The Best of the Week

Dear Reader,

Welcome to the weekend edition of Casey Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.


Releasing the U.S. Oil Reserves

By the Casey Research Energy Team

In an attempt to stabilize global oil supplies and reduce energy prices in the face of Libya’s missing production, the United States is leading an international effort to release 60 million barrels of crude reserves to world markets.

The 28 member states of the International Energy Agency (IEA) decided to release the reserves after weeks of secret negotiations, in the hopes that increased supply will lower prices. The tactic worked immediately: the spot price of Brent crude fell 4.2% to US$108.08 a barrel while the spot price of West Texas Intermediate (WTI) crude was cut 4.6% to close at US$90.65 per barrel.

The total amount of oil to be released – 60 million barrels over 30 days – is relatively trivial, given that the world consumes more than 89 million barrels of oil each day. But the release is still significant, in large part because half will be drawn from America’s Strategic Petroleum Reserve, a failsafe pool that presidents can access in the face of oil supply disruptions that threaten the economy and national security. This is only the third time the Strategic Reserve has been tapped since it was established following the 1973-74 Arab oil embargo, with the other two occasions being the 1991 Gulf War and Hurricane Katrina in 2005.

The 60-million-barrel release is also significant relative to the 132 million barrels of production that have been lost since war broke out in Libya.

It sends a strong signal to the Organization of Petroleum Exporting Countries (OPEC) that the world’s importers will not just stand by and watch as global economic growth is hamstrung by high oil prices. At a June 8 meeting, OPEC members failed to reach an agreement to increase oil production to make up for supply disruptions. After the meeting, Saudi Arabia and the Persian Gulf states split from other producers and agreed to pump up to 1.5 million more barrels of oil daily until the end of the year, to reduce stress on the global economy.

“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” said U.S. Energy Secretary Steven Chu in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”

Prices were already falling at American gas pumps as the EIA debated the oil release. The average price of a gallon of regular fuel has fallen to US$3.61, compared with US$3.83 a month ago. A year ago, a gallon of gas cost US$2.74.

The EIA nations involved in the oil release will review its effect after 30 days, to see whether additional releases are warranted.

Energy stocks declined broadly on the news, with most energy indices falling more than 2%. The EIA announcement was not the only bearish news of the day, however; the Labor Department also released news of greater-than-expected unemployment insurance claims, and the Federal Reserve reduced its expectations for economic growth.

The decline in oil and equity prices is to be expected. President Bush’s decision to tap the Strategic Petroleum Reserve in 1991 is widely credited with calming an oil market that was working itself into a frenzy. When the Republic of Iraq invaded the State of Kuwait on August 6, 1990, the two nations combined were producing 4.3 million barrels of oil a day. This potential loss, coupled with threats to Saudi Arabian production, pushed oil prices from below US$18 per barrel in July to a peak of US$46 in October, an increase of 155% in just three months.

On January 16, 1991, the same day U.S. and allied forces launched their first attacks against Baghdad, the president announced that the U.S. would begin releasing oil from its Strategic Reserve as part of an international effort to minimize world oil market disruptions. Within three months, the Gulf War was over and the price of oil had settled back down to between $18 and $19 a barrel.

Sure, the current decision prompts the question: Why now? The war in Libya has been raging since the middle of March and, as mentioned, Saudi Arabia and the Persian Gulf states just decided to increase their production rates. High gas prices have taken a big toll on President Obama’s popularity, so many are saying the move is more about campaigning than about reducing pain at the pump.

Regardless, it is happening, and for us in the Casey Energy team, it is a reminder that U.S. stockpiles are near all-time high levels. Together, the Strategic Reserve and America’s commercial stockpiles currently hold 1.1 billion barrels of crude oil, compared to an average of 900 million barrels since 1982. The nation has a lot of oil on hand in case of an emergency, which should temper major price spikes (even if that logic doesn’t always prevail).

The U.S. has released a raft of poor economic data in recent weeks. The potential for European debt and currency crises still looms large. The Arab Spring still has life, supported by continued protests by Syria’s courageous population, which means contagion to other Middle Eastern states remains a possibility. Right now, uncertainty is the name of the global oil game.

For investors, that means it is time to stick to the basics. There are deals to be had out there, but if you want to be a speculator and not just a gambler, you have to focus on fundamentally sound companies with near-term growth potential. This is not a time to play around with new technologies, or risky terrains, or unproven management.

The global oil machine is a complex beast, but at its heart is simple supply and demand. This oil release adds supply, and that will push prices down in the short term.

[Marin and his team always have their fingers on the pulse of the energy markets – finding the best profit opportunities ahead of the crowd. One of their current favorites is a small company whose specialty is discovering unconventional oil in the Middle East. OPEC countries are starting to run out of easily extracted oil, but this newcomer could save their collective heads. Read on for more.]


Additional Views About Bitcoin

By Vedran Vuk

Over the weekend, I received many angry e-mails over my recent article on Bitcoin. Once again, the supporters defended the theoretical premise of Bitcoin – even though my entire article had no problem with the idea behind it. I simply don’t like the product.

To read some more thoughts on Bitcoin, check out Doug Casey’s recent CWC issue. Personally, I don’t care about the theory. My problem is that I just don’t find the currency useful. Here is a short list of Bitcoins’ benefits and my responses to them:

1.  Bitcoins provide an alternative currency to the dollar. This makes sense, but the question is whether this is the best alternative. For example, I can hedge my dollar risk with euros, Swiss francs, yen, etc. Furthermore, those options can pay interest. And one doesn’t need to choose a single currency but can choose a basket of them.

Then there’s also gold and silver, the traditional play against a declining dollar. If one is trying to hedge against the dollar, these options are more than adequate. I don’t see Bitcoin as having an advantage here.

2.  Bitcoin can be secretly transported across international borders. OK, sure, that seems like an advantage. There’s just one problem: I have no need to transfer large amounts of cash across international borders. Though this feature is often praised by Bitcoin supporters, how many have actually utilized it to circumvent international laws? Yeah, probably close to zero.

3.  Bitcoin allows for anonymous transactions online and helps avoid taxes. Sounds nice, but personally, I have nothing to hide regarding my online transactions. Maybe if I was operating an online business, this would be great, but as a regular consumer, I don’t see any advantages here. After all, I already avoid sales tax by shopping online; and I’m not going to violate tax laws. 

On top of this, my favorite online retailers don’t accept Bitcoin; so why exactly should I start using it?

However, if one is doing something illegal, then Bitcoin would seem to be more useful. As has been reported, Bitcoin has been used to sell illegal drugs online. Now, Bitcoin supporters claim that this is overhyped and that these illicit deals are giving Bitcoin a bad name. In reality, I see this as the only comparative advantage of this currency. Sure, one can still be tracked with Bitcoin, but it would be harder than a transfer from a credit card or bank account.

But since I have no intention of buying drugs online or off, the currency is worthless to me. So what’s the point?

4.  Bitcoin is free-market money. Since there are few practical reasons to use Bitcoin, the supporters grab onto the idea that it’s free-market money. Hence, we’re somehow saving the world by using it. That’s a big reason that the supporters get so upset when anyone criticizes Bitcoin.

But here again, Bitcoin doesn’t offer anything unique. If I want to invest in free-market money, I can buy gold and silver – a store of value recognized around the world for centuries.

Unless I’m planning some illegal transaction, Bitcoin just doesn’t seem like a useful product to me. For everything Bitcoins offer, other, better alternatives already exist. Bitcoin is an interesting idea; I just don’t find it useful.


The Change Function Revisited

By Chris Wood

In last week’s Daily Dispatch, Alex Daley hit on a concept germane to technology investing that deserves some additional commentary.

To quote from the article, The Coming Biometrics Onslaught:

When we think of technology, we often dream of the whiz-bang new capabilities it has brought to our lives, from ATMs to DVRs to smartphones. For a technology to go mainstream, first and foremost it generally has to also reduce someone’s “pain” – whether that be saving businesses money, or allowing an individual to conveniently catch his or her favorite program.

Ultimately, it usually comes down to the end-user of a piece of technology, who has to like the outcome before it will really catch on in a big way. Just because banks would prefer to save money with ATMs doesn’t mean customers will prefer them over live tellers. But put them in places where one can’t put a bank – like convenience stores and malls – and suddenly they are beneficial to both parties. That’s a recipe for widespread proliferation.

The concept Alex hits on in the quote above is one of the first tools we in the technology division use to initially assess potential tech investment opportunities – the “change function.”

Originally described by technology guru Pip Coburn in his book, The Change Function: Why Some Technologies Take Off and Others Crash and Burn, the change function is all about addressing the thoroughly disproven maxim of “build it and they will come.” It’s an approach to creating and evaluating technology from a user’s (particularly end-user) perspective rather than focusing solely on Grove-style 10x disruptive change and Moore’s Law, the supplier-centric approaches of the past.

The essence of the change function is that users will only change their habits when the pain of their current situation is greater than their perceived pain of adopting a possible solution.

Consider, as Coburn does in his book, lessons of the personal computer. The first PC was built in 1964. Moore’s Law was a necessary condition to bring the price down to a low-enough level for a market to develop. But responsible for the huge growth in the PC market was the graphical user interface (GUI), which lowered people’s perceived pain of adoption enough to fuel the rapid market expansion and sales in the late 1980s and 1990s. Thanks to the GUI, the technology of the PC was now available to the masses without the pain of having to learn how to write code to adopt it. As Coburn said, “The GUI was the sufficient condition that made a cool technology less scary to Earthlings and therefore more accessible.”

The takeaway here from a technology investor’s standpoint is that it’s a good idea to initially assess new technologies through the lens of the change function. Rather than just considering how disruptive a new technology is or how relatively cheap it’s likely to become in the next few years, first try to determine whether it solves a problem for end-users and whether the pain of not having the new technology outweighs the total perceived pain of adopting it. This will put you on firm footing to dig deeper and allow you to screen for potential technology investment opportunities more readily.

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China Gets Picky

By the Casey Research Energy Team

It turns out that China is not willing to pay whatever it has to for energy and metal resources.

Several resource deals have faltered in recent months, indicating an increasingly choosy Chinese perspective on energy and metal acquisitions. Add to that the growing concern that the global economy is once again stumbling and that commodity prices may be near a top, and you have a Chinese deal-making market that has gone from 60 to zero in no time.

On the metals side, observers are seeing a “buyer’s strike,” where companies are watching commodity prices from the sidelines rather than making deals. China’s Minmetals Resources, for example, stepped back from its bid to acquire copper producer Equinox Minerals after Barrick Gold (NYSE.ABX, T.ABX) topped Minmetal’s $6.3 billion offer with a $6.7 billion bid.

Equinox was lucky to get the higher Barrick offer; other companies, like Lundin Mining (T.LUN), have given up trying to find suitors willing to pay a fair price. In May, the company announced it couldn’t find an acceptable buyer for all or part of its copper, nickel, and zinc mines that are spread across Europe and Africa, citing a gulf between its project valuations and what buyers were willing to pay.

Both stories signal that there is a limit to how much even the deep-pocketed Chinese will pay for resources, even though securing resource assets is a stated national goal.

Pricing may be at the heart of the problem. Prices for oil assets in Alberta – home to the massive oil sands and a raft of light oil and natural gas plays – have soared: The average price per acre has climbed from C$2,185 in mid-2010 to C$3,111 today, according to government statistics. The price increased on the back of a series of international deals: France’s Total S.A. signed a $C1.75-billion deal with Suncor Energy to develop oil sands reserves; Malaysia’s Petronas Nasional inked a C$1.07-billion deal for ownership stakes in some Albertan natural gas fields; and China’s Sinopec spent C$4.6 billion for a 9% stake in Syncrude Canada.

But price isn’t the impediment to new deals – the biggest Chinese investment in Canada’s oil patch to date just fell apart because the potential partners couldn’t agree on how to work together. China’s largest oil and gas company, PetroChina International Investment, and Canada’s Encana (T.ECA) announced on June 21 that their C$5.4-billion deal to jointly develop Encana’s Cutbank Ridge gas project had fallen apart. The companies couldn’t agree on how to structure the joint operating agreement, though they did not elaborate on the specific issues.

Encana will now launch a fresh search for a new Cutbank partner… or perhaps partners. The PetroChina deal included stakes in gas production, reserves, acreages, pipelines, and processing facilities, but Encana now says it wants to split things up, offering a variety of joint-venture opportunities for portions of the undeveloped resources and infrastructure requirements while keeping the producing acres for itself.

The PetroChina-Encana deal was a bit of a sweetheart in the industry, often cited to support arguments about China’s growing interest in Canadian oil and gas. Its failure now supports the opposite stance: that China is getting pickier about what projects it supports and how that support plays out.

In the first five and a half months of 2011, Canadian energy companies sold a total of 231 million barrels of oil and gas reserves, less than half the 482 million barrels sold in the same period in 2010. The value of those Canadian oil and gas deals came in at $11 billion, down 35% from a year earlier (excluding the failed PetroChina deal). So there are fewer deals being made.

That may not last for long, especially given that a 34-day market slide has left valuations on the cheap side of average. According to Bloomberg, companies on the S&P 500 Index will earn 18% more this year than in 2010, but the index has fallen 6.8% since the end of April. The combination means valuations are the cheapest they’ve been in 26 years. The index is valued at 8.7 times cash flow, cheaper than in 81% of occasions since 1998; and it is priced at 2.1 times book value, which is lower than it has traded 90% of the time since 1995.

The challenge for a buyer right now is to actually ink a deal at current prices, because most potential targets are still valuing themselves using parameters pulled from the rich deals of 2010.

How will it all pan out? Only time will tell. If commodity prices continue to slide because of U.S economic uncertainty, Greek default concerns, and slowing Chinese demand, deal-making will remain quiet for a while – until the floor is visible – as no one wants to buy a company today that will be cheaper tomorrow. If commodity prices rebound, deals will be back on the table, as no one wants to chase a rising price.

We expect the M&A world to remain fairly quiet for the next few months, as the global economic situation figures itself out. Greece has enough bailout funding to get through August without defaulting, but there are no guarantees beyond that. The U.S. Federal Reserve just lowered its growth forecast for the next two years, but still remains confident that the American economy is simply going through a rough patch. As for China, there are as many analysts predicting continued double-digit growth as there are anticipating a significant, inflation-fueled slowdown.

Regardless, it seems that the age of huge, blind Chinese investments is waning. The Asian giant has become pickier in its choices and more demanding in its deals, and why shouldn’t it? After all, we are all relying on China’s massive population to support global economic growth. It seems reasonable that such growth should be on China’s terms.

[Don’t let market shifts catch you unaware. As a subscriber to The Casey Report, you will be privy to all the analysis… all the early warnings… all the profit opportunities this team of experts (including Doug Casey, David Galland and Bud Conrad) provides. A subscription to The Casey Report can open up profitable investment opportunities ahead of the general populous’ awareness. Find out how you can give it a risk-free, 90-day trial.]


3D Computing Arrives – Sort Of

By Doug Hornig

Somewhat surprisingly, computer architecture has always been two dimensional.

Chips are designed much like the wooden mazes of yore that rats used to run through in science experiments. Walls constrict the movement of the charge, and gates throughout the chip allow it to progress toward an exit. Nothing moves in three dimensions – there is no “up” inside a CPU.

Even when adding multiple cores to a processor – common practice nowadays, with the majority of chips now shipping with two or more cores on the same die – components have just been packed next to each other in the same plane.

That’s about to change.

First, 3D arrays for multiple-core processors are on the way.

Chips stacked in 3D are not merely as good as the same number of chips placed side by side: They’re better, way better. That’s because they’re not running independently, but are fully integrated across all of their functions. According to IBM researchers working in Switzerland, this dramatically shortens the distance information needs to travel on a chip to just 1/1000th of that on 2D chips, while allowing the addition of up to 100 times more channels (or pathways) along which that information may flow. The result: higher speed and far more power packed into a comparable space.

The arrival of 3D arrays has awaited the resolution of some technical problems. For one thing, these things get hot, and conventional air-cooling techniques don’t work. Developers had to construct a liquid, interlayer cooling system. According to IBM, it had to be “a system that maximizes the water flow through the layers, yet hermetically seals the interconnects to prevent water from causing electrical shorts. The complexity of such a system resembles that of a human brain, wherein millions of nerves and neurons for signal transmissions are intermixed but do not interfere with tens of thousands of blood vessels for cooling and energy supply, all within the same volume.”

That’s quite a challenge, but they succeeded with the structure pictured in the diagram above.

In addition, the designers had to work within an accuracy of ten microns – ten times more accurate than for interconnects and metallizations in current chips. That they have also accomplished.

Building a machine based on 3D architecture is now under way. And what a machine. In early March 2010, IBM agreed to cooperate on a four-year project – called CMOSAIC – with the École Polytechnique Fédérale de Lausanne and the Swiss Federal Institute of Technology Zurich (ETH).

These folks are not thinking small. From the project description: “The CMOSAIC project is a genuine opportunity to contribute to the realization of arguably the most complicated system that mankind has ever assembled: a 3-D stack of computer chips with a functionality per unit volume that nearly parallels the functional density of a human brain.”

Yet these techniques only involve taking the same basic chip designs and stacking them more closely together to be more efficient – like building a skyscraper to replace 40 one-story office buildings. Same use, less space, and some efficiency gained in wiring and HVAC.

However, in 2008 at the University of Rochester, an effort led by Professor Eby Friedman helped to create the first true 3D chip – or as they have dubbed it, the first processor “cube.”

The Rochester chip is not simply a number of regular processors stacked on top of one another. It was built specifically to optimize key processing functions vertically through multiple layers of silicone, the same way ordinary chips lay out logic horizontally along that maze.

Manufactured at the Massachusetts Institute of Technology, the chip has millions of small holes essentially drilled into the insulation that separates the layers. When the layers are assembled, millions of vertical connectors can be added in that insulation to connect the transistors on different levels.

For years, chip designers have postulated the eventual end of miniaturization, whereby their attempts to push more transistors in the same area will quickly come to a screeching halt. From there, the only way to go is up. However, until recently there have not been any truly successful models for a 3D chip that would be friendly to use with chip design software and could accommodate the different impedances and power requirements of the differing functions each layer would provide, or handle complex tasks like synchronicity.

Since each layer could be a different processor with a different function – from decoding digital audio and video to performing complex calculations – the 3D chip is essentially an entire circuit board folded up into a tiny package.

Using this technique, the group at Rochester claims the chips inside something like an iPod could be compacted to one-tenth of their current size yet run at ten times the current speed.

Mr. Friedman says, “Are we going to hit a point where we can't scale integrated circuits any smaller? Horizontally, yes. But we’re going to start scaling vertically, and that will never end. At least not in my lifetime. Talk to my grandchildren about that.”

Unfortunately, 3D chips are still in the development stage. We’ll have a long wait before they get out of the lab and into the marketplace. But in the meantime, Intel has taken an interim step forward, by announcing on May 4, 2011 that it will soon begin high-volume manufacturing of chips featuring Tri-Gate, the world's first three-dimensional transistors. According to the company, they will allow for the prolongation of Moore’s Law for at least another two years.

Call it a mini-revolution. And we do mean “mini.” These things are small. Transistors in Intel’s current-generation chips – the planar (2D) type that have been the standard since their invention in 1959 – are already only 32 nanometers (nm) in size. 3D Tri-Gates are only 22nm. (A nanometer is one-billionth of a meter. More than six million 22-nm Tri-Gate transistors would fit on the period at the end of this sentence.)

This image shows the vertical fins of Intel’s Tri-Gate transistors passing through the gates:

PCMag describes how it works (here’s a visual presentation by Mark Bohr):

The Tri-Gate technology gets its name from the fact that transistors using it have conducting channels that are formed on all three sides – two on each side, one across the top – of a tall and narrow silicon fin that rises vertically from the silicon substrate. On a traditional [planar] transistor, the gate runs just across the top. But on the vertical fin, transistors can be packed closer together. This provides enough extra control to allow more transistor current to flow when the transistor is on, almost zero when it is off, and gives the transistor the ability to switch quickly between the two states.

The Tri-Gate’s capabilities give chip designers the flexibility to choose transistors targeted for low power or high performance, depending on the application. They can provide up to a 37% performance increase at low voltage versus Intel's 32-nm planar transistors. Or, when run at the same performance level, they consume less than half the power required by the 2D transistors. All this has an added manufacturing cost of just 2-3% for each wafer from which chips are cut.

Intel’s factories will have to be upgraded to produce the processors (to be called Ivy Bridge) based on the new tech. That’s no small task when you manufacture about five billion transistors per second, as Intel does. But the company says that the actual changes being implemented will not be more significant than have been required for previous process improvements.

We can expect to see processors and devices using Ivy Bridge technology by the end of 2011, with product shipping in early 2012.


The Postmaster and the Carpenter

By David Galland

Yesterday I wandered alone down to a local golf course for a quick round of golf. It’s the sort of quaint, no-frills 9-hole course where you can still play a round on a weekday afternoon for $20. Its advantage over my regular haunt is that the entire course is built atop a plateau of sand and gravel, and so it dries quickly following rain – and rain is something we have had a lot of this year.

As is so often the case when golfing alone, I eventually bumped up against the group ahead of me – three duffers the youngest of whom, Mary, I would say was in her late seventies. The oldest, Pete, had to be pushing 90, with Ralph, Mary’s husband, falling somewhere in between.

They offered to let me play through, as etiquette dictates when a solo player comes up behind a group, but as the morning was pleasant and there were additional groups up ahead so my progress was destined to be retarded no matter, I asked if I could just play along with them.

Those of you who play the blessed game will know immediately what I mean when I say that the older you get, the straighter you tend to hit the ball – though your distances suffer. And so it was that I, still in the (relative) vigor of youth, mashed my ball a couple hundred yards, then settled in for a casual walk as my companions made determined progress in 40-yard increments toward the next flag.

In addition to being generally enjoyable, the experience was also inspirational. That’s because even though my companions were all heavily weighed down by the rigors of time, they still managed to fight the good fight in the quest for a decent score. Particularly old Pete, who had to wrestle with a serious palsy as he endeavored to drop his ball on the tee – a task he persevered with in every instance.

Proving necessity as the mother of invention, Pete had installed a suction cup on the handle of his putter, which he put to good use in retrieving his ball from the cup without having to stoop over. Funnily, it soon became obvious that his two companions were accustomed to leaving their balls in the cup until after putting in, so that Pete could fish them out as well. By the last hole, I too was participating in the ritual, patiently waiting my turn until Pete graced me with my ball.

As is also customary over the course of a round of golf with strangers, before long we started chatting about this and that, and getting to know each other’s background a bit. When I told them that I was a writer with a skew toward financial and investment topics, Ralph shook his head and asked, rhetorically, “Have you seen CD rates? We can’t earn any money.”

“Are you living off your savings?” I inquired.

“Eh?” he asked, bending an ear in my direction.

“ARE YOU LIVING OFF YOUR SAVINGS?” I asked again a little louder.

“Oh, yes, I was always self-employed. As an industrial carpenter, replacing windows and other fixtures in factories, hospitals, that sort of thing,” Ralph answered proudly. “But it’s not easy to live off savings when you can’t make any money on your money,” he added with a stoic sigh before distractedly slicing his next shot off the toe of his 5 iron into a patch of rough.

By contrast, despite the visible hand of advanced age having twisted Pete into a posture akin to Hugo’s Quasimodo, Pete had a noticeably carefree attitude about him.

“And what did you do in your working career?” I asked, sticking my nose in his business as we Americans are unhesitant in doing.

“Oh, I was the postmaster hereabouts. But I retired twenty or so years ago.”

“And so you live on a pension?”

“Sure do,” he answered with a glint in his eye, before puttering off to the next tee in his personal golf cart.

And so, I reflected after the round was over, the difference in the lives between one old duffer and his wife, now clearly being squeezed by a deliberate government policy to keep interest rates low in order to bail out the banks, and the other, Pete, who has no such concerns, granted as he was a steady income from his government pension, helpfully adjusted for inflation.

The sharp difference in their circumstances was notable. In the one case, the carpenter is at the mercy of a corrupt government. A government that manipulates interest rates, even though they know the hurt that will cause savers and those who rely on savings. A government that also promulgates inflation, adding to the steady erosion in the quality of life of those savers and anyone forced to live on a fixed income.

How is it that one class of citizens, the bureaucrats, have arranged things to insulate themselves from the ill consequences of their own actions?

The answer, simply, is “because they can.”

For Pete, providing for his comfortable inflation-adjusted retirement required nothing more than time served and a bit of paperwork done by a bureaucrat before them, paperwork that says for all to read that, upon retirement, the state will provide certain benefits to its workers until the end of their road is reached and then continue still further for any surviving spouses.

By contrast, a self-employed businessperson has to pay close attention to the outgoing vs. the incoming to ensure that, over time, they’ll have something left to tide them over in their fallow years. The pensioned bureaucrat need not make any such calculations, and so has no such concerns.

Of course, many companies in these United States, and elsewhere, used to offer pension plans as well. But long ago, the vast majority of those plans were scrapped out of economic necessity, much of it tied to the uncertainty of operating in a changeable regulatory environment. It was one thing when a company’s obligations to its long-term workers were obvious. It became another thing altogether when the government began layering on added levies for various safety net programs and insurances. At some point in the past, the added expense of these costly worker-related mandates made it necessary for the companies to make adjustments in the benefits offered, in order to afford those mandates and stay in business.

Now, don’t get me wrong. Pete was a very agreeable individual, and I’d be happy to play golf with him again any time. His decision to pursue a career in “public service” is as benign as Ralph and Mary’s decision to start a carpentry business. In Pete’s case, however, it is safe to assume that the attractive, life-long benefits package played a part in his career deliberations. 

Just like it did for a guy I used to know who worked for CALTRANS, cleaning the debris off the side of California freeways. He used to tell anyone who would listen how he was taking, or had just taken, some civil service test or another to improve his pay grade with the clear goal in mind of boosting same to the max before retiring at 50 years old with 70% of his final salary guaranteed for life. While I haven’t seen Lenny in many years, I suspect he was as good as his word, and today is probably enjoying a game of golf, just as unconcerned as Pete.

Is there a point to these musings?

Nothing overly profound, I fear. But I do think it is worth reflecting on a set-up where one class of people, the bureaucrats, are…

  • Required to produce nothing that has to stand on its own in free markets,
  • Given license to make laws and regulations that benefit themselves at the expense of others,
  • Further given the power of coercion to enforce such laws and regulations, even to the point of throwing non-compliant individuals into jail.

The net result of such a set-up is two distinct classes of citizens, one of which could be loosely described as the Master Class, and the other the Slave Class.

Unfortunately for the bureaucrats, in the sort of crisis we are in today – a crisis directly linked to the unfettered growth in government – they will not be able to avoid sharing in the pain. Their very excesses will lead, and are leading, to a backlash that will result in cutbacks. In Minnesota, the state government has just shut down in a dispute over a $5 billion budget deficit. The bureaucrats hope that by closing down services, they will be able to squeeze the citizenry into ponying up more taxes to keep the master class living in the manner they have become accustomed to – and they’ll probably succeed, this time around.

On a larger stage, the U.S. federal government is likewise locked in a debate over raising the debt ceiling, yet again. And, yet again, a compromise will be reached whereby the bureaucrats can maintain their status at the expense of the tax slaves and their unborn progeny.

Now, I wish I could say that in time, Americans will come to the conclusion that the country can do with a lot less bureaucracy – as in a 50% or better reduction – but if history is any guide, that’s just not in the cards. For one thing, bureaucrats are remarkably adept at developing entrenched constituencies. Shut down the parks? Heavens forbid, say the sportsmen, casual users and environmentalists. Stop issuing food stamps? What about the starving children, ask the recipients. Close the Department of Motor Vehicles, but how will we renew our licenses? Stop inspecting the food we eat? Can E. coli be far behind? Stop fixing the potholes? And who is going to pay for the damage to my car?

And so while their ranks may not shrink, other than perhaps by attrition that leaves those who have reached tenure secure in their position and their benefits, the bureaucrats are far from out of the woods. For one thing, they will find that the inflation emanating from their unchecked excesses, and the need to try and hide that inflation from the slave class by jiggering the reported indexes, will erode their own salaries, pensions and cost-of-living adjustments. And unlike the entrepreneurs who will be able to use their ingenuity to adapt to the inflation – perhaps even by diversifying internationally – the bureaucrats are cemented into place by the very same contracts that were designed to protect them.

Of course, the powers-that-be won’t go down without doing their best to maintain their status, which means turning to the tried and true approach of vilifying the entrepreneur – with the level of vilification rising in direct proportion to success.

Case in point, after a stint at trying to appear business friendly, President Obama and his flunkies are once again pointing fingers at the greedy capitalists that seek advantage by drawing the very lifeblood of the proletariat.

Quoting Federal Reserve Guv Sarah Raskin

Federal Reserve Governor Sarah Bloom Raskin said the financial inequality resulting from stagnating incomes for most Americans and rapid growth in wealth for the richest 1 percent is hindering the U.S. economic recovery.

“This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently,” Raskin said today to a forum in Washington sponsored by the New America Foundation. The disparities help “drag down maximum economic growth and are anathema to the social progress that is part and parcel of such growth,” she said.

And now we know the root cause of today’s economic ills – it all boils down to income inequality. Which, of course, is actually just a thinly coded way of saying, “We need more taxes, and people with money are the only remaining target.”

In a speech earlier this week, the president also pulled on the leather gloves, mentioning “corporate jet owners” six times as part of a pitch to close a tax loophole that is seen as helping to provide yet more slop to those capitalist pigs. Unfortunately, as our own Jeff Clark points out…

Not only did he appear embarrassingly un-presidential, but the tax "loophole" he wants to close (accelerated depreciation) will affect all equipment manufacturers, thereby decreasing sales and tax receipts, and increasing unemployment.

Amazon and Overstock.com both just announced they're leaving California due to Gov. Brown's new law, which requires them to collect sales tax on CA customers. The CA consumer can still order products, but they'll come from out-of-state affiliates, so tax revenue will actually decrease and unemployment increase in CA.

In the end, both the postman and the carpenter are going to be affected by the collapse of the U.S. monetary system. While the postman will do everything he can to keep his head above water, including standing on the head of the carpenter, in the final analysis everyone who fails to adapt to what’s coming is going to find themselves treading water.

And when it comes time to adapt, the carpenter alone will still know how to build a boat.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

Vedran Vuk
Casey Daily Dispatch Editor

Jul 02, 2011