I live hollows out a bit further. Every so often, another business closes down and the slot gets filled by yet another charity shop - its about 25% charity shops at the moment. I don't know if they have the concept in the US but charity shops are shops selling donated stuff (books, clothes, bric-a-brac etc) through the store front. They are not bad looking - clean, professional and the stuff they sell is usually reasonable, cheap, used goods.

They fill a real niche in keeping the town center from looking like a war zone with boarded up windows and help make it viable for other businesses to carry on. However, being charities they don't pay anything like the property tax that real businesses do, the staff are usually mostly volunteers and so pay no tax and I suspect there is a limit to how many of them can populate the high street before there is no incentive what-so-ever to visit the place unless you need used clothes. The self supporting ecosystem is thinning out rapidly.

Of course the shrinking tax base and increasing obligations means we get a massive property tax rise each year and always more service cuts. The local government even put in meters on what was formerly free parking in order to raise money. You can imagine the effect that that had on the town center - especially for short term quick shops. In fact, people would pay for an hour (the minimum) and then try to hand a ticket with 45 minutes on it to other people entering the public parking lot. This could not be stood for so the local government instituted a system where you had to enter the last three digits of your license plate into the ticket machine to ensure they were not transferrable. Increasingly people just go to the ever growing number of big box stores out of town that have free parking. Its easier and there is more selection.

The thing about most complex systems is that they are scale invariant so an understanding could also offer insights into smaller systems. For example, in an economy you see the same interactions on the scale of a neighborhood, city, region, country and internationally. The scale of the interactions varies with the size of the system - but the pattern remains the same. Think of a simple line drawing of a coastline. Without some sort of reference, it would be very difficult to tell whether the map was of 1 mile, 10 miles or 100 miles of coastline. Scale invariant.

In fiscal year 2005, $15 million of Berkeley’s $115 million general fund will pay for contributions to the California Public Employees System (PERS). Last year, the city spent $8 million on retirement benefits. The year before, the city spent only $2.8 million.

A lot of that money is going to cover stock market losses, but a good chunk will pay for improved pension benefits to Berkeley’s growing ranks of retirees who threaten to strangle the city’s general fund for the foreseeable future.

Berkeley Police Lieutenant Sherrie Aldinger, who is retiring after 28 years on the job, will receive 84 percent of her highest annual salary from the city for the remainder of her life. The salary for a Berkeley Police Lieutenant ranges from $104,568 to $119,136.

“Basically they’ve given away the store,” said Ron Roach of the California Taxpayers Association, one of the few groups to oppose the higher pension plan. For local police and firefighters the bill meant they could now retire at age 50 with a pension that equaled three percent times their years of service—75 percent of his or her highest yearly salary, for instance, for an officer who retires at age 50 after spending 25 years on the force. Subsequently the state passed a law allowing police and firefighters to receive a pension as high as 90 percent of their highest annual salary. (source: Berkeley Daily Planet)

I can't help but feel that a 100 nuke hit against cities and infrastructure around the US would truly be devastating. While the initial strike wouldn't kill everyone, a high percentage of our population would ultimately die as an indirect result of the attack. You cannot minimize the effect of radioactive fallout, which would ultimately kill millions more. And then the possibility of starvation taking many more as our agriculture production would be largely destroyed, as would the ability to transport any food that we might still have. I think a certain percentage of people would survive, but we would not be the US of A anymore.

Thanks for all your hard work and dedication to this site. I look forward to each article!! All the best, Scott

I have a friend who obsesses about this subject, and I always make a few points:

- Your insane dictator isn't the only one involved in launching a nuke. The whole chain of command has to be insane as well. Some senior military may look at the odds and realize this is suicide, and decide to take matters into his own hands.

- No government is going to give a nuke to terrorists. First, they are nitwits and might be discovered. The only thing worse than facing retaliation for using a nuke is to face retaliation for planning to use one. Second, they might change their minds about targets, or have internal rivalries that break the group up when given a nuke. In other words, you don't have control. What's more, your first nuke costs probably a billion dollars. If you are going to throw money at terrorists, you could fund 1000 Al Quedas for that. Finally, the only reason to give them one is deniability. As you point out, the signature of the blast probably points right back to the source. Making the bomb 'dirty' probably doesn't obscure this.

- Launches aren't entirely reliable. Better to have one and bluff with it than actually take the risk of using it. Your missile could explode on the pad, go off course, or the bomb could just fail to explode. A plane can be tracked and perhaps shot down. Stealth delivery (via truck or ship to port) can be discovered. There will be lots of people who know your plans within your own government, and they may not all be suicidal.

Again, if you are going to use something like that, you'd better hit your mark. The reaction will be severe whether you hit or miss!

Also, just as a side note, it's entirely reasonable for Iran to want a nuke. We've branded them as part of the 'axis of evil', pounded one of their neighbors into the ground, and threatened to attack them if they continue with development of a nuke. Neocons rumble about attacking them for their role in Iraq. Sounds like a nuke is the only way to really deter the U.S. In their position, I'd want one!

You might do a little research of the Kharg oil depot in Iran. it is probably one of the most heavily guarded places in the world, mostly by russian technology I think. A video game uses Kharg as a scenario. www.strategypage.com discusses it and war scenarios in Iran in general.

One element I think you missed in the opening paragraph of your entry besides increased number of enrollees and inflation is the increased number of procedures that have become available in that time. Since the common wisdom is that these new procedures are both increasingly more sophisticated and expensive, their introduction into the system should produce additional expense. Otherwise we assume that the kinds of available treatments have remained the same over time, which we know is not true.

The question then becomes how much additional cost has been introduced by the development and use of these new procedures. That's probably impossible to determine for our purposes since we probably can't get easily access to the general cost of the procedure or the number of times it has been used.

I don't dispute that there is waste - lots of it as evidenced by your two other quoted posts. I just don't think you can calculate it the way you tried to.

I have often thought but never tried to analyze whether the inflation in the health care industry stems from the fact that we have an umlimited deep pocket in Uncle Sam who can create money at will out of thin air to "pay" for all this. Since price inflation is actually a function of more money chasing a given amount of goods or services, it would seem that with a potentially unlimited supply of money available the cost of medical care services can't go anywhere but up.

I have no doubt that there are terrible wastes in all sectors that the government has anything to do with. On the other hand I don't think that we can safely use any gov figures for inflation. For example, my folks bought a new Ford Galaxie 500 in the Spring of 1966 for about $2100. It was their first car with air conditioning and power this and that. A top of the line Ford at the time. If you inflate that $2,100 at 6.5% through 2006 you come up with 26,073, which I doubt is too far off for a comparable Ford today. Maybe low if anything.

Taking the 50 billion medicare bill in 1980 and inflating it at 7.5% we get and annual tab of $327 billion by the end of 2006 and that is not adding any extra people to the plan. I read a study done in Europe that broke inflation down into different age groups. It showed that older people have a higher rate of inflation that younger or middle aged groups because of their increased use of health care.

I see a lot of our problem being the fact that our population is growing faster than our need for workers. At the same time we are exporting a lot of our jobs overseas, because our "precious little ones" are just too good to work in factories. Therefore, we have spent the last 40 years coming up with some really creative ways of keeping them busy. Some are drug reps, some plant flowers along the interstate, others perform needless lab tests and surgeries. We should all study the history of the Roman Empire.

By the way, if you take your $390 billion figure and inflate it at 7.5% it becomes 1.073 trillion by 2020, and that is without adding any new people to the plan!

Burmese forces are waging the largest military offensive against their own people in more than a decade, targeting the country's eastern ethnic groups with violence and destruction. Tens of thousands of refugees, mostly Karen minorities, are abandoning villages in search of safety in Thailand.

Maw Pu army camp is one of many Burma Army camps along the road from Kyauk Kyi to Hsaw Hta. It was expanded in 2006. The central compound is surrounded by at least 8 layers of bamboo fencing and a deep trench filled with sharpened bamboo stakes. The Prisoner porters are confined to a sub-compound within the camp. Maw Pu is located at Lat.Long. N18 25 00 E097 13 30 and on the British 1 inch map 94 f/3 at 803 322

The Burma Army has used over 1,700 porters in this offensive and over 265 have been reported to have died, many who were executed. Among the porters in Papun District alone, there are over 20 child porters (boys under 16 years old from Insein Prison). The Burma Army is now using the term, “transporter”-“Woon Htan”, instead of “prisoner porter” to describe the people they force to carry their loads.

Please see Dec. 19 report Forced Labor Continues in Burma.

This is a reply to your medicare waste issue. I am a nurse and have first hand experience at the waste in our health care system. I'll use medications as just one example of the kind of waste I see daily. Partial doses of drugs are common for every patient. Rather than save the other half of the dose, we are required to waste it even though that patient will be needing it again (in some instances within 1-2 hours). On my shift alone I average about 5 wastes of various medications. That may not seem like a lot but I am one nurse, on one shift, with five patients. There are facilities in third world countries that have systems of medication saving that is efficient and safe. However, health care corporations would rather cut costs via large ticket items such as laying off employees, neglecting facilities and equipment, purchasing sub par products, etc. Although this routine does cut costs, you are left with overworked staff using out of date, malfunctioning, badly performing equipment.

As a side note, communication is also a huge problem in the medical community. One patient may have five doctors who know nothing of what the other doctors are doing. Doctors use progress notes as a way of communicating with each other, however, most doctors don't bother to read them or the orders they place. I go through duplicate orders all time. This broken system gives birth to patients on 10-20 different kinds of medications none of which are ever tested together to know if they actually should be given together.

Due to my experience in the medical field, I advise everyone of these three things: 1) Stay out of hospitals if at all possible, 2) Use as little medication as you can, 3) Use your brain, do your homework, question everything.

I also recommend for those who are more open minded is to try to find more natural ways of healing such as using a homeopathic or ayurvedic doctor first. Research has proven that many ancient remedies and natural methods work even better than traditional medicine with less side effects. (Digitalis, a drug millions of people are on, is from the foxglove plant which has been used for hundreds of years. Only recently has it been providing profit to pharmaceutical companies) A good homeopathic or ayurvedic doctor will know if your problem is beyond their help and will advise a traditional doctor when necessary. Unfortunately with HMO's this is difficult to do for most people, but if you have the money, go natural first.

Anyway, thanks for being my watchdog for the world out there. I have enjoyed your blog for the past year and have encouraged many of my friends to do the same. Keep fighting on!!!

Thoughts on health care in the USA: My wife and father are physicians. I've spent a not-insignificant amout of time and effort helping them with their offices. They both spend WAY too much time on "coding", i.e. deciding which 4 or 5-digit number (out of thousands) to assign to a diagnosis, procedure, office visit, etc. They've both spent days out of the office attending seminars about coding. Why? Because without the proper code, the govt. (Medicare/cade) or a private insurer will deny the insurance claim or pay less than the already discounted amout of the physician's fee.

In short, because we don't have a national healthcare system, physicians' overhead is much higher than it should be. My relatives would love to just care for patients, but they instead have to spend enormous amounts of time and money determining the right code. Multiply their efforts by the number of physicians in the US and you can see the scope of the problem. There is an enormous amount of time and money spent in each individual office on "coding" that could be otherwise spent on patient care. A central single-payer system for healthcare would go a long way toward eliminating this unnecessary overhead cost.

I'd also add that the "coding" issue is just part of the overhead issue. The basic problem as I see it is that each physician is negotiating directly and independently with a whole array of private insurance companies, as well as state and federal agencies, to secure compensation for his or her services. Each physician thus has to incur the overhead cost of hiring someone to prepare and submit claims for payment, collect the copayments from patients, and then follow up when the submitted claims are denied or not paid in full. This cost is not insignificant to the individual physician. Moreover, each and every physician is incurring the same set of costs because they are all, in effect, independent contractors. So these costs are replicated for each physician in the USA and add significantly to the overall cost of our healthcare. I think moving to a single-payer system would make our healtcare less expensive because of the significant reduction in time and effort that each physician in the system would have to devote to billing and collection of fees.

My wife would love to spend her time providing patient care instead of making endless phone calls to various insurance companies to try to find out why claims were denied or not paid fully.

In fact, they found that the size of earthquakes followed a law known to mathematicians as a power law. This law, now known as the Gutenberg-Richter Law, states that when you double the energy of an earthquake it happens four times less frequently.

What's remarkable about the Gutenberg-Richter Law is that it holds for quakes over a range of sizes exceeding a million to one. That is, the law is scale invariant—it holds for small earthquakes just as much as for middle-range or gigantic ones.

Since earthquakes and the sudden falling of empires have a certain similiarity, the British physicist Leslie Richardson decided to see if a power law might apply to the various wars attendent upon nations and empires jockeying for power.

To measure the size of a war, Richardson used a grim statistic: the number of war deaths. And he found another amazing power law: If you double the size of the war, it becomes four times less common. And this applied to all sizes of wars!

What makes this remarkable is that phenomena which exist on a power law are "expected" to have large events. Large events are no more unusual than small ones; it's just that the large ones occur less frequently. As the size goes up the frequency goes down, and vice-versa, all on a smooth mathematical curve.

Moving the analogy to economics I would ask: Is it better to have an economy that degrades and rebounds gracefully under stress or one that bears heavy loads but which fails dramatically when it hits the limits? The first is inherently robust but exhibits many variations in state. The second shows much more stability - but offers fewer indicators of the stresses the system is under.

Which style of economy do we have now? In practice it would seem that there is a spectrum which ranges from bouncy to brittle. Looking at business cycles, it appears that 50 years ago most western economies tended to be a bit bouncy. The exception was the Soviet block economies which exhibited characteristics of the stable-to-failure type. Now, with today's much more flattened economic cycles it would appear that most of the developed world's economies are at the brittle end of the scale. One sees articles proclaiming the end of the business cycle as a fine and wonderful thing - I have my doubts.

It's more than just the flattened business cycles that make me think today's economies are brittle. As I look at things I tend to see a lack of robustness everywhere and this is my fundamental problem with an organization like Wal-Mart. It is big, it is massively wealthy and it can take a lot of stress and it will show little external effect. It is vulnerable though - there is quite a list: long supply chains, dependency on a high value dollar and low fuel prices etc. etc.. Wal-Mart is very strong but because of the centralized simplicity of the organization and the inability of its component parts to adapt it is brittle. Hit it in the right place and it will fail. Its not a matter of running out of money - the failure could take other forms. Perhaps it will manifest itself as a sudden inablity to offer the goods and services it used to provide. This will leave a huge hole in the economy. You don't get that catastrophic failure mode with an equivalent collection of mom-and-pop operations. Wal-Mart's dominance makes it an economic monoculture: very strong but brittle. Too many brittle components and you get a brittle economy. I subscribe to the view point that this is not a good thing.