Mish's Global Economic Trend Analysis

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Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP Posted: 11 Apr 2015 08:16 PM PDT In response to Readers Question Free Trade; Does Nonreciprocal Free Trade Cost Jobs? Paul Krugman "Was" Right!, reader Ken is wondering about legacy capital and the destruction of capital. Ken writes ... Hi Mish I really enjoy your explications of economic ideas, and I think the world really needs them, since many are so economically illiterate. I do have a question about free trade and loss of capital. My father and uncle both trained at Detroit's illustrious technical high school. My dad went on to college and became a physiology researcher and professor, my uncle developed a state of the art machine shop making rocket engine parts. When job and factory loss occurs there is also loss of the physical capital of the legacy tools and machines, and not all of them are worthy of obsolescence. In addition there is the loss of human capital embodied in persons and organizations. Here I am thinking of institutions such as the famed Detroit technical high school, and of individual trained personnel such as the senior master machinist who has years of experience and detailed practical knowledge that can only be relayed in person from a master machinist to a developing journeyman machinist. I recognize that there is radical technological innovation ongoing, but there still must be some value in this legacy capital. I would be interested if you might address this consequence of free trade in your writing. Thanks, Ken Legacy Capital Disappears Over Time As technology advances, the value of legacy capital depreciates at varying rates, but skills can change from being very needed to completely obsolete quite fast, even overnight. Is there any legacy capital left for ability to use a slide rule? I suspect none at all. I have that skill and it is totally useless other than as a conversation piece. My freshman year in college in an engineering curriculum, knowledge of how to use a slide rule was important. And the better you could use one, the more likely you were to arrive at the correct answer. One semester later, skill in using slide rules was rendered totally useless. Texas Instruments came out with small hand-held engineering calculators that made the slide rule obsolete, overnight. Having a good slide rule and knowing how to use it was needed one semester, but on day one of the next semester having an engineering calculator was a requirement. Robots are now doing much machine work. Boeing recently replaced highly skilled riveters with robots that do a far better job with fewer errors. See KUKA Systems develops robotic riveting system for Boeing 777 wide-body fuselage assembly. Is there legacy capital for highly skilled airplane riveters? The answer is pretty clear: Except for niche applications, need for that skill just vanished. Over time all sorts of skills become obsolete or relegated to small niches. Horse riding is a good example of niche use. Horse riding skills are needed for jockeys at the racetrack, wild west shows, recreational uses, and perhaps some ranching functions. Unlike the slide rule there is still some demand for horse riding and training, but not like in 1840. Someday, and sooner than most think, truck driving skills will be of limited use, perhaps even no use at all. Right now, truck driving skills are still valuable. With that let's return to free trade and tie up some loose ends. Sugar Lobby Please consider Powerful US sugar lobby stands between Australian cane growers and a sweet trade deal. It's the kind of political power Australian agricultural industries can only dream of. America's sugar producers continue to benefit from government subsidies, import quotas and tariffs, despite the vehement opposition of the influential American business lobby and the agreement of numerous free trade deals, including one with Australia in 2005. It's long been a sore point for Australian cane growers, who hope the Trans-Pacific Partnership (TPP) will bring change. But while business is optimistic, other political observers in Washington DC say Australia will be lucky to win any concession on sugar. Scott Miller, from the pro-trade Washington think-tank the Centre for Strategic and International Studies, said the "political intensity" of the US sugar lobby is "unrivaled" and he's blunt about the prospects for change in the TPP. "Sugar, I'd hold out no hope for," Mr Miller said. "The United States has had a sugar protection scheme since about 1794, and that will probably continue through my lifetime." It's notable that on Capitol Hill, even some who advocate for free trade and support the Trans-Pacific Partnership believe sugar concessions are a bridge too far. The US Chamber of Commerce represents major sugar manufacturers including Mars, and the Chamber's Asia director Catherine Mellor says protection policies are unfair and don't make economic sense. "It's raised the cost of sugar in the US and we've lost 30,000 jobs - 30,000 jobs out of Chicago have gone because sugar manufacturers have left the United States to go to Canada so that they can import sugar," she said, calling on American leaders to show courage in tackling sugar subsidies and tariffs in the Trans-Pacific Partnership negotiations. Free Trade Agreement? After 5 years of wrangling TPP is nowhere close to a free trade agreement. What about Steel? Looking for more tariffs that likely will not go away? If so, consider steel. Here's a Google search I did for Steel Tariffs.  Scroll down the list and look for recent listings. You will find a bunch of complaints for and against the US and EU. Steel Tariffs Won't Save Jobs A decent article to consider is the accurate assessment in July of 2014 by Forbes contributor Tim Worstall who says Why Steel Tariffs Won't Save Jobs. The article even mentions TPP. The latest round of steel tariffs are a classical, sui generis, example of how politics really works. Larded with a great deal of rhetoric about how this will save jobs, make America great again and possibly improve the flavour of Mom's apple pie the reality is that it protects some number of politically important jobs at the cost of more, less politically important, jobs elsewhere in the economy. Now with trans-Pacific and trans-Atlantic trade talks missing deadline after deadline, Washington is slapping new tariffs on steel imports. This election-year gift to U.S. steel giants and their unions will raise prices for other U.S. firms, handicap domestic energy production and alienate trading partners world-wide. On Friday the Commerce Department imposed duties on hundreds of millions of dollars in annual trade with South Korea and eight other countries, including India, Vietnam, Turkey and Taiwan. As punishment for allegedly dumping steel into the U.S. market at unfair low prices, South Korea's exporters will face tariffs of about 10% to 16%, while smaller players from other countries face rates up to 118%. Essentially, what is being repeated is the mistake of the Bush steel tariffs back a decade or so. As a result of a Section 201 ("safeguard") investigation brought at the behest of the U.S. steel industry, President Bush in March 2002 imposed tariffs on imports of certain steel products for three years and one day. The tariffs, combined with other challenges present in the marketplace at the time and in the months that followed, boosted steel costs to the detriment of American companies that use steel to produce goods in the United States. The resulting negative impact included job losses for thousands of American workers. 200,000 Americans lost their jobs to higher steel prices during 2002. These lost jobs represent approximately $4 billion in lost wages from February to November 2002. One out of four (50,000) of these job losses occurred in the metal manufacturing, machinery and equipment and transportation equipment and parts sectors. More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself (187,500 Americans were employed by U.S. steel producers in December 2002). Steel Analysis Does the above sound reasonable? It does to me. Why? Because US auto and other US manufacturers that use steel in any form had to pay higher prices for it than foreign competition. People bought foreign cars that were better and cheaper. We saved steel jobs but at far greater expense of other jobs. Turning TPP to TP Obama's Trans-Pacific Partnership is not a step in the right direction. It would serve a better use as toilet paper. For further analysis, please see my article that started this chain of posts: Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice? I repeat for the third time ... I am in favor of free trade. An excellent free trade agreement would consist of precisely one line of text. I propose the following agreement: "All tariffs and all government subsidies on all goods and services will be eliminated effective June 1, 2015." Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot. Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Introducing "Spot" the Robo-Dog Posted: 11 Apr 2015 01:07 PM PDT Here's a robot gadget that I would actually like but mainly for a reason that I challenge readers to guess. While watching the video below, in which no robots were harmed in spite of being kicked, think of some reasons for "Spot" the robo-dog made by Boston Dynamics. Link if video does not play: Introducing Spot. Spot is a four-legged robot designed for indoor and outdoor operation. It is electrically powered and hydraulically actuated. Spot has a sensor head that helps it navigate and negotiate rough terrain. Spot weighs about 160 lbs. I think "Spot" will eventually be a big hit for security purposes. In such a mode it would be equipped with a video camera, voice, heat-seeking ability, etc. Robo-Dog as Animal Deterrent We have a 1 acre property with huge gardens. Our property is close to a forest preserve. Deer are extremely problematic. They eat nearly everything unless I take other measures. One bite off the top of a lily and it will not flower in the current year. Repeat bites and it will not survive at all. I believe a robo-dog like spot roaming the property from dusk to dawn would keep deer and other animals away. Meanwhile for all you gardeners with a deer problem, I suggest "Mish's Brew". Mish's Brew You can find deer repellants at garden shops for about $30 a quart. One quart will fill a two or three gallon container perhaps three times. The list of ingredients typically says something like "putrefied eggs and garlic extract".  $30 seems like a huge price for something so simple. I thought that I could make that myself. I tried and did. My brew works even better, with fewer clogs than the commercial mix. Mish's Brew Recipe In a blending bowl, add one egg and a half cup of "stuff". The "stuff" is combination of garlic powder, onion powder, powdered curry, and powdered cinnamon. Use whatever stuff you like, but it needs to be pure powdered ingredients, not something like garlic salt. If it has salt in it, it will harm or kill your plants. Anyway take about a half cup of "stuff" whose primary ingredient is garlic powder, add an egg and a couple cups of water. Blend really well for two minutes. The better the blend and the finer the powder, the fewer the sprayer clogs.  Next add a few tablespoons of liquid dish-washing detergent such as Dawn, and a bit more water.  Add the detergent later in the mixing process to reduce foaming. Blend another minute or more. The longer the better. Using a funnel, pour the mix in equal portions in two "strong" quart plastic bottles. Orange juice bottles are better than a milk bottle. I have Mish's Brew eat through the latter. Fill the quart bottles up with water and shake. Now you have concentrate. Half of that quart bottle is enough to fill a three gallon sprayer. Choose a sprayer with a metal tip, not the plastic ones. Metal tips clog less frequently and are easier to unclog if the do get clogged. Again, I have had far better clogging results with my mix than the commercial stuff. The dish-washing detergent is a wetting agent and the egg acts like a glue that will dry on and stay on. Choose your powdered stuff with care. Sometimes the generic store brand in bulk is the finest powder you can get. You can also try garlic juice instead of powdered stuff. A cup of juice instead of "stuff" will suffice, and it will clog even less than powders. I am using liquid juice now, with a bit of cinnamon and curry powder added in. Mish's Brew Really Stinks! Mish's Brew improves with age. It really stinks! Imagine rotten eggs infused with concentrated garlic. Don't spray on a windy day. The smell in the garden will go away within hours, but the brew will stop deer up to a month, even with rains. Whenever you see deer munching again, it is time to spray again. The critical time to spray is springtime: now. Deer are very hungry and plants are sprouting up. I spray more in Spring and early Summer than other times. Also, if you have flowering shrubs that deer like (viburnums) spray in late autumn so deer do not eat the flower buds. One late spray on shrubs will last the entire winter. Aging works well. Mish's brew improves the longer it sits, but you can also use it immediately. Don't use Mish's Brew on vegetables or anything you intend to eat! I have never had my brew harm any plant with two possible exceptions: Clematis and yews. I have seen yew discoloration but I am not positive it is related to my mix or if it was caused by something else. On a couple occasions, it seemed to adversely affect my clematis vines. I will not again spray my clematis vines (and they do not seem to be a deer favorite anyway). Other than that, I have seen no problems caused by the mix, but please note the mix does not stick well to tulip leaves (nor does the commercial mix). Tulip leaves are very waxy and it runs right off. Tulips and Lilies are among the favorite choices for deer. No need to spray daffodils, alliums, peonies, bleeding hearts, monks hood, or lamb's ear. Deer also do not touch some groundcovers such as vinca, lamnium, and pachysandra. Judge from your own experience. Many plants are questionably labeled "deer-resistant". Until the cost of robo-dog is incredibly cheap (I suspect it will be some day), Mish's Brew will guard my gardens, not robo-dog. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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