The NBER comments...

...on themes readers of this blog already know about. Note the flows and ramifications for the dollar.

The U.S. net international investment position at yearend 2008 was -$3,469.2 billion (preliminary), as the value of foreign investments in the United States continued to exceed the value of U.S. investments abroad (table 1).  At yearend 2007, the U.S. net international investment position was -$2,139.9 billion (revised).     The -$1,329.3 billion change in the U.S. net investment position from yearend 2007 to yearend 2008 resulted from (1) declines in the prices of U.S.-held foreign stocks that surpassed declines in the prices of foreign-held U.S. stocks, (2) the depreciation of most major currencies against the U.S. dollar that lowered the dollar value of U.S.-owned assets abroad, and (3) net foreign acquisitions of financial assets in the United States that exceeded net U.S. acquisitions of financial assets abroad.  The impact of these differences was partly offset by “other” changes (such as changes in reporting panels and capital gains and losses) that raised the value of U.S.-owned assets abroad and lowered the value of foreign-owned assets in the United States.     The following are highlights for 2008:  *  Foreign acquisitions of financial assets in the United States, excluding    financial derivatives, were $534.1 billion in 2008, down substantially from    $2,129.5 billion in 2007.  In 2008, foreign acquisitions of Treasury    securities and foreign direct investment in the United States were especially    strong.  In contrast, foreign residents sold more U.S. securities other than    Treasury securities than they purchased, and U.S. banks’ and nonbanks’    liabilities to foreign residents fell sharply.  

*  U.S. acquisitions of financial assets abroad, excluding financial    derivatives, were $0.1 billion in 2008, down substantially from $1,472.1    billion in 2007.  In 2008, U.S. banks’ and nonbanks’ claims against foreign    residents fell sharply and U.S. residents sold more foreign securities than    they purchased.  However, U.S. direct investment abroad remained robust and    U.S. government holdings of foreign currencies increased substantially as a    result of unprecedented net drawings on temporary reciprocal currency    arrangements between the U.S. Federal Reserve System and foreign central    banks.

Domestic Demand...

...is Asia's problem. In light of the recent post on Mr. Bernanke and the limit of zero-bound nominal interest rates, raise your hand here if you think "accomadative monetary policy" alone can wrest an economy out from recession.

I will post a rant about "nominal vs. real" rates soon as well.

TOKYO, June 26 - Japanese consumer prices fell a record 1.1 per cent in the year to May, with falling demand increasingly blamed as the country’s second bout of deflation in less than two years deepens.

The slide may make the Bank of Japan less willing to end unconventional policies due to expire in September. But the central bank will likely stop short of a return to full-blown quantitative easing as the world’s second largest economy is expected to resume growing after contracting for a full year, analysts say.

“Deflation is getting worse and underscores that the BOJ cannot move for a considerable time,” said Masamichi Adachi, senior economist at JP Morgan.

“Even with deflation going further, as long as the real economy is on an uptrend, I think the BOJ will not activate quantitative easing.”

Kaoru Yosano, finance minister, also expressed concern about the impact of weak output and demand as the nationwide core consumer price index fell 1.1 per cent in May from a year earlier.

It was the largest fall in records dating back to 1970, but slightly less than a consensus forecast for a 1.2 per cent drop.

An academic paper...

...worth revisiting...

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

ABSTRACT

The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on “non-standard” policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate “noarbitrage” models of the term structure for the United States and Japan. There is some evidence that central bank communications can help to shape public expectations offuture policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset.

The pattern...

...of green shoot statistical releases promptly followed by donward previous month "revisions" continues. With error bands elongating, why would anyone attribute market movements to (exclusively) statistical releases?

Of course the short answer is they don't. And yet the public marches on in its addiction to these "eureka" moments when an answer is not found but provided by financial media. Of course, next month, when downward revisions to the durable goods orders are released, this will not be news.

June 24 (Bloomberg) -- U.S. stocks rose for a second day after orders for durable goods unexpectedly jumped and earnings topped estimates at Oracle Corp. and Monsanto Co.

The new Cold War...

The following article details a new cold war with another communist power, only this time spheres of influence are replaced by tetrabytes of sensitive information. There will be spillovers into "IRL" but the major conflicts will be waged Tron-like (the movie has the added convenience of "blue vs. red" as well) over computers. An interesting Detente and a net win for the U.S. by occupying (and probably hiring away) the time of talented uber-nerds.

by CHRISTOPHER DREW and JOHN MARKOFF

MELBOURNE, Fla. — The government’s urgent push into cyberwarfare has set off a rush among the biggest military companies for billions of dollars in new defense contracts.

The exotic nature of the work, coupled with the deep recession, is enabling the companies to attract top young talent that once would have gone to Silicon Valley. And the race to develop weapons that defend against, or initiate, computer attacks has given rise to thousands of “hacker soldiers” within the Pentagon who can blend the new capabilities into the nation’s war planning.

Nearly all of the largest military companies — including Northrop Grumman, General Dynamics, Lockheed Martin and Raytheon — have major cyber contracts with the military and intelligence agencies.

The companies have been moving quickly to lock up the relatively small number of experts with the training and creativity to block the attacks and design countermeasures. They have been buying smaller firms, financing academic research and running advertisements for “cyberninjas” at a time when other industries are shedding workers.

The changes are manifesting themselves in highly classified laboratories, where computer geeks in their 20s like to joke that they are hackers with security clearances.

At a Raytheon facility here south of the Kennedy Space Center, a hub of innovation in an earlier era, rock music blares and empty cans of Mountain Dew pile up as engineers create tools to protect the Pentagon’s computers and crack into the networks of countries that could become adversaries. Prizes like cappuccino machines and stacks of cash spur them on, and a gong heralds each major breakthrough.

The young engineers represent the new face of a war that President Obama described Friday as “one of the most serious economic and national security challenges we face as a nation.” The president said he would appoint a senior White House official to oversee the nation’s cybersecurity strategies.

Computer experts say the government is behind the curve in sealing off its networks from threats that are growing more persistent and sophisticated, with thousands of intrusions each day from organized criminals and legions of hackers for nations including Russia and China.

“Everybody’s attacking everybody,” said Scott Chase, a 30-year-old computer engineer who helps run the Raytheon unit here.

The angular momentum of conflict...

When satellite countries and dissident regimes suddenly enter into the fold of large alliances, trouble is on the way. It likely will not be physical conflict that begins.

Several blocks are forming, some based on trade, others on culture, still others purely on geographical proximity. One of the problems with blocks is the tendency for powder kegs to form. We have seen this repeatedly throughout history, and once this "angular momentum" of conflict starts spinning ever-faster, we can be assured that the ending will be more explosive than thought when examining the individual components in a steady state.

Or, like Kipling said (far more eloquently than the above)

Four things greater than all things are, --
Women and Horses and Power and War.

And so we see the jockeying that is guaranteed to happen during the fallout from economic bubbles, and must monitor the subsequent events very, very carefully.

Sino-Russian alliances...

...have not had a good run, historically speaking.

Bloviating about currencies is a populist measure and does more to deflect blame than to solve any problems relating to trade. I see why this is important to Medvedev, but its less obvious to me why China is involved...other than to continually probe the U.S. for weakness.

MOSCOW, June 16 (RIA Novosti) - The leaders of Shanghai Cooperation Organization countries backed on Tuesday Russia's proposal on using national currencies in mutual settlements and introducing a common currency for the group.

The common currency would be similar to the European currency unit, in use in the EC until the introduction of the euro in 1999.

The SCO, which comprises Russia, China and four ex-Soviet Central Asian republics - Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan - held a summit in the Russian Urals city of Yekaterinburg on Tuesday.

The summit's participants said that the current structure of the world currency system, dominated by the U.S. dollar as the major global reserve currency, was far from ideal and that the appearance of new reserve currencies was inevitable.

Russian President Dmitry Medvedev told the summit that the Shanghai group member states should increase the share of national currencies in mutual settlements to reduce dependence on the dollar and improve the health of the global financial system.

"The current set of reserve currencies and the main reserve currency - the U.S. dollar - have failed to function as they should," Medvedev told the summit, adding that the Russian ruble could hopefully become a reserve currency in the foreseeable future.