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Friday, November 29

Two Myths: Reverse migration of offshored US manufacturing firms, The Lazy Mexican

From the schedule for John Batchelor's radio show (emphasis mine; see the JBS website for links and podcast of the discussion
Wednesday 27 November 2013 / Hour 2, Block C: Alan Tonelson, Research Fellow at the U.S. Business & Industry Council Educational Fdn, in re: "You name it, Foxconn makes it."
[...]
[China's] Foxconn also contributed $10 million to Carnegie-Mellon's robotic program. In the US automotive sector, now booming: inflation-adjusted wages have been falling faster since the recession trick at the end of 2007, faster even than retail wages have. In China, wages rising four times faster than productivity is. The field is still much skewed by Chinese govt subsidies plus Chinese currency manipulation.

In the US, govt regulatory capture driving industry out of much of the Eastern US, many parts of which are industrial wastelands. Washington State losing Boeing to South Carolina. Inshoring: mfg operations return to the US after having migrated overseas -- it's overwhelmingly imaginary!

Foxconn Sends a manufacturing message with New Pennsylvania plant last week, the international electronics mega-manufacturer Foxconn announced plans to invest $30 million in a new robotics plant in Harrisburg, PA. Foxconn, the notorious Chinese low-wage manufacturer of Apple’s iPhone, has become the poster child of U.S. outsourcing in the face of ruinous global labor cost competition. The calculus of manufacturing supremacy is seemingly simple: Low labor costs and taxes, proximity to a large consumer base, and manageable corruption levels equal a sure strategy to attract global firms. [more]
Hmmmm. Why does that calculus sound familiar to me? Oh -- Mexico! As to what Americans will do when their Mexican gardeners, nannies, lettuce pickers, and construction workers return in droves to Mexico to work on assembly lines there -- maybe they can make up the shortfall for a few years with workers further south than Mexico. But then hordes of upper- and middle-income Mexicans will be scooping up cheap labor from further south to work as their gardeners, nannies, etc.

As to whether Americans themselves can make up the shortfall: in a televised exchange in 2011, a passerby asked a white Wall Street Occupier (virtually all WSOs were white) and jobless college graduate whether he'd ever considered exerting himself to get a job, any kind of job. The Occupier snarled that he wasn't going to work for minimum wage.

And a few hours ago I heard a clip on Majic 102.3 -- a 'black' radio station in the DMV (Greater Washington, DC). The clip was from a recent Tom Joyner morning radio show, which is syndicated in big cities throughout the USA. The clip poked fun at Mexicans working at Wal-Mart on Thanksgiving Day. (Many Americans are protesting any store policy that requires employees to work on the holiday; Wal-Mart is one of the stores but it pays employees an extra day's pay for working on Thanksgiving.) The comedy bit was replete with the kind of phony Mexican accent that would bring forth the wrath of political correctness watchdogs if uttered by a white instead of a black. The reaction to the bit from the other blacks on the show was laughter.

And laughter from a black American audience was the reaction to a black standup comedian's routine more than a year ago, in which he played a black American construction worker trying to persuade a Mexican co-worker to slow down and not work so hard because he was showing him up.

From these and many other indications, somehow I don't think a majority of Americans will want to make up the shortfall in the event of a large reverse diaspora of Mexicans.

Oh well, there's always robotics.

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Monday, November 18

"Anything's Possible Now"

The best portrait of the brave new global order I've come across was published in a column in the April 2013 edition of France's Le Monde Diplomatique magazine. The writer makes no mention of the larger issues surrounding the historic events that unfolded this March in Nicosia, the capital of the tiny island nation of Cyprus, issues which hadn't become apparent at the time.  None of this takes away from the writing, which shook up a lot of people.  There is just something about it, a quiet finality:    

Anything’s possible now
by Serge Halimi

Everything was becoming impossible. It was impossible to increase taxes because that would discourage “entrepreneurs”. It was impossible to protect a country against commercial dumping by low wage countries, as that would contravene free trade agreements. It was impossible to impose even the tiniest tax on financial transactions; most states would need to support it in advance. It was impossible to reduce VAT, as Brussels would have to agree to that.

On 16 March, everything changed. Those orthodox institutions, the European Central Bank (ECB), the International Monetary Fund, the Eurogroup and the German government led by Angela Merkel forced the reluctant Cyprus authorities to take a step which, had it been taken by Hugo Chávez, would have been deemed dictatorial, tyrannical, a blow to liberty, and would have prompted angry editorials.

The step? Automatic withdrawals from bank deposits. The rate of confiscation, initially set at 6.75% to 9.90%, was almost a thousand times as much as the Tobin tax that has been a hot topic for 15 years.

So in Europe, where there’s a will there’s a way. Provided of course that the right target is chosen: not shareholders, not creditors, but the holders of deposit accounts in debt-ridden banks. It is so much easier to rob a pensioner in Cyprus (on the pretext that the real target is a Russian mobster hiding in a tax haven) than it is to extract money from a German banker or a Greek armaments manufacturer or a multinational with dividends tucked away in Ireland, Switzerland or Luxembourg.

Angela Merkel, the IMF and the ECB are forever talking about the imperative need to restore creditors’ “confidence” and the impossibility of increasing public expenditure or renegotiating sovereign debts: the financial markets would come down on any deviation. But how much confidence is it possible to have in the single currency and the sacrosanct guarantee of bank deposits when customers of a European bank can wake up to find that part of their savings has disappeared overnight?

So the 17 member states of the Eurogroup took the unthinkable step. And they will do it again: all citizens of the European Union must realise they are the target of a financial policy determined to rob them of the fruits of their labours on the pretext of balancing the books. Local puppets in Rome, Athens and Nicosia appear resigned to carrying out orders from Brussels, Frankfurt or Berlin with the reward of public rejection (1).

But events in Nicosia should have left the people in Italy, Greece and Cyprus with more than a deep sense of bitterness: they now have the liberating knowledge that, for them too, anything is possible.

Perhaps the embarrassment of some European ministers after their attempt to use force betrayed a fear that they had unwittingly obliterated 30 years of lectures that government should be powerless. Now that we have been reminded government can act forcefully, we are free to contemplate other harsh measures. Germany might not like them. Their targets might be wealthier than modest savers in Nicosia.


(1) See “Fate of Island Depositors was Sealed in Germany”, Financial Times, London, 18 March 2013. None of the Cypriot members of parliament voted for the Eurogroup plan.

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Reign of terror

I want to return to Bloomberg/Business Week Economics Editor Peter Coy's observation, "Good-bye globalization, hello balkanization," which he made in his report on the Federal Reserve's proposed regulation to force U.S. branches of major European banks to concede to the same high capitalization rates that are being imposed on U.S. banks. (The Fed Wants Bigger Cushions For Units of Deutsche Bank and Others, September 19, 2013.) I quoted without comment from the report around the time it was published (and discussed with Peter Coy on John Batchelor's radio show). Here I want to discuss a part of the report I didn't quote earlier:

Coy details the rationale for the proposed regulation, which was largely crafted by attorney and Federal Reserve Governor Daniel Tarullo:
Economists on the staff of the Federal Reserve have documented what looks like genuine harm to the U.S. economy from a 2011 episode in which foreign banks operating in the U.S. were temporarily starved of cash. The Fed economists found that in the spring of 2011, investors began to fret that a Greek default would damage European banks that had lent to Greece. Money-market mutual funds that had lent to the European banks by buying certificates of deposit were forced to cut back their loans because their own customers were withdrawing deposits.

What happened next never made the newspapers. According to the latest version of a working paper by three Fed staff economists, published in July, the European bank branches in the U.S. appealed to their home offices for funds to replace what they’d lost, but they didn’t get all they needed. They were forced to cut back lending in the U.S. by about $20 billion, the working paper said. That’s not a lot in an almost $16 trillion U.S. economy, but to the Fed it was a taste of what might happen in a more serious funding squeeze.
I suspect that every economist at the Federal Reserve lives in fear of Daniel Tarullo, so I question the working paper's calculations and conclusions. But taking the paper at face value, how is that foreign banks cutting back lending to Americans harmed the U.S. economy? In other words, how is that Americans who tried to borrow $20 billion from foreign banks couldn't turn to American banks for the loans?

Peter Coy did not put the question to Daniel Tarullo during their discussion, which he details in the report -- or if he did, the question was off the record. But there really is no answer, except the truth.

The truth is that first the American banks were tied up with regulatory red tape, then the regulations were used by government to force them to write mortgage loans that had "default" written all over them. Then the banks speculated in junk investment vehicles in the attempt to offset the floods of defaults.

When it call came crashing down, then the Fed and White House wanted the banks to write loans to American big business to stimulate hiring -- at a time when the businesses were slashing costs and payrolls in an attempt to stay afloat. When the banks wouldn't strap on suicide vests, the Fed and White House backed the writing of even more regulations in the form of the Dodd-Frank Act, which isn't even half written yet! So the banks still don't know what they're facing in terms of more regulations.

In the midst of all this madness there were European and other foreign banks willing to take risks to loan to Americans -- risks that American banks would not take, could not take. But after hearing about the proposal to force them under the rule of the Federal Reserve, they're having second thoughts.

Peter Coy reported:
Deutsche Bank Chief Financial Officer Stefan Krause told analysts in July that rather than raise more capital to comply -- say, by selling shares to the public -- the German bank would book some operations in other countries.
I would think, I would hope, that such statements caused the Fed to reconsider its proposed regulation, but I'm not seeing evidence that rational actions are informing American monetary or fiscal policy. What I'm seeing is a reign of terror.

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Remember: It's not a currency war if G20 says it isn't

By the way Ellen Brown mentioned a few days ago that there are now more nations in the G20 than 20; I think by her count it's 27, but moving along just a couple of months ago the G20 at one confab determined that the Japanese Central Bank's move to weaken its currency wasn't indication of a currency war because it was being done for the good of Japan's economy. Well, now that they know it's not a currency war, other central banks jumped on the currency devaluation bandwagon, as the following report, which is already old news -- but still important news -- indicates. 

Regarding the last quote in the report, "People aren’t as content as they once were about being on the end of dollar weakness, and hence an appreciation of their own currencies," I think the comma confuses the point.  He means that being "on the end" of (U.S.) dollar weakness makes other currencies appreciate against the dollar, not that central banks are trying to appreciate their currencies against the dollar.  (See , this is why AI still has a long way to go.)   

Race to Bottom Resumes as Central Bankers Ease Anew: Currencies
By Emma Charlton and John Detrixhe
November 11, 2013
Business Week/Bloomberg News

The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth.

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

“It’s a very real concern of these countries to keep their currencies weak,” Axel Merk, who oversees about $450 million of foreign exchange as the head of Palo Alto, California-based Merk Investments LLC, said in a Nov. 8 telephone interview. ECB President Mario Draghi, “persistently since earlier this year, has been trying to talk down the euro,” Merk said.

With the outlook for the global economy being downgraded by the International Monetary Fund and inflation slowing to levels that may hinder investment, countries and central banks are revisiting policies that tend to boost competitiveness through weaker currencies.

Mantega’s ‘War’

The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.”
“We’re seeing a new era of currency wars,” Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in a Nov. 8 telephone interview.

The ECB lowered its benchmark rate on Nov. 7 by a quarter-point to a record 0.25 percent, a reduction anticipated by just three of 70 economists in a Bloomberg survey. Draghi said the cut was to reduce the risk of a “prolonged period” of low inflation and the euro’s strength “didn’t play any role” in the decision. Euro-region consumer-price inflation has remained below the ECB’s 2 percent ceiling for the past nine months.

The euro slumped as much as 1.6 percent against the dollar on the day of the rate cut, the most in almost two years, before ending the week at $1.3367. It rose 0.3 percent today to $1.3406 at 12:14 p.m. in New York.
The shared currency pared gains versus a basket of nine developed-market peers this year to 5.8 percent, from as much as 7.2 percent at its Oct. 29 peak, Bloomberg Correlation-Weighted Indexes show.

‘Quite Weak’

“There are places in the world where economies are generally quite weak, where inflation is already low,” Alan Ruskin, global head of Group-of-10 foreign exchange in New York at Deutsche Bank AG, the world’s largest currency trader, said in a Nov. 8 phone interview. “Japan was in that mix for 20-odd years. Nobody wants to go there” and “the talk from Draghi shows they’re taking the disinflation story very seriously. The Czech Republic is the same story.”

The Czech National Bank’s drove its koruna down by 4.4 percent versus the euro on Nov. 7, the most since the single currency’s creation in 1999, when it intervened to spur inflation. Governor Miroslav Singer pledged to keep selling koruna “for as long as needed” to boost growth.

Peru’s central bank on Nov. 4 unexpectedly reduced borrowing costs for the first time in four years as slower export growth imperils the commodity-dependent economy. The board cut the overnight rate by a quarter-point to 4 percent from 4.25 percent, surprising all 15 economists surveyed by Bloomberg who forecast no change.

Trade Slowdown

The IMF last month cut its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent and 3.8 percent. It also sees inflation in developed economies remaining short of the 2 percent rate favored by most central banks.

Growth in global trade may slow to 2.5 percent in 2013, the new head of the World Trade Organization said after a Sept. 5-6 summit of G-20 nations in St. Petersburg, Russia, down from the organization’s previous estimate in April of 3.3 percent. Even so, the G-20 participants agreed to “refrain from competitive devaluation” and not “target our exchange rates for competitive purposes.”

“The idea that central banks are setting policies to weaken their currencies has always been overstated,” Adam Cole, Royal Bank of Canada’s head of G-10 currency strategy in London, said in a Nov. 8 phone interview. “In most cases they’re happy to see their currencies fall, but they’re not going out of their way to induce weakness.”

Lufthansa, LVMH

German airline Deutsche Lufthansa AG cited the strong euro last month when its profit estimate fell short of analysts’ forecasts, while French luxury-goods maker LVMH Moet Hennessy Louis Vuitton SA said on Oct. 16 that the currency’s gains versus the dollar and Japanese yen shaved 6 percent off third-quarter revenue.

Lufthansa said on Oct. 22 this year’s operating profit will be 600 million euros to 700 million euros, below an estimate of about 918 million euros by analysts surveyed by Bloomberg. LVMH, whose Louis Vuitton brand’s founder built his reputation as a luggage-maker for the wife of Napoleon III, said it has hedged 90 percent of its euro-yen exposure for this year and about 66 percent for next year.

“Do I think the euro-zone central bank wanted to engage in a currency war?” Lane Newman, a director of foreign exchange at ING Groep NV in New York, said in a Nov. 8 phone interview. “I think, post facto, yes. Because they cut rates knowing it was going to put the euro on the back foot.”
‘Attentive’ ECB

While the ECB hasn’t said it’s explicitly targeting the euro, comments from policy makers signal they consider exchange rates in their decisions. An ECB spokesman declined to comment when contacted on Nov. 8.

“As you know, the exchange rate is not a policy target for the ECB,” Draghi said at a press conference on Oct. 2. “The target for the ECB is medium-term price stability. However, the exchange rate is important for growth and for price stability. And we are certainly attentive to these developments.”

At the same time the ECB is easing, the U.S. Federal Reserve said it will keep printing enough dollars to buy $85 billion of bonds each month because the economy is still too weak to stand on its own. The Bank of Japan is also employing a policy of quantitative easing.

‘New Era’

Reserve Bank of New Zealand Governor Graeme Wheeler has cited the risk of slow inflation and currency gains as reasons for not raising the nation’s official cash rate from a record-low 2.5 percent this year. That’s even with the need to tackle what he has described as an overheated housing market. The kiwi rose 4.2 percent in the past four months, Bloomberg Correlation Indexes show.

Australia’s dollar is 27 percent overvalued against the greenback, according to a gauge of purchasing-power parity compiled by the Paris-based Organization for Economic Cooperation and Development.

The Reserve Bank of Australia lowered its growth estimate for next year to 2 percent to 3 percent, compared with 2.5 percent to 3.5 percent three months ago. South Korea’s finance ministry said last month it may act to counter “herd behavior” in the currency, as the Bank of Korea lowered its outlook for the economy.

The Fed said in October it needed to see more evidence of a U.S. recovery before it trims the Treasury and mortgage-bond purchases it uses to pump money into the financial system.

Analysts surveyed by Bloomberg last week predicted the Fed would delay tapering until March even though a Labor Department report on Nov. 8 showing employers added a larger-than-forecast 204,000 workers in October.
“People aren’t as content as they once were about being on the end of dollar weakness, and hence an appreciation of their own currencies,” Bank of New York’s Mellor said. “We’ve had a change in tone from South Korea, Australia and New Zealand.”

END REPORT
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Bitcoin surges 24% to new high: big financial news out of Asia today

Bitcoin surges 24% to new high as popularity grows
By John Phillips, Digital Editor for CNBC.com
Monday, 18 Nov 2013 - 2:36 AM ET
CNBC

Bitcoin touched a fresh all-time high on Monday as the digital currency continued to gain favor with investors.

The virtual currency rose to just under $608 on Mt. Gox exchange Monday afternoon in Asia, up 24.5 percent from the same time on Sunday.

Its latest gains come as the potential for regulation hangs over the market, with a U.S. Senate committee to discuss virtual currencies later on Monday.

According to Bobby Lee, CEO of BTC China – the world's largest Bitcoin exchange by volume – the price rise reflects increased awareness about the digital currency.

"There's more awareness of Bitcoin following recent press coverage," Lee said, highlighting the Bitcoin Singapore conference held last week and recent press coverage in China.

[...]
See the CNBC site for the rest of the report and links to a CNBC report on whether China can "make or break Bitcoin," and a discussion about whether Bitcoin is the real deal or just a digital version of tulip mania.

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Wednesday, November 13

Poland nationalizes retirement accounts

Jim Sinclair's comment on this September news:  "Nationalization of retirement accounts just occurred in Poland. It is shocking in that it has no compensation so far in this watershed event. Note how it is spun as an OVERHAUL of the retirement system."  Yup. 

Poland reduces public debt through pension funds overhaul 
Wed Sep 4, 2013 12:56pm EDT
By Dagmara Leszkowicz and Chris Borowski
 
* Reform moves bond assets from private to state fund
* Some equity assets to gradually move to state as well
* Changes seen reducing Polish public debt by 8 pct of GDP
* Funds say moves could be unconstitutional
* Warnings that private pension funds could be wiped out

WARSAW, Sept 4 (Reuters) - Poland said on Wednesday it will transfer to the state many of the assets held by private pension funds, slashing public debt but putting in doubt the future of the multi-billion-euro funds, many of them foreign-owned.
                                                                                           
The changes went deeper than many in the market expected and could fuel investor concerns that the government is ditching some business-friendly policies to try to improve its flagging popularity with voters.

The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.

Announcing the long-awaited overhaul of state-guaranteed pensions, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.

He said that what remained in citizens' pension pots in the private funds will be gradually transferred into the state vehicle over the last 10 years before savers hit retirement age.

The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."

Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds.
[...]

Stratfor report: Aging infrastructure on critical US inland waterways

 "The drought in 2012 brought to the forefront how unplanned delays, or even the potential for unplanned delays, can affect both transport operators and commodity prices."

United States: The Problem of Aging Infrastructure on Inland Waterways

United States: The Problem of Aging Infrastructure on Inland Waterways
Cargo ships pass along the Mississippi River on April 13, 2011, in New Orleans. Mario Tama/Getty Images

Summary

The United States continues to face the problem of aging infrastructure on major water-based transport routes. A new waterways bill that is likely to be finalized soon -- the first such legislation since 2007 -- addresses some of the inefficiencies in the current system. However, the larger looming problem of insufficient funding remains. The U.S. inland waterways infrastructure is old, much-needed improvements have been delayed and the total cost of rehabilitation is expected to rise.
This is not a new or unknown problem, but measures to address the problem have been limited, and there is no immediate, rapid solution. Navigable rivers are one of the United States' inherent geographic benefits and have contributed to the nation's economic success. Failure to update and maintain the inland waterways could lead to disruptions in the supply chain and hurt U.S. competitiveness on the global export market.

Analysis

The United States' inland waterways system -- more than 19,000 kilometers (12,000 miles) of navigable routes maintained by the U.S. Army Corps of Engineers overlaid with expansive farmlands -- has contributed greatly to the country's success. Ongoing use of the waterway system requires the maintenance of infrastructure to meet usage demand, including dredging of ports and rivers, and the operation and maintenance of dams, levees and locks.
U.S. Inland and Intercoastal Waterways

The Mississippi and Ohio rivers and the Illinois waterways, the busiest avenues for commercial traffic on inland waterways, all have expansive lock systems. The locks make navigating a river easier, sequestering vessels before raising or lowering the water level in a chamber in order to compensate for changes in the river's level. Most of these locks were constructed in the early 20th century, with an expected lifetime of 50 years. Seventy or 80 years later, many of these locks are still in operation. Unplanned delays due to mechanical breakdowns have been on the rise for more than a decade.

Funding for Inland Waterways and Ports

Under the current policy, the cost of maintaining this infrastructure falls to the federal government, but funding for major construction and rehabilitation projects on inland waterways is split equally between federally appropriated funds and money from a trust, the Inland Waterways Trust Fund, which currently secures revenue through a 20 cent tax on commercial barge operators' fuel. The tax rate has remained the same since the mid-1990s. The fund's assets began declining in 2002 and fell rapidly starting in 2005 as expenses continued to increase as the system aged, eventually exceeding the revenue generated by the fund. Moreover, some projects exceeded their expected budgets, further straining the trust fund. The decline of the Inland Waterways Trust Fund was halted in 2010 after the federal government suspended new contracts using money from the fund.

Port and harbor maintenance has a similar trust fund, the Harbor Maintenance Trust Fund, which receives money from a tax on imports and domestically traded goods. Unlike the fund for inland waterways, the Harbor Maintenance Trust Fund has a surplus. The funds are used for port maintenance, such as dredging to maintain port depths, and not for new construction, so many larger ships must still wait until high tide as full channel depths are not maintained at all times -- even in some of the nation's busiest ports. As vessels, especially container ships, become larger, an inability to maintain port depth could result in additional delays and an increase in related costs.

With the expansion of the Panama Canal, many Gulf and East Coast ports want to expand to handle the larger vessels that will now be coming through the canal. Increased use of the Harbor Maintenance Trust Fund (the government's budget for 2013 requested $848 million for maintenance programs -- roughly 50 percent of the revenues the fund generated in 2013) could allow ports to conduct more maintenance dredging to prevent unnecessary delays.

However, competition between ports could make the distribution of funds contentious. Because the trust fund is supplied from taxes on traded goods, ports that have higher traffic contribute more to the fund, but these ports are often not the ones that require the most dredging maintenance. For instance, Los Angeles/Long Beach spends less than 1 cent from the Harbor Maintenance Trust Fund per ton of cargo moved, whereas Savannah, Ga., spends 42 cents per ton, and Grays Harbor, Wash., spends $6.16 per ton. The system is set up for a cooperative environment, but as more ports compete for the projected increases in traffic coming through the Panama Canal after 2015, this cooperative system has the potential to break down.

Addressing Inefficiencies

The U.S. government traditionally passes water resource legislation every two years, but the Water Resources Reform and Development Act, which the House of Representatives passed resoundingly with strong bipartisan support Oct. 23, was the first such legislation passed since 2007. The Senate passed a similar bill in May. The House and Senate versions will have to be reconciled, but both versions passed with bipartisan approval and are fairly similar, so it is reasonable to believe that some version will become law.

Select Major Inland Waterway Projects, 2013

Part of the legislation is meant to limit projects that are unnecessary or stalled, freeing up funds for more necessary projects. A total of $8 billion in projects, including flood prevention and port expansion projects, would be approved under the new House bill, while $12 billion in projects would be eliminated. In addition, time limits on feasibility and environmental studies will be imposed. For the past several years, a large portion of the Inland Waterways Trust Fund has been tied up in a single lock improvement project, commonly known as the Olmsted project. Both versions of the bill increase federal funds for the project, freeing up money from the trust fund for other projects. Congress will consider the use of alternative methods to provide more revenue for the Inland Waterways Trust Fund, but no specific changes are outlined. Both versions of the bill also attempt to address the Harbor Maintenance Trust Fund's current spending practices and increase total spending from the trust over the course of the next several years.

The Lingering Problem Inland

Regardless of the new legislation, the problem of underfunded and outdated infrastructure remains.   The U.S. Army Corps of Engineers estimates that it will cost $125 billion or more to revamp the entire inland waterway system. Some estimates show that just maintaining the status quo of unscheduled delays for the more than 200 locks on U.S. inland waterways would require an investment of roughly $13 billion dollars by 2020, averaging out to more than $1.5 billion annually. Operating and maintaining these are only part of the responsibilities held by the U.S. Army Corps of Engineers, which has a total appropriated non-emergency budget of roughly $5-6 billion annually. Because spending from the Inland Waterways Trust Fund is limited, a total of $170 million per year is currently available for major inland waterway construction projects.

If operating under unconstrained conditions, the recommended construction budget for major rehabilitation or new construction would average $900 million per year over the next 20 years, with some years reaching $1.5 billion. Under the current budget, upgrading the system will be a long, drawn out process, and unintended delays are likely to continue increasing in the near term.

The drought in 2012 brought to the forefront how unplanned delays, or even the potential for unplanned delays, can affect both transport operators and commodity prices. Transportation by barge is well suited for bulk commodities that can benefit from the cost savings by exploiting economies of scale. The agricultural, coal, petroleum and fertilizer industries rely heavily on U.S. rivers to transport goods.

Each year, more than 600 million metric tons of cargo, valued at roughly $180 billion, is handled along inland waterways managed by the U.S. Army Corps of Engineers. In addition, it is hard for older infrastructure to accommodate modern barges. This often causes longer passage times, which could contribute to increased transportation costs for goods. According to the American Society of Civil Engineers, costs attributed to delays reached $33 billion in 2010 and are projected to rise to $49 billion by 2020.

Road and rail provide alternative transportation modes, and the current increase in road and rail freight traffic is projected to continue. Since a single 15 barge tow is equivalent to roughly 1,000 trucks or more than 200 rail cars, shifting traffic from rivers to road or rail likely will increase congestion on these transportation routes. Moreover, waterways remain the least expensive mode of long-distance transport for freight, with operating costs of roughly 2 cents per ton per mile compared to under 4 cents per ton per mile for rail and slightly less than 18 cents per ton per mile for truck. This increased cost likely will be passed on to the consumer, and since a significant portion of the freight traveling on waterways is destined for export, this could affect global commodity prices, especially for staple agriculture products like corn and soybeans.

Increases in federal spending could make up the difference between the funds needed and the funds available. However, as U.S. government funding for infrastructure spending has dropped significantly in recent years, increases in user fees, tolls or private funding likely will be needed to fully pay for all current and future necessary improvements to the U.S. inland waterways. Until then, limited improvements to the aging infrastructure will likely continue to cause transport delays. Given the importance of waterways as a transport method for bulk goods, including agricultural exports, delays and the accompanying transport cost increases could affect both the U.S. economy and global food prices.

Read more: United States: The Problem of Aging Infrastructure on Inland Waterways | Stratfor

Friday, November 8

The View From the Roof: Distributed Loads

I'm working on a post that calls for deep thought and now my brain is demanding a timeout. Let me see how I can give it some play time. Well I got through another Halloween, this year without problem. Last year it took hours before the rescue squad showed up. I insisted they call the rescue squad because we could have all fallen off the roof if a couple retired Pentagon brass and a State official who were already three sheets to the wind before they fortified themselves for the mission set out to rescue me.

No no they didn't call 911; it's a volunteer squad. The first thing the dispatcher asked was, 'Is it Pundita up there?' I'm always the lowest priority on Halloween, which is not a good thing for someone of my age and bladder control. For this reason people in certain neighborhoods in Northern Virginia who throw Halloween parties leave a ladder propped against the house so I can get up on the roof, drape the house with a roll of toilet paper, and climb down without incident.

Last Halloween, however, I went disguised as Otto von Bismarck; I figured they'd never see through that one. At one house I got tangled up on the ladder in the ceremonial sword and sash but the tipping point was the backpack. You wouldn't think that 10 rolls of toilet paper were that heavy but it was more the bulk and trying to manage the sword at the same time, and three cups of bourbon eggnog hadn't helped my balance.

I got onto the roof before the ladder fell but during this process I lost control of the backpack, which I'd forgotten was unzipped. The toilet paper rolls spilled out, bounced on car roofs in the driveway and unrolled down the street. When the rescue squad arrived they took one look at the situation and said, "Let her stay up there another 20 minutes."

No respect for the elderly anymore.

This year I went disguised as a quark. This allowed me to redistribute the load of toilet paper rolls, so while it was the same number of rolls it didn't unbalance my climbs.

I've had problems with rescue squads before, by the way, and even with an animal rescue squad. A few years ago the squirrel member of my foreign policy team blew up the garage. It's okay, I'd always wanted a swimming pool on that side of the house. I used to store my homemade demon repellent in glass gallon jugs in the garage, but who knew about the glitch in the formula until 4 containers of the stuff were knocked off a high shelf, which granted was overloaded. Even so I'd told the squirrel many times not to fool around on those shelves, and always kept the garage door shut when I wasn't around except for the time I forgot.

No there was no trouble with the authorities. This could be the one house in Washington where if you tell the fire and police departments that a crater in the yard was a household accident they just write it up. They don't want to hear the story.

Of course he survived, those types always do. But he was blown into a neighbor's tree, then he wouldn't come down because he was hysterical. When I called for a rescue squad they told me, "Ma'am, if a squirrel is up a tree it has a reason for being there."

It took the neighbor and a tree landscaper working two sides of the tree on ladders to grab him. Then I had to wrestle an eyedropper's worth of brandy down his throat to calm him, so I get his singed ass to a veterinarian. The vet saw his condition, sniffed his breath, then told me accusingly, "This squirrel has been abused."

About five minutes later I heard a crashing sound from the examination room. The veterinarian was all right. No broken bones, a little shaken up of course, but I couldn't resist. I said, "Let me guess. You told him not to fool around on top of the medicine chest."

Yet I noticed while the assistant and I were pulling the chest off the vet that it was very top heavy.

Distributed loads. Probably not the secret to the universe but they are the key to humanity surviving the era of megapopulations with some grace. It's not so much the numbers but their distribution. There are countless incidents to illustrate this.

A few weeks ago a boatload of refugees from north Africa got stranded off the Italian coast. Everyone on the boat ran to one side in a panicked attempt to signal a plane for help. The very uneven load capsized the boat. Hundreds of the refugees were drowned.

From what I've been told about the story, the people who designed the process for Americans to register for Affordable Care health insurance didn't take load distribution into account.

Another distributed load problem became starkly evident only in April, in the gold market, after millions of people had piled into the 'paper' end of the gold market through ETFs. This unbalanced the load on the physical gold market. So it took just small downward pressure on the gold price to touch off a selling stampede in the ETFs, crashing the price of gold for the entire market.

A less obvious example is that by the mid-1950s management of U.S. monetary policy, the internal part, had fallen almost exclusively to the Federal Reserve. To assess the state of the U.S. economy the Fed relies on statistics and mathematical modeling. Both can exclude galactic-sized chunks of reality and also be in error and reflect obsolete data. By 2008 it was evident that this unbalanced intellectual load had capsized the system of U.S. money management.

So now economists at the Fed have taken a back seat to the very unscientific Daniel Tarullo, or "Dan" as his colleagues call him, which is like referring to Robespierre as Max.

The intellectual load had been unbalanced for a long time yet in the age of megapopulations the margin for error hovers near zero but there I go, thinking again, which undercuts the purpose of my writing this post.

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