Friday, July 31, 2009

Chinese Industrial Policy of Piracy

Capitalism divorced from any ethics or morality, this is the Chinese way.

Sun Danyong, the 25-year-old suicide victim who worked at contract cellphone maker Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the Taiwanese company. When one went missing, Foxconn's security guards raided his apartment, according to a report in the People's Daily. The phone didn't turn up. A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters.

"The copying of prototypes certainly happens a lot in the electronics and IT industries," said Dane Chamorro, a regional general manager with Control Risks, a corporate investigations consulting firm. "You don't have to steal them, you just have to borrow one for a day." In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products "several times" before getting them back again.

Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.
According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to $221.7 million.

"Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies," said Steve Vickers, president of Hong Kong-based FTI-International Risk. "It remains a major problem."

A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store. "The iPhone quality is good and quite steady," said Li Jinhui, a salesperson with Shenzhen Guanghui Communication, one of the phone sellers, pointing at one of the counterfeit phones on display. "The real phone price is too expensive, so many people buy this instead."

The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production. This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.

Theives have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.

"Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in," said Blank. "It's usually an employee or a contractor who already has access to the facility." Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them. "If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes," said Chamorro. "It's not rocket science to throw money at them."

China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than 50,000 yuan ($7,330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.

Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a report by the International Anticounterfeiting Coalition, coalition members have been told by local police that they were under instructions not to pursue criminal cases against counterfeiters. "Overall, we've seen a deterioration," said one Hong Kong-based lawyer who declined to be named. "There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability."

Arizona Government Selling Capitol Buildings

Nothing is more emblematic of the real effects of the financial contraction cycle than the latest proposal by the Arizona government to sell their own government buildings.

In a monetary contraction, real wealth, starting with real estate, is vacuumed up by the financial elite. As I have detailed elsewhere, that is exactly the purpose and function of monetary contractions: a well-executed plan by the wealthy to gather more wealth. Normal people lose their possessions by going into debt during the credit run-up. Arizona is proving it can happen to governments too.

Living beyond your means, relying on the bankers to bridge your budget with their loans, this is the mechanism of slavery. A sale/lease-back such as Arizona is proposing is just a loan by another name, as they try to sneak around legal limits on their ability to get loans.

Thank you, Arizona, for making the process of wealth contract by bankers at teh expense of the people so obvious and notorious.

Dream with Bernanke!!!!

This morning I had a dream with Bernanke. Yeah, weird, I know.

We were in a room in some big city apartment building with some other people for a publicity thing, a big-wig mingling with the commoners kind of photo-op. So I asked him real respectful like, why he gave all the bailout money to the banks rather than directly to the people.

He just laughed and went into the next room.

Friday, July 24, 2009

The Paradox of International Trade Deficits

Many people still have the idea that a trade deficit is an unqualified negative, but since we went off the gold standard, that unqualified judgment no longer really applies.

Back in the days of the gold standard, an imbalance of trade would be settled in gold. So, a country operating a trade deficit would be chronically bleeding gold. In fact, that exact thing was happening to America in the early 1970s, leading Nixon to take the dollar off of its international gold standard .

The situation today is much different. The deficit country gives slips of paper to the surpluss country, in return for real goods. Who is really getting rich in that scenario? Obviously, its better to get stuff and give paper. The surplus trade partner is just plain dumb in the first place for accepting a non-objective currency as a settlement of account.

They are even dumber for then reinvesting those dollars in dollar-denominated debt. Seriously, would you give a loan to someone expecting repayment in a paper currency they can print out at will? It is asking to be taken advantage of, quite frankly.

The only rational thing to do with a paper currency from a foreign issuer is to immediately plow it back into real goods and services.

This analysis merely highlights how irrational Chinese economic policy has been. Actually, to be clear, it is only irrational from the perspective of maximizing value. It is not irrational, it makes perfect sense actually, in light of their true policy objective: full employment. The Chinese are willing to sacrifice a great deal to maintain full employment.

The problem for us is that by hitching our economies together, our economy is distorted by their irrational economic objectives. We get tons of cheap Chinese junk and a bloated financial sector, but lose real productive jobs.

Worst of all, we are subsidizing the unsustainable, inefficient, and destructive production goals of the Chinese government. In classical economic terms, this is called malinvestment.

It makes no economic sense to keep people employed by making half of them construct houses and the other half tear them down. But under a command economy, such economically destructive processes go on all the time. In fact, the Chinese already have a large overcapacity of housing supply, but that doesn't stop them from building more under the direction of central planners.

In the Soviet days, their planned economy was isolated, firewalled off from the free world. Today, ours is linked to theirs. On the one hand, we benefit from all the cheap goods they give to us for paper dollars, on the other hand, we suffer from inflated commodity prices and the loss of jobs, and we encourage an unsustainable and destructive economic system.

Thursday, July 23, 2009

Credit Contractions and the Consolidation of Wealth

The wealthy love credit contractions and they use their banks to facilitate them. Here why and how:

It is an axiom of human psychology that people will fall victim to easy credit. I chalk it up mainly to the inevitable fact that young people with the keenest need for status displays have the least available savings. For that and no doubt other reasons, people are happy to go into debt to get something today rather than wait until they have saved to afford it.

Easy credit serves to consolidate wealth in the bankers’ hands in two ways. For one, there is a systemic shortage of dollars to pay off loans. Because we operate under a debt-based money system, collectively, there is not enough money. In short, money is created is based on the value of loan collateral, but there is no extra money created for the interest payments.

Thus, there is a mathematical shortage of money relative to outstanding debt owed, which guarantees a constant percentage of loan failures. A loan failure means a permanent transfer of wealth into banking hands.

This constant transfer of wealth into banking hands is a low-level phenomenon under the normal conditions of an expanding credit supply, but undergoes a massive spike upward when credit conditions tighten, which is the second reason why the wealthy love credit contractions.

The conditions of easy credit create a greater demand for credit, because the easy credit drives up prices. For example, if housing has to be paid for in cash, there will be less ability to afford houses, i.e., lower demand. On the other hand, if housing can be 100% financed with loans, more people will be in the market for housing, the greater demand driving up prices. The higher prices then mean that fewer can afford the prices, driving up the need for credit. Rising prices then drag in speculators hoping to ride the upward tide of prices. Thus, as you can see, easy credit and higher prices form a feedback loop, producing what are commonly known as price bubbles.

The wealthy love price bubbles because they know exactly when they are going to pop. They know this not because they have psychic powers or are economic geniuses, but because they themselves cause the bubble to pop. The wealthy pop the bubble themselves by removing their own investments, known as profit taking.

Profit taking is happy enough for them, but it gets even better, because after taking their profits, they also tighten credit availability. Tighter credit, combined with their initial burst of selling, produces a bubble collapse. Masses of common people are left sitting on devalued collateral but overvalued loans, resulting in mass defaults and panic sales at low prices.

Now, of course the wealthy love getting to repossess and resell the collateral, but even more than that, they love swooping in and buying up the goods at ultra-cheap prices from distressed sellers.

It is really the simplest game in the world for the banking class: pump up prices with easy credit, take profits, pop bubble, acquire cheap assets, repeat.

But you object, banks get hurt in the process too, don’t they? Well, the big ones don’t, not at all, they are “too big to fail”, remember? But even more importantly, you are confusing banks with the banking class. Sure, some banks fail, but that is part of the process of tightening credit and lowering asset values. A bank may “fail” but the bankers are still getting rich. A bank is just a legal fiction, so the bankers are not actually going broke when a bank fails. Their personal assets are squirreled away and safe, sitting in cash and other valuable goods. Remember, they are the ones who know exactly when to cash out, because they caused the bubble collapse themselves.

When you are rich enough, you are not riding the market, you are moving the market. The common investors are just along for the ride, hoping for the scraps that fly down from the feast. Additionally, this banking class is in contact with one another, so they have the ultimate insider information. Because they themselves move the market, and are in close contact with others who do the same, their trades will always occur before the masses. Its like the built-in house advantage at the casino. Just enough commoners make money to keep the whole operation going, but it is the house that is always getting rich.

Unfortunately, our debt-money system is structured so that you are forced to play at their game. They create the money, so they get the goods, it’s really that simple.

For the common people, the main solution is to get the base of our money supply off the debt system. People will always be going into debt to banks, but the government should be putting debt-free money into the economy to counteract the money shortage.

Government can also prevent asset bubbles by regulating interest rates and bank charges, as well as guaranteeing consumer rights (rather than bank rights). These government actions would not regulate bank credit creation directly (which would be almost impossible), but would effectively control bank credit creation by squeezing its profitability.

Government can also go into the banking business itself. Much government revenue would be created through interest charges, and even loan failures would go to the public good. Competition with government would also drive down the costs associated of the private bankers and decrease their overall power. Government directly banking could also be used to finance crucial government infrastructure functions, debt free, saving us all money.

Tuesday, July 21, 2009

The Black Magic of Debt Money Creation

Anything with market value can be monetized to create money. The most common example we can all relate to is housing. Here is how it works:

You give the bank your house, they give you money. You are then allowed to buy your house back from them, on a slow repayment plan. In short, they give you dollars up front, then you slowly give back the dollars to get your house back (except you give back about three times the number of original dollars, because of the interest charged).

This house for dollars scheme is one example of debt dollars. The dollars are based on a debt, the amount owed on a house. You supply the house, they supply the money. Where did they get the money? They created it.

Now, by creating it, I don’t mean they printed the dollars. In our modern system, that is not necessary. They simply created an account balance for you. On their accounting, they have a house as an asset, and you have money as your asset, so it balances out.

Hopefully, now you can better understand the meaning of economic statements like the following:

"Note that although the system of fractional-reserve banking creates money, it does not create wealth. When a bank loans out some of its reserves, it gives borrowers the ability to make transactions and therefore increases the supply of money. The borrowers are also undertaking a debt obligation to the bank, however, so the loan does not make them wealthier. In other words, the creation of money by the banking system increases the economy's liquidity, not its wealth." (N. Gregory Mankiw, Ph D., Professor of Economics at Harvard University, Macroeconomics, Fifth Edition, pg 485)

This easy creation of money by banks is the real reason why the rich always get richer. They create credit dollars, and they get to buy real assets like houses. As mentioned, they don’t even have to print actual paper dollars, they simply create money as an accounting balance. They get the house, you get the account balance. Of course, if you fail to scrounge dollars from other sources, they keep your house.

Nice little scam, really, but it’s only for the rich. In order to gain this money creating power, you have to prove you are sufficiently wealthy to start with. That’s because the rules state that banks have to have a minimum capital level before they can get chartered as a bank. Gotta have money to make money, as they say!

Housing was the traditional basis for a lot of money creation, but in today’s world, banks have found something even better: government cash flow. Now we all know that governments have a regular cash flow coming in from taxes. Bankers figured out that they can create money based on the promise of future cash flow. Creating money based on future money, it sounds kind of shady, doesn’t it? Here is how it works:

Any institution that generates cash flow can take out a loan, right? Except, long ago, they discovered the best way to get a loan is not go begging for money from individual sources, but to make the money sources come to them! They do this by issuing bonds. They advertise that they are in the market for some money, and they will take a loan from whoever gives them the best deal. Various people with money bid against each other, lowering the cost of the loan, until finally someone wins. The winner then buys the loan contract, which is called a bond. Both private companies and government bodies can gather money this way, by issuing bonds.

Bankers like bonds, because, as slips of paper, they are more easily bought and sold than real estate. If they didn’t want to hold the bond, they found they could sell the bond to someone else. Remember, at the root of the bond is a company or government paying off a loan. Whoever buys the bond gets that loan repayment money, so a market developed buying and selling bonds.

At some point the bankers realized that they could monetize bonds the same way they monetized real estate. Say you own a bond, and you sell it to the bank. You give them the bond, they give you money. As long as the bond has a market value, that process is just as legit as selling your house for money, right? It seems a bit shady because it has entered the realm of abstraction: creating money to exchange for the promise of other money.

This enters us into the ethereal realm of financial products, all the way up to the credit default swaps and derivatives which became notorious during the financial panic of 2008. As long as there was a market value for something, some creative banker could monetize it, creating money to pay for it, in an ever-growing mountain of credit leverage.

The dollar is often called debt money because it is based on the monetization of US government debt bonds. The US Federal Reserve is the source font of dollar creation, because it monetizes the bonds of the US government. The Fed Reserve is also responsible for releasing actual paper cash into the economy, but that is a separate issue. Interestingly, the US Mint releases coin cash into the economy in yet a third money creating process.

But at its most basic level, the Fed Reserve creates credit money by monetizing government debt. The Fed then provides that credit money to banks to distribute into the economy at large. That creates the base source of the money supply. The market value of the federal debt is the collateral that backs the money supply.

Because the debt is the basis of the money supply, if the government paid off its debt, what would be the basis of the money supply? Hmm, there is a good question. Obviously, there would be the paper bills and coins in circulation. There would also be the credit money that commercial banks created by monetizing assets into private loans. But obviously, the money supply would shrink drastically if the government paid off its debt.

As a practical matter, the government simply keeps up the process of turning over its debt, continually refinancing and expanding its debt. Obviously, that continues to expand the money supply as well, resulting in widespread easy credit and chronic inflation.

Individual banks also have the power to increase the money supply on their own, by monetizing assets into loans, as we detailed previously. There was a time in the early mid-1800s when the debt was paid off and the money supply for the nation was solely in hands of private state banks (called the Free Bank Era). The banks based their money issue on exactly what we have been talking about: the monetization of real estate and government bonds as collateral.

This era was criticized as the Wildcat Bank era, but it did not really end out of its own failure. It was brought to an end by the National Bank Act of 1863 to meet the financing needs of the Civil War.

After the Civil War, the government returned to the discipline of the gold standard. That was then criticized for being too inelastic in its ability to create credit. Which led to the formation of the Federal Reserve system in the 1910s to loosen up credit. Which worked spectacularly throughout the 1920’s to pump up the economy. The credit bubble burst, however, resulting in the Great Depression. To loosen up credit again, the dollar was taken off the gold standard. Since then we have had runaway economic growth and malinvestment fueled by easy credit and chronic inflation, culminating in the Credit Crunch of 2008 and the ongoing Great Recession.

There is a better way of these destructive and unsustainable cycle, and it involves moving out of the system of debt-backed money.

The Real Costs of Business with China

Great article detailing the practice of business with the Chinese. In sum, they are untrustworthy, highly unethical, and frankly brutal in the treatment of business partners. Read the following book review for yourself.

Poorly Made in China by Paul Midler
Reviewed by Muhammad Cohen

When you buy for US$2 in New York an umbrella that's made in China, you have to wonder how they do it. After all, the umbrella components have to cost something, there's shipping, and there's profit for numerous middlemen and the retailer. Among the economic miracles unfolding in China over the past two decades, the most mysterious may be how a country that skipped the Industrial Revolution, substituting the Cultural Revolution, became the low-cost factory floor to the world.

Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game provides fascinating and disturbing answers. Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers' products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer.

. . .

Wednesday, July 15, 2009

The Theory and Practice of Credit Exchanges and Alternative Money

Money represents wealth. Money can be issued based on anything of value, be it a good or a service. Creating money to represent some object of wealth is called monetizing. Any collateral can be monetized to create new money. Even labor can be monetized to create money.

Money that is created apart from collateral wealth, apart from real goods and services, is inflationary, because it causes a surplus of money relative to wealth. Money can be printed, but unless wealth is created along with it, it does not make anyone richer.

Credit, the kind issued by a credit clearing exchange, can only be issued in the same fashion. Credit can only be created based on the monetization of some collateral or service. By definition, the creation of credit only makes sense to facilitate some mutual transaction. Credit cannot be given out freely, any more than money loans can be given out freely.

For this reason, in a credit exchange, people should not be extended unearned credit lines. Credit clearing exchanges die because of negative balances. Credit clearing must proceed on the same time-tested basis as any other banking function: on good collateral.

A credit clearing exchange cannot be run solely on idealism. It has to be based on real wealth and offer a real profit motive, both for the members and the exchange operator.

Without the availability of an interest charge on loaned money, the credit exchange operator has to rely on an alternate source of revenue: brokerage. The exchange is not offering a good, like money, it is offering a service. The service is to broker economic transactions, and to track objectively and accurately the mutual credit streams created.

A credit exchange is backed by nothing more or less than the full faith and credit of its members. The exchange only profits insofar as it facilitates economic transactions. The interests of the exchange and the members are aligned: profitable economic transactions.

This is the only economic function of a credit exchange: facilitating economic transactions that would not otherwise take place. The economic problem the exchange solves is a lack of cash. For example, a plumber and a mechanic have both lost their jobs. They are both without money, so in the regular scheme of things, neither can afford each other’s services. However, the credit exchange can step in and facilitate their mutual transaction, garnering a small brokerage fee for the service.

If the tradesmen were flush with cash, they would not need the credit exchange broker. Thus, the target audience for a credit exchange is clear: the unemployed and under-employed. People who have excess time, but not a steady cash flow, need the services of a credit exchange. Some people would also like to join the credit exchange as a form of advertising. The larger the labor pool, the more transactions would take place.

Thus, in practice, the exchange operator must seek out and recruit clients into the exchange. The operator should have an eye for specific industries and skills that would be most beneficial for the overall health the exchange network. The operator must deliberately and systematically seek to maximize in-network credit transactions. Each new member should be encouraged to invite others into the network as well.

New members should not be extended free credit, as the problem of free-riders would get too large. Rather, new members should be required to deposit their own good/service into the exchange vaults. Economically speaking, this is a deposit of wealth which the credit exchange then monetizes. The deposit would earn a balance in the network, and mark the official entry of the member into the exchange’s economic system.

Members have to monetize their own wealth-building service as a form of capitalizing their own credit account. For example, a mechanic could monetize 8 hours of his own labor, or he could monetize 80 hours of his own labor. It would be up to the exchange operator to establish an upper limit on the credit value that could be monetized by any member. This is a very intuitive form of a credit limit that even a new member would understand.

Beginning members might not be allowed to monetize any of their labor at first, but might have to operate solely on an service-rendered-first trade basis. Or beginners might be allowed to monetize a day’s worth of labor. But as their reputation score rose, the credit limit could rise with it. Soon, a member might be able to monetize a week’s worth of labor, or more, as appropriate.

Monetizing labor means that trade credit is granted a member, under the expectation that future labor will be done. The member would literally sign over a labor check, or labor bond, stating how much labor was deposited with the exchange. It is nothing more or less than a personal IOU signed over to the exchange.

The exchange operator would then be able to market that IOU. Someone who needs that service would purchase that service with their own IOU. This is how a purely credit exchange network would operate. The IOUs function as money, but they are backed solely by the full faith and credit of the issuer. A member would deposit their own personal IOU with the exchange, then complete that service when someone purchased the IOU.

If someone refused to, or was unable to, honor their IOU, functionally, that means they have defaulted on their credit. In such cases, the loss would have to be absorbed by the exchange operator. The operator must be running at a sufficient profit to enable the write-off of defaulted credit by unfaithful members. Obviously, this is exactly parallel to how a money bank must earn enough dollars in interest and fees to offset loan losses.

Members would be encouraged to be faithful guarantors of their IOUs by the benefits of being in-network. Their faithfulness and skill in fulfilling their IOUs would be revealed by their reputation score. If someone refused to honor their own IOU on day one, before they used anyone else’s services, there would be no harm done to the exchange itself. However, if someone spent two weeks using the services of the exchange, then refused to contribute in turn, that would be a huge loss for the exchange to absorb.

Everyone contributes with the expectation of getting something back, so widespread defaults could easily shake the confidence in the faithfulness of the exchange network itself. Members should be fully briefed on the high ethical standard that they are expected to maintain when they join the network. Obviously, refusal to honor even one IOU could be grounds for removal from the exchange network, and new members should be limited to very small account balances until they established their credit worthiness.

So far, I have only discussed the monetization and trading of services, but goods can be monetized into the exchange network as well. Rather than capitalizing their own labor through an IOU, someone might simply contribute a bicycle, or a car, or a bus, or whatever, into the capital fund of the exchange network. The member would receive trade credit, and the exchange operator would then market the collateral. Within network, members could offer their own goods directly for sale to other members for trade credit.

Counterfeiting is a huge problem for alternative currencies, as the printing technology is likely to be simplistic and the ability to track or prosecute counterfeiters almost non-existent. Trade credits and other alternative currencies should be electronic to the greatest extent possible. When printed, they should be printed in cheque form, to be countersigned upon transfer, so that a chain of legitimacy can be established. Using checks has the added advantage of preventing theft.

Teleb and Spitznagel Call for Debt Cancellation

Taleb and Spitznagel have an excellent grasp on the problem of high debt, and getting people thinking about debt cancellation is a good thing. They also point out the folly of current economic modeling, and the failure of the economists in general. But their proposal to convert debt to equity is highly problematic.

The idea is taken straight from corporate finance: Corporate debt holders, rather than receiving cash payment, will sometimes receive ownership shares in the company. Debt holders can often be forced into this conversion against their will, as the article suggests.

However, this article is the perverse opposite of that process. Rather than debt holders being forced to accept equity, he is suggestion that owners be forced to give away shares to debt holders! The idea that we should support a system in which debt holders forcibly acquire an ownership stake is highly objectionable, in fact, it is outrageous.

The proposal would benefit one group: the debt holders who are seeing their debt-generated wealth evaporate on a large scale. Now that debt payments are defaulting like crazy, these parasites are trying to get hold of the underlying assets. It is an outrage! And an example of the priveleged elitist attitude which sees the entire world as a bunch of cattle to be milked and butchered for their profit and convenience.

Taleb and Spitznagel are speaking for the parasite class, and as far as I am concerned, they should be told to go to hell. There will be no forcible debt to equity conversions.

The solution to a high debt depression is a Jubilee renewal, freeing the people from their debts, not a bail out for the parasite class. The government can directly pay off debts, and simultaneously raise bank reserve requirements to absorb the excess money to avoid inflationary effects. This is the People's Bailout, and we could do it right now, without violating any laws or contracts.

Tuesday, July 14, 2009

International Trade and Protectionism, part 3

Policy Implications

Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.

The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.

Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.

A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.

Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.

Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.

Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.

American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.

Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.

Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.

Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.

Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.

Friday, July 10, 2009

International Trade: Comparative Advantage and Protectionism, part 2

That money saved is the usual macro-economic justification for off-shoring in the first place. Theoretically, that money saved creates a job elsewhere in the economy. This is where so many people trip up, unable to differentiate monetary effects from real economic effects. In real economic effects, production of the same output has become less efficient and capital destroyed.
The great lie told during this generation of outsourcing has been that these laid-off workers would move up the knowledge chain, into higher value-added occupations. However, we can see that this is empirically false.

The fact is, there is a natural limit to the amount of “knowledge economy” jobs that are available. Knowledge jobs (traditionally called white collar) are subsidiary jobs: they exist to support some other industry. Remove the base industry, and the knowledge job disappears with it.

The idea that you can have an entire economy based on knowledge jobs is silly, it does not even make sense. There are only so many accountants, teachers, lawyers, salesmen, and consultants needed for a given population. They are subsidiary jobs because all of these “knowledge-work” professions depend on other industries to create the wealth. Without a primary base of wealth-creating enterprises, white collar jobs are not required. The same thing goes for so-called service jobs. You can’t base an economy on retail, restaurants, hair stylists, and spas. All those jobs are possible in a wealthy and nicely diversified economy, but without a wealth-creating base, they wither and die as overall standards of living fall, because there is less real wealth circulating.

This is a simple truth: at the base of every economy are the wealth-producers, who create and build something tangible that improves our quality of life. Mining, farming, chemicals, steel, plastics, textiles, and manufacturing of all kinds, that is the basis of the modern economy. A huge chunk of white collar economic activity then develops to support those industries, trailing off into the salesmen and retail stores that move the wealth. Teachers, doctors, police, and government workers are necessary for civil society, but they do not create wealth, and their standard of living is dependent on the wealth-producing industries.

To help clarify the economic principle, let’s look at a practical example. A car factory in Michigan is shut down, with production moved to a car factory in China instead. Physical plant in Michigan is destroyed, and skilled workers are fired. Cars intended for the American market are now shipped in from China, consuming extra resources in the transportation process.

The process is only economically justified if the displaced workers can find a new activity that produces greater wealth than what they did before. Is that even possible? What are their options? In the real world, such displaced workers have to switch careers, becoming truck drivers, plumbers, laborers, or whatever. Does that increase wealth? Unfortunately not. Unless they are shifted to another wealth creating activity, they will merely become wealth-consumers, and compete with other workers in some service job. So, they lose their own high previous wage, and drive down wages in whatever field they go into, while adding nothing of wealth to the economy as a whole.

But what about the money the car company saved? Doesn’t that return somewhere in some efficiency to create a new job? Let’s follow the money trail and see. Ok, so assume the company’s dollar profits just went up by lowering labor costs. The dollars return to the US economy through executive salaries and stock owner dividends. From a class perspective, the rich just got richer and the poor got poorer, but is it good from a macroeconomic perspective?

The question is, what happens to those dollars when they enter the domestic economy? Of course, there are less dollars in the US economy at first, because the laid-off worker is not being paid. Say the worker was paid 100 dollars, but after outsourcing, 50 dollars go to the Chinese worker, and the remaining 50 dollars goes to corporate profits. However, the 50 dollars paid to the Chinaman have to come back to the US economy eventually, as dollars can’t be used in China. But when the dollars do get back to the US, there is less stuff to buy. Less goods are being produced because our industry was lost to outsourcing. A constant amount of dollars chasing fewer goods: a formula for inflation.

The only way to short circuit this process is to make sure the laid-off worker is moved into another productive industry. If the worker transitions to any non-wealth creating job, he will merely be adding to a fixed labor pool, with the effect of driving down wages. There is no way around this. If he becomes a laborer, we now have one more laborer, if he becomes a plumber, we have one more plumber, if he becomes an accountant, we now have one more accountant. In all cases, no new wealth is being produced, so wages can only be driven down as the fields are crowded with displaced workers.

We have the same amount of real wealth available, since the car he built is now build and imported from China. We are poorer in terms of resources however, if for no other reason than the increased transportation costs. We have the same amount of money in circulation, assuming that is kept constant. We just have more workers in other fields. This is known as downward mobility.

Even if he becomes a doctor, which would make him personally richer, the country overall is poorer. His dollar wage may have gone up, and the country gets a needed doctor, but our overall wealth went down. Doctors do not create wealth. Teachers do not create wealth, lawyers do not create wealth, government workers don’t create wealth… The list could go on and on. Unless our displaced worker finds another wealth-producing position to fill, our country got poorer.

Some have objected to protectionism on the grounds of scale, asking, so why doesn’t each state become protectionist, or it must be bad to move a factory from New York to Alabama, for example. Unfortunately, these questions reveal a poor understanding of comparative advantage in regional economies, so let us examine these claims.

Let’s say a factory owner sees a potential profit relocating a factory from high cost New York to low cost Alabama. How is that different from relocating to China? The key difference is the available movement of labor. If the displaced New York factory worker cannot find better employment in New York, he is free to move to Alabama himself and take advantage of its growing economy. Thus, in a regionally integrated economy like the United States, economic progress proceeds generally and in a healthy fashion.

Also, the white collar jobs that support the wealth-building activity are all created locally. So producing cars in Alabama will not only employ laborers and skilled factory workers, but also technicians, engineers, accountants, and lawyers. None of those jobs are available to Americans if the factory is located in China. The local wealth-creation supports higher wages for those positions, and drags up wages overall. This is a "drawing-upwards" of workers into higher standards of living, the opposite of what happens when displaced workers have to get retrained and placed into a labor pool with workers in an already-existing industry.

Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.

The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system. Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.

A rational economic policy for America would safeguard the foundations of our industrial strength. Trade should be open and free when based on true comparative advantage and fair competition. Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import. Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored. Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.

American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.

International Trade, Comparative Advantage and Protectionism, part 1

The latest attack of economic propaganda came out of the G8 meeting in Italy today, extolling the virtues of free trade and vowing to fight protectionism. The classic formula -- "the Great Depression was made worse by protectionism" – continues to get ground into our collective mindset until it becomes an unquestioned axiom of thought. Heck, I used to believe it myself, until I actually starting analyzing it.

Here is the short-form rebuttal: in the 1920's, the US was the world’s number 1 exporter and creditor. Today, the US is the world's number 1 importer and debtor. The case against protectionism, for America, does not apply. Less developed countries have understood for centuries that domestic industries often need protection to stand a chance of getting off the ground against larger and richer foreign competition. From colonial America to post-war Japan, nurturing of domestic industry has always been practiced.

But what about today? Have we passed the point where national protectionism is not necessary, that it does more harm than good? In fact, it is the opposite. Our economic world today, more than any other time in history, calls for a certain amount of protectionism. I am not making this claim based on nationalism or some theory of social justice, either (although those arguments have their own merits). I am saying protectionism is justified solely on economic grounds.

In free-trade theory, when a domestic job is displaced due to foreign competition, a new job is supposed to open up somewhere in the economy because of the money saved, based on the efficiencies of comparative advantage in production. The idea is that a foreigner can produce something more efficiently, thus lowering overall costs, thereby freeing up more money, which will create a job somewhere else.

Comparative advantage is a powerful economic theory, and it has much truth to it. In order to understand why it doesn't it apply to certain aspects of international trade today, we have to understand why it does apply to some situations. Only by understanding its truth and correct application, can we understand when it is used falsely and incorrectly applied.

Comparative advantage is mainly rooted in geological and environmental factors. For example, people on grassland plains have a comparative advantage raising cattle, people on the coasts have a comparative advantage catching fish, and people in the mountains have a comparative advantage raising timber. In a primitive economy, people have to raise their own meat, catch their own fish, and build their own houses out of local resources. However, trading freely and widely allows them to specialize in what they have an advantage in, thereby benefitting everyone.

Another aspect of comparative advantage comes from relative location. Thus, a factory close to a source of materials has a comparative advantage over a factory far away. An oil field with easily extracted crude has a comparative advantage over a location with deeper, harder to access oil. A power plant close to its fuel source has a comparative advantage over one farther away, and so on.

All comparative advantage is rooted in the efficient use of scare resources. The rule is: less resources in, cheaper products out. We all get richer, meaning more output in less time using less resources, when everyone is operating at maximum efficiency. Healthy systems of domestic and international trade incorporate those efficiencies. For example, oil from the Middle East is more easily accessed than domestic sources, while coffee and bananas cannot be grown in America. These are exactly the kind of comparative advantages that lie at the heart of healthy trade, making us all wealthier by encouraging us to do what we have a natural efficiency doing.

The problem with comparative advantage in global trade today is that it is not based on real comparative advantage, but only on the illusion of advantage created by money. Thus, the dominant source of comparative advantage today is found in taking advantage of low wage labor in countries with cheap currencies and low standards of living. We are so accustomed to operating in the nominal terms of dollars that we are blinded to the real effects of such wage arbitrage.

Real comparative advantage takes advantage of real efficiencies to increase overall wealth. Exporting jobs to low wage countries decreases real wealth by working against natural efficiencies and increasing input and transportation costs. The problem is thinking in dollar terms, not in real terms. In real terms, what happens when an industry is off-shored? That domestic factory grew up at a natural nexus of efficiency related to labor, materials, markets, and transport. Moving that factory disrupts that natural efficiency and introduces massive inefficiencies. In dollar terms, it seems like a good idea, but in resource terms, it is not.

The comparatively cheap labor rate in dollars is papering over big losses of real wealth as resources are squandered to make factories from scratch in far distant locations. The distant location of the new factory also increases the loss of resources that results from transporting raw material and finished goods to a location that is far removed from either primary resources or consumer markets.

In short, from a purely macro-economic perspective, off-shoring decreases overall wealth. After off-shoring, production is transferred to a new location which takes greater time and uses greater resources. This is the opposite of comparative advantage, which is based on less time and less resources. After off-shoring, the real cost of production, measured in time and resources, has risen.

Meanwhile, at home, the factory is shuttered, meaning capital is destroyed, and the labor is idled, meaning skills and training (human capital) are wasted. Theoretically, these workers are going to find something else to do, but by definition, anything else they do will be less economically efficient, since they have already spent years training, mastering their specific economic role. Anything they do after layoffs will be an economic loss overall, unless they are immediately transferred into some high-value added endeavor.

Off-shoring means that local production networks based on real comparative advantages are tossed aside, throwing away those advantages for the sake of illusory dollar profits. Because no real efficiency is gain, we are actually getting poorer, because there is less overall wealth circulating in the economy.

Most people get stuck on this point, so it bears repeating until it is fully understood: When a production job is outsourced, no real wealth is created. Rather, real wealth is lost as comparative advantages, fixed capital, and labor skills are thrown away. We are actually getting poorer as wealth is thrown away and efficiencies lost. Corporations gain an advantage at the expense of domestic workers because of the illusion of dollar savings, but our collective standard of living falls.

The only hope, the leap of faith in trade theory, is that those displaced workers find a more efficient economic activity. From a macro-economic perspective, that new economic activity has to be more efficient and productive than the previous activity, or the economy has suffered a net loss.

But, should we take that leap of free trade faith? Is it possible for that laid-off worker to find a more productive activity? If they can’t find a more productive activity, their layoff is not economically justified.

Notice the macro perspective I am adopting here. From the macro economic perspective, replacing one worker with another only makes sense if it introduces a real efficiency into the process. Remember, giving a production job to a worker in China, who was previously unemployed, is economically neutral if it merely causes a worker in Detroit to be unemployed. That fact that the new Chinese factory is far away from sources, trade networks, and markets, means that the off-shoring starts out as an economically backward idea, since it consumes greater resources. Moving production to some far-away locale costs more, so it must be justified by a greater efficiency introduced elsewhere, or we have just gotten poorer (since we are using more resources to produce the same goods)!

From the individual corporation’s perspective, laying off the worker for a lower-wage worker increases profits. But that is exactly the illusion created by looking at the situation through the nominal dollar lens. The company is saving money, but by doing so, they are introducing inefficiencies into the economic system. The inefficiencies of off-shoring are only worth it if the displaced workers move into a more efficient occupation.

Notice that the off-shoring company does not care about the displaced worker. They company’s only concern is with their own higher corporate profits. This is the paradox of modern industrial economic policy planning. What saves money for individual companies is often bad for the economy as a whole.

Minimum Wage Law Has Negative Effects

The following is probably the best essay I have read concerning the pernicious negative effects of the minimum wage law. Printed in full, original article here.

Minimum Wage, Maximum Stupidity
In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping and learning from the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

Tuesday, July 7, 2009

It's All About the Productive Jobs

The basis of any and all economic activity is simple: productive jobs. Always keep in mind this basic law of economics: production must always preceed consumption. Part of the propaganda effort against the common citizen is the idea that consumption is all-important. Much propaganda is crafted trying to paint a rosy picture of the economy because of the importance of consumer confidence leading to greater spending. Along with allied stupidities like "we have to get credit flowing again" to "stimulate the economy".

Obviously, consumer confidence and available credit have their place in ramping up economic activity, but their effect is overshadowed by the far more important power of productive employment. Nothing elevates consumer confidence and loan applications like having a high paying and stable job. In fact, without a high paying and stable job, consumer confidence and credit applications are simply impossible, as people without jobs can't buy things or get loans.

These facts are so obviously plain, simple, and true, it is a marvel that anyone could ever support economic policies that aren't based on the fundamental importance of productive jobs. And yet, it seems we have built an entire generations worth of economic policy ignoring that fact. Even more unbelievably, our current economic policy, in the midst of a collapsing economy, is still operating in complete ignorance of the fundamental importance of productive jobs.

The official (and understated) unemployment rate is 9.5% and rising, the highest in 26 years. The United States now has fewer jobs than it did nine years ago, even though the work force has grown by 12.5 million people since then. It's the first time since the Great Depression that a recession has wiped out all the jobs created during the previous business cycle.

So, why was job growth from 2000 to 2007 so ephemaral and easily lost? They were in bubble jobs, unsustainable jobs. Most were parasite jobs (paper pushing finance jobs), and even the productive jobs (like construction) were often malinvested (into overbuilding). The debt-based bubble years of 2000-2007 have left us in worse condition than when we started, as now we are over-built and heavily burdened by debt.

Dr. Housing Bubble puts it eloquently in his recent analysis [here]:
"It is amazing how little focus has been given to job creation. If we spent half the amount of time as we did in bailing out the crony banks on job growth we’d be in much better shape. But as many of you now know the U.S. Treasury and Federal Reserve when push comes to shove, answer to their banking oligarchs first and then to whatever they have time for. That is why the unemployment situation is quickly falling apart. In fact, that is why we have seen no employment plan come out from either the last or current administration. No matter what tax break you give for buying a home, without a job it really doesn’t matter. That is something that really amazes me in this current economic crisis. Where are the jobs going to come from? If anything, I can stand behind a job plan more than I can stand behind a crony banking bailout. Yet all this time is devoted to saving Wall Street and banks. Now you know who the Fed serves and it isn’t the American citizen."

also, "It is amazing that the Federal Reserve, which in its mission talks about maintaining stability, has presided over: the Great Depression, multiple recessions, the 1987 Panic, the technology stock crash, and housing bubble. By this simple definition they have failed miserably. They operate as a cartel and when things are going well, it goes better for those connected here. When things hit the fan, they take care of their banking partners and take the average taxpayer out to dry."

Meanwhile, the productive economy continues to shed jobs because of high debt in a deflationary environment, which leads to both job destruction and constrained consumer spending. The fundamental solution to a debt deflation is cancellation of debt. Why is no one talking about this?

Monday, July 6, 2009

California Issues its Own IOU Money

The official name for this new money issue is registered warrants, popularly called IOUs, but it is a form of money, like a bond or a real bill. Banks are accepting these IOUs (for this week at least), and there is a market already developing for them. I'll call them CaliBonds, since that what they really are.

The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.

The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.

Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.

Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site (although it has only 3 ads as of Monday afternoon).

This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.

While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.

The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.

Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).

The California registered warrants were available for redemption a month early:

Decrease Your Tax Withholding Now

It is a popular pasttime in America to get a big refund check in the mail when filing taxes. It's an understandable habit, as getting a big refund is a great feeling, like finding money in your pockets, and people prefer to over-withhold, since finding out you owe thousands is a real bummer. Heck, I've done it that way myself for years.

Now, however, is the time to change that habit. I did it a couple months ago, and if you haven't yet, you need to do it now. Change your withholdings so they take the bare minimum out of your check.

The fact is, it is very unlikely that any refunds will be issued next year. Already this year, a number of states have failed to process refunds properly. I myself don't want to trust government to have the money, or be willing to part with it, when refund time comes.

News articles are already being written about the problems people are facing when trying to secure a refund.

You have been warned!