Overtime Rules: Can We At Least Agree on Inflation Adjustments???

The House Education and Workforce Committee is holding a hearing today to discuss overtime rules.  This should be interesting…

The consensus expectation seems to be that the Department of Labor will propose increasing the salary threshold for nonexempt workers to $970 a week from the existing threshold of $455 a week.  That means that folks making $50,440 and more a year will fall under the overtime rules instead $23,660 a year.  A change that could impact millions of working Americans.

The reason why I expect the hearing to be interesting is that some on the right are already screaming bloody murder, that it will kill jobs, that it will hurt companies… you know the standard boilerplate attack.  What these same folks will fail to mention is that the proposal would merely follow the recommendations from work done by the Economic Policy Institute, a nonpartisan think tank that works to address the needs of low and middle-income workers.

What these folks will also fail to mention, and most importantly, is that the recommendation from EPI, and the expected Department of Labor proposal, will be to simply adjust the existing rules to account for inflation – that is they just want to get back to the spirit of the original law and adjust the salary threshold to account for inflation.  This is what the recommendation specifically says:

“The salary threshold has been changed only eight times in 75 years and only once since 1975. Simply adjusting the threshold for inflation since 1975—one of our key recommendations—would raise it to $970 per week, equivalent to an annual salary of about $50,440 today”

I hate to see this become another partisan debate, it should not be.  This is a question of decency, of respect for balance, and protections for those in the labor market least capable of defending themselves against predatory and opportunistic practices.  It is unfortunate that even the idea of adjusting the rules to account for inflation can become something that is even debatable.

The EPI paper touches on two issues that I think are clear in terms of their importance on workers but in particular to the middle class and the family unit – work/life balance are important factors for a healthy family and society and workplace protections are proven features of a safe and fair work environment.  I could easily provide research that demonstrates these two issues, but the reality is that it is not necessary.  Most folks can recognize it because either they are experiencing it or know someone who is.

With the majority of American families having both parents in the workplace, there is not a lot of time left for all-important family time.  The problem only becomes worse when one or both parents are forced to work overtime instead of being home to make dinner, help kids with homework, exercise, or just unwind from a long day at work.  The EPI paper mentions this early on, saying that,

“The right to a limited workweek provides time for leisure, civic participation, commuting, self-improvement, and tending to family and friends.”

As you can see, the paper goes as far as calling it a right.  Which I tend to agree with.  American workers deserve protections for a modicum of balance in their lives.  We are, after all, not robots.  We all have lives outside of work that include responsibilities, hobbies, friends and family.  These are all aspects of our lives that only make the social fabric stronger.

The U.S. economy has enjoyed tremendous increases in productivity over the last several decades, but, as we all well know, most of those productivity gains have only benefited the top.  So while Americans continue to get squeezed for more time at work, the benefits of their increased efforts never get back to them, which leads the second issue – fairness.

Again, from the EPI paper,

“The fundamental idea behind overtime coverage, and the minimum wage, is to maintain a basic norm within our labor market. Under certain market conditions, for example when unemployment is high or workers hold especially low levels of bargaining power, employers might be able to require employees to labor long hours without receiving additional compensation.”

The overtime rules help provide fairness by accomplishing two things – by creating a disincentive for companies to force overtime and by ensuring that workers who do work overtime are compensated appropriately.

The main objective of the overtime rules is to give companies the freedom to force overtime, but only after incurring additional costs.  The idea being that it would force companies to consider adding additional “straight time” staff to make up for the needed work.  Unfortunately, if the rules allow companies to use questionable determinations of who should be exempt or salary thresholds that are just above the poverty line, then the rule has effectively been vitiated.  The overtime rules should be clear in terms of who should be considered exempt by either simple task determinations or, preferably, by the salary threshold.  The salary threshold has always been a better determinant because as long as it keeps pace with inflation and matches the median income, it will closely reflect the actual responsibility and role of the worker.

The current overtime rules allow companies to force overtime and then claim that the worker is exempt.  Because the salary threshold is so low, $23,660 a year, many low income workers fall under the exemption.  Furthermore, changes to the overtime rules in 2004 during the Bush administration included terms like “team leader” as definitions for exempt.  Thus, even a minimum wage worker at, say Walmart or The Gap or McDonalds that is called a “team leader” could be forced to work overtime with no addition overtime pay.

The aspect of this overtime issue that I find the most egregious is for salaried workers making at or below the median income.  Because they are salaried and considered exempt, companies can effectively dilute their workers’ pay by forcing them to work in excess of 40 hours a week with no additional pay!  This is fantastic for companies. They can increase their output and make more money from all of those extra hours and it cost them nothing!  Meanwhile, these overworked folks are spending longer hours and getting nothing back.  Nothing for the sacrificed time from home and family, nothing for the additional value that it brings to the company, nothing… Just more overtime.

Overtime rules should not be a partisan issue, and at a MINIMUM, a proposal to adjust the salary threshold for inflation should be welcomed by any politician that claims to back working families.

Posted in Business, Daily News, Democracy, Economics, Human Resources, Labor, Law, Politics, Society | 2 Comments

You are too poor to invest…

I have a hypothetical question for you – if you tried to invest in an early stage start-up or perhaps fund a peer-to-peer loan and you were not allowed, simply because your bank account was not big enough, would it upset you?  I hope so.

Today, most Americans are specifically excluded from the freedom to choose where to invest their money; based on the offensive and dubious claim that income and bank account size determine one’s ability to make certain investment decisions.

Currently, the SEC is accepting comments on a proposal that COULD change the rules and would finally allow main street investors to participate in the same risky but lucrative investments that were previously only open to the rich.

Specifically, Section V of the Proposed Rule states that,

“in light of the considerations that commenters raised, the Commission staff has begun a review of the definition of accredited investor as it relates to natural persons, including the need for any changes to this definition following the effectiveness of Rule 506(c).

This review, which we anticipate will be completed in a timely manner, will encompass, among other things, both the question of whether net worth and annual income should be used as the tests for determining whether a natural person is an accredited investor and the question of what the thresholds should be for those and other potential tests.”

I wrote about this last year, when the initial comment period opened and I submitted the comments below:

Dear SEC,

I agree with the comment submitted by Kiran Lingam at SeedInvest on July 8, 2014 available at http://www.sec.gov/comments/s7-06-13/s70613-546.pdf that raising the accredited investor thresholds would be disastrous for startups, job creation and the U.S. economy.  I believe the SEC should refrain from increasing these thresholds and should also adopt knowledge/experience based standards for an individual to become an accredited investor.

Under the current rules and definitions, I am not considered an accredited investor.  I am a young working professional with a degree in economics and finance and yet the “accredited investor” rules have precluded me from having the opportunity to invest in numerous opportunities.  While I can appreciate and understand the concern to protect investors, I absolutely cannot reconcile the use of what equates to financial discrimination as an appropriate tool to achieve such results.  The thresholds for income and wealth, at best, seem arbitrary and biased towards those who already have wealth.

In an environment where many Americans already feel like the deck is stacked against them, where wealth begets special privileges, where markets and the government rules that control it seem less and less egalitarian;  this rule only exacerbates the sentiment.  The right to invest in private companies should be just that, not a privilege available only to those with means.

Again, I kindly urge you to consider in earnest the comment submitted by Kiran Lingam at SeedInvest on July 8, 2014 and with particular attention to those related to adopting knowledge/experience based standards for an individual to become an accredited investor.  Protecting investors is an important function of the SEC, excluding many Americans from investing in private companies is not.

Just last month, during a May 13 House Hearing on P2P lending, the committee heard comments from representatives of the industry.  Overall, I agreed with most of their comments, except this part.  In fact, I took particular issue with this specific statement:

Peter Renton, from Lend Academy, said that, “Today, retail investors get a good deal.  Retails investors can invest in Lending Club, on Prosper, on Funding Circle. They can invest in loans, and … the playing field is level.”

You can watch the entire hearing here.

This statement is not accurate and leaves out one very important fact – not all retail investors have access to the same deals.  Because of SEC rules on who is considered an “accredited investor”, many Americans cannot access the same investment opportunities as their “accredited” counterparts.  Let me explain.

The P2P lending market really consists of two submarkets.

  1. The first market is that where loans are originated; this is where it all begins.  Borrowers come to the P2P lending platform of choice (Lending Club, Prosper, Funding Circle) and ask for money.  Investors choose which loans they want to fund and originate the loans.  So at the end of the day, the borrower gets their loan funded and the investor has a place to park their money.
  2. The second, and less discussed, is the secondary market.  The secondary market is where existing loans can be bought and sold among investors.  This market is open to all investors.  This, in my opinion, is a critical component of the overall P2P lending market because it provides liquidity.    Anyone that makes investments knows how important liquidity is.

Because of the SEC rules, “accredited” investors have access to both the origination and secondary markets for loans.  HOWEVER, everyone else can only access the secondary market.  In other words, most Americans are only serving as a liquidity tool for “accredited” investors.  I gave more details about this back in 2013 when I wrote about my experience using Lending Club.  To paraphrase my ending comments,

“I feel that their secondary market is a sham that serves more as an exit for the originating investors than it does an actual market for everyone else.

Buyer beware”

Utopian Shift LLC made excellent points in their letter to the SEC.  I recommend you read it.  Overall, they beautifully illustrated the absurdity of telling folks that they can engage in the MUCH riskier activities, such as trading on margin, pattern day trading, commodity and securities futures trading, and FOREX trading, but cannot participate in private placements that fund investments in start-up companies, P2P loans, and oil and gas projects.  Some other excellent points in the letter include:

“This comes down to some of the basic principles upon which our country was founded. The Declaration of Independence states; “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. While it is understandable that we would like to protect individuals that might not have the financial sophistication and/or investment experience from undertaking investments that might not be appropriate for them. The accredited investor rule denies the majority of the population two of these three rights, the rights of Liberty and the pursuit of Happiness. This is not protecting these investors, this is denying them the ability to be investors.”


“These are individuals that might have little or no knowledge regarding equities, commodities or FOREX, but they know that their uncle already has two very successful restaurants and needs some money to fund the opening of a third. They know that they were right to spend a fortune sending their daughter to that Ivy League school, and now they want to help her set up her own medical practice, and get a return on the investment they already made in her education. They know that their best friend is the smartest person they have ever met, and all the years she spent immersed in the Seattle tech startup scene prepared her to launch her own startup with an idea for a product that solves a huge problem that people have now.”

So what can you do about this?

1.  Submit a comment to the SEC.

  • The easiest and fastest way is to send an email to rule-comments@sec.gov.
    • On the subject line include: File Number S7-06-13
    • Unless you want to send your own comments, you can copy and paste the comment below:

Dear SEC,

In regards to request for comments on Section V of Proposed Rule, Release No. 33-9416, items 96, 97 and 99:

I believe the SEC should remove completely the accredited investor requirements or adopt knowledge/experience based standards for an individual to become an accredited investor.

While I can appreciate and understand the concern to protect investors, I absolutely cannot reconcile the use of what equates to financial discrimination as an appropriate tool to achieve such results.  The thresholds for income and wealth, at best, seem arbitrary and biased towards those who already have wealth.

In an environment where many Americans already feel like the deck is stacked against them, where wealth begets special privileges, where markets and the government rules that control it seem less and less egalitarian;  this rule only exacerbates the sentiment.

The right to invest should be just that, and not a privilege available only to those with means.  Again, I kindly urge you to consider in earnest the  complete removal of the accredited investor requirements or adopt knowledge/experience based standards for an individual to become an accredited investor.

Protecting investors is an important function of the SEC, excluding many Americans from investing in private companies is not.

2.  Contact your elected official

  • You can find out who your elected officials are at http://www.commoncause.org.
    • Just type in your address and it will show you who they are.
    • The easiest way to contact them will be to send them an email.  Most have an online form to contact them.  Again, either you can send in your own comments or you can copy and paste the following:

I would like to know your position on SEC proposed rulemaking on Reg D Rule 156 and the definition of an accredited investor, under SEC File No S7-06-13, Release No. 33-9416, Section V.

The SEC is currently considering changes to the definition of an accredited investor.  I would like to see that the rules are changed to allow average Americans the opportunity to make investments regardless of what their income is or how much they have in their bank account.

While I can appreciate and understand the concern to protect investors, I absolutely cannot reconcile the use of what equates to financial discrimination as an appropriate tool to achieve such results.  The thresholds for income and wealth, at best, seem arbitrary and biased towards those who already have wealth.

In an environment where many Americans already feel like the deck is stacked against them, where wealth begets special privileges, where markets and the government rules that control it seem less and less egalitarian;  this rule only exacerbates the sentiment.  The right to invest in private companies should be just that, not a privilege available only to those with means.

Protecting investors is an important function of the SEC, excluding many Americans from investing in private companies is not.

I would like to see your office submit comments to the SEC showing support for working Americans on this.  I would like to see your office show support to either completely remove the accredited investor definition or make a change that allows anyone with a reasonable, but not burdensome, level of knowledge to make their own investment decisions without government deciding what is suitable.


3.  Engage your Social Network

  • Share this with your friends and family and ask them submit comments.
  • Raise awareness by sharing this on your Twitter, Facebook and other social accounts.

While this may seem like a mundane issue, it boils down to freedom and equality.  The freedom to take control and responsibility of one’s financial future without facing an arbitrary rule that limits one’s investment options.  It boils down to ALL Americans having EQUAL access to investment options, regardless of income or wealth or some other paternalistic notion of “suitability”.

So again, as I said earlier, Mr. Renton’s comments that “the playing field is level” are patently not true and I sincerely hope we can force a change.

Posted in Business, Cloud Technology, Corporate Finance, Democracy, Economics, Finance, Law, P2P Lending, Politics | 4 Comments

The Falklands Conflict: What China May Have Learned & How They Might Be Applying it in the South China Sea

It has been said that China’s policies are developed in terms of decades, which might be in contrast to other countries that seem to be fixated on issues relevant to the next election cycle.  The South China Sea policy may be just one of those examples.

Territorial disputes in the South China Sea go back over 200 years between China, the Philippines, Vietnam, Malaysia and Brunei.  The most public and vocal among them are China and Vietnam.  On May 2, 2014 Vietnamese and Chinese ships collided while China was in the process of maneuvering an oil rig in the area.


Just recently, China issued a formal complaint against the U.S. for flying P-8 surveillance aircraft over the area.  While the plane was warned several times to leave, the warnings were ignored.  U.S. Navy Admiral Harry Harris told Time that,

“So far, beyond words of warning to those getting too close to what China contends is its territory, it has only dredging gear, bulldozers and graders to enforce its claim. So the U.S. is ignoring it. But that, Pentagon officials believe, is all but certain to change. And as it changes, the stakes, and resulting tensions, will grow.”

The stakes are already high; considering that in addition to control over strategic islands and important shipping routes in the area, there are significant amounts of oil and gas deposits.  The disputed area also contains valuable fishing zones that create regular tensions between China and the Philippines.

In considering the situation over the South China Sea area, it might be instructive to review what happened during the Falklands Conflict, which resulted in a brief war between Britain and Argentina.  Similar to the South China Sea, the Falkland Islands and other nearby areas are the subject of disputed ownership, primarily between Argentina and Britain.  In April 1982 Argentina invaded and took control of the Falklands.  Shortly thereafter, with coordinated support from U.S. and international community, Britain deployed military assets to the area and successfully regained control.  After weeks of fighting with losses on both sides, Argentina surrendered control of the islands, but did not drop its claim.

During the conflict, the United States offered to help Argentina come to a peaceful solution.  However, Argentina refused and the U.S. subsequently restricted the sale of arms to the country.  While this alone may not have severely hurt Argentina’s prospects for success, I am sure that the lesson was not lost on China.  The lesson was clear – any credible military capability must be able to supply itself and avoid being cut off, as Argentina was.

Over the last decade, China has ramped up its military spending.   A 2014 report from the Stockholm International Peace Research Institute had some interesting comments with respect to this.  While their report specifically excludes China because a lack of reliable data, their comments were worth noting,

“China’s military spending more than quadrupled in real terms between 2000 and 2012, and the country has engaged in major efforts to develop its domestic industry. As a result, since the late 2000s China has been decreasing its arms imports in favour of domestic procurement. In addition, China’s arms exports have grown substantially in the past decade, to the extent that the country is now the fifth largest arms exporter, just after France.”

A 2013 New York Times article discussing China’s arms industry quoted a retired People’s Liberation Army general commenting about China’s competitiveness, saying that,

“besides pricing, Chinese companies had another advantage: they do not “make demands over other governments’ status and internal policies.” He added: “Our policy of noninterference applies here. Whoever is in the government, whoever has diplomatic status with us, we can talk about arms sales with them.”

I find this illuminating.  This view acknowledges the strategic importance of a country’s ability to produce its own military hardware in addition to the competitive advantage that a policy of ‘noninterference’ offers to export markets for the same products.

Another lesson that China may have learned from the Falklands War is the importance of having military capabilities that extend beyond the mainland – namely air and naval assets.  Argentina faced limitations in its ability to defend the islands directly from the mainland, as their aircraft could not stay in the air long enough to counter British attacks.  Most recently, China and Vietnam have been hard at work building artificial islands in the South China Sea to house military installations that include airfields, barracks and defensive positions.

At some point, there will be a ‘Falklands Moment'; a point at which the passive aggressive, indirect and subtle measures will be replaced with a more direct action, one that will redefine the balance of power in the South China Sea.

There is an interesting piece by Felix K. Chang at the Foreign Policy Research Institute that I would recommend reading.  It offers some insight into the challenges that geography would create for the U.S. if a conflict were to occur.  The map below is from the article.

Map of South China Sea, from Foreign Policy Research Institute, "Ready for a Fight?: How America Could Respond to a South China Sea Crisis" by Felix K. Chang

Map of South China Sea, from Foreign Policy Research Institute, “Ready for a Fight?: How America Could Respond to a South China Sea Crisis” by Felix K. Chang

Posted in Diplomacy, Foreign Affairs, Ruminations | Tagged , | 1 Comment

Texas Manufacturing Outlook Survey hits 6 Year Low

The most recent results from the Dallas Fed’s Texas Manufacturing Outlook Survey ran across my Twitter feed and it got my attention.  The first thing I noticed was that their chart began around the middle of 2008.

Dallas Fed: U.S. Manufacturing Outlook Survey

Dallas Fed: U.S. Manufacturing Outlook Survey

I always like to have a little more context, so I pulled the available data from their site, which goes back to June 2004.  There are a few things that get my attention here.

Dallas Fed: U.S. Manufacturing Outlook Survey

Dallas Fed: U.S. Manufacturing Outlook Survey

The first is that Texas makes up for approximately 9% of U.S. output and ranks only 2nd behind California in terms of share of U.S. GDP.  A multi year low in the second most productive state in the nation is not something I would discount.  It begs to be further looked into at a minimum.  Below is a chart with data from BEA data showing the Top 10 States in terms of share of U.S. GDP from 2000 to 2013.

GDP Top 10 States

The dramatic fall in oil prices is sure to be a factor, but the Texas economy is rather robust and well diversified.  If you look at Texas’s share of U.S. GDP over the last several years, you will find that it has been fairly stable – regardless of oil prices, and it continues to grow.

The second thing that gets my attention is that since late 2009, the survey has trended in a stable range, averaging roughly 10% (Note: no math here, I am just eying it).  The last two quarters have not been kind and the question remains, are we reaching an inflection point?

I find it interesting to see this data roughly correspond (again eying it) with the JOLTS Survey data.

Bureau of Labor Statistics: JOLTS Data (Monthly)

Bureau of Labor Statistics: JOLTS Data (Monthly)

Posted in Business, Economics | 1 Comment

Tyler Cowen’s comments on income inequality and technology… I disagree

I just read Tyler Cowen’s comments in the International New York Times Upshot piece titled, “How Technology Could Help Fight Income Inequality“, and I could not make it past the second paragraph before the words came rushing out of my mouth, “rubbish!”.

It is a short piece so I invite you to read it yourself but I will remark on a few of his comments that just leave me unsettled.  Cowen essentially argues in his piece that we should consider letting technology solve the income inequality problem – that “Technology has contributed to the rise in inequality, but there are also some significant ways in which technology could reduce it.”

Funny enough, however, Cowen early on concedes that, “It is a bit harder to see how information technology can lower housing costs, but perhaps the sharing economy can make it easier to live in much smaller spaces and rent needed items, rather than store them in a house or apartment.

What I read from this is, “well, o.k., technology will not help lower housing costs, but hey, maybe this thing called the “sharing economy” will make it easier for folks to tolerate income inequality.  Oh, and since you have to tolerate living in a shoe box and don’t have space for all of those products that 2/3 of the American economy needs you to spend money on, you can just share those too.  Its gonna be great! :)

While I can agree with Cowen that there are some areas where technology can help alleviate the income inequality problem, I disagree with his notion that it in itself can be the solution.  What I find remarkable with Cowen’s comments is that he mentions nothing of how government can help – libertarian bias???  How can anyone talk about income inequality without addressing some of the overt obstacles to achieving it – such as an education system that favors means, or government regulation that discriminates against investors who are  not wealthy enough?  Perhaps that is what he meant when he said that, “these possibilities reframe the inequality problem”.

Mr. Cowen finally ends his piece with stating his belief that, “there exists a plausible and more distant future in which we are mostly much better off and more equal.”  I am getting butterflies in my stomach just imagining the possibilities! (sarcasm)

Mr. Cowen, the Jack and Jills of America are tired of sugar coated pep talks about how free markets will be good for everyone and that the sun will shine everywhere – if only you are patient and think happy thoughts.  Whether it is the idea that eventually wealth will ‘trickle down’ or that technology will solve it – the average American, in fact, the average global citizen, is not buying it anymore.

I urge you to consider addressing the core drivers of income inequality instead of trying to reframe the conversation into an extension of failed economic policies.

Posted in Economics, Politics, Society, Technology | 3 Comments

Folks, secure your digital life!


Securing your digital life is becoming increasingly more important. Too much of our life, and the information that is part of it, is somehow or somewhere online. This is not something that should scare you, but it should be something that you are aware of and understand how to take steps to minimize the possibility of your personal information being compromised.

I am NOT a security expert and this is not comprehensive, but below are a few easy to implement steps to take that will SIGNIFICANTLY increase the difficulty of your accounts being compromised.


Folks, if there is one account that should require a meaningful effort to lock down – this is it. Your email account is generally THE gateway to the rest of your life. Not only does your email likely have thousands and thousands of correspondence (many with attachments), but your email address is likely THE way to gain access to many of your other accounts. So if someone obtains access to your email account, well, they are in a position to really wreak havoc on you if that is their intention. LOCK IT DOWN FOLKS!

We all recycle passwords, but your email account (at least the one you use as a primary one) should have its own designated password that is not used anywhere else. This account is just too important and should have its own that is changed on a regular basis. You decide how often but make it part of a routine –change it twice a year, for example.

Try using a random sentence as a password that is easy for you to remember. Mix up a few letters with numbers. For example, try replacing the letter E with the number 3. It is easy to remember and adds to the complexity of the password.

Example: bostonyank33sdriv3soup! (Boston Yankees Drive Soup!)

2 Factor Authentication

Many of you have probably seen the security token key chains that businesses and banks have used to access their systems. It usually was a little key fob with a random number that was always changing. This is 2 factor authentication. Basically, it is a method that requires not only your password BUT ALSO a separate code that only the person with physical access to the token has.

2 factor authentication is a system that requires SOMETHING YOU KNOW with SOMETHING YOU HAVE. The token can be your smart phone. There are apps (I recommend Google Authenticator) that you can install on your smart phone to act as your key fob. You can easily implement this system with many of your accounts (Gmail, Twitter, Facebook, Dropbox, Evernote, even Xbox Live) and I highly recommend it.

I recommend you install the Google Authenticator app on your phone and then setup 2 factor authentication with your accounts where possible. Just remember, you will need physical access to your phone to gain access once your accounts are setup – so keep your phones handy and make sure they are locked down with a code or password as well!

If you google “2 factor authentication” you will find ample information on how to set it up. Likewise for other accounts. Take 20 minutes out of your day and set this up and know that your accounts are MUCH safer now.

Stay safe and happy holidays all!

Installing Google Authenticator – Click Here

Twitter – Click Here

Facebook – Click Here

Google Accounts – Click Here

LinkedIn – Click Here

Posted in Technology | Leave a comment

Is there a storm coming?

Calm before the storm

Calm before the storm

Anyone who has spent some time in a sailboat will have an appreciation for the ‘calm before the storm’.  It is a brief moment that is simultaneously peaceful and unsettling; there is no mistaking it.

Everything slows down and the world around you gets reduced to a silence that competes only with the occasional clang of wilted sails and water splashing around as a reminder that you are a guest in an unforgiving environment.

With the Bank of Japan making a Halloween announcement that it will dramatically increase the scope of its accommodative monetary policy, I am getting that tingling sensation that my sails are losing wind and time is slowing down.

I have been a critic of the Fed’s QE program for some time now and have only watched with sadness as other countries have had to follow suit with their own central banks.  I can’t say they had much choice but to simply react to the Fed – something that has not gone over well with some of our global neighbors.  India and Brazil come to mind but other nations have taken notice as well.  It may not be obvious to some, but we could be at the initial stages of what might end up as a full blown currency war – all done by proxy at the central banks.  Brazil’s Finance Minister, Guido Mantega, said as much as early as 2010.

As I have mentioned before, there are massive externalities associated with accommodative monetary policies.  The most significant being the currency flows between nations.  The Fed’s QE program initiated a tsunami of money flowing out of the United States and into emerging markets – thus creating a boom in those respective markets that was partly, if not mostly, created through debt.  Just like a tide going in and suddenly retreating, any change in monetary policy can quickly drain that emerging market of cash as investors flock back to the U.S.

Benn Steil wrote a piece in Foreign Affairs last July describing the effect that the Fed’s mere mention of tapering had on Ukraine’s ability to finance debt and the subsequent rift that ensued with Russia – the consequences of which are still playing out to this day.

“Ukraine’s financial problems had been mounting over many years, but it was the mere prospect of the Fed pumping fewer new dollars into the market each month that pushed the cost of rolling over its debt — that is, paying off old obligations with new bonds — beyond Kiev’s capacity to pay. Had the Fed stayed dovish, Ukraine could have at least delayed its financial crisis, and a crisis delayed can be a crisis averted. Yanukovych ultimately turned for help to Moscow, which successfully demanded that he abandon an association agreement with the European Union in return. Ukrainians took to the streets — and the rest is history.”

My concern is not just that accommodative monetary policy is beginning to unravel, but that the underlying weaknesses that persist throughout the global economy will come front and center with a vengeance – chiefly among them deflation and income inequality.

Deflation is one of those seemingly abstract concepts that many relegate to academia.  Unfortunately, as is the case with many other economic ideas – and as John Maynard Keynes famously put it,

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

Deflation in the aggregate is a psychological impairment that can  prevent large swaths of the population from engaging in normal economic activity.  The simple act of purchasing a good becomes a ponderous task that brings with it doubt and uncertainty.  Slowly, a vicious self reinforcing cycle takes hold and drives economic activity to a grind.  Because deflation is rooted in a psychological sentiment that lives within each individual, it is the contrary actions of those same individuals from which deflation must be defeated – a task not be taken lightly.

One would not normally expect to see deflation during times of expansionary monetary policy but in fact it is exactly what we are seeing.  Whether in Europe now or possibly in the United States, the prospects are evident and should be a concern for not only policymakers but businesses and consumers alike.

Income inequality is something that is receiving much needed attention lately but has been festering for almost three decades.  The data is clear and more important – the sentiment is palpable.

Richard Wilkinson gave an excellent TED Talk that I recommend you listen to.  See below.

What I am most interested in – and what worries me the most – is the overall feeling, whether warranted or not or correctly placed, of inequality that different groups around the world are expressing and how they are coping with it.

Inequality by itself is not something that stokes concern; however, when viewed from the context of a group that feels marginalized or excluded from participating in prosperous times, or when inequality is adopted within the framework of a social movement – therein lies the danger.

Will Durant wrote in The Story of Civilization that there are certain factors that condition civilization.   Even though this beautifully worded and timeless work was written close to 90 years ago, his description of those factors that can negatively impact civilization are not only relevant today, but almost prescient – as if we are being warned.

“Certain factors condition civilization, any may encourage or impede it.

First, geological conditions.  Civilization is an interlude between ice ages: at any time the current of glaciation may rise again, cover with ice and stone the works of man, and reduce life to some narrow segment of the earth.  Or the demon of earthquake, by whose leave we build our cities, may shrug his shoulders and consume us indifferently.

Second, geographical conditions…. If the soil is fertile in food or minerals, if rivers offer an easy avenue of exchange, if the coast-line is indented with natural harbors for a commercial fleet, if above all, a nation lies on the highroad of the world’s trade, like Athens or Carthage, Florence or Venice – then geography, though it can never create it, smiles upon civilization, and nourishes it.

Economic conditions are more important.  A people may possess ordered institutions, a lofty moral code, and even a flair for the minor forms or art, like the American Indians; and yet if it remains in the hunting stage, if it depends for its existence upon the precarious fortunes of the chase, it will never quite pass from barbarism to civilization.

The disappearance of these conditions – sometimes of even one of them – may destroy a civilization…. the relative smallness of the families that might bequeath most fully the cultural inheritance of the race; a pathological concentration of wealth, leading to class wars, disruptive revolutions, and financial exhaustion; these are some of the ways in which a civilization may die.  For civilization is not something inborn or imperishable; it must be acquired anew by every generation, and any serious interruption in its financing or its transmission may bring it to an end.  Man differs from the beast only by education, which may be defined as the technique of transmitting civilization.”

Emphasis is my own in the above paragraphs.  While the average person is not necessarily involved in the ‘chase’ for food as our primitive ancestors once where, there is today a seemingly comparable ‘chase’ for financial stability that is in most cases the single most important factor in attaining even our most basic needs – food and shelter.

I cannot presume to understand what exactly Will Durant eluded to or meant by ‘pathological concentration of wealth’ but it nonetheless sparks my interest.

Lastly, his comments about the financing or transmission of civilization is something that resembles very much a warning that education is (or at least should be) a top priority.  I will not comment on the state of education in the United States and much less so globally, but most should be able to walk away from that statement with a fairly clear understanding of how serious that subject is.

My primary complaint about QE has been that it served only to buy time or put off the inevitable – a deflationary environment that was setup from decades of stagnant wage growth and productivity gains that were disproportionately distributed to the top.  If we are seeing bouts of deflation and weak economic growth now during unprecedented times of expansionary monetary policy, what can we expect when QE ends and the inflationary forces that come from it begin to subside?  The Fed, along with similar attempts at other central banks, has tried and failed to bring inflation to their target 2%.

We live in a very complex and interconnected world and understanding and forecasting what might happen is no simple task.  At best, we can try to piece together clues that might amplify our foresight and understanding of the events taking place.  One clue I see as a possible silver lining is the skills shortage that persists globally coupled with declining population growth among the developed nations.  I see this as one possible inflationary solution to what looks to be a coming period of slow growth and declining prices.

Of course, I am under no illusion to think that I KNOW what will happen; only that I am feeling a little uneasy in these waters and see some ominous looking clouds in my horizon.

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