Since 2002, indeed to some extent since 1995, the U.S. economy has been managed on Kamikaze principles. Long term goals and traditional prudential controls have been sacrificed in order to keep the stock and housing bubbles inflated. In this traditionally tricky month of October, it appears that the kamikaze approach to economics may no longer be working, and collapse may be near.

The Japanese “kamikaze” suicide attacks late in World War II were born out of desperation; the country sacrificed irreplaceable resources of airplanes and pilots in a doomed attempt to achieve its war objective of stopping the United States. Aside from their suicidal nature the kamikaze attacks were thus strategically self-defeating; at some not too distant point Japan would run out of airplanes and pilots, and strategic collapse would occur.

For us bears, October is an enjoyable month. The change of seasons, the end of the holiday period and the approach of the New Year causes investors to focus further into the future than previously. Prospects for the New Year are factored into investors’ calculations alongside their long established beliefs about the expected outcome for the existing year. In some Octobers, problems that seem distant this year loom larger when next year is examined. This causes investors’ outlook to change markedly, and may produce a sharp discontinuity in the stock market as investor time horizons are adjusted.

As well as sharp and occasionally catastrophic drops, the history of Octobers past also contains solid rises, in which the outlook for the following year proves on closer inspection to be less threatening than had been feared. In 1998 for example, the collapse of the hedge fund Long Term Capital Management proved not to be devastating to the U.S. financial system, so October 1998 saw the beginning of a renewed positive trend in the market that was to last until March 2000.

Once October is over, either the stock market panic it contained leads to a “bounce” of short term recovery, or the renewed optimism it brought continues; thus the three month period from early November (which in any case – except in 2000 — removes political uncertainties where there are any) to the end of January is statistically the most attractive time of the year to be fully invested in stocks.

Bears who have been waiting in irritation for the end of a lengthy bull phase which they perceive to be ill-founded thus greet October with particular enthusiasm. If the month’s lengthening in time horizons causes the problems perceived by the bears to come into sharper focus among investors in general, it’s likely that investors will experience a moment similar to that of Holman Hunt’s 1848 picture “The awakening conscience” in which they realize that their past course of activity has been damaging and ill-considered. If so, bear profits will be large, and bear satisfaction great.

Is this such an October?

Kamikaze economic management has been clear since at least September 2001 and in many respects since 1997. The monetary policy throttle was wedged open by Fed Chairman Alan Greenspan in July 1997, when he purported to find a higher long term trend in productivity that justified stock market valuations he had previously chided for “irrational exuberance.” As he should have been aware even at that time, the main sources of the apparent jump in labor productivity were an increasing intensity of capital in the U.S. economy (which drove up labor productivity at the expense of capital productivity) and the 1996 change to “hedonic pricing” in the Bureau of Economic Analysis price data. This change decreased reported inflation and increased reported growth and productivity growth rates by close to 1 percent per annum compared with pre-1995 figures.

Very rapid growth in money supply is kamikaze in that it is in the long term self-destructive, leading to higher inflation and a requirement for tighter than normal monetary management to bring that inflation under control. The Greenspan loosening, which became fully self-defeating when it was intensified after January 2001, began at a time when almost two decades of tight monetary management since Paul Volcker’s “October surprise” of 1979 had reduced inflation expectations in the world economy to such a low level that oil sold for $10 a barrel and gold for $250 an ounce. Needless to say, in the long run the surge in U.S. money creation changed this, and made a repeat of Volcker’s unpleasant medicine almost inevitable. It must however be admitted that Greenspan, aided by good luck and a certain amount of statistical chicanery, has managed to keep reported U.S. inflation at a low level for far longer than one would have thought possible.

There’s no question that the George W. Bush administration’s fiscal policy has been kamikaze and continues so. Since that administration came into office just as a stock market downturn hit, and faced unexpected demands within months from the 9/11 attacks, its decision to pursue short term-oriented economic policies was perhaps forgivable, although the long term perils of such policies should always have been foreseen.

In particular, the tax cut of 2001 was justifiable, since the Federal budget was at that stage showing a surplus (albeit a spurious one, buoyed by capital gains tax revenues that proved all too evanescent.) However, for sound policy that tax cut needed to be combined with a high degree of spending restraint, so that the inevitable recession did not pull the Federal budget into large deficit shortly before the baby boomers were due to retire.

Notoriously, restraint didn’t happen; instead, the “No Child Left Behind” Act in 2001, the Medicare prescription drugs entitlement in 2003, the unexpected additional costs of the Afghanistan and Iraq campaigns and now the expenses undertaken to clean up Hurricane Katrina have pushed the budget into substantial and growing deficit. While apparently rapid economic growth brought the deficit in the year to September 30, 2005 below that of 2004, prescription drugs, Katrina and the transportation bill will push the 2006-07deficits back up over $500 billion, even if there is no recession. In a recession, judging by past experience, the federal budget deficit will quickly spiral out of control.

Kamikaze monetary policy and kamikaze fiscal policy have been combined since 2002 with two other kamikaze features of the U.S. economy that are both unsustainable and deeply painful when they cease. One is the U.S. trade deficit, which in the $700-800 billion per annum range is at the level where a currency collapse is more than likely once confidence is breached. The problem here is not that readjustment will be needed at some point, reducing imports and increasing exports – U.S. consumption has been far too high for far too long and a period of austerity will be good for the bloated U.S. consumer. However, with a trade deficit that is so large, propped up artificially by the buying of U.S. bonds by foreign central banks and huge speculative flows from hedge funds, the landing is almost certain to be a hard one, with a period of excruciating economic adjustment thereafter.

The second extraneous kamikaze feature of the current U.S. economy, and of several other economies in advanced countries, notably Britain and Spain, is the over-inflation in residential real estate construction and prices that has been caused by too much cheap money for too long. A period of quiescence in the housing market is from time to time inevitable, and does nobody much harm. However, a housing market whose supply and prices have got as far ahead of themselves as have the markets of London, the Costa del Sol and the two U.S. coasts needs not just a period of quiescence but an outright fall in prices. If Japan’s post-1990 experience is a guide, this will be accompanied by a tsunami of bankruptcies in the construction sector, and will be followed by a decade or so of continually falling house prices and very low activity. In Britain and the United States, this in turn will lead to a huge surge in consumer bankruptcies, far in excess of anything seen in past recessions since the 1930s, with all the economic and social disruption such a wave must inevitably cause.

The kamikaze attacks were damaging, self-defeating and both personally and strategically suicidal. Like Vice Admiral Takijiro Onishi, Alan Greenspan and George W. Bush have pursued policies that produce only short term victories and can end only in spectacular disaster. That disaster is rapidly approaching. The next Fed increase in interest rates, due November 2, will raise the Federal Funds rate to 4 percent, close to the 4.3 percent yield on 10 year Treasury bonds. This may well provide a market signal to hedge fund speculators in Treasury bonds that causes a drop in Treasury bond prices, which in turn sets off a stock market downswing that has every prospect of spiraling into something much worse. If that doesn’t do it, something else will, with little prospect of further delay, and few policy weapons available to fight catastrophe.

It’s October. It’s panic time. Tora! Tora! Tora!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.