According to Federal Reserve Flow of Fund tables for Q2 2009 (F.107 Rest of the World), non-US residents are moving out of US private debt instruments, favoring US Treasuries despite record-low interest rates.

The “flight to safety” which started with the Crash of 2009 has accelerated as the economic policies of the Obama administration are becoming evident.

The following graph shows a net swing away from selected private debt accounts on the order of USD !.5 trillion, between 2006 and Q2 2009:

	Fed Flow of Funds Table F.107, US$ billions (annual flows) to Q2 2009

This movement seems to reflect avoidance of three types of risk:

1. OTC counterparty risk: Flight from security repurchase agreements and interbank lending reflects fear of sloppy trading and settlement practices in over-the-counter markets.
2. Credit risk: Lack of confidence in the opinions of the traditional credit rating agencies grew even faster, following the Crash of 2008 and combined with the obvious risks of over-leveraging and difficult loan roll-overs due to the credit squeeze, to drive investors out of corporate debt markets.
3. Inflation risk: Debt with the strongest credit and most efficient settlement markets cannot withstand a fall in value due to an increased rate of inflation. The Obama administration is doing what it can to scare bond investors away by gargantuan “spending is simulus” packages, passed in the dead of night, written by unknown parties, and unread by legislators or even the President.

Foreign flows to Treasuries and Equities at pre-Crash levels

	Foreign net flows to US Treasuries, US$ B, to Q2 2009

After brief and sharp spikes during the last quarter of 2008, foreign flows into US Treasuries have returned about to the levels of 2004, and about twice the levels of 2005-7.

This seems to indicate that the panic of the Crash of 2008 has already subsided, but that there is no where near the amount of money available from the Rest of the World that would be needed to finance the Obama administration’s “spending is stimulus” packages in order to avoid inflation.

The non-debt foreign investment flows are indicated by the accounts “corporate equities”, “mutual funds”, and “foreign direct investments”.

	Fed Flow of Funds Table F.107, US$ billions (annual flows) to Q2 2009

These equity-type flows suggest that, following the boom years of 2006-2007, the appetite of the Rest of the World for US non-debt investments has returned to levels similar to those of 2004-2005.

In Q2 2009, foreign flows into US equities (annual basis) were $114.6 billion, compared to issues of foreign equities into the US market of $ 148.9 billion.

This means that by Q2 2009, the Rest of the World was, on balance, avidly avoiding new investment into US equities and private debt, while failing to show enthusiasm for financing the vast Obama stimulus packages which are coming down the road.

With these statistics and the historic importance of foreign investment in the US capital markets, one is left scratching one’s head, wondering why the US stock market was rising throughout the first half of 2009?

The trillion-dollar Obama health care plan increases the odds that US economic recover will be delayed, and that unemployment and inflation will increase.

The main thrust of the Obama plan is to increase taxes on individuals earning more than $250,000 a year, while forcing all but the tiniest businesses to purchase health insurance coverage for employees.

The money raised by these taxes will be transferred as subsidies for those who do not have health insurance — primarily due to low earnings and inability or unwillingness to purchase health insurance without government assistance.

Proposed legislation on Obama care, drafted by House Democrats, covers more than 1,000 pages. Some analysts claim that this huge document contains clauses that will eventually force millions of American to acquire government health insurance.

Typical of Obama reforms, the measure is being rushed through Congress without adequate discussion of consequences, without bi-partisan consensus, and with scant disclosure by the Democrat party that has filibuster-proof control of the US Congress. Most Republicans are expected to vote against the measure.

Increased inflation and unemployment

Most new employment in the United States is created by small and medium-size business — precisely the people that President Obama wants to tax in order to raise funds that will be transferred to poorer, less-productive sectors of the economy.

Businesses being hit by these massive new taxes have only a few ways to respond:

• Reduce the number of employees or delay hiring new employees.
• Pass the costs of higher taxes on to consumers.
• Increase outsourcing of labor costs to offshore suppliers.
• Compensate for rising taxes by reducing wages.

In other words, the immediate impact of Obamacare is likely to be increased unemployment and higher prices — stagflation.

The Obama administration claims that costs of subsidized health insurance will be compensated by undocumented “cost savings” — but these claims are contested by the Congressional Budget Office.

In the next decade, Obamacare is estimated to cost over $1.5 trillion.

Why health costs will continue to rise

Over the last fifty years, costs of health care in the United States have steadily increased faster than other consumer prices.

There are many reasons for the escalating costs of health care, but the two main drivers have been:

1. Medical advances: Many life-saving medical procedures are available today that were impossible fifty years ago. Organ transplants are a case in point. The existence of these procedures creates demand. However, many of these procedures are extremely expensive, well beyond the financial capacity of most of the population. In good times, many employers have been willing to give workers free health insurance to cover such costly procedures.
2. Employer paid health insurance: The common practice of large businesses providing free health care insurance to employees as a fringe benefit, often written into employment contracts, has created vast inefficiencies in the pricing of medical services, as beneficiaries of health care were disassociated from the normal need to shop for the best service at the lowest price. At the same time, because of the nature of insurance contracts, doctors were paid per procedure rather than for results. The costs of health insurance for individuals not covered by group plans became too high for many to afford.

To these basic structural reasons for escalating health care costs, the Obama plan adds the extra price driver of increasing the size of the market for health services (by offering subsidized coverage to the poor), without a corresponding increase in the number of doctors and nurses.

A missed opportunity

Barrack Obama was elected on a platform calling for change and there is general consensus that reforms of the US health care system are needed.

However, by forcing through a plan that seems almost certain to increase unemployment while spurring inflation, the so-called misery index (inflation plus unemployment) is likely to rise far above the level that prevailed when President Obama took office. Over the last two generations, a rising misery index has portended that the incumbent President will be removed from office by the voters.

This, perhaps, is why President Obama is anxious to pass this highly controversial legislation before his popularity sinks to the point where such legislation will not longer be possible.

Along with mismanaged “spending is stimulus” package and the “cap and trade” legislation, the Obama healthcare plan may seal the fate of this administration.