Tuesday, December 30, 2008

US home prices plunge

Classic Case Shiller Housing Price Chart, Updated


Nice updated depiction of the classic Case Shiller chart, by regular TBP reader Steve Barry. We are now at 158, and SB sees the mean reversion going on until 2015 or so. (ouch)

c

hat tip Steve Barry.

Seasonal Patterns for the Market

Posted: 30 Dec 2008 08:15 AM PST

Barron’s Michael Santoli discusses what market patterns to expect in the closing days of 2008 and the beginning of 2009.

12/29/2008

          

Boom To Gloom Part II

Posted: 30 Dec 2008 07:00 AM PST

A Long Hot Summer

Winter Chills

Spring Hopes

December 30, 2008

Internet Passes Newspapers as Info Source

I guess this makes it official: The net is now a bigger source of news than newspapers, according to Pew Research Center for the People & the Press:

The internet, which emerged this year as a leading source for campaign news, has now surpassed all other media except television as a main source for national and international news.

Currently, 40% say they get most of their news about national and international issues from the internet, up from just 24% in September 2007. For the first time in a Pew survey, more people say they rely mostly on the internet for news than cite newspapers (35%). Television continues to be cited most frequently as a main source for national and international news, at 70%.

Not very surprising at all . . .

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Hat Tip:  JP

Sources:
Internet Overtakes Newspapers As News Source
December 23, 2008
http://people-press.org/report/479/internet-overtakes-newspapers-as-news-source

Stop the Presses…
December 29, 2008, 4:54 AM PT
http://digitaldaily.allthingsd.com/20081229/stop-the-presses/

Russian analyst says US outlook dire

Following events from a safe distance, a former Russian KGB analyst says the outlook for Americans is dire. And predicts the breakup of the United States by mid-2010.

"There's a 55-45% chance right now that disintegration will occur," Igor Panarin told The Wall Street Journal this morning. "One could rejoice in that process. But if we're talking reasonably, it's not the best scenario -- for Russia."

“Mr. Panarin posits,” according to the WSJ, “that mass immigration, economic decline and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces -- with Alaska reverting to Russian control.”

But the professor is not necessarily happy about it. “Though Russia would become more powerful on the global stage,” he says, “its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.”

Hmmn… we’re trying to imagine some cowboy from Bakersfield submitting to Chinese rule. Or a Texan taking his orders from Mexico City. Heh.

Monday, December 29, 2008

Worst predictions for 2008

In case you missed it, here are several different collections of the worst predictions of the year:

• The 10 Worst Predictions for 2008 (Foreign Policy)

• The Worst Predictions About 2008 (Businessweek)

Those two above have been cited all over the web. Here are a few others worth mentioning (did I miss any?)

• How wrong they were (Salon)

• The web’s worst predictions (Daily Mail UK)

• Worst Tech Predictions of 2008 (C/NET)
(See also: Top 10 worst tech predictions of all time)

• The Most Inane Punditry of the 2008 presidential campaign (Media Matters)

Not predictions, but real time errors in assigning  casting, via MarketBeat:

• 2008 Lookback: The Blame Game

Bonus! Not a forecaster, but the person who consistently gets the present wrong:

• Media Matters’ 2008 Misinformer of the Year

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Related:
The Folly of Forecasting
RealMoney.com Contributor
6/7/2005 1:05 PM EDT
http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html

Worst Calls of 2008 (November 2008)
http://www.ritholtz.com/blog/2008/11/worst-calls-of-2008/

IMF economist warns of “Great Depression”

US: Christmas marked by declining sales as unemployment climbs

By Joe Kishore 
27 December 2008

Early figures confirm an extremely bleak holiday shopping season in the US, as broad sections of the population have been hit hard by a deepening economic recession.

Total retail sales, excluding automobiles, fell 8 percent in December through Christmas Eve over the same period last year, according to MasterCard Inc.'s SpendingPulse. Sales for November fell 5.5 percent. If gasoline is excluded, the drop was a more modest 2 to 4 percent.

The holiday numbers come a few days after a Labor Department report showed that the number of US workers filing for first-time unemployment benefits increased 30,000 to 586,000 last week. The four-week moving average rose to 558,000. Both figures are the highest they have been since November 1982.

The sales declines are two to five times more severe than most analysts expected. It is the first time that holiday sales have fallen in the US in at least 40 years. SpendingPulse noted in its report that the 2008 shopping season was "one of the most challenging...we've faced in modern times."

The figures are based on sales from the company's credit card, with estimates for other forms of spending.

Declines were deep and broad-based, affecting all types of goods. Sales of expensive luxury goods, including jewelry, fell 34.5 percent. Apparel sales declined about 20 percent, and electronics goods fell by 26 percent. The decline in electronic sales was driven in part by a sharp fall in sales of more expensive products, as consumers cut back on large purchases and have had greater difficulty getting credit.

Even online sales declined 2 percent as compared to the 2007 holiday season, after soaring more than 20 percent last year.

Another research firm, ShopperTrak, reported Friday that visits to retail stores before Christmas fell 24 percent from last year. According to ShopperTrak's figures, overall sales declined 5.3 percent over last year.

These figures are sharply worse than ShopperTrak had predicted only a month ago. The firm expected visits to fall only 10 percent and sales to fall by 1.5 to 2 percent.

The Wall Street Journal quoted Mary Delk, a director in the retail practice at consulting Firm Deloitte LLP, as saying, "This will go down as one of the worst holiday sales seasons on record. Retailers went from ‘Ho-ho' to ‘Uh-oh' to ‘Oh-no.' "

Retailers introduced sharp discounts on many items in the weeks leading up to Christmas, with some sellers in panic mode, in an attempt to unload excess inventory. Sales are continuing into the post-Christmas period, but they will do little to improve figures for the month and the year as a whole.

Declining holiday sales are only the latest consequence of the deepening economic recession in the US. Hundreds of thousands of jobs have been eliminated in recent months, and wages continue to deteriorate. US consumers, already deeply in debt, are confronting difficulties getting credit as banks have ceased lending.

The end of the winter shopping season will likely mean a surge in layoffs. Retail stores already shed more than 90,000 jobs in November, and several major firms have declared bankruptcy or begun liquidation (including Circuit City, Linens ‘N Things, Steve & Barry's, and Mervyn's). This list of casualties will mount as the final results of 2008 come in.

A US Commerce Department report this week showed a 0.6 percent decline in spending in November. Incomes for the month fell by 0.2 percent. Sales of existing homes fell 8.6 percent in the same month, according to the National Association of Realtors.

American corporations have only begun to take measures in response to the economic crisis, shedding jobs, reducing hours, and cutting wages and benefits.

The top economist at the International Monetary Fund, Olivier Blanchard, warned earlier this week that continued declines in consumer spending would set off a global depression. "Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," he told the French newspaper Le Monde, as reported by Agence France-Presse.

"It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression."

The US gross domestic product (GDP) fell 0.5 percent in the third quarter (July-September) from the same period a year ago. The fourth quarter decline will be much steeper—around 5 percent. Production in the other advanced capitalist countries, including in Europe, is also declining.

The news from Japan is even worse. Industrial output in the second largest economy in the world fell by 8.1 percent since October.

The Financial Times noted, "The fall was the most rapid fall in industrial output since the current index was introduced in the 1950s, and the Ministry of Economy, Trade and Industry said its survey showed manufacturers expected the decline to continue, with an 8.0 per cent contracted forecast for this month."

Some countries are already in the midst of economic conditions on the scale of the Great Depression. In Ukraine, industrial production fell by a massive 28.6 percent in November, following a nearly 20 percent decline the month before. In other words, nearly half of the country's industrial production has been eliminated in the space of two months.

As the world enters the New Year, the Great Crash of 2008 is turning into the global depression of 2009.

Harry Schultz is newsletter of the year

Newsletter of the year? Harry Schultz. Really. 
Commentary: His prescient call of the ‘financial tsunami’ is the reason why 
By Peter Brimelow, MarketWatch 
Last update: 11:14 p.m. EST Dec. 28, 2008

NEW YORK (MarketWatch) — My choice for investment letter of the year: The International Harry Shultz Letter.

I usually say that my selection method is highly scientific (I choose whoever I feel like). And I have to say it particularly loudly this year.

Schultz was Letter of the Year in 2005. See Dec. 29, 2005 column, which explains his nuanced gold-bug philosophy in more detail

But over the past 12 months through November, Schultz is down a heart-stopping 76.05% by Hulbert Financial Digest count, vs. negative 36.68% for the dividend-reinvested Dow Jones Wilshire 5000.

This loss has wiped out Shultz’s strong post-2000 run, when he benefited from the gold and commodities boom. Now, over the past 10 years, the HFD shows the letter achieving an annualized loss of negative 8.73%, even worse than the negative 1.16% annualized loss for the total return DJ-Wilshire 5000.

And it’s an unpleasant arithmetical fact that even future triple-digit gains (which aren’t impossible) will not dig Schultz out of this hole.

(But, if you’re a new investor starting at the bottom, who cares?)

The reason I pick Schultz: the extraordinary prescience he showed in predicting what he called a "financial tsunami" well over a year ago. See Oct. 19 column

Well? He was right, wasn’t he?

More…

Study Says DoD May Act On US Civil Unrest

A U.S. Army War College report warns an economic crisis in the United States could lead to massive civil unrest and the need to call on the military to restore order. The Pentagon previously announced plans to train up to 20,000 Soldiers to work with civilian law enforcement in homeland security. 
Full Story

Sunday, December 28, 2008

Five Sophisticated Gold and Silver Investment Strategies for 2009

Buying a few gold coins or the odd mini-ingot and hiding them away has been a successful investment strategy over the past five years. Even in the annus horribilus of 2008 investors who chose gold over other asset classes have been well protected while others have seen their wealth decimated. US dollar gold prices have been maintained while gold in Australian dollars, for example, was one of the best performing global asset classes in 2008.

For 2009 the resumption of a strong bull market in gold is one of the few positive predictions that look reliable. The sell-offs by hedge funds which kept gold future prices down in 2008 are coming to an end, and that should unleash a powerful new up leg in the gold market.

Chartists can already see this happening in their technical analysis. The spot price of gold has moved above the futures price, something known as ‘backwardisation’. This is almost always a signal that a huge price shift is about to occur. The same ‘backwardisation’ is also present in the silver price chart.

Soaring demand

You can also see this in the demand for physical gold that has been soaring. Last months a group of Saudi investors bought a $3.5 billion hoard of gold, one of the largest single deals ever, and smaller investors have been snapping up precious metals all over the world, leading to shortages of many popular bullion coins and delivery delays.

What is gradually happening is that physical demand for gold is overpowering the paper or futures market in determining the spot price for the yellow metal, that is what ‘backwardisation’ means down on the ground, and once the futures market is sunk the gold price will leap back above the high of $1,030 set last March.

Aside from sensing this change, why is it that smarter investors are so keen to invest in gold now? It is really down to the condition of the global economy and the massive amounts of money being injected by governments to counter the slump in bank lending. Investors reason that not too long down the road, this action is going to be inflationary, like in the 1970s.

Gold has a relatively fixed supply and so will retain its value as price levels soar, and in fact this phenomenon will attract new investors to the yellow metal and send prices very much higher. In the late 1970s the gold price rose eight-fold, and history has a habit of repeating itself, whatever governments try to do to keep prices down.

But the smarter investor is going to want to find a way to leverage the rising gold price in 2009 and to achieve the greatest returns without necessarily putting capital at risk through debt-funded instruments. There are a number of well-proven methods of achieving this kind of zero-debt leverage to the gold price.

Gold stocks

First, you can buy gold stocks, the shares of large gold producers. Conveniently the recent stock market crash has taken these share prices down to low levels, marking an attractive entry point for investors.

Buying gold stocks levers the gold price because as the gold price rises it has an even larger impact on the profits of gold producers. Clearly any rise in the gold price above the cost of production flows straight through to the bottom line.

Secondly, junior gold stocks or gold exploration stocks offer a riskier investment class – as smaller companies with less certain assets and management – but a proportionately higher return. Gold exploration companies own the claims to land on which future gold mines might be located, and in a gold boom the value of these assets rises exponentially.

Legendary investment adviser Dr. Marc Faber recommends gold explorers in his latest newsletter, pointing out that these stocks have become ‘incredibly cheap’ because of the stock market crash. In the late 1970s investors who bought the right gold juniors at the right time made one hundred times their original investment.

Thirdly, instead of buying gold you could buy silver. These two precious metals are close cousins and it is not for nothing that silver is often referred to as ‘poor man’s gold’.

In previous gold price booms, silver has always tended to outperform gold in terms of its price rise. People who cannot afford gold tend to buy silver and it is a fact of life that the available stock of silver is much smaller than gold, and so the price rises are more dramatic as demand lifts off.

Silver

Silver price movements can be very volatile as investors have seen in 2008, but the reward for patience is higher returns than gold. Chartists note that silver price movements tend to lag gold in the early months of a major price advance and then suddenly sprint ahead, bringing down the important gold-to-silver price ratio.

The gold-to-silver price ratio stands at around 66 today compared with its long-run average of 15. This leaves considerable room for a closing of the gap between the gold and silver price, and that will come on top of an increase in the gold price. Owning silver therefore gives a strong leverage over the gold price.

Fourth, the sophisticated investor can look to gear-up on the silver price by buying stock in the major silver producers. This is how investors like Warren Buffett, Bill Gates and George Soros have played a rising silver market in the past. The same argument applies as with the gold producers, as profits will be geared to the rising price of the underlying metal.

And here is a fifth and final option for smarter investors in precious metals: you could buy shares in the smaller silver producers, or silver explorers, whose share price advances in a bull market will eventually be bigger than the larger integrated producers. Again in a real bull market the value of the assets of smaller companies will leap, and these shares are presently very cheap after the stock market crash.

However, one big warning to smarter investors who want to leverage the gold price in 2009: leverage, even without debt, will act in reverse if the gold price falls. So a diversified portfolio of precious metal assets is preferable to limit downside risk.

Also you should note that this article has not even considered ways of levering the gold price by borrowing cash for investment. Gold is not for market timers whose leverage depends on precisely timing options, and silver is even more volatile.

No debt

The trick is to keep the price movements working for you by holding the right type of investment instrument and not borrowing up to the eyeballs or using options to try to lever a small price change that might not happen exactly when you want it.

Think of precious metal exploration stocks as an option that never expires, or at least one that does so very slowly, but do not buy precious metal options unless you happen to be in the jewelry trade.

However, the sophisticated investor is paying more and more attention to precious metals and trying to exact the best performance from this asset class is something that is taxing the best brains in the business right now. It maybe that top managers come up with some better ideas than those presented in this article, but these are all the approaches that have worked in past precious metal booms.

Saturday, December 27, 2008

CCTV software tracks individuals in cities

Ohio prof develops CCTV people-tracker 'ware


Paging Mr Orwell

Boffins in Ohio have taken another step towards the global surveillance panopticon of the future, developing software which can autonomously track an individual through a city using CCTV cameras.

James W Davis, associate prof at the Ohio State computer science and engineering department, developed the new spyware with the aid of grad student Karthik Sankaranarayanan.

Davis and Sankaranarayanan's code works by using a pan-tilt-zoom camera to create a panoramic image of its entire field of view, and then linking each ground pixel in the picture to a georeferenced location on a map. This means that when the camera sees a person or vehicle, the computer also knows in terms of map coordinates where it is looking.

That in turn makes it possible for a new camera to be trained on the target as he/she/it passes out of the first one's field of view. In this way, a subject can be followed automatically anywhere that the monitoring computer has CCTV coverage. There's no need for a human operator to manually train cameras around, using up man-hours and sooner or later making a mistake and losing track.

"That's the advantage of linking all the cameras together in one system - you could follow a person's trajectory seamlessly," says Davis.

For now, such camera networks are small and localised. However, the Home Office here in the UK has said it would like to "create an effective cross country strategic CCTV network". Such a network, combined with Davis and Sankaranarayanan's new software, would allow plods or spooks to track people completely hands-off. That said, until facial-recognition software gets a lot better the computers would lose their target as soon as he or she left CCTV coverage.

Not content with his efforts so far, Davis wants to go even further and write code which can pick out people "engaging in nefarious behaviour".

"We are trying to automatically learn what typical activity patterns exist in the monitored area, and then have the system look for atypical patterns that may signal a person of interest," he says.

Such systems are already being trialled, and are known to be more than a bit flaky. The panoramic-map software with its people-tracking abilities seems more promising - from a surveillance operator's point of view, anyway. ®

Free Download - The Business Case for Virtualization

Man who set up alternate email for White House dies in plane crash

Conspiracy theorists awaken! Man who set up alternate email system for White House dies in a plane crashRemember those missing emails that the White House has known about since 2005? They just started looking for them. Update:Democracy Now has much more on this story.


From at-Largely (Larisa Alexandrovna):
 200812201504Mike Connell set-up the alternate email and communications system for the White House. He was responsible for creating the system that hosted the infamous GWB43.com accounts that Karl Rove and others used. When asked by Congress to provide these emails, the White House said that they were destroyed. But in reality, what Connell is alleged to have done is move these files to other servers after having allegedly scrubbed the files from all “known” Karl Rove accounts.

In addition, I have reason to believe that the alternate accounts were used to communicate with US Attorneys involved in political prosecutions, like that of Don Siegelman. This is what I have been working on to prove for over a year. In fact, it was through following the Siegelman-Rove trail that I found evidence leading to Connell. That is how I became aware of him. Mike was getting ready to talk. He was frightened.”

Graham writes: "Unfortunately, he won’t get to talk. He died in a plane crash yesterday."

UPDATE: A curious press release: "Bush Insider Who Planned To Tell All Killed In Plane Crash: Non-Profit Demands Full Federal Investigation(Thanks, Adam!)

(Via Why, That's Delightful)

This is an interesting development...

Take a gander (emphasis mine):

The required transfer in four weeks of all of the Bush White House's electronic mail messages and documents to the National Archives has been imperiled by a combination of technical glitches, lawsuits and lagging computer forensic work, according to government officials, historians and lawyers.

Federal law requires outgoing White House officials to provide the Archives copies of their records, a cache estimated at more than 300 million messages and 25,000 boxes of documents depicting some of the most sensitive policymaking of the past eight years.

But archivists are uncertain whether the transfer will include all the electronic messages sent and received by the officials, because the administration began trying only in recent months to recover from White House backup tapes hundreds of thousands of e-mails that were reported missing from readily accessible files in 2005.

The risks that the transfer may be incomplete are also pointed up by a continuing legal battle between a coalition of historians and nonprofit groups over access to Vice President Cheney's records. The coalition is contesting the administration's assertion in federal court this month that he "alone may determine what constitutes vice presidential records or personal records" and "how his records will be created, maintained, managed, and disposed," without outside challenge or judicial review.

White House spokesman Scott M. Stanzel said last week that "we are making significant progress in accounting for the e-mail records stored on our computer network." But he declined to say how many e-mails remain missing or to predict how long the recovery will take because the issue is the subject of ongoing litigation.

In the case of the vice president's records, the White House has promised a different federal judge that it will comply with a Nixon-era law requiring the preservation and transfer of all documents related to the vice president's official duties, but the coalition has drafted a filing for the court on Monday that accuses Cheney of subtly seeking to circumscribe the legal definition of what those official duties encompass to such a degree that he will be able to take home or destroy countless documents related to policymaking that historians want to see.

Stanzel said the White House is also still "working to acquire" e-mails involving official government business that were transmitted by presidential aides through accounts operated by the Republican National Committee, a problem also first publicized almost three years ago. "We continue to be in communication with RNC officials about recovering official records," he said without offering details. Such records are subject to the Presidential Records Act, which requires their transfer to the Archives at noon on Jan. 20.

This last graph describes (but does not mention and the writers may not even know) what Connell has been alleged to be directly involved in. So forget the plane crash for a moment. Why did Connell make this most recent trip to DC? Was it related to the allegedly scrubbed emails issue? Who did he meet with? These are questions that should be looked at regardless of what the investigators determine occurred with the plane crash. This is the story that some of us having tracking for quite some time. This is the important investigation that must take place. This is why Connell was important, because he was one of the few people who could answer these questions. There are others, a few, but will they be willing to talk now? Anyway, I want to state again - forget the crash for a moment and focus on this part of the story because this is the story of import. These emails must be retrieved if we are to know just what has happened in these last 8 years


Notes from Obama's first presidential briefing


via Wulff Morgenthaler

Friday, December 26, 2008

U.S. Calls The Tune As Gold, Silver Plunge

By John Embry

Now that physical shortages of gold and silver are more pronounced, the theatre of the absurd continues to play out, as the paper price of both metals plunge.

The sharp drop in price should come as no surprise to anyone who is aware of what is really occurring in gold and silver.

Put simply, the entire fiat money system is in crisis - perhaps a terminal one - judging from the calls for a new Bretton Woods agreement by European leaders.

As a result, the powers that be in the US appear to be prepared to do virtually anything to obscure this reality from an increasingly terrified populace - one that’s now seeing its savings destroyed by the carnage in real estate.

In the eyes of the authorities, gold and silver must not be seen as attractive alternatives to financial assets; thus, the prices of both metals are crushed.

As I have said many times, it’s actually very easy to manipulate gold and silver prices in the paper market because the bad guys (i.e. the anti-gold cartel) have a lot more muscle than their adversaries.

More…

Thursday, December 25, 2008

A Christmas Card from the Stock Market

U.S. Military Preparing for Domestic Disturbances



A new report from the U.S. Army War College discusses the use of American troops to quell civil unrest brought about by a worsening economic crisis.

The report from the War College’s Strategic Studies Institute warns that the U.S. military must prepare for a “violent, strategic dislocation inside the United States” that could be provoked by “unforeseen economic collapse” or “loss of functioning political and legal order.”

Entitled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development,” the report was produced by Nathan Freier, a recently retired Army lieutenant colonel who is a professor at the college — the Army’s main training institute for prospective senior officers.

He writes: “To the extent events like this involve organized violence against local, state, and national authorities and exceed the capacity of the former two to restore public order and protect vulnerable populations, DoD [Department of Defense] would be required to fill the gap.”

Freier continues: “Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order … An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home.”

International Monetary Fund Managing Director Dominique Strauss-Kahn warned last week of riots and unrest in global markets if the ongoing financial crisis is not addressed and lower-income households are beset with credit constraints and rising unemployment, the Phoenix Business Journal reported.

Sen. James Inhofe of Oklahoma and Rep. Brad Sherman of California disclosed that Treasury Secretary Henry Paulson discussed a worst-case scenario as he pushed the Wall Street bailout in September, and said that scenario might even require a declaration of martial law.

The Army College report states: “DoD might be forced by circumstances to put its broad resources at the disposal of civil authorities to contain and reverse violent threats to domestic tranquility. Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States.

“Further, DoD would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance.”

He concludes this section of the report by observing: “DoD is already challenged by stabilization abroad. Imagine the challenges associated with doing so on a massive scale at home."

As Newsmax reported earlier, the Defense Department has made plans to deploy 20,000 troops nationwide by 2011 to help state and local officials respond to emergencies.

The 130-year-old Posse Comitatus Act restricts the military’s role in domestic law enforcement. But a 1994 Defense Department Directive allows military commanders to take emergency actions in domestic situations to save lives, prevent suffering or mitigate great property damage, according to the Business Journal.

And Gen. Tommy Franks, who led the U.S. military operations to liberate Iraq, said in a 2003 interview that if the U.S. is attacked with a weapon of mass destruction, the Constitution will likely be discarded in favor of a military form of government.

© 2008 Newsmax. All rights reserved.

Wednesday, December 24, 2008

Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says

By Stanley White and Shigeki Nozawa

Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.

“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”

The U.S. budget deficit may swell to at least $1 trillion this fiscal year as policy makers flood the country with $8.5 trillion through 23 different programs to combat the worst recession since the Great Depression. Japan is the world’s second-biggest foreign holder of Treasuries after China.

The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said. The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said.

U.S. President-elect Barack Obama wants to create 3 million jobs over the next two years, more than the 2.5 million jobs originally planned, an aide said on Dec. 20. Obama takes office on Jan. 20.

Marshall Plan

Japan should also invest in U.S. roads and bridges to support personal spending and secure demand for its goods as a global recession crimps trade, Mikuni said.

Japan’s exports fell 26.7 percent in November from a year earlier, the Finance Ministry said on Dec. 22. That was the biggest decline on record as shipments of cars and electronics collapsed.

Combining debt waivers with infrastructure spending would be similar to the Marshall Plan that helped Europe rebuild after the destruction of World War II, Mikuni said.

“U.S. households simply won’t have the same access to credit that they’ve enjoyed in the past,” he said. “Their demand for all products, including imports, will suffer unless something is done.”

The plan was named after George Marshall, the U.S. secretary of state at the time, and provided more than $13 billion in grants and loans to European countries to support their import of U.S. goods and the rebuilding of their industries

Currency Reserves

The Japanese government could use a new Marshall Plan as a chance to shrink its $976.9 billion in foreign-exchange reserves, the world’s second-largest after China’s, and help reduce global economic imbalances, Mikuni said.

The amount of foreign assets held by the Japanese government and the private sector total around $7 trillion, Mikuni said.

Japan will also have to accept that a stronger yen is good for the country in order to reduce excessive trade surpluses and deficits, he said. The yen has appreciated 23 percent versus the dollar this year, the most since 1987, as the credit crisis prompted investors to flee riskier assets and repay loans in the Japanese currency.

“Japan’s economic model has been dependent on external demand since the Meiji Period” that began in 1868, Mikuni said. “The model where the U.S. relies on overseas borrowing to fuel its property market is over. A strong yen will spur Japanese domestic spending and reduce import prices, thereby increasing purchasing power.”

To contact the reporter on this story: Stanley White in Tokyo atswhite28@bloomberg.netShigeki Nozawa in Tokyo atsnozawa1@bloomberg.net