If you have any doubts about the impact of VOIP (see July 23 BlowBack "A Heads Up From DC") and you have a decent DSL hook-up as we do, you merely have to download the latest version of Skype (1.0), then fire it up. For less than 2 pennies a minute --you do need to open an account-- using a standard PC microphone and speakers, the folks we dialed up in France and Italy (on their regular phones) were unable to detect any difference between our Skype call and our usual plain old calls. Skype is available for PC's and Linux (Beta) and has announced plans to soon have a MAC version. Our advice: if you're making any bets on companies that are basing their futures on the status quo in long distance telephony, short them!
If two bills making their way fast-forward through Congress are any indication --and, rhetorically speaking, it's not likely we would have brought them up if they weren't-- Mr. Lumpen Citizen is asleep at the wheel when it comes to what goes over here in Washington DC.
In one bill, Congress is putting up roadblocks to truly cheap telephone or voice over the Internet (VOIP) connections. In reality, it's only a matter of time before this technology becomes mainstream as more people get highspeed internet connections and the technologies that support them like DSL are made more efficient. Using the cover of new market development, the telephone and ISP industry are trying to cut out state taxman and keep more of the future profits for themselves.
In the other, spearheaded by Senator Orrin Hatch, and nicknamed the INDUCE ACT, there is a serious attempt to rebalance the flow of copyrighted content in favor of the copyright holders and to the detriment of new technology development.
Both of these bills seriously impact just about every American but chances are the people most affected have heard little about them and understand the tradeoffs even less. It is the old story of mainstream media inattention and a kind of understandable but no less tortuous apathy that allows our lawmakers and the lobbyists to play out their battles with almost no input from those most impacted by their actions.
Since both these bills can, with a little forcing, be boiled down to pretty simple stuff, we thought we'd take a shot at sifting through the tinted waters to get down to the tea leaves. The scoop on the VOIP bill goes like this: The real value of this technology for most users is not computer to computer telephony, where two or more parties are sitting at their terminals and ring each other up. It's about business and home consumers hooking their telephone systems into their network and being able to call others on their regular wired or mobile telephones. In order to do this --i.e., make the other party's everyday phone ring-- VOIP services have to be able to hook back into the plain old telephone system (POTS). That's where Congress enters the picture. The bill under discussion as originally introduced by Senator Sununu would have forbidden the states from taxing at this juncture. And since the states derive serious income from their ability to tax the POTS providers at the point of interconnection, it was their ox that was to be gored. Bottom line: Congress appears to have decided not to allow internet to POTS connections to bypass state tax departments. So don't expect major savings when VOIP, with its less than optimum service, gets introduced by players big (Verizon) and small (Skype) in the near future. The good news for desk potatoes at home or business: this doesn't affect computer to computer calls.
The INDUCE ACT is a little more complicated but still boils down to a few critical threads. What the entertainment industry through Hatch et al. are trying to outlaw are the future equivalent of VCR's, whatever that might be. In a now famous Supreme Court decision back in 1984, referred to as "Betamax", the Court (in a 5-4 vote) decided that any technology that people use for legal purposes would be legal -- even if the device could be used for illegal purposes, like content piracy. As a result of the ruling, the consumer electronics industry and Hollywood went on to develop a thriving market in home video and DVDs.
In INDUCE, the bill tries to retilt this decision by outlawing machines that "induce" someone to commit the illegal act of piracy, or any other illegal act for that matter. In this new world --"induce" even has an Orwellian ring to it-- TIVO and iPOD type devices become suspect (see some of the Cherry Picks in the right column) and the flow of information enters a world of new and future minefields.
The big losers are the public who could very well end up with players that only play officially sanctioned content of one type or another. You can imagine, in another age, the campuses or streets up in arms, but it will be the electronic device manufacturers and their lobbyists who will carry the fight with a little help from the information freedom folks, who have about as much real clout in Washington as a stalwart Nader supporter with the Democratic Party these days. Unfortunately, that's the way things work in our brave new world.
Of course, the INDUCE ACT, in particular, if passed, will serve to put the same kind of choke-hold on technology development in this country as the ban on stem cell lines has on biotech.
It's past midday in the dead of summer here in the nation's capital and with the NASDAQ hovering right around 1900 and interest rates falling on 10 YR TRES, we can't help extending our mind half way around the globe. After all, way back in the year 1900, there must have been contrarian thinkers out there ready to predict the meteoric rise of the US economy to a position of world dominance. Nobody (but their relatives) had to tell the streams of immigrants coming from Poland, Russia, Italy, Ireland, the Ukraine --you name it-- that factory jobs were opening up in hard to pronounce places called Waterbury, Bridgeport, the Bowery, Trenton, Buffalo, Toledo, Chicago, Seattle etc. Nobody had to tell Tesla or Marconi where to bring their ideas.
In a world dominated by the global colonial powers the equation was quite simple: the poor countries provided foodstuffs and raw materials to the rich countries which turned them into usable items that were then exported at a premium back to the same suppliers. Of course, like everything else in life, it wasn't quite that simple but in taking a look at a fading photo of a meeting of the world's leading physicists, Conseil de Physique Solvay, held in Brussels (see brownish pic) at the Hotel Metropole in 1911 not only is there no attendee from Asia, there isn't one American although names like Plank, Curie, Einstein, Rutherford would later take on international significance.
Most Americans, we'd wager, couldn't give a damn about any of this in July or any other month but even among those who do, it's unlikely many have grasped just how much of the US trade picture is third worldly. To a large degree we export agricultural and capital goods and import manufactured goods. Last year, for instance, the only sector in which the US had a trade surplus, was agricultural products, according to the US Census Bureau. In the single month of May of 2004, in a recent but wholly typical example we exported, to China alone, a little less than $3 billion and imported a little more than $15 billion for a gap of more than $12 billion. The capital goods segment is important because it actually underlines the trend. Capital goods, is the term economist's use for machinery that is used to make manufactured goods. In simple terms, capital goods means machines that American factories might be using to provide manufacturing jobs that are instead being sent to Asia, Mexico and other cheap labor cost areas.
China, like Japan and the US and Europe before it, has become a massive siphon of raw materials like iron ore, copper, petroleum and other agricultural goods and manufacturing know-how that has primarily benefited neighboring countries like Australia, New Zealand and Japan.
Lately, the Chinese government, sensing an impending bubble, has started to cause a slowing mainly by restricting lending activity.
On October 30, 2003 Greg Mankiw, the Bush Administration's Chairman of the Council of Economic Advisers testified to Congress on the subject "China's Trade and US Manufacturing Jobs" The speech is famous because in it Mankiw argues that despite the enormous imbalance, trade with China is a positive with little impact on US manufacturing jobs.
In a concluding paragraph Mankiw states:
"Imports from China are one of many factors that influence manufacturing employment. The five industries that have contributed most significantly to manufacturing job losses since July 2000 are: computer and electronic equipment (16% of all manufacturing job losses), machinery (10.8%) transportation equipment (10.7%), fabricated metal products (10.7%), and semiconductor and electronic components (7.5%). These are export-intensive industries for the United States where imports from China are small. This suggests that US job losses are more closely related to declines in domestic investment and weak exports than to import competition."
What are we supposed to make of these comments?..... Perhaps, that the real losses in jobs to China are okay because we are also losing jobs to other parts of the world, (Europe, airplanes, Singapore, chips) in more vital areas?
So what's going to happen now that it's clear to anybody who knows how to read (and isn't a member of the band) that the much anticipated present US recovery is nearly stillborn despite --or perhaps, because of-- the massive dose of steroids it's been given by the Fed for the last three years? One thing is for sure --and the bond market knows it-- it's going to be very, very hard for the Fed to raise rates any more than the measly 25 basis points it got back last month. Like Japan, after its big bust, the Fed finds itself with absolutely no room down on interest rates. Given, the upcoming election sensitivities, they will probably stand pat.
But after the election, there's going to be noise all over the place no matter who wins. The dollar is already nearly back to its lows against the Euro and Pound and gold has crept back up over $400. Suddenly, we can expect to see a lot of attention given to the Chinese RMB by the Americans. A devaluation against the RMB would slow Chinese imports and raise Chinese buying power vis a vis the dollar, they will exclaim, even as the noise alone drives the dollar further down against the Euro, Pound and Yen. That will, if history is any example, rekindle interest in gold.
But even under intense pressure from its major trading partner, will the Chinese government accede to a revaluation? This is a tricky question. The Chinese do not want to give up their competitive advantage, which is working out just fine for them. They face enormous pressures from the massive populations in their own hinterlands to create their own Waterbury's and Akron's and San Jose's.
One thing we do think: Alan Greeenspan will not stay out the full six years of this present term he just got appointed to. The kitchen is going to get a lot hotter.
The US trade imbalance and what used to be called back in the quaint old days, "the dollar overhang", have been pet subjects here at DW. You might ask why we are so obsessed with a situation that seems, after all, to work pretty well. In short, the American consumer gets to borrow and do what he does best, consume; the Asians make and service, OPEC pumps oil, and the dollars get recycled back in the form of direct investment and government notes.
What's the alternative?, you might ask. All this global economic activity is pretty good, isn't it? and prices for goods and services are holding pretty steady, aren't they? You're not suggesting some sort of protectionism, are you?
The answer, of course, is that we have no belief in building artificial barriers whether it is around the trade of goods and services or the movement of bits and bytes. It's as if we had just discovered that two wrongs don't make a right or some other profound old saw. How about, "if it ain't broke why fix it?" We say, ask Ken Lay! Just because it ain't collapsed don't mean it won't collapse.
Here's the scary thought in our mind: everybody acknowledges that the present economy rests on the shoulders of the American consumer. Great news, you say, why just last month the university that measures such things noted that consumer confidence was up! Having borrowed against her house, maxed out her plastic, this gal was coming back for more. She can even get a new SUV with nothing down and 0% interest. GM is even offering $5,000 back on some of its more macho models. In other words, it's a dream come true, it's almost like, like... you get paid for buying. Who wouldn't have confidence?
And so the Fed prints more dollars even as it bumps up interest rates a quarter of a point. And the world continues to buy our notes.
Here's the way it is supposed to work: with advances in technology the children of farm workers move to the factories and then on to cubicles. The business of America becomes intellectual property, brainpower combined with know-how resting on a base of demand for bigger, faster, more complex systems. In this scenario, information becomes the only real currency. Forget about shiny metal, black liquid and fiat currencies, she who knows how, wins. As they might edit the sign on the bridge across the Delaware River going into Trenton: from Trenton Makes and The World Takes to The World Makes and Trenton Thinks
Sounds good, n'est-ce-pas? So how does that reconcile with a public education system that has lost the confidence of middle class families in the cities and the suburbs? How does it reconcile with a world order in which growing masses of left-behind peoples reject edgy angst-ridden "entertainment" --a major export of the "knowledge" society-- for a return to the relative security of a pre-Galilean world view? Of course, to put it mildly, there is no shortage of contradictions.
Perhaps you can run ever greater trade deficits year after year. Perhaps the world will never tire of taking more newly minted greenbacks. Perhaps Trenton will take and take and take ad infinitum. And so with our dominance we can pretty much get what we want. If you feel that way there is little to worry about.
As for us, we're a little more old fashioned. We actually think there may come a day when investors and government bankers around the world start taking a harder look at all those dollars accumulating in their vaults. So here's a thought, instead of concentrating on imports that fill our need for tchotckes; we might note that only half the current accounts balance is based on imports, the other half registers in a countervailing manner, exports. In other words, if we can get exports up to all those newly minted Chinese and Indian shoppers not to mention all those Europeans we can offset rising imports.
Now let's look at what is certain highly valuable US intellectual property, our brand names. Here's some rhetorical questions we will pose to the current administration: does dropping out of highly charged international conventions like the Kyoto Treaty help or enhance US brands abroad, does rejecting the rule of the World Bank over US behavior, does unilateral US foreign policy, rejection of the role of the UN, insults to old allies, a cavalier attitude that looks like bullying, etc. enhance the world view of US brands? Fade left as we imagine that shining city on the hill topped by giant golden arches.
US foreign corporate earnings have been somewhat masked in the last couple of years by a falling dollar that quite automatically boosts incoming profits denominated in Yen and Euros on US corporate balance sheets. If the real cutting edge of US business is measured in the extension of US brands into the new and old countries whose goods we buy, can we count on government and corporate decision-makers in these countries purchasing proprietary mission-critical systems from companies like Oracle, Cisco and Microsoft whose intellectual property has now become, along with Hollywood's, not only key to our prosperity but also a major concern of Congress?
One of the reasons we have put a major focus on the debates raging around Open Systems and digital rights management (DRM) here at DW has a lot to do with the above. After all, as Microsoft has itself acknowledged in its Trustworthy Computing initiative, it all comes down to Trust, doesn't it? And Trust is in mighty short supply these days.
The first big concrete and steel project (of the new economy see Sliding Head First below) may just occur in or around the nation's capital in the form of a baseball stadium. How this all works has been an incredible eye-opener. It appears that the only difference between the way major league baseball and the mob work is that the former is legal. It appears that the 29 families (groups) that own our beloved baseball teams have carved the country up into territories they control. Sound familiar? Not only can no outsider compete with them (no, you can't just get together a serious bunch of great athletes and call them a major league team) inside or out of their territories but the teams, themselves, can't get up and move to greener pastures. In baseball, turf is turf.
No, even if you are one of the major TV markets in the country --sixth if you don't count Baltimore just 30 miles up the road, third if you do-- you've got nothing to say unless you come crawling on bloody stumps across a field of rusty nails. And even then, it seems that if the "boss" up the road who owns you, doesn't get his cut of the action, you still don't have a chance.
And so Washington DC --yes, that's the same city that can't afford to paint or replace broken windows of its schoolhouses, has closed or limited the hours of most of its libraries and perennially finishes down at the bottom of the list for public education, health and safety (more per capita cancer, more TB, more asthma, more children left behind, etc.) has now got into a bidding match against itself. The big boys of baseball have made it clear that unless Washington is willing to fully pay for a new stadium (over $400 million) it doesn't stand a chance of getting another bunch of Senators from Montreal. The Expos are a team without a home and without owners. In fact, the 29 families themselves own the team --If you are interested, there was a thorough article in the Washington Post: that explains the amazing ins and outs of the cartel. In short, what happened is that they really wanted to take the team out to the far edges of the parking lot and make it disappear into the witness protection program. But, having been caught red-handed, they were trapped in a dilemma that left them holding the bag. And now four years and multiple deals and broken knees later, what to do? Create a competitor down the road from the Baltimore capo, Peter Angelos? That would never do! Portland is out there but there is the suspicion those guys aren't really dumb enough to go all the way down on their knees. Well how about Las Vegas? Sure, the bucks were definitely there but so is the betting industry. And god knows, betting has nothing to do with baseball. Imagine Pete Rose coaching in Las Vegas!
So that left Washington DC with its big lobbyist law firms, its cash-flush beltway bandits in this era of outsourcing (otherwise known as government contractors) its rabid Redskin fans and its bored bunch of legislators and hangers on. Could it be that with the mayor assuming the position and over 400 million in new stadium construction money on the table (would the City Council actually approve?) that there might be a way to cut in Angelos on the take and still bring a team in?
Alas, there is an alternative. Not to be undone, the Commonwealth of Virginia, has also offered a stadium with all the trappings out by Dulles airport, which coincidentally lies approximately the same distance from DC as Baltimore. Could this be the kind of deal that Tony Soprano and Johnny Sack might work out?
And so we will have to wait to see where the godfathers come down on this one. Although, probably not too long given that not one player from the Expos actually made the all-star team this year. The team is an embarrassment and a basket case that was supposed, like Jimmy Hoffa, to end up encased forever in concrete and is now, instead, facing another kind of exposure.
Do these competing municipalities playing with taxpayer money get to make any demands on the bosses? Don't kid yourself! Do the profits from the sale of a team come back to pay for the money invested by taxpayers? You gotta be joking! Does baseball generate economic activity that might justify the investment? Not according to any serious independent study ever made on the subject (see: May the Best Team Win: Baseball Economics and Public Policy by Andrew Zimbalist). Do the teams let the public get in as investors? That's about as likely as the Redskins changing their name, speaking of outrageous!
This was the week that the Federal Reserve slid headfirst into second base. As we have been predicting, it sometimes seems forever, the Fed waited as long as it could before finally letting up on what was the most stimulated economy since the Weimar Republic. We say second base, because as the papers noted today this was far from a grand slam for the easy money guys. Maybe they were hoping that nobody was looking at anything but the price of hotdogs, hamburger patties and cases of cold ones on this holiday weekend but the news was just not good on the jobs front. First, we found out that the more robust employment numbers that came out earlier in the year were revised downward. Then for June the figures were a plain anemic 112,000 new jobs. Even worse, according to the New York Times, wages had once again failed to keep up with inflation over the last year. Did anyone say "burger flipper"?
This should come as no surprise to DW readers as we've often noted that the US economy needs to churn out an average of 150,000 new jobs per month just to keep pace with new people entering the workforce. A few months of growth after years of stimulus and job losses does not a robust recovery make.
The Feds problem, however, is more acute; having accommodated the Administration's wish for growth at all cost during this election year (deficits, trade imbalances be damned) by leaving interest rates at a 40 year low even while inflation crept up. Since we know that there is a lag of nearly six month between rate changes and their impact, the Fed finally felt it was safe to step in and get a hold on the only tested tool in their box, the interest rate lever. With the benchmark rate now at 1.25% the Fed has nowhere to go but up and has said so-- and that in the face of what might be the more serious leg of the downturn that occurred four years ago. After all, deficit spending --in other words, spending money you don't have-- is easy until the piper wants to get paid. Eventually, even the US government, with the happiest printing presses in the world, has to borrow back that money and becomes a major competitor for investor money. This demand results in higher interest rates. And this time around the Fed will not have the ability to counter by lowering its overnight rate, the amount it charges banks, in order to dampen the upward pressure. This would result in bad news both for the bond market and the stock market... and particularly worrisome news for the many Americans holding variable rate mortgages and credit card debt.
Further, Congress will find it too risky politically to further lower taxes in the face of growing deficits. So, it is possible that the Fed has waited too long to get rates up to the point where they will have some room back down to counter a slowdown. We may, as a result, be entering into uncharted territory in the US. In Japan, faced with a similar problem, the government started running the concrete factories full time. In other words, if you want to stimulate job growth start building highways, bridges, airports, jersey barriers, whatever, as long as it consumes concrete and steel and can't be done abroad.