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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"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.

.

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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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

Analysis

November 5, 2013 | 0535

 

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.

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.

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

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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Lessons for Americans in Germany's cultural, educational, and business models

"In German, borrowing is 'schulden', [the same word for] guilt. There is an attitude that if you have to borrow, there is something wrong with you."

"There is a culture of business owners acknowledging and rewarding the efforts of the workforce," says Andreas Woergoetter, head of country studies at the OECD's economics department. No wonder, then, that Germans work fewer hours than most.

School finishes at lunchtime across much of Germany due to what Mr Woergoetter calls a "societal preference", designed to allow children to spend more time with their families.

Strong employment protection legislation and a degree of trust on behalf of the workforce in well-capitalised companies that had not over-borrowed, meant the Social Democratic government was able to use its close ties with labour unions to push for moderation in wage inflation.

The reforms laid the foundation for a stable and flexible labour market. While unemployment across Europe and the US soared during the global downturn, remarkably the jobless number in Germany barely flickered.

"Half of all youngsters in upper secondary school are in vocational training, and half of these are in apprenticeships," says Mr Woergoetter.

Apprentices aged 15 to 16 spend more time in the workplace receiving on-the-job training than they do in school, and after three to four years are almost guaranteed a full-time job.

And in Germany, there is less stigma attached to vocational training and technical colleges than in many countries.

"They are not considered a dead end," says Mr Woergoetter. "In some countries, company management come from those who attended business school, but in Germany, if you're ambitious and talented, you can make it to the top of even the very biggest companies."

The German education system, therefore, provides a conveyor belt of highly skilled workers to meet the specific needs of the country's long-established and powerful manufacturing base, which is rooted in the stable, small-scale family businesses that have long provided the backbone of the economy.

While the rest of Europe gorged on cheap credit throughout the 1990s and 2000s, German companies and individuals refused to spend beyond their means. One reason for this, says David Kohl, deputy chief economist at Frankfurt-based Julius Baer bank, is that real interest rates in Germany remained stable, unlike those in other European economies.

"In the UK, Italy, Spain and Portugal, for example, higher inflation meant real rates moved down, so there was a huge incentive to borrow money," he says.

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The U.S. Treasury has published an economic report that levels rare U.S. government criticism at Germany; it contends that the country's export-driven strategy has hurt the eurozone and the world economy. See the BBC's October 30 report for details. Given that Germany has been chiefly responsible for propping up the eurozone and by extension the world economy, I take the criticism with a grain of salt. 

Perhaps as a mild editorial comment on Treasury's report the same BBC news page features a link to another report on Germany, one filed August 15, 2012 by BBC Business Reporter John Anderson, and headlined German economic strength: The secrets of success. This post leads with quotes I pulled from the report.

While the vast differences between the geographic size and population of the USA and Germany have to be taken into account, I think it would be hard for many Americans to read Mr Anderson's report without feeling shame and bitterness about what our cultural, educational, and business models have wrought for us -- and for our children.

I hope you will read the entire report.

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Deliverance

PUNDITA: Are things getting clearer?

MICHAEL WRIGHT: Sure, now that I know my finances are run by a ghost, a pampered man-eating dog and a 300 year old paradox.

PUNDITA: Don't forget Frank, and remember it's not the paradox; it's attempts by the Federal Reserve to reverse engineer the paradox. And I don't think Petunia ever actually ate anyone, except Frank, the first Frank, but then it is a dog eat dog world.

MICHAEL: I think you should bring Mrs LeVoon back for an encore performance. Have her give the Fed another talk.

PUNDITA: Zut Alors! Madame, not Mrs. I could manage one or two sentences in her patois but no more, not without study if I didn't want the linguists and ethnologists jumping on me.

MICHAEL: A couple sentences is all you'd need. "Hear what I'm telling you. Shut it down."

PUNDITA: You wouldn't want to shut down this nation's central bank even if you could; it performs a critical function in a banking system that writes a huge volume of loans. The problem is that the Fed is suffering from a severe case of mission drift. It was supposed to perform its function for the banks and advise the federal government on the state of American business cycles. It went from advising to managing the business cycles, which it renamed "the economy," to something like a priestly caste.

All that keeps the caste at bay is Petunia, or at least that's the way it was until the 2008 financial crisis. Now the Federal Reserve wants to do Treasury's job on the excuse that it can't manage internal monetary policy if it can't also manage external policy. Yet if the Fed keeps on using the banking system as a tool of monetary policy there's not going to be any system left to speak of.

MICHAEL: You've just told me that this mission drift worked out to tremendous power. The Fed is now like a fourth branch of government. You're mistaken if you think the economists there would voluntarily give up that much power, even if they saw the error of their ways.

PUNDITA: The only power they have is what bankers have given them. The bankers got dependent on the Fed then addicted to the Fed's cheap loans. Like all addicts they fed their addiction even when it became self destructive. The bankers need to attend AA/NA meetings to see how it's done, then set up their own support groups. Stand in front of a microphone and admit that without divine intervention they're powerless to fight their addiction to the Fed's cheap money.

MICHAEL: I'd like to see you in the White House for a year.

PUNDITA: Why only a year?

MICHAEL: That's all it would take you.

PUNDITA: Everything you like about my approach to problem solving would be destroyed by bringing it into the political system.

MICHAEL: I don't agree but I have a question about the Fed. Do you think it played a role in the 2008 financial crash?

PUNDITA: Yes, a big role.

MICHAEL: How so?

PUNDITA: That's a shaggy dog story.

MICHAEL: Here we go.

PUNDITA: No no, there's no dogs in the story.

MICHAEL: So you're telling me it's a dog of a story. All right, I'll play.

PUNDITA: In the 1970s I saw James Dickey act out a shaggy dog story on the Johnny Carson show --

MICHAEL: The Deliverance author?

PUNDITA: The poet and novelist, yes. It was the one about the man who's told that his suit jacket sleeve, the left one, is a little shorter than the right one. The man pulls his right arm back into the right sleeve a little, to make it look as if the right sleeve is even with the left sleeve. Then someone else points out that the right sleeve looks a bit shorter than the left sleeve. So the man pulls his left arm a little out of the left sleeve, in another attempt to even up the appearance of the sleeve lengths. Then someone else points out that the other sleeve looks shorter, so he pulls that arm even farther back inside the sleeve.

It went on and on like that. Dickey ended up with both arms inside his suit jacket, with the empty sleeves flopping around.

I almost died laughing but when I thought about how U.S. monetary policy works, the internal policy, I said, "Oh no. It's the shaggy dog suit jacket story."

The Federal Reserve keeps trying to balance the economy between inflation and deflation but there are too many variables to get a balance, so they're always overshooting or undershooting the mark, then trying to correct the imbalance, and it goes on and on. A classic example is what happened in 2001. The Fed decided that the manufacturing numbers looked squishy --

MICHAEL: So you didn't make up that part.

PUNDITA: Well I made up Frank squatting on the chart but yes that happened; that's how the snowball started rolling downhill. Out of concern that the data portended a recession, the Fed cut the target for I think the Federal Funds Rate or one of the rates that the Fed targets control.

Here the Fed was following what had become traditional macroeconomic policy. The general idea is to make it cheaper for banks in the Federal Reserve system to borrow from the Fed, so they'll write more loans to business; this to encourage business expansion, including hiring, thus warding off a recession.

It didn't work out that way. Why? For one reason, because Fed watchers in the business, investment, and banking sectors -- and they're all Fed watchers -- were very familiar with the traditional Fed policy. They saw the rate cut and wondered if the Fed knew something about the state of the economy that they didn't, even though there was no recession. So they pulled back on investing, hiring, loan writing, and borrowing. That meant the Fed had to cut the rate again.

MICHAEL: I don't think I want to hear the rest of this story.

PUNDITA: The second round of interest rate cuts worried Fed watchers even more so they cut back more on hiring and so on. So the Fed had to cut the target rate again in another attempt to overcome fears about a recession. By this time the Fed was probably cutting all the interest rate targets they could; in any case that's how it ended up.

By the third or fourth cut the consumer got worried that the economy was tanking and pulled back on spending. So then the Fed had to cut the rates again.

It went on and on like that. The Federal Reserve cut the rate seven times. Then 9/11 struck, so then the Fed really did have something to worry about. By then the interest rates were nearing bottom but the Fed had no choice other than to cut the rate again, and again, in the same year. This put interest rates in 2001 to their lowest in 40 years.

Nine times, Michael, nine times those clowns at the Fed tried to even up the sleeves.

By October 2001 a former Fed economist, Lacy Hunt, who'd gone to work for an investment firm, had looked at the data. Hunt said wait a minute; the private sector doesn't have the balance sheet capacity to take on more debt, and the banking system is in the same boat -- it can't write more loans. Not at the level the Fed had envisioned that all the rate cuts would stimulate.

But the Fed's mathematical models had excluded the kind of data that Hunt studied. That's not all the models excluded. The slashed interest rates had plummeted the income that Americans received from their savings accounts and other savings instruments. And not only individuals; business and institutions that parked a chunk of their money in cash and near cash were now staring at the prospect of losing money if inflation heated up.

That put all those Americans in a fix. Either they could start paying down debt with their savings, which meant they could be losing money if interest rates on the debt continued to move toward zero. Or they could start speculating with the money in the attempt to offset their losses from much lower interest income and from possible inflation.

The inflation never did materialize -- not in the areas that the Fed was watching for such signs. The inflation was building in a way the Fed's mathematical models hadn't taken into account -- in the highly speculative, overpriced debt consolidation instruments known as derivatives that shadow banks and brokerage firms were packaging and selling to pension funds, retirement accounts, bankers, retail investors, and state and local governments.

MICHAEL: The Fed needs to be shut down. If there's some critical function it handles, start a new agency to handle just that function.

PUNDITA: It's not going to happen, for the same reason I don't think the banking system will be nationalized in the United States. It makes it possible for the White House and Congress to shift a great deal of blame.

MICHAEL: You don't think nationalizing the Federal Reserve would help?

PUNDITA: That would be putting the foxes directly in charge of the chicken coop, and again, that would make the federal government directly responsible for serious miscalculations by the Fed economists.

Anyway, by doing everything to ward off a recession in 2001, the Fed created a recession that year. That set up conditions for an even bigger recession. Yet to this day they can't confront what they wrought by trying to even up the sleeves.

MICHAEL: I guess the Fed's math also missed signs of the 2008 crash.

PUNDITA: Even if they saw the signs, what were they supposed to do? Call for audits of the banks? Tell the SEC to start audits? Go to Congress? All or any of that would have set off panic in the bond and stock markets. That would have led to runs on banks.

But it had all started years earlier. If James Dickey had lived to see the nine interest rate cuts in 2001 he would have put his arms inside his suit jacket and waggled the empty sleeves.

There could be a moral to this shaggy dog story, only I don't know what it is.

MICHAEL: The moral is that once you put clowns in a canoe and send them down the river they're up the creek no matter what they do.

PUNDITA: [laughing] Deliverance! Wasn't it two canoes?

MICHAEL: Not on the way back.

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"Look at the charts, Frank." U.S. monetary policy gone to the dogs.

It's come to my attention that many people are confused about U.S. monetary policy, viewing it as an arcane and even magical preoccupation of economists whose mysterious and seemingly arbitrary decisions greatly affect the financial affairs of ordinary Americans. Actually, the workings of U.S. monetary policy are easy to understand if you know there are actually two policies: the internal policy, which is controlled by Frank, who works for the Federal Reserve, and external policy, enforced by Petunia, who works for Treasury.

These policies don't so much work in tandem as coexist in an uneasy detente that has been broken on occasion, like the time Petunia ate Frank. It's okay. The Fed got a replacement and there'd been more than one Frank before then, just as there's been more than one Petunia since. It was her first day of work, the handler accidentally let go of her leash. Since then the Fed has employed scouts to make sure Frank and Petunia aren't being walked at the same time.

And no, the handler wasn't fired. He was given a promotion.

Frank

Now who is Frank? He's a chihuahua and the linchpin of the system by which the Federal Reserve Open Market Committee settles their disagreements about the meaning of U.S. economic indicators. They spread all the statistical charts on a large conference table, put Frank on the table, then say, "Look at the charts, Frank."

(Some of the charts are actually graphs but this is a superfluous detail from Frank's point of view.) Then the committee members take notes on Frank's expression as he looks at each chart. Then they figure an average of their impressions of his expressions to determine where to set interest rate targets.

If that sounds like a screwy system it's an improvement on the old system. The FOMC used to slaughter a chicken on a full moon night at a parking lot in Northeast Washington and read its entrails. But there were always fights: You kill the chicken this time. No I killed it two times ago.

Finally they hired a Voodoo practitioner who called herself Madame LeVoon to kill the chicken. That system of reading economic indicators lurched along for a time. Then Madame LeVoon lost money in a stock market downturn that was a direct result of the Fed's misreading of entrails. The next time she saw the committee she said, "Hear what I'm telling you. A dog could read the signs better."

Of course they didn't hear. The next morning a member of the FOMC broke his leg in a freak fall. The next morning another member broke his arm in a freak car accident. That afternoon the FOMC members who weren't wearing a plaster cast, their hearing much improved by then, went to a pet store and bought the first dog they saw, which was a chihuahua.

That's how the new system started; again, there have been a number of Franks since then. Also that's where the economic slang term "squishy" comes from, as in "The manufacturing sector numbers for this quarter are squishy." Sometimes they forget to walk Frank before a meeting. It's not like a tiny dog can hop off a high conference table to scratch at the door. Papers spread around the table, you get the picture.

But then they have to note which chart Frank chooses to squat on. So you would think they wouldn't forget to walk Frank, and sometimes they don't forget. These are the times when a scout reports that Petunia is being walked. As to why they don't simply take Frank to an executive washroom at those times -- because the same system tends to generate the same mindset, no matter how different the people. There are always fights: You take Frank to the washroom this time. No I took him two times ago.

In the end, let him do his business on a chart if he can't wait.

Petunia

Who is Petunia? She stands four feet high and looks something like a cross between an English mastiff and a cougar. If that sounds like a strange dog, you should see some of the creatures that defend currencies of other major trading nations.

The first Petunia went to work for Treasury in 1973. This was when the Bretton Woods monetary system ended. At that time Treasury set up a department to enforce the new external U.S. monetary policy, which boiled down to a simple mandate: No central bank tries to dump the U.S. dollar, no central bank gets hurt.

Petunia, her handler and pilot are the only employees in the department. She has her own jet plane, Air Force Petunia, which by tradition is piloted by a member of the family in the Appalachian Mountains that breeds and raises Petunias.

All Petunias are very intelligent. Mastiffs were originally used to guard large English estates, so the dogs were bred to have a fine sense of judgment; after all it wouldn't do to mistake a new vicar paying a courtesy call for a poacher. Because of this inbred intelligence and because cougars are very shrewd, Petunias are only taught three commands: "Snarl," "Sit for bacon," and "Don't eat the U.S. President or the dog groomer," with the rest pretty much left to their judgment.

As to why there's no command not to eat the Treasury Secretary, in the earlier years it was concerns about KGB infiltration, then later moles for China's government. For this reason there are entirely separate elevator systems at Treasury. Petunias are bright but they can make mistakes.

Petunia and the East Asian Financial Crisis

It so happens that the second command taught to Petunias was the biggest factor in the Asian Financial Crisis spilling out of Asia. It all started when some central bankers in ASEAN countries began ruminating in front of a microphone about making the Japanese Yen their major reserve currency instead of the U.S. dollar. This activated Petunia. She was only supposed to frighten a few Asian bankers and heads of state but when it came time to give the stand-down command her handler, who was new at the job, said, "Sit for biscuit."

When she wouldn't obey what sounded to her ears like gibberish the handler whapped her on the nose with a rolled up newspaper.

Try to put yourself in Petunia's place to understand why references to the department manual were no use after that. Finally the handler got a choke leash on her and yanked her aboard her plane, all the while hissing, "Bad dog!" at her.

When the pilot heard her whimpering he threw the handler off the plane. Then he translated her yips and whines into a flight plan and jetted her to various financial centers, with layovers at the farm in the Appalachians so she could get moral support from family and friends.

(These layovers explain why, as Larry Summers told the BBC's Katty Kay this March, what had started as a financial crisis in East Asia seemed to die down for a time before suddenly appearing in another country outside Asia.)

What the handler should have done immediately was phone the White House for help; instead, he followed Air Force Petunia around the world on commercial flights -- first class airfare, I might add, which of course he charged to his expense account. It was only when Petunia began chasing traders around the floor of the New York Stock Exchange that he threw in the towel.

President Bill Clinton personally gave the correct stand-down command. Then using three pints of bacon ice cream -- two pints for Petunia and one pint for Bill to keep up his strength through the ordeal -- he coaxed her into his limousine. She was returned to Treasury no worse for wear if you don't count a case of injured pride.

No, the handler wasn't fired. He was transferred to a desk at State where he helped write U.S. trade policy on China.

Speaking of Larry Summers, there were rumors at the time that Petunia bore a striking resemblance to him, but then for years there were rumors she was the spitting image of George Soros. Having seen the present Petunia I can tell you that she looks nothing like either man. I also saw photographs of earlier Petunias, which the handler has preserved in a beautiful gold-embossed album. Here the best I can say is that when you've seen one photo of a strange looking dog wearing an enormous hand-washed, hand-ironed pink satin bow you've pretty much seen them all.

Pundita's Adventures Researching U.S. Monetary Policy

As to how I know about Petunia -- in the same way I know that the Ghost of 1929 haunts the Federal Reserve building in Washington after midnight. Late last year I decided to research U.S. monetary policy in depth. This kind of research always involves field work. Lucky for you Pundita is a master of disguises when it comes to field work. This gave me great insight into the way America's finances are actually run, which I've been able to pass along to you in several posts this year.

I can't reveal much about my disguise at Treasury except to say that when your only coworkers are a dog and a man who is devoted to the dog, you tend to be talkative with the dog groomer. This might be why Petunia gets a shampoo at least twice a week, which by the way she very much enjoys.

With regard to my research at the Federal Reserve, again I can't reveal much about my disguise but I will observe that when your system of analyzing the economy boils down to a game of Pin the Tail on the Donkey you might as well make it a real party. Who's the first person you call when you want to plan a party? The party planner, of course. And everyone in an office loves the party planner because they get to choose what kind of ice cream and cake they want and pick out decorations and party prizes. This means party planners always get the run of an office.

So to answer Sleepless before she sends another email: yes, with my own eyes I have seen the Ghost of 1929. As to how I know it's that particular ghost and not any ghost, in the same way I know that the racket the ghost makes after midnight is the sound of 40,000 1930s-era bank teller windows slamming shut at the same time. There's a mathematician who likes to burn the midnight oil at the Fed and who's on speaking terms with the ghost. My own view is that it never pays to get conversational with a ghost. But the mathematician told me the story when I promised there would be strawberry ice cream for everyone after the next FOMC meeting. And yes, I also saw Frank while I was at the Fed.

Pundita Meets the World's Big People

I also attended the World Economic Forum in Davos-Kloster, Switzerland. As to how I managed to crash that gathering of the world's Big People, again I can't reveal much but I will say that this year at Davos it helped to wear 30 pounds of 24 karat gold jewelry borrowed from Charlotte ("Remember, you break it, you own it"), an I.D. tag that read "Tajikistan" and to be accompanied by two nervous-looking young men from the City of London who kept telling the hall monitors, "She's looking for the sessions on oil and gas exploration and how to buy some banks."

See this is one reason not to get conversational with a ghost. I don't think the Ghost of 1929 recognized me underneath my fetching ethnic disguise when it showed up at Davos, or it might have asked what the party planner was doing there. Anyhow, as I mentioned in April, the big news to come out of this year's Davos confab, which you will only read about here, is that the ghost put in an appearance.

So much for the belief that the ghost won't appear in Switzerland because it's scared of Swiss bankers. Maybe at one time it was scared of them but obviously no more. Here I should add that very few at Davos actually saw the ghost. It made its presence felt though odd squeaking noises that one attendee, a student of the French Revolution, identified as the sound of a portable guillotine slowly being wheeled into place, and by uproarious laughter.

Battles With Wall Street Zombies

I also went to Manhattan to investigate the financial sector, which is part of U.S. monetary policy on account of the U.S. banking system was converted into a monetary tool decades ago, with the results you see today.

I don't think it would do any harm to reveal that for this phase of my research I joined the midnight shift of a crew that cleans offices in Wall Street firms. No names, but I can tell you these firms are part of what's known as the Global Shadow Banking System -- this being the system of non-bank financial institutions that offer banking services.

It was actually the shadow banking system, not what passes for the U.S. banking system, which crashed in 2008, even though several banks were and still are part of the shadow system. The crash caught economists in government and the financial sector unawares, partly because nobody thought to figure rehypothecation into their calculations. And Frank, bless his heart, can't read equations. So it wasn't until 2010 that two guys at the International Monetary Fund figured out that everyone had underestimated the size of the U.S. part of the shadow banking system by 5 trillion dollars. (I am not making that part up.)

The other part was that the math wizards who designed the hideously complex mortgage derivatives trades didn't understand the mortgage business, and the people who sold these derivatives didn't understand the math behind them but were too proud to admit this. (I am not making that part up, either.)

Happily, the globe was saved from crashing by a series of massive taxpayer-funded bailouts led by American taxpayers. However, government explanations to the American Little People about why it was vital that their tax money bail out banks and insurance companies they'd never heard of on account of these firms weren't located in the USA tactfully avoided mentioning the zombie problem.

This problem was first described by an American professor, who was trying to explain to the public in plain English why FDIC insurance paid by banks for decades hadn't been enough to cover losses in the crash of the savings and loan banking industry in the 1980s. The losses had to be covered by the taxpayer because the S&L industry was too big to be allowed to fail. The professor explained that the bailout had created zombie banks: banks that were deader than a doornail but which carried on an undead existence of sorts by feeding on the living taxpayer.

The same problem emerged from the bailout of the shadow banks. And so the truly hair-raising phase of my field work. It's one thing to deal with a ghost, but fending off the undead and trying to vacuum carpets at the same time while the crew boss shrieks, "Nobody bump into the supercomputers!" calls for the reflexes of a ninja.

But from this adventure I can report that the zombies on Wall Street, which by the way has become a euphemism for the Global Shadow Banking System, are still undead and well.

Pundita Joins a Cult

After completing my investigation in Manhattan it was home to Washington. I returned the gold jewelry intact to Charlotte. Of course she got it assayed, just to make sure. Speaking of Charlotte, to keep the peace I corrected my "Tofu and the Police State" post after she read that I'd termed her gambling "illegal." If you say you've never heard of a possum that can read -- how else could she work an Ouija board? She told me that none of her gambling was illegal; that what I considered illegal was actually unorthodox gambling. She got that from reading that IMF chief Christine Lagarde had called the Fed's massive quantitative easing experiment "unorthodox" monetary policy.

Then I transferred my field work to the world's Little People. This was how I discovered that many Americans belong to a pagan cult. I personally witnessed their bizarre rituals, which involve bowing to an image of a sacred cow and chanting, "I must go into debt to get a good education so I can get a good job and spend my way into bigger debt so I can save my way to being rich when I'm old enough to wear Depends diapers."

I will tell you I was so shocked by this display that I nearly blew my cover when I gasped, "Have you all lost your mind?"

I diverted attention from the gaffe by thundering in Hungarian, "Take me to your leader or I'll rat you out to the Secret Service for running a Ponzi scheme!"

(Amazing but true, the Secret Service got involved in investigating Ponzi schemes. This happened when the schemes began proliferating like mice in the wake of 9/11, which saw the FBI greatly occupied with investigating terrorist matters.)

I had to wait some time but finally one night I was ushered into the presence. My jaw dropped at the sight that met my eyes. There was a chihuahua, got up in a tiny powdered wig and velvet waistcoat and seated on a throne.

"Meet our leader, Bernard de Mandeville," whispered one cult member.

I said, "That's not Mandeville. He's dead. He's been dead for 300 years. That's Frank."

Then I grabbed Frank and ran like hell. I returned him to the Fed the next day with the advice to keep a closer eye on him in future. Then the fights started: It's your turn to keep an eye on him. No it was my turn two times ago.

Closing Thoughts

Well I hope all that clears up any confusion about U.S. monetary policy. But I would like to emphasize that not only has Bernard de Mandeville been dead for 300 years, he never advised that governments attempt to reverse engineer the Paradox of Thrift. Nor did he advise that the banking system be virtually destroyed in the service of reverse engineering an economy, as if business cycles were a contraption that could be tweaked whenever it seemed to be malfunctioning.

And if John Maynard Keynes had lived to see middle-income Americans walkinig around in $200 designer jeans and sneakers bought on credit, I think he would have regretted mentioning Mandeville's Paradox of Thrift when he wrote his 1930 "A Treatise on Money." He advised that governments do deficit spending in the face of a looming recession. Governments -- not individuals.

Yes, I understand that most Americans can't read economic indicators in the way Frank can and so can't see signs of a looming recession. But then why do these Americans live as if they can see the signs?

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More on the rule of law and a road map to a police state

As I noted in the post about the original police state and the rule of law, the United States is fast approaching the outer banks of its success as a democracy because its form of government has generated such a huge body of laws. Even with the use of private contractors, even if the U.S. population is doubled through fast-tracked citizenship for immigrants, we are running out of adults to administer all the legislation churned out at the federal, state, and municipal levels of government.

Yet this problem is not even publicly acknowledged because the rule of law is above debate in the United States.

If I recall there are certain anarchists who argue in principled fashion against the rule of law but I think any solutions they propose as a substitute are utopian. It's much the same with Libertarians; they want fewer laws, less regulation, smaller government, but they do not question the necessity for the rule of law. And they have no alternative to propose to this rule.

As for the rest of the American body politic, in this regard it evokes the parable of the man who loses his keys in a darkened house, but searches outside for them because the light is better out there. All national political debates about the size of U.S. government are ridiculous because they don't grapple with the inherent contradiction between the demand for smaller government and the very foundation of the United States government -- the rule of law, which of necessity requires regulatory regimes to oversee the laws, thus inexorably increasing the size of government.

In the earlier post I alluded to a possible way out of the conundrum: make a clear distinction between the principle of the rule of law and a literal rule by endless legislation. Yet putting the distinction into practice would, I think, mean a radical change in American politics.

But even if the debates got on track, even if a temporary moratorium on lawmaking could be enacted in the effort to slow the rate of legislation -- or if some kind of patchwork solution could be created, such as making a law that before a new law and its regulatory regime are created, an old one has to be retired, this would not address one of the most troubling negative consequences of an unrestricted rule of legislation:

The United States isn't a closed system; the very success in the USA of relying on a rule of law to protect freedom has been replicated in virtually every free country during the past century. Moreover, those nations that still have authoritarian governments are pressured by the U.S. and other major democratic governments to adopt or more broadly adopt the rule of law. The pressure is not only in the form of jawboning. Any government that wants greater say in global trade issues must work toward implementing or expanding the rule of law in its country.

If all that sounds like a great idea, there is a catch. The rule of law is being converted into a global regulatory regime with totalitarian implications. This regime is based on applying the rule of law to legislation written by groups of nations and legislative bodies over which Americans (and no single peoples) have any control.

And yet the very Americans who complain the loudest about this burgeoning global regulatory regime are the same Americans who would defend the rule of law with their lives! Something has to give here, or something has to be clarified and very quickly.

There is another problem with an unrestricted rule by legislation, which I mentioned in the earlier post. Once there's a regulation for everything you're looking at a society of lawbreakers. That state of affairs is a road map to a police state.

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Singularism?

A reader took up my challenge to find a term that was more descriptive than "economic collectivism." She pointed out that what I'd described wasn't so much collectivism, in the sense of the many folded into a group, as "singularism" in the sense of the many being conceived of as a single entity; e.g., the Statistical Person, the Economy. She pointed out that this view was closer to totalitarian than collectivist.

These are interesting observations, particularly because the denunciation of collectivism as a great evil, by observers as diverse in their politics as Ayn Rand and George Orwell, is clearly more of an indictment of totalitarian government than state-enforced interpretations of collectivism -- or at least as much as an indictment.

However, I shy away from associating totalitarianism with the over-application of statistical reasoning because it would have to go through several steps to end up as a justification for totalitarian government, wouldn't it?

With regard to the term singularism: I checked a few dictionary definitions, which differ slightly but which can be boil down to "any philosophy that explains phenomena from a single principle" (Collins Dictionary)

But the phenomenon I'm describing is basically psycho-epistemological one, not philosophical. It's a mindset that arises from mentally jamming a tremendous amount of diverse statistical data into a single concept, such as "the economy." I think the mindset, when translated into economic policies, veers toward the collectivist viewpoint. So while I might get an argument from the reader and others, at this point I  prefer economic collectivism to singularism, although I thank the reader for her suggestion.

I realize I was the one who started this discussion but it's beginning to remind me of a scene in the movie "Ladyhawk." The evil bishop's soldiers shout curses at the drunken overseer of a rundown monastery as they fall off a rickety collapsing footbridge. He shouts back, "I'm a monk, not an architect!"

I'm a pundita, not a scientific epistemologist. If you're happier with economic singularism, or economic statisticalism, or econo-singular statisticalism, or tofu, just so you're in the ballpark about what I mean by economic collectivism.

I'm simply trying to move us from point A to point B, then we can all get on with our lives. My discussion of what I've termed economic collectivism is to identify a big hidden obstacle standing in the way of sorting out America's financial problems: the public's unawareness of the tendency for fiscal and monetary policymakers to overly rely on statistical reasoning when crafting policies.

So there's the over-reliance, and the public unawareness of this. So this is actually a two-part problem. The over-reliance part is for scientific epistemologists to grapple with. I'm interested in the second part. But having pointed out the obstacle in the "Economic Collectivism" posts, I'm content to proceed to the next milepost.

This is not to discourage suggestions, by the way. I'd be glad to see a better term than economic collectivism. But there's another problem with singularism. The term is now being used to describe a kind of quasi-religious or philosophical view that humanity is set to make a singular leap in consciousness because of our machines, or something like that.

It seems the idea has attracted several techie types and it's becoming controversial in some quarters. I think Wikipedia might have an article on the term, as it's applied in this case. Anyhow, I wouldn't want economic collectivism to be confused with that interpretation of singularism.

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One Solution For 1,000 Problems: Part 4 of Money, Wealth, and You

Adverse Feedback Loops a.k.a. Vicious Cycles

Economists and leaders in the two major U.S. political parties make the same mistake when they debate the best way to create financial security for Americans. No matter how different their views on America's economic troubles they believe that job opportunities and business growth are the basis of security for the individual and the society as a whole.

The mistake is that the individual's sense of security is derived as much or more from his ability to hoard a portion of his wealth than his earning income. In a modern society this translates into hoarding of money. But Americans aren't allowed to hoard money, not without severe penalties. The attempt to offset or evade the penalties diverts large amounts of time from Americans' personal and work responsibilities, causes them a host of emotional disorders and stress-related illnesses.

Those who blame all this on the uncertainties of life in a capitalist economic system are off the mark. Humans are built to take an incredible amount of uncertainty in stride, thanks in part to our nomadic past and experience with the vagaries of weather and ground water supplies during the earliest farming eras. Yet it's just because of the uncertainties that accompany the struggle to survive that humans learned to hoard wealth as protection against unpleasant surprises.

Here "wealth" simply means an abundance, not a numerical amount. A billionaire has more wealth than someone earning far less, but an abundance of money -- what money an earner has left over after all his expenses is met -- is an abundance, whether it's a billion dollars or ten.
Hoarding of a portion of abundance allows humanity to face life's unpleasant surprises with resilience. So when the hoarding instinct is repeatedly frustrated, a society begins experiencing many problems in many directions.

There's another reason capitalism isn't the culprit. Republicans argue that with enough free-market capitalism supported by low rates of taxation the American economy can generate enough job opportunities to provide a reasonable level of employment security for the individual.

The argument ignores the fact that capitalism ceased to be the driving force in U.S. fiscal and economic policies after the collapse in 1973 of the Bretton Woods agreement, which had established a new international monetary system for the post World War Two era. The system, which was based on fixed exchange rates for currency, was replaced with floating exchange rates. This meant that the U.S. government and Federal Reserve's struggle to maintain the U.S. dollar's status as the world's major reserve currency superseded all other macroeconomic and financial considerations, including capitalism.

The Democrats are also off the mark when they argue that taxation is the way to provide security in the form of financial safety nets for all Americans. The argument ignores the fact that if you inject a tremendous amount of insecurity into the society by taxing virtually every aspect of money, this when added to uncertainties about employment sets in motion a vicious cycle:

1. The more uncertain their hoard of wealth and job opportunities, the more people will seek a secure source of income. This leads to more and more people who seek a reasonably guaranteed income in the form of employment with the government.

2. The more people employed by government, the more taxes need to be levied to support the government workforce.

3. The more taxes levied, the more people look at the erosion of their wealth and protest.

4. The protests lead government to impose taxes on more and more types of saving and spending as the way to avoid steeply increasing the payroll tax. This sneaky means of raising revenue created a tax code so complex that maybe only 1,000 accountants in the entire United States fully understand it, which only adds to the insecurities of people trying to hoard a few bucks.

5. The more types of taxes levied, the more insecure people become when faced with no way to protect their wealth or nail down guaranteed employment.

Return to #1 and repeat the cycle.

The cycle set in motion other vicious cycles that today negatively impact every aspect of American society. Not the least has been the erosion of the U.S. republic. A republic is a rule of the people, but whoever heard of a long-lived ruler who couldn't protect his wealth? Power, governing power in a republic, comes not from the point of a gun but from the crushing power of wealth. Only when Americans as individuals have the ability to preserve their wealth can they as a collective rule.

One Solution For 1,000 Problems

If you accept all the above for the sake of discussion, the method for breaking the vicious cycle is pretty simple: Give people want they want. Give them a reliable, hassle-free means to protect their wealth. How to do this? Find an American banker who's spitting mad at the Federal Reserve and the U.S. federal government -- and there must be at least, well, however many bankers there are right now in the United States -- who are that mad, and talk him (or her) into trying something new for a change, like this:

Set up a liquid savings account for individuals that would require a token minimum to open the account and be like a regular savings account in all other respects except for two unique features:

1) The bank pays a baseline interest on the deposits that never changes, remaining static at anywhere between 3.5 and 5 percent (I like 4 percent).

2) Either by increasing the interest it pays above the baseline or through offering gifts or services, the bank pays enough on the savings account to offset increases in the cost of living.

So, this account is designed to allow for the preservation of wealth, which is why the bank should call it a "wealth account" to distinguish it from a regular savings account, which does not protect the savings from erosion through increases in the cost of living.

Can a bank offer that kind of account without the need to change laws? A bank can pay any rate of interest on savings accounts it finds prudent.

As to what banker in his right mind would find it prudent under present Federal Reserve monetary policy to pay out such a high baseline rate of interest --

1. The banker who knows that a bank that offered a wealth account would be so well capitalized it would be far less dependent on the Federal Reserve system.

2. The banker who knows that the present state of computer technology would allow a bank to compete with credit card companies, payday loan companies, pawn shops and other non-bank types of companies that cater to individuals who need 'tide-over' loans ranging from a few days to a month. The bank could charge less in interest than the payday loan companies and still charge more than it could on mortgage loans. In this way the bank could make up in volume with tide-over loans what mortgage loan business it would lose by charging a higher interest on those loans to offset the higher interest paid on the wealth account.

If readers are shocked that I would suggest a bank become a 'loan shark' -- then you would really be in for a shock if you studied the Wikipedia article on payday loans (these types of loans aren't necessarily tied to a payday repayment). Payday loan companies are filling a critical need at this time in the United States.

For instance, consider the number of natural disasters that afflict the continental USA; barely a month goes by that one region or another isn't being hit with wildfires, floods, blizzards, tornadoes, and hurricanes. All those disasters can temporarily prevent employed people from getting to work from a period of few days to a few weeks. Many of those people don't have savings, don't have a line of credit with a bank, and so the only way many of them make ends meet until they get back to work is through the payday loan companies.

The banks abandoned this field of emergency loans. They need to retake it. By doing so, they will win customer loyalty and establish the physical bank as a kind of community center.

Moreover, the banks can do something that the payday loan companies and other non-bank lending companies can't: offer financial advice to payday loan 'addicts' to help them break out of the payday loan cycle.

3. The banker who figures out how gifts and services can win loan customer and depositor loyalty, and build community. The sky's the limit when it comes to the kind of services that banks could provide in order to compensate savers for increases in the cost of living. This community building would also provide the bank with dedicated lobbyists. As banks became more and more distant from the public they turned more and more to high-priced lobbyists to help them fight excessive regulations. How many billions of dollars have banks spent in this fashion during the past decade, when they could have gotten the lobbying done for free?

Restoring the Banking System

A healthy banking system is the lifeblood of a modern society, yet the U.S. banking system is in effect dead because it became an instrument of U.S. monetary and fiscal policies. The lack of a genuine banking system is killing American business, American capitalism, and has greatly weakened the entire U.S. society.

There is only one way to restore the banking system, and that is by providing individuals with a reliable means to preserve their wealth and keep it liquid; i.e., readily available for use.

Render Unto Caesar

By all means the interest income on a wealth account should be taxed in the same way that income on a regular savings account is taxed. Tax-free and tax deferred methods of saving give the government additional avenues by which to impose regulations and expand their regulatory and oversight regimes.

Would the Wealth Account Kill Wall Street?

At this point some who follow such matters might say I've come up with a way to put a crimp in the shadow banking system. The shadow banking system is not going away, and for the same reason that gambling casinos will always survive. There are always people willing to take very great risks for a chance at a very high return on their money -- and there's nothing wrong with that. The wrong part happens when an entire society is forced to act in that fashion just in the attempt to stay above water.

Nor would a wealth account collapse Wall Street or the credit card companies. Wall Street is dominated by institutional investors: hedge funds, pension funds, business and government corporations, and so on. The institutional investor will always have good reasons to park money in stocks -- and bonds.

And the individual would not throw away all his credit cards once he had a wealth account. There will always be times when people need more quick cash than their bank is willing to lend them and who'll accept high interest rates to get the money.

The Psychological Benefits

A wealth account help cure a range of money-related neuroses, including the attempt to provide an illusion of wealth through a kind of self-inflicted Ponzi scheme -- a scheme built on borrowing from one credit card to keep up payments on others.

The existence of a wealth account would also tamp down fears that create market bubbles and resultant panics, and which make Americans easy victims of true Ponzi schemes and other illegal scams.

It would also tamp down the devastating gambling fever that in effect taxes Americans at astronomical rates via lotteries, and which diverts Americans from building wealth and becoming genuine investors, as distinct from being driven into high-risk securities, many of which are nothing more than legalized gambling.

The above says nothing about the great psychological value of having a simple avenue to building wealth and protecting it. In many cases, everything from substance abuse to divorce to stress-related psychological and physical disorders is rooted in fears about money that can be traced to the inability to hoard it.

Even character flaws that manifest in petty theft, cheating on exams, and lying to procure employment will lessen once people have a sense of security about their savings. It's hard to develop good character while standing on quicksand. That's what it feels like to people at the mercy of mysterious and seemingly arbitrary economic decisions that keep moving the goal posts on the field of wealth creation and protection.

Render Unto Economists That Which is the Economy

As to whether the wealth account would be inflationary or deflationary: gee, someone said that if you start sailing the ocean eventually you'll fall off the edge of the earth. I guess there's nothing for it but to get in the boat and start sailing, and see what happens. [flipping a pen in the air] I am not in the mood today to discuss the Paradox of Thrift or what economists think about the economy.

Technical Difficulties

I have made the wealth account sound simple to set up but there are technical difficulties. For instance, half the planet would want to open a wealth account as soon as it was advertised. And I wouldn't want to be a teller at the bank on the first day the account was offered. It would be like Wal-Mart on Black Friday multiplied by every other Black Friday going back to the first one.

Logistics would be only one of the technical difficulties. Nothing that couldn't be ironed out, but here is where the bank could run into legal issues because I think the ironing would involve setting up conditions for who could open the account. Yet I don't like the idea of a credit union offering the wealth account; I'd like to see a bank offer it. Ah well, what are law firms specializing in banking regulations for?

The Greatest Benefit for the Individual and Society

The pivotal problem is that every time Americans turn around their money hoard is a little less. Even if you put the hoard under a mattress its value is eroding with every hike in taxes and the cost of living. As to the argument that pay raises or higher business profits offset the hikes: the reasoning would hold true only if no employee was ever fired, no business ever had to take a cut in profits, the cost of living never increased for anyone, and life never sprung expensive surprises.

The wealth account would be the basis of true wealth preservation for the individual. The person's savings would not need to be supplemented by investments and tax schemes that the individual hopes will offset the erosion of his wealth. So the account would be a real savings account, as distinct from the faux ones that Americans are offered now.

But the greatest benefit? Predictability. More than the interest income from the account, the depositor would be able to predict that the principal would be roughly worth as much five years into the future. That ability to predict is the basis of something called "long-range planning." This kind of planning should be the reward of living in a free country, an advanced, wealthy society. Instead, Americans have been thrown into the same situation that bedevils peoples in unfree societies, in the poorest ones: things are so uncertain that people don't like to plan, or invest, beyond the short term. This prevents the society from advancing, which only entrenches short-range thinking. It's a vicious cycle, and one that is very hard to break.

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