Sunday, December 10, 2017

China A State Driven Business Model Geared To Expand

It could be said that people are naive if they do not recognize the distinct advantage a state-driven economy has over free enterprise, at least initially. A bit predatory in nature, such a system can quickly exploit the weaknesses of its competitors, however, a major flaw is that over time a state-controlled system pays dearly in that they are not responsive to consumers real needs or trends. Such systems also fail to react accordingly to market change thus squandering their resources. The crux of this article is that it is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition. Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal.

For years China has been a place were corruption has flourished, partly fueled because any appearance of growth has been rewarded. Also, the rules protect the politically connected.  Donald Trump recognized this and rallied those Americans that have been harmed and most affected by globalization and the "China effect" to put him in office. Trump's so-called base is made up of supporters many of which have lost their jobs or seen wages stagnate over the years. This sometimes referred to as the hollowing out of America is something that has occurred across a broad swath of the country as greedy companies have exploited the concept of "free trade" by having the products they sell in America manufactured in China using cheap Chinese labor.

Now Airborn The C919 Will Be A Major Player
Three articles that appeared on this site over the last year support my argument that China is not our friend and that we had better be on our toes. The first explored how China was ramping up its fledgling aviation industry and how when it hits its stride we can expect cutthroat competition. The article warns that as China's aviation industry takes flight over the next decade America may be saying say goodbye to a big chunk of its exports in this field. The Chinese manufacturer claims the twin-engine, narrow-body design of the C919 is superior to its competition the Boeing 737, the best-selling jetliner in the world, and its competitor, the Airbus A320. COMAC (Commercial Aircraft Corp. of China) also says it can bring the C919 in at a price lower than the $50 million range that Boeing and Airbus charge for each of their planes.

On Chinese President Xi Jinping's first state visit to the USA, he made a couple deals said to help foster relations between the two countries. One was to order 300 Boeing aircraft for $38 billion, this was tied to Boeing building the first "aircraft completion plant" in China, it was to be Boeing's first non-U.S. plant. Considering China's knack, or shall we say, history, of taking advantage of sucking production ideas from manufacturers this move was a watershed event to many industry watchers. As noted above China is now in a far better position to realize its dreams to develop this industry because part suppliers such as GE, Pratt & Whitney, and other firms are eager to supply the engines and other key components. The politics of globalization a few years ago have paved the way forward and makes China's effort to produce planes far more likely to succeed. With China's experience of building cities from scratch, why build just one factory when you can build twenty? This means we should not expect this industry to grow organically but it is logical it will be engineered by an aggressive government with a mission.

Chinese-Bullet-Trains On Display
The second deals with the company formed in a recent merger of China’s two largest train makers this means the production of railway locomotives, bullet trains, passenger trains and metro vehicles.   It points out that no effort is being made to deny that the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. Proof of its ability to compete is that it has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA. It should also be noted that CRRC recently formed a consortium with Bombardier that allows it to compete for the renewal of the New York subways where it appears they are currently in the lead to win the contract that should amount to around $1.5 billion dollars.

The third article warns that when you closely examine America's trade deficit with Mexico it becomes even more disturbing.  When following the money the United States huge trade deficits you begin to understand the money eventually ends up in China.  When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. The US trade deficit widened to a shocking 48.7 billion dollars in October of 2017.

It does not take a great deal of foresight to realize that America is on verge of giving up its role as an economic leader if it continues on its current path. Those who surrender to the idea America is too small to lead based on population numbers do not understand that quality beats quantity hands down. Sadly the spirit of, "I will gladly pay you Tuesday for a hamburger today" is alive and well in many of those advocating free trade and the expansion of globalism. Whether driven by greed or suffering from being short-sighted, buyers of the many products we import each year should resist giving up their futures so that we can buy the latest fancy flat screen television or set of patio furniture made in China for far less than one made in America. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey.

Saturday, December 9, 2017

Is Growing National Debt No Longer A Major Issue?

It appears Washington is again prepared to ignore the deficit and growing national debt and press forward on more "important" matters. Consider how small an issue this was for most Republicans when they passed their tax bill. America is already over twenty trillion dollars in debt and it was projected that debt would grow another ten trillion dollars over the next decade, so is adding another one and a half trillion more during the next ten years such a big deal? Apparently, Congress has decided that it is not and so has the president which is confirmed by his recent tweet.

  Donald J. Trump @realDonaldTrump
We are one step closer to delivering MASSIVE tax cuts for working families across America. Special thanks to @SenateMajLdr Mitch McConnell and Chairman @SenOrrinHatch for shepherding our bill through the Senate. Look forward to signing a final bill before Christmas!

Estimates Have Been Very Very Wrong
It is important to remember predictions of future spending and revenue often turn out to be wrong. The chart to the right predicted that by 2019 the national debt would top 12 trillion dollars. Projections made by the government or any group predicting budgets based on events that may or may not happen at some future date are simply that, projections or predictions and not fact. This means that such numbers are totally unreliable. Sadly, when President-elect Trump taking office in early 2017  the National Debt Clock was ready to breach the 20 trillion dollar mark. This means the deficit during the Obama years ran at over twice the nosebleed levels that had been projected. Yet, this appears to have raised no red flags as we continue to hear from the media how robust economic growth has helped push the U.S. budget deficit down. These claims bantered about by Washington and the media have helped push the stock market into new territory and reassured America that all is well.

We often confuse and muddy the waters when we talk about the debt, one way we do this is to emotionally charge the issue by seeking which administration or President is to blame. While Bush left office with the economy in the sewer most the resulting deficit occurred on Obama's watch.  Over the last few years, the Obama administration has touted how the deficit is dropping and the economy is on the mend. Don't expect a chart put out by somebody with an agenda to clarify this issue, long ago I learned that looking at a chart to see how we are fairing can be very deceiving, little things like the scale or how they are colored often blur how we interpret their message. This has led some Americans into thinking the worst of our problems are now in the rearview mirror. One thing is clear and that is only by looking back decades do we see just how large this problem has grown.

As things stand America continues to rack up a deficit each year of nearly $2,500 for every man woman and child in the country, such deficits were unheard of in the past unless it was during a major war. Deficit spending has been accomplished by borrowing money that will become a long-term drag on the economy going forward. To make matters worse the government has fiddled away the time in deadlock rather than pursuing the structural reforms we so desperately need. This means much of this money has been poorly spent in ways that do little to address the deep problems that plague our economic future. Even the tailwind of lower energy cost through the massive expansion of oil and natural gas supplies has not been enough to move the economy forward. Much of what we have seen should be considered a "one-off" that is behind us. Bottom-line all this trickles down to job growth which has been nothing to brag about when you consider many of the positions being created are not "quality" or even full-time jobs.

Even though we have seen deficits reach unprecedented levels the deficits in our future will be dramatically worse. Any claim that Washington has the budget deficit back under control is a total lie. We are currently mired in the midst of the greatest government debt bubble in the history of the world. By our actions or lack of action, we are destroying the future of this nation. Only when we use the massive 2009 deficit as a baseline are we given the impression the budget is back under control, it is clear that 2009 was an unplanned budget disaster and should never be used as our reference point. The ugly truth many people choose to ignore is that starting in 2017 entitlements will become the driving force that carries the deficit higher and higher into nosebleed territory.

The fact is with the artificially low-interest rates of today many people seem to have little desire to cut spending. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy to wildly run up debt as if there is no tomorrow. Way back in 2011, the "Gang of Six" committee’s bipartisan plan proposed three dollars of budget cuts for every one dollar in tax increases, after much tough talk this has all been forgotten. The irony is that today lawmakers are again looking at boosting spending on both defense and infrastructure programs at the same time they cut taxes.

If you want to know what the real budget deficit is, all you have to do is go to a U.S. Treasury website which calculates the U.S. national debt. Below you will find the amount of debt outstanding on an annual basis from 2000 through 2015. This includes legal tender notes, gold and silver certificates, etc. The first fiscal year for the U.S. Government started Jan. 1, 1789. Congress changed the beginning of the fiscal year from Jan. 1 to Jul. 1 in 1842, and finally from Jul. 1 to Oct. 1 in 1977 where it remains today.

Date Dollar Amount
09/30/2015 18,150,617,666,484.33
09/30/2014 17,824,071,380,733.82
09/30/2013 16,738,183,526,697.32
09/30/2012 16,066,241,407,385.89
09/30/2011 14,790,340,328,557.15
09/30/2010 13,561,623,030,891.79
09/30/2009 11,909,829,003,511.75
09/30/2008 10,024,724,896,912.49
09/30/2007 9,007,653,372,262.48
09/30/2006 8,506,973,899,215.23
09/30/2005 7,932,709,661,723.50
09/30/2004 7,379,052,696,330.32
09/30/2003 6,783,231,062,743.62
09/30/2002 6,228,235,965,597.16
09/30/2001 5,807,463,412,200.06
09/30/2000 5,674,178,209,886.86
To find more historical information, visit The Public Debt Historical Information archives.

Sunday, December 3, 2017

Economic Evolution Makes Many Comparisons Obsolete

With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. Over the decades we have moved from an agricultural based society to an industrial centered manufacturing way of making a living. Now, without a doubt, we are moving solidly in the direction of technology becoming the main driver of cultural change and with it, the economy is again undergoing a metamorphosis. With the passage of time, we tend to forget or minimize in our minds what is too painful to remember and the way we were during times where growing pains battered us at every point. While we are undergoing this latest transformation and all the noise that accompanying it I ask you to consider the possibility the important adjustments the economy must make are lagging far behind our current "financial culture" or that the economy has evolved in a way that simply no longer works.

The Titanic Was Herald As "Unsinkable"
Much of this has yet to become apparent to the masses and is masked by institutions papering over problems and a tradition of optimism that has served mankind well, however, something seems to be broken or out of kilter. When we look behind the curtain it is difficult to ignore the numbers simply do not work going forward. Ignoring the warning signs on the horizon does not make them go away and kicking the can down the road can only delay the inevitable for so long. Many of the comments I read concerning the current stock market and companies such as Tesla and Amazon remind me of the following statement, "Not even God himself could sink this ship." that an employee of the White Star Line made during the launch of the Titanic on May 31, 1911.  The truth is as we move forward we are in uncharted waters at any time a surprise might shock us into the reality.

Much of the economic distortions we are experiencing today harken back to President Richard Nixon's decision on August 15, 1971, to close the gold window. It is a factor that changed everything. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Nixon's decision untethering the dollar from gold and releasing it from the promise dollars could be redeemed in gold, this resulted in opening the floodgates and allowed credit to explode from $1.7 trillion to $65.5 trillion at the end of 2015.

Exploding Credit Has Massive Ramifications
A question we must ask is just how relevant today's comparisons are with prior economic cycles? The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades. Much of this has flowed from Nixon's decision to close the gold window and may be greatly responsible for the rising income inequality that has occurred in recent decades. After inflation soared in the late 70s America found the cost inflation in goods could be reduced by buying these things from low-cost producers located in other countries. This means imports soared.

A de facto policy of placing no restraints on trade deficits due to the removal of the gold window has encouraged the outsourcing of jobs. This policy dovetailed with America's decision decades ago to make China into a formidable ally that would act as a  counterbalance against Russia and the Kremlin. We did this by offering economic incentives and help to China's economy, looking back this was a watershed event which changed the way American companies conducted business. It has resulted in American companies outsourcing production and the mass exodus of manufacturing jobs from America to distant lands where labor was both cheap and abundant. This policy was sold to America's middle-class as a "win-win situation" and we were told the American worker would move up the economic food chain towards better-paying jobs that would be more fulfilling and require less toil. This did not happen.

Many Comparisons With The Past Now Obsolete
Returning to the main theme of this article this massive expansion has rendered many comparisons with the past obsolete. It has also resulted in the economy embarking on a rollercoaster-like experience where it encountered a series of events such as the dot-com bubble, which burst in 2001. In reaction, the Greenspan Fed stepped on the gas blowing the biggest housing bubble on record. In response to that asset bubble popping, we saw the Fed bail out the banks, the asset holders and the wealthy. The bottom-line is that in the end, this chain of events left the average American worse off than before. During all this time debt has grown, and to service that growing pile of debt the Fed had to keep slashing interest rates. This means that instead of allowing consumers to benefit from technological advances that tend to be inherently deflationary, the Fed sought to increase inflation by declaring inflation in the range of  2% to be in our best interest. This has benefited the banks and those already wealthy while at the same time increased inequality.

I came back to finish this article that I started some time ago because I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. While investors are often urged to be cautious the excesses of today are in many ways not as "sector" oriented as those experienced during certain periods we have seen in the past and this makes it more difficult. It seems everything is encouraging and causing both savers and investors to take far more risk than they should in the quest for higher returns and yields. The "fear of missing" out is again running rampant and with the strategy of buying the dip having proven successful over almost a decade investors have become complacent to the risk they face.

Sunday, November 26, 2017

Is Medicare Free? Don't Count On It, Get Ready To Pay!

Medicare Not Free If You Want Good Coverage
Like many people, I was under the impression that Medicare was free and that after the age of 65 at least the burden of healthcare payments would be lifted from my shoulders. President Lyndon Johnson signed the Medicare and Medicaid programs into law in 1965 to cover the cost of healthcare for many Americans. But this does not answer the question “is Medicare Free?” Many Americans share the misconception that Medicare coverage is free. This is generally rooted in the fact that Medicare part A is indeed free for most Americans, however, more than one part exists to this very complicated program. The dirty little secret is that part A will only suffice or be enough if you are poor or willing to become poor if you become ill and run up massive healthcare cost. 

  • Premium-free Part A. You usually don't pay a monthly premium for Medicare Part A (Hospital Insurance) coverage if you or your spouse paid Medicare taxes while working. - Basic Policy
  •  You pay a premium each month for Medicare Part B. Most people will pay the standard premium amount, in 2017 of $134 a month. If your modified adjusted gross income is above a certain amount, you may pay more. - Less Basic Policy
  •  Your out-of-pocket costs in a Medicare Advantage Plan (Part C) depend on, many factors such as range of coverage, where you live, and more Price per month varies greatly. - also known as "Medigap Plans" these plans are designed to pick up cost that Medicare sidesteps.

Rather than being shocked I was disappointed to find out how limited Medicare A is. This means that in order to protect your assets or see you don't get a huge medical bill you still have to carry Medicare part B or what they call "supplements." Generally, anyone that is interested in protecting their savings and removing the risk of bankruptcy will sign up for the "optional" part B and very likely more. This means many people have little choice but to make monthly payments that are deducted directly from their Social Security checks. This is a topic many people seem not inclined to talk about or something that those heading towards retirement simply don't want to hear. There are many complex guidelines and laws that have to be examined to determine the exact cost of Medicare but it is safe to say a program picking up all our healthcare cost is not free. In fact, as we look down the road it appears the path forward is about to become much grimmer.

Medicare Is A Budget Buster!
The Heritage Foundation Reports that,"The rising cost of Medicare is placing an increasing burden on current and future taxpayers, as well as exacerbating the poor financial condition of a program on which America’s seniors depend in their retirement." most Americans know this but have chosen to ignore this reality or  decided to kick the can down the road and deal with the situation at a later date or just hope for the best. Ironically, making the cost of rising Medicare cost even more certain is the continued stubborn refusal of the government to let us die, that is why I predict whether you agree or disagree with the idea of euthanasia it is destined to become a major social issue in coming years. With people living longer and technologies ability to extend a person's life well beyond where they feel it has any "real quality" the issue of euthanasia will not go away. Given both the sheer size of Medicare spending and the future projections, Congress cannot even begin to address America’s crushing debt without slowing its growth. It should be considered a red flag that currently much of Medicare debt is not included in conventional debt projections on the nation’s books.

The demographic pressure of baby boomers joining Medicare at the rate of 10,000 per day over coming years will cause enrollment to soar from 50.7 million beneficiaries in 2012 to over 81 million beneficiaries in 2030. Medicare is the fastest-growing program in the federal budget and already accounts for about 15 percent of federal spending. In 2012, Medicare spending reached $557 billion in 2012, and it is expected to nearly double in the next 10 years. Medicare spending accounted for 3.67 percent of the entire economy, measured as gross domestic product (GDP), in 2011and will rise to an estimated 5.8 percent of GDP in 2030. The Medicare Office of the Actuary estimates that, under the most realistic scenario, Medicare has an unfunded obligation of $37 trillion over the next 75 years.

It is conventionally assumed that Medicare is more efficient than private insurance because it has lower administrative costs but this claim is somewhat misleading, the public-private comparisons made on its behalf are often skewed. Medicare patients comprise not only an aged insurance pool, they are also far more likely to be suffering from chronic medical conditions and are more physically disabled than the general working population that is covered by private insurance. Medicare is also the primary coverage for a special class of patients suffering from end-stage renal disease. The profile of the Medicare pool guarantees much higher health spending for its patients than those enrolled in private insurance. Thus, expressing administrative costs as a percentage of total program costs driven by this older and sicker population makes the official administrative costs for Medicare of around 2 percent to 3 percent of claims only appear low.

Most Americans Know Very Little About Medicare
While the government boasts that Medicare has very low administrative costs, they are in fact higher than those of private insurance even after including money spent on non-administrative functions, such as marketing and profit. On top of this much higher Medicare costs are generated by high levels of waste, fraud, and abuse within the program. Medicare's complex administrative payment system, combined with relatively rapid payment of largely unexamined claims has been an invitation to dishonest providers seeking to game the system at the expense of the taxpayer. The program also transfers a "hidden administrative costs" by shifting to doctors, hospitals, clinics, and skilled nursing facilities all the hours necessary to comply with a mountain of Medicare rules, regulations, and related paperwork.

While conventional methods of “cost control” have ratcheted down reimbursements for doctors and hospitals they have in recent years not been enough. Cuts have hit seniors in the form of reduced access to care and also shifted the costs of Medicare’s "below-market payment rates" to younger working Americans in the form of higher premiums for their private health insurance. This almost guarantees that additional conflict will arise between different age groups of our society concerning financial policy over entitlements as the bill for such things is squarely placed at the feet of today's youth. It is clear that each round of Medicare cost shifting to non-Medicare patients routinely shows up in higher insurance premium costs for younger workers and their families.

Sadly, these are already the people who are already paying the bulk of Medicare bills through their taxes. In any given year, through a combination of payroll and income taxes, taxpayers finance almost $9 of every $10 spent on the Medicare program but this is an uphill battle. Today a single male who retired at 65 in 2011 and earned the average wage ($43,500 in 2011 dollars) would have paid $60,000 in Medicare taxes but received $170,000 in benefits, a difference of $110,000. A one-earner couple, who retired in 2011 and earned the average wage would have also paid $60,000 in Medicare taxes but received total benefits worth $357,000, a difference of $297,000. This imbalance contributes to the Hospital Insurance Trust Fund’s projected financial insufficiency. 

Now let's look at the figures a couple I know recently shared with me, these "real life numbers" are not pretty. Both the husband and wife each received about $1,000 each per month and thinking Medicare was free they planned to retire on this income. To say they were shocked to find they would have to continue paying out big bucks after turning 65 and going on Medicare is an understatement. Knowing that it is not difficult to rack up a $100,000 plus bill for a short stay in the hospital it is no wonder people are both fearful and surprised of what holes often exist in coverage, even a 20 percent co-pay can result in a huge bill. In order to protect what they had worked years to save they were forced into making the ugly decision to take Part B, Part C, and Part D in order to fill in the massive holes in coverage.

While far less than the $20,000 dollar plus healthcare cost they had been paying for a policy with high deductibles the cost of Medicare was something they had not anticipated in their "golden years." The monthly cost of Medicare will leave this couple with a meager $1,200 a month of income. This is not the kind of retirement income they envisioned being forced to exist on. Fortunately for them they have over the years cobbled together around one hundred thousand dollars in savings to supplement this, however, with today's interest rates having turned an expected 5 percent stream of interest from over $400 dollars a month into a mere trickle of around $50 sure doesn't help. They reminded me that many other Americans are in the same boat but a huge number of those people lack any saving from which they can draw upon in case of an emergency, those are the people in a real pickle.

A few final notes, if you are in a Medicare Advantage plan, also known as part C, you get both your Medicare Part A and Part B coverage through a private health insurance company contracted with Medicare. Today, roughly three of four Medicare patients are enrolled in the traditional Medicare program, this leaves just over a quarter of Americans enrolled in the more comprehensive part C known as Medicare Advantage. For many people even affording part B is a reach too far and if they have few assets if they do become ill a very good chance exist that the bills will never be paid. As for Part D, it has to do with drug coverage, the high cost of drug prescriptions has become a major expense and concern for many Americans.

After these basic choices, if you can afford it, as usual, other options also are available. All in all my research has brought me to the conclusion that many Americans have chosen to avoid confronting the issue of healthcare in their later years until the very last moment. I also found that like all government programs the Medicare program is massively complicated, flawed and crafted to meet the needs of powerful special interests, this is masked by both its size and nobody really wanting to look directly at a problem with few easy answers. Do not give the government to much credit for crafting a program which will supply older Americans with healthcare at a reasonable price. While the Medicare system may be very difficult to navigate the task pales in comparison to the problems this area of healthcare faces going forward.

Footnote; Few Americans were fans of the recently deceased Cuban El Presidente Fidel Castro but he did leave one positive legacy and that is Cuba's quality healthcare system. The poor country of Cuba has managed to guarantee access to care for all segments of the population and obtain results similar to those of the most developed nations. The article below delves into ways we can fix our broken healthcare system.

Thursday, November 23, 2017

To Amazon, Loudly Just Say NO!

As the holidays approach it seems Amazon has made it their company mission to be in our face. Not only that the company has made it their policy to know when you are sleeping, to know when you're awake, to know when you are bad or good through its ties with the CIA and NSA. According to a study by the Institute for Local Self Reliance, Amazon's not about just market share but also social control and the company has already achieved a level of cultural dominance that exceeds anything Walmart ever was able to exercise. Amazon has even taken to cross-company promotions that offer up Amazon Prime for free in an all gloves off effort to expand their customer base and weasel into the lives of those who have resisted its advances.

Logo Shaped Like Upturned Penis, What Do They Want?
The average American who fills their day with texting, watching hours of television, eating junk food, and other activities it is easy not to notice that Amazon is extending its control. Even as we are constantly bombarded by articles about Amazon that are filled with hype masquerading as news few people take the time to think about how powerful and wide-ranging Amazon has become. For all of its reach, Amazon, the company founded by Jeff Bezos in 1995 as an online bookstore, is still remarkably invisible compared to the influence it wields. It is more than the ability to put packages on the consumer's doorstep and providing an inviting interface, Amazon has quietly positioned itself at the center of a growing share of our daily activities and transactions which has allowed it to extend its tentacles across our economy and deeply into our lives.

To say a few conflicts cloud Amazon's future would be an understatement. The company has ravaged America's retail landscape destroying jobs while at the same time enjoying a slew of taxpayer subsidies. But several of the cozy arrangement they have enjoyed over the years pale in comparison to the deal Amazon is now trying to push through Congress. The technology giant which is no stranger to sweetheart deals that line its pockets at taxpayer expense is quietly moving in a direction that is destined to create even more controversy. Amazon is on the verge of winning a multibillion-dollar advantage over rivals by taking over large swaths of federal procurement. This makes it increasingly difficult to ignore that the company's CEO Jeff Bezos also owns one of America's leading newspapers, the Washington Post, through which Bezos has embarked on a mission to shape public opinion. When you couple such a voice with a company so deeply involved with discovering and archiving detailed files and information about individuals and the politicians across America you command a great deal of power.

We all know Amazon started out as an online retailer touting low prices and exploited brick and mortar stores across the land but for some reason, the federal government cannot stop giving Amazon, even more, advantages over the stores that line the streets of our communities. One example of how Amazon has found ways to have the government subsidize its operations is how the U.S. Postal Service which has lost $60 billion since 2007 handles last-mile shipping for two-thirds of Amazon’s deliveries and this extends to even delivering on Sunday. This has resulted in overtime for workers and a good incoming revenue number on the USPS’s balance sheet, but in truth, it has been a financial bonanza for Amazon. According to media reports, USPS delivers Amazon packages for $2 each even though it costs USPS $3.46 per package to make these deliveries. And that’s before you get into the $200 million three years ago for 270,000 handheld scanners to process the packages or the $5 billion or more to replace USPS vehicles with those better suited to deliver Amazon’s packages.

Congress has started down the path to change the federal purchasing plan that would result in Amazon’s most lucrative government handout yet. The language buried in Section 801 of the House-passed version of the National Defense Authorization Act would in effect move Defense Department purchases of commercial off-the-shelf products to online marketplaces. The House Armed Services Committee Chairman Mac Thornberry, argues it is needed to save money over the burdensome current system and that some IT equipment could be purchased more cheaply on the open market than through the GSA’s “schedules.” The plan calls for developing an online marketplace platform through which federal agencies can buy products such as paper clips, bottled water, computers, office furniture and more in the same way any business would.

The legislation calls for a platform designed to “enable government-wide use of such marketplaces” which rules out all small players unless they employ a procurement and supply management firm big enough to serve the entire U.S. government by offering multiple suppliers for a massive number of products with constantly changing selection and prices. With all Amazon's influence, it is not an accident that Amazon Business is the company best positioned to exploit what is basically monopoly control over a great deal of the $53 billion in federal purchasing for the commercial supplies bought through no-bid contracts. As to whether this becomes law in the future the fact that Amazon got it through the house should cause us great concern and is proof of their ability to manipulate Washington  All this reeks of corruption, a major shift in power, and sets up opportunities for abuse not to mention massive control over suppliers.

Even the suggestion of a pilot program is just another way for Amazon to wedge its foot in the door. It is important to remember by simply providing the platform necessary for companies to sell through to their current customers Amazon would extract money from those third-party sellers and collect billions of dollars annually. Typically it receives 15 percent to 20 percent of the proceeds from such sales, which means a huge revenue stream for Amazon for doing basically nothing while vendors are forced to cough up as much as half their margin. This would prove devastating to many small businesses. Amazon would also get an enormous amount of data on agencies which they could then use to identify top competitors and drive them out of the marketplace with increased fees or other rules changes. And it means many discounts that are normally negotiated for bulk rate purchases would flow not to the government and taxpayers but would be diverted into Amazon’s pocket.

The online marketplace provision, which still has to get through a House-Senate conference but with all the power and lobby power Amazon currently holds it has push. It must be noted that as head of Amazon Business’s public sector division, the company hired Anne Rung, who ran the Office of Management and Budget’s Office of Federal Procurement Policy until fall 2016, this is another way of saying the "top purchasing official" in the United States. The hire is a boon to Amazon, which gains an experienced government insider who can help connect the Seattle-based company with huge market opportunities in state and federal e-procurement applications. Considering how Amazon operates it should not come as a surprise they chose a "government insider" to guide them, also we should not be surprised at the significant ramp-up of Amazon Business which only started in 2015 and already has 1 million customers and $1 billion in sales. Recently Amazon introduced Amazon Business Prime, a $499 membership that comes with free two-day shipping for its business-to-business products. 

This has tanked the stock prices of its main industrial supply competitors, Fastenal and W.W. Grainger. Regardless of how this plays out on the national level, Amazon has been moving at the local level where in January, the company won a contract with U.S. Communities, a coalition of 90,000 local governments. Ironically after Amazon famously spent years denying the payment of sales tax to local governments it now is a major supplier of local government office supplies. Clearly, Amazon will not be happy until it is the go-to source for all online office supplies and other goods. For those who have seen the damage Amazon's predatory practices have done to so many companies, it is difficult to see this as a good thing.

"Just Say No" was an advertising campaign, part of the U.S. "War on Drugs" during the 1980s and early 1990s, it was aimed at discouraging children from engaging in illegal recreational drug use and practices that would end up hurting them. The campaign focused on the simple idea of firmly rejecting the allure of the drug culture by offering various ways of saying no. Eventually, the scope of the campaign expanded to cover violence and premarital sex as well as drug use. With a company logo resembling and shaped like an upturned penis Amazon almost screams that its goal is to screw us all, with this in mind, I like many other people have decided to just say NO!

Tuesday, November 21, 2017

Follow The Money - Trade Deficit With Mexico Misleading!

When you follow the money the United States huge trade deficit with Mexico becomes even more disturbing as you begin to understand where the money eventually ends up. Some people argue that a trade deficit should have virtually nothing to do with trade policy because it represents only part of the flow of investment funds into or out of the country. I beg to differ because it directly plays into the bigger issue of how much the people of a nation save and invest which is linked to incomes. Even more important is its impact on the value of our currency and our balance of payments which is the broadest accounting of a nation’s international transactions. While the link is tenuous at best it is best we should not underestimate its importance over the long run.

But Where Does The Money Go From There?
When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash. Interesting trade deficit data concerning Mexico reveal a fact most people miss. A bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. This is the reasoning behind substantially strengthening NAFTA but in a way that gives a great deal more value to the United States.

The true size of our trade deficit with Mexico is difficult to get a handle on, some figures show it as over 64 billion dollars in 2016 while a recent article claimed the number was closer to 74 billion. The numbers below are even uglier coming in around 122 billion dollars, similar numbers were reported on several websites, in this case, it is not so much a question of their authenticity or accuracy that is important but what really stands out is where Mexico sends its trade income. The following numbers show that when it comes to trade in 2016 exports of goods and services made up just over 38% of Mexico's GDP but even with a huge trade surplus with the United States, Mexico still ran an overall trade deficit.

Total Exports (2015)$380,600,857,434
Total Imports (2015)$395,232,221,167
 Trade Balance (2015)-$14,631,363,733

Top 10 Export PartnersExport Volume ($)
United States$309,213,074,619
Korea, South$2,770,047,172

Top 10 Import PartnersImport Volume ($)
United States$187,301,416,336
Korea, South$14,618,851,023

The math from these numbers indicates that in addition to the United States being a huge importer of goods from China, Mexico also ran a trade deficit with them of around 64 billion dollars. Interesting, while the numbers are not nearly as bad Canada adds another 19 to 36 billion dollars to the wealth leaving the North American continent depending on whose numbers you believe. Canada is considered to be a "trading nation" in that its total trade is worth more than two-thirds of its GDP. As expected the United States accounts for the bulk of its exports of 392,260 billion dollars and 359,915 dollars of imports. This means like Mexico, Canada also runs a trade surplus with the United States but because it runs a deficit with its next three largest trading partners, Europe, China, and Mexico as a percentage it all nets out as nearly a wash.

1United States392,260359,915

When all is said and done, the fact is America is feeding the "Chinese Japanese Economic Complex" even more than is first apparent I use this terminology which may seem strange to many readers because under the surface the ties between the two countries are much stronger than many people realize.  If we add the deficit the United States has with China of 347 to Mexico's 64 billion and Canada's, lets say25, we come up with a whopping 436 billion. Next comes Japanese trade where the United States negative 69 billion when added to Mexico and Canada shortfalls of around 18 billion that totals another 87 billion. Together the three countries in North America are sending somewhere around 523 billion dollars a year to these two countries, over half a trillion dollars is a staggering amount of money, and much of that cash flow is enabled by the overspending of consumers here in the United States.

Once Wealth flows To Asia, It Stays There
For years the United States has carried the two countries of China and Japan on our back and enriched them through what often seems like rather lopsided trade arrangements, and during that time we have watched them grow stronger as we have weakened. Those preaching the virtues of globalism and free trade point out that American consumers pay far lower prices because of this but overlook the fact that in the long run such an unbalance will not end well. The bottom-line is that not only directly but even indirectly the United States and the whole North American continent is shipping wealth off to Asia, this means China and Japan are a far bigger issue than the imbalance with our NAFTA partners.

This article ties in with two others recently published. One delves into how China has not been fair in trading with America and how a very strong strategic dimension exists for NAFTA and a powerful regional trade bloc to compete in a changing global economy.  http://Nafta And Regional Trade Better than Buying From China.html The second explores the relationship between Japan and China and how it has grown stronger over the years. http://Japan's Strong Economic Link To China.html  This tight relationship is apparent each time trouble surfaces in China the yen jumps in value as wealth in a stealth move flees China often through business back-channels. This should not be misinterpreted as the yen strengthening, but rather a temporary bump before the wealth moves on to an even safer place.

Sunday, November 19, 2017

Small Business Failures Merit More Of Our Attention

Small Business Failures Merit Our Attention
It is very important that small business failures receive a lot more attention then they do, we will see a lot of these in the near future as people have started down this path when unable to find a job. Small business is hard, going into business is risky, and many people are not up to the task. As a property owner that leases space to many start-ups I have a keen interest and knowledge of the microeconomics that occur when a small business is formed. This includes its effect on the economy both long and short term. What many people fail to realize is that most business start-ups having a very short lifespan of just months or around a year, this means the economy experiences a short-term burst of spending that is quickly followed by a slew of long-term negatives.

While America claims to want new business formation as a society we are weak in creating policies that support them. We should not underestimate the role new government regulations or Amazon's exploitation of brick and mortar stores have played in undermining their success. In fact not only has government been complicit in allowing small businesses to be destroyed but in many ways they even subsidize Amazon. Today startups also face the harsh reality that many major retailers plan closing stores. While many people see this as creating new opportunities down the road, short term it is problematic. It is difficult enough for a new venture to turn the corner towards making a profit but semi loads of discounted merchandise flooding a market as a closing outlet liquidates its inventory only adds to the challenge. The pressure resulting from stores closing tends to trickle down affecting all sectors of an economy reducing overall demand for services and casting a wet blanket on demand at the same time pushing down prices.

The Ugly Reality Is Most Businesses Fail
Formation of new businesses is very important to America and the economy, but a dark side does exist. The study of the anatomy of a failed business can be very enlightening and can contain some rather mean unintended consequences. When a new business opens or is formed generally a fair amount of money is spent or invested. The source of this money is often the savings or loans from the owner, their family or close friends. This explosion of spending that accompanies opening a new business stimulates the general economy. Money spent on fixtures, signage, leasehold improvements, services, and inventory help create jobs, but as stated earlier a dark side exists to this entrepreneurial adventure and it is exposed if the business fails to achieve economic success. When a business fails people often get hurt.

I'm not talking about hurt feelings or simply feeling sad, the ramifications reach far deeper. I'm talking serious pain of a financial nature. Contracts go unfulfilled, bills are not paid. Suppliers must take write-offs, and landlords after only a few months rent and often several months that are never paid, usually get back buildings negatively altered by unsophisticated novices doing shoddy work. Utility bills go unpaid and must be written off, those who have sold services never collect monies promised, yet suffer the upfront cost and investment. The fixtures and inventory of these failed enterprises often sold at a discount or trashed become underutilized, or dampen a competitor's future sales.

And last but not least, let us return to the psychological damage that follows in the wake of a business failure. This often turns into shame as they dodge those they let down, and is often followed by bankruptcy, destruction of credit, broken families, divorce, loss of one's home. An entrepreneur who fails often sees years of hard work and all or most of their retirement savings vanishing into the land of broken dreams. In the end, the taxpayer and government may end up supporting those who fail during a business venture and have exhausted their savings and that is a cost and negative many forget. Whether they retire early without savings or need medical help society can be forced to step in. Long hours of hard work and sacrifice is only part of the demands and burdens asked of today's entrepreneurs, in fact just going down this path poses its own risk.