Mike Holt's  Instablog

Mike Holt
Send Message
Mike Holt is a Senior VP, Wealth Management Strategist with The MDE Group, an innovative Wealth Management Firm located in Morristown, NJ that manages over $1 billion for corporate executives and other high net worth individuals located across the US. Mike's diverse background includes auditing... More
My company:
The MDE Group
  • TREM '11 -- Part One: The Challenges 25 comments
    Aug 30, 2011 10:17 PM
    On March 22, 2011, I walked into a conference room at the Ritz-Carlton Pentagon City hotel, the site of the TREM ’11 Technology Metals for Energy & Security Conference.  I decided to attend this conference in an effort to better understand how the US government and American businesses were planning to address our dangerous reliance on imports of rare earth based materials, both for our critical national security needs, and for numerous advanced technologies that hold the key to the economic growth that we so desperately need. On March 23, I walked out of that conference room with heightened concerns regarding the challenges that such a public/private sector partnership presents, but an overall sense of optimism regarding a number of initiatives that were presented for our shared consideration. In this article, I will describe the challenges.
     TREM 11 Logo
    Although I didn’t notice beforehand any discernible pattern in the sequence of presentations on the agenda for the TREM’11 Conference, in hindsight it was clear that the perspective had evolved from one questioning why the government hadn’t done more to develop a domestic rare earth mining industry to one critical of excess government regulations and inefficient bureaucracies that served to hinder the development of a domestic rare earth mining industry – indeed, a domestic mining industry in general.
    This growing sense of enlightenment seemed to result from more than just the incremental insight gained from each successive speaker. After looking back at the agenda, the explanation for this became clear. The Conference began with speakers from representatives of various US Government Agencies and ended with CEOs of various rare earths mining companies. (Copies of most of the presentations, by the way, are also available at the IAGS TREM Center website.) Although the topics and backgrounds of the speakers for the intervening presentations were refreshingly diverse, the awareness that reducing our dangerous dependency on foreign sources of energy and critical materials would ultimately be the primary responsibility of the private sector was realized gradually, almost imperceptibly, until it was made obvious by the final speakers.
    This is not to say that the government, military, industry associations, trade groups, non-profits, NGOs, media and others can’t play a vital role in addressing our dangerous reliance on energy and critical materials from foreign sources, sometimes controlled by unreliable trading partners, and sometimes from parts of the world that are unstable and/or characterized by hostility toward the US and its allies. It is just that these efforts are more likely to succeed if they are supportive of businesses, and elicit the cooperation of the American public. For the most part, the speakers representing the various government agencies seemed to understand this, as they were already seeking to better coordinate their efforts among each other. Based upon the feedback they received at the TREM ’11 Conference, these improved communication/coordination efforts should eventually be expanded to also include businesses, investors, and consumers.
    What is the Proper Role of the Government in the Economy?
    However, there is still room for improvement in understanding the true nature of the issues facing us, and in some cases, the solution on the part of the government is less not more. For example, the CEO for one of the rare earth mining companies effectively stated something like this, “We’re not looking for handouts from the government. We would just like to eliminate much of the bureaucracy and red tape that result in excessive start-up times for a mining operation in the US.”
     TREM 11 Permitting Challenges
    To put this into perspective, Katie Sweeney of the National Mining Association pointed out that the Department of the Interior requires a fourteen department, SEQUENTIAL, review process before a mining company can even commence the scoping necessary to prepare an environmental impact statement. This adds about three months to the permit processing time. Furthermore, there are four such permitting processes required throughout the start-up cycle of a mining operation, each of which is subject to similar bureaucratic delays. In total, the permitting process in the United States can take seven to ten years to complete, and only then can the mine development process commence.
     Key Commodities Import Dependence
    Obviously, the greater the uncertainty, complexity, and time required for an attractive deposit to be converted into a viable mining operation, the less attractive such US mining operations are likely to be to investors, and the less likely such deposits will be developed within the US. Environmentalists and desert tortoises may celebrate these roadblocks, but this should be a great cause for concern among freedom loving people concerned about our economic and national security, who may also appreciate the importance of a domestic mining industry -- as well as a domestic manufacturing industry and many other job creating industries within the US, for that matter. For more information on this topic, visit www.mineralsmakelife.org
    Contribution of Minerals to US GDP
    Can’t Live With Them, but Can’t Live Without Them
    But, while many in the industry seemed to want the government to simply get out of the way, my initial concern was why the government hadn’t done more. This question loomed even larger after I listened to a presentation in the first session by retired Air Force Major General Dr. Robert Latiff, now Director of the Intelligence and Security Research Center at George Mason University.
    Dr. Latiff pointed out that the need to adopt new methods for assuring the timely availability of rare earth elements and other materials necessary to maintain national defense capabilities beyond the outdated reliance on the National Defense Stockpile first established in 1939 was presented to the Department of Defense as early as 2003. This is documented in a book titled, “Managing Materials for a 21st Century Military, ” which was authored by a National Research Council committee that he chaired. This two-page Report prepared in October 2007 provides a brief summary of the book’s conclusions, and indicates how the book can be ordered by those seeking more details. Dr. Latiff further explained that the steps necessary to transition the National Defense Stockpile to a total system approach known as the Strategic Materials Security Program was presented to the US Department of Defense in September 2010, but is still under review.
    NMAB Report
    I was left with the impression that Nero was clearly fiddling while Rome burned. It was obvious that something needed to be done years ago, and there was little or no time left to be pondering alternatives.
    Are There Substitutes, or Just Excuses? (Where is John Galt?)
    But, ponder alternatives is exactly what was being suggested in the next session by Robert Cekuta, who is the Deputy Assistant Secretary for Energy, Sanctions and Commodities for the United States Department of State. He is responsible for the United States global energy security policy. It then dawned upon me that perhaps the most important question regarding the danger posed by our reliance upon imports of rare earth based materials – namely, whether there are substitutes for rare earth elements that could be realistically developed on a timely basis to achieve our national security goals and our economic growth objectives -- remained largely unanswered. So, I asked Mr. Cekuta for his opinion in this regard.
    I was initially shocked by his response.  In his words, if there were no substitutes, then market forces already would have enticed private companies into the space. Did he not realize that, sitting in the seats before him were executives representing scores of rare earth mining companies? What possibly could have enticed them into this space? Would his answer be any different if the issue at hand was as pressing as a desert traveler’s immediate need for water, I asked? What good would it do to inform the traveler that there is no water, but there is hope that someday, someone may be able to produce a substitute? It wasn’t until later, when I had heard the comments made by representatives of the mining companies, and when it occurred to me that most had operations outside the US, that I appreciated his response that “mines won’t be opened unless they are profitable.”
     REE Global Supply Demand Balance
    What Will it Take to Make US Mines Profitable?
    I later developed a better understanding of Robert Cekuta’s remarks, but I still believe that there is a role for government, even if we must ultimately rely upon the private sector to engage in those activities for which it is better designed than the government. This is what led to my follow-up question to this same panel, but this time directed to Terence Stewart, the managing partner at the Law Offices of Stewart and Stewart, with a concentration on international trade matters and customs law. Currently, he is a Member of the Steering Group of the International Trade Committee of the American Bar Association’s International Law Section. In my notes, I summarized his presentation as follows: What happens when one country dominates supply of a commodity and then chooses to control the supply of that commodity for geopolitical purposes rather than for commercial purposes?
    Who better to ask: (1) whether it is possible to expel a country from the World Trade Organization if that country repeatedly fails to abide by the conditions upon which its admission was based; and (2) given the restrictions on actions that some might regard to be a foreign intervention into a matter under the sovereign control of another country, what measures can be taken to directly penalize the managers of corporations who harm corporate stakeholders by establishing operations in a country that is known to disrespect intellectual property laws and to engage in practices that are detrimental to free trade?
    Unfortunately, his answers were less than comforting: Once a country is admitted to the WTO, it would be nearly impossible to expel them, and it is virtually impossible to pierce the corporate veil. I am not an attorney so, for better or worse, I am not able to understand how things that make no sense make sense. However, I am aware that individuals are often held directly responsible for their actions in China, especially when it involves “state secrets” – which is not too uncommon since it is virtually impossible to avoid doing business in China with a company in which the state does not somehow maintain a stake. So, perhaps there is some comfort to be taken in knowing that ultimately at least one country’s intellectual property and stakeholder interests will be respected.
     Law and Policy of the WTO -  Table of Contents
    Unfortunately, the inability of our own government and judicial systems to ensure that market forces remain intact does little to ensure that we may rely upon such market forces to entice the private sector into establishing rare earth mining companies and related industries within the US.  Ironically, where government actions have been taken, they have often served to further impede a healthy industrial sector within the US.   The paradox is that markets have become so distorted by domestic and foreign government policies and interventions that it is hard to see a way forward without a need for even greater involvement on the part of the US Government. This may explain why retired General Gregory S. Martin, former Commander of the U.S. Air Force Material Command (AFMC), which is responsible for various activities necessary to maintain Air Force weapons systems, commented that we can’t just leave these issues to the markets.    Of the ten commands reporting to HQ USAF, AFMC is the largest in terms of funding, with an operating budget equal to 57% of the Air Force budget.
    Is There Hope for Change?
    Given the current state of affairs, General Martin’s assessment may be correct, but I think we can right the ship if changes are made within both the public and private sectors. Although government officials did not dwell on this topic during the conference, I suspect that the maze of regulations now faced by the mining industry as a whole were triggered at least in part by irresponsible actions likely taken by certain private businesses. But as private sector participants were quick to point out, punishing the entire industry with an extremely inefficient maze of regulations administered by overlapping regulatory bodies rather than efficiently prosecuting wrongdoers is not the answer.
    As for the private sector, the efficient allocation of capital to this space seems to require a more long-term strategic perspective on the part of downstream industries that rely upon rare earth based materials for the profits that they generate from their potentially higher margin products. I believe that such a vertical integration strategy, representing a private sector rather than a public sector initiative, is a better way to address the risk of further market manipulating activities on the part of foreign governments that seem to have only temporarily resulted in artificially low costs elsewhere.
    The response from the public sector should be to eliminate artificially high costs here in the US.  Although it may be tempting for the government to play a greater role – to fight fire with fire, so to say – such efforts often backfire. For example, there is some evidence, such as cancelled IPOs, which suggests that the recent launch of an array of new government programs and central bank interventions has introduced a level of confusion and uncertainty that makes it increasingly difficult for private sector businesses to raise needed capital, which is particularly vital to the development of mining companies. Increased government spending during a slowing economy may seem appealing on the surface, but could actually be quite harmful if it serves to reduce private sector spending and investment to an even greater extent.
    But, as indicated earlier, there is a very important role for the government to play here. We just need to identify what things are best handled by the public and private sectors, and to improve the relationships between the two to ensure that both remain healthy. I’ll talk more about this in Part Two.
Back To Mike Holt's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (25)
Track new comments
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » On June 9, 2011, a paper co-authored by Terence P. Stewart titled "Rare Earths, An Update: A Fresh look at the Supplier(s), the Buyers, and the Trade Rules" was presented to a Colloqium of the Global Business Dialogue, Inc. and the Trans-Atlantic Business Dialogue.


    As indicated in my Insta-Blog titled "TREM '11 -- Part One: The Challenges," Terence Stewart is the Managing Partner of the Law Offices of Stewart and Stewart located in Washington, DC, and he was kind enough to participate in one of the panel discussions at the 2011 TREM Conference.


    The paper provides an excellent summary of the issues and controversies surrounding a series of restraints applied by China to limit the exportation of rare earth's, including export duties and export quotas, both of which are direct violations of China's WTO comitments and its obligations under its protocol of accession to the WTO. The paper also cites a number of sources that should be very helpful toward developing a better understanding of these issues, how they developed, and options for policymakers to address both:


    (1) the need to develop domestic rare earths resources, and
    (2) the need to secure more equitable access to essential rare earth resources by ensuring that China adheres to its international obligations by eliminating export restraints on such materials.


    The paper can be accessed through the link below.




    I commend Terence P. Stewart, Esq. and his colleagues for their efforts in developing this paper, and for the many other publications that Terence Stewart has authored, which are also available via the Stewart and Stewart website.
    1 Sep 2011, 03:54 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » To many average Americans, the two paths leading to [or from?] the Road to Serfdom might be attributed to a critical trade imbalance that is often overlooked, namely the ratio of attorneys to engineers. Here in the US, many believe that we have a surplus of attorneys and a shortage of engineers. In China, the opposite seems to be true.


    While it is widely understood that part of the solution is to train more engineers in the US, there also appears to be a need to address the frequent disregard for the law in China and a legal system that relies more upon power and force than jurisprudence in order to contain social instability. There the justice system could be depicted by a masked figure holding a blindfold in one hand, and a scale in the other. On one side of the scale stands a sword, and on the other a huge carrot representing efforts to quell unrest by providing jobs for as many Communist Party supporters as possible.


    This has many implications, but one that has rightfully attracted much attention lately is the high level of unemployment rates in the US. Other factors contribute to these high unemployment rates as well -- e.g., the hollowing of the industrial base and restrictions on mining activities here in the US -- but regardless, it should be clear that the nature of, and solutions to, high levels of unemployment in the US are not monetary in nature. As such, it seems absurd that we place so much reliance on the Federal Reserve and its bewildering array of innovative monetary policies to address this problem.


    For example, perhaps we should take a moment to familiarize ourselves with the Ofice of the United States Trade Representative. To my knowledge, it doesn't have an abbreviated name as catchy as that of "the Fed" and the head of the office is not nearly as well known as those of past and present Chairmen of the Fed, often cited as the most powerful man in the world, rivaled perhaps only by the past and present officers and directors of Goldman Sachs.


    I'll give you a hint: the head of the office holds the title of United States Trade Representative [USTR], which is a Cabinet-level position (though not technically within the Cabinet), and the USTR also carries the title of Ambassador. The Office of the USTR is the United States government agency responsible for developing and recommending US trade policy to the President of the United States, conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government through the interagency Trade Policy Staff Committee [TPSC] and Trade Policy Review Group [TPRG]. The current USTR, appointed in 2009, served as mayor of Dallas, Texas from 1995 to 2002; he also ran for the US Senate in 2002. Following his failed bid for Senate and a brief stint at another law firm, he was a partner with the Houston-based law firm Vinson and Elkins where, according to Texans for Public Justice, he was, as of March 2007, one of the four highest paid lobbyists for Energy Future Holdings Corporation, the group created by KKR, TPG Capital, and Goldman Sachs to acquire TXU for $45 billion, the largest leveraged buyout in history.


    To his credit, Ambassador Ron Kirk (well, now you have it) has repeatedly raised concerns of American businesses that China is not properly enforcing intellectual property rights of American companies doing business there. He has also been critical of China's internet censorship policies, and he is reported to be considering whether to challenge such censorship regulations in the WTO as an unfair barrier to trade; it would be the first case of its kind.


    Let us stay patiently tuned into any developments in this regard. We do seem to have a relatively more abundant supply of attorneys and, all kidding aside, we may need to rely upon them now more than at any other time in our history.
    2 Sep 2011, 12:35 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » The WTO website provides the following flowchart illustrating the process and timetable for completion of the settlement of disputes filed under the WTO Dispute Settlement System.




    Other helpful background information regarding the WTO Dispute Settlement System is also available through this link.
    2 Sep 2011, 02:24 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Reuters reports today, September 20, 2011 that US Trade Representative Ron Kirk will announce a major trade enforcement action against China, according to an advisory by Kirk's office obtained by a business group. Stay tuned for a discussion of the "history behind this headline."
    20 Sep 2011, 08:14 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Hmmm, this brings new meaning to the saying "don't count your chickens before they are hatched." As indicated in the link below to the website of the USTR, the major action initiated against China through the WTO doesn't deal with rare earths, violations of intellectual property rights, or China's censoring of information on the internet. Rather, it deals with China's imposition of duties on imports of chicken parts from America, which affects #300,000 American workers/voters.




    Okay, so now that I've got egg on my face anyway, what would happen if various forms of copyrighted materials explaining the vitality of liberty and justice to sustainable economic development became best sellers here in the US? Would not pirated copies find their way throughout China?


    If so, our hope that the Chinese people would recognize the danger posed by the single-party, authoritarian rule by the Chinese Communist Party would be realized.


    If not, it would demonstrate that the Chinese Communist Party is much more able to prevent pirates from counterfeiting and distributing copyrighted materials than they claim. Just a thought.
    21 Sep 2011, 11:58 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » I had a conversation with a representative of a very large, well-established investment management firm yesterday. I asked how likely it is that a major action would be initiated against China through the WTO with respect to such significant matters as rare earth export restrictions, violations of intellectual property rights, or Internet censorship.


    In his opinion, there is very little likelihood that "protectionist pressures" such as this would be advanced because the world is too dependent upon China for needed economic growth, and vice versa.


    That's just one opinion, but if true, our efforts would be better directed toward developing a domestic rare earths supply chain ASAP.
    24 Sep 2011, 03:52 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » September 11, 2011 will mark the Tenth Anniversary of the Terrorist Attacks on our Country.


    December 11, 2011 will also mark the Tenth Anniversary of the Accession of China to the World Trade Organization. The relevance of this ten year anniversary is as follows:


    Section 18 -- Transitional Review Mechanism of The Protocol on the Accession of The People's Republic of China (see page 11 in link below)




    states that:


    1. Those subsidiary bodies of the WTO which have a mandate covering China's commitments under the WTO Agreement or this Protocol, shall within one year after accession and in accordance with paragraph 4 below, review, as appropriate to their mandate, the implementation by China of the WTO Agreement and of the related provisions of this Protocol. ...


    2. The General Council shall, within one year after accession, and in accordance with paragraph 4 below, review the implementation by China of the WTO Agreement and the provisions of this Protocol. ...


    3. ...


    4. The review provided for in paragraphs 1 and 2 will take place after accession in each year for eight years. THEREAFTER THERE WILL BE A FINAL REVIEW IN YEAR 10 OR AT AN EARLIER DATE DECIDED BY THE GENERAL COUNCIL.
    2 Sep 2011, 10:45 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » In 2001, when China was admitted to the WTO, Robert Zoellick was the US Trade Representative. In fact, according to the USTR website, Robert Zoellick completed negotiations to bring China and Taiwan into the WTO.


    Prior to his appointment as USTR, Robert Zoellick served as a foreign policy advisor to George W. Bush in the 2000 presidential election campaign as part of a group led by Condoleeza Rice. Zoellick continued his role as USTR until 2005 when Bush nominated Zoellick to be Deputy Secretary of State.


    On September 21, 2005, Zoellick presented a speech to the National Committee on U.S.-China Relations that stirred controversy on both sides of the Pacific. In this speech, titled "Whither China: From Membership to Responsibility?" much of the rationale for the US policy in favor of admitting China to the WTO is explained. He introduced the notion of China as a "responsible stakeholder" in the international community, and sought to allay concerns that mercantilist Chinese policies will try to direct controlled markets instead of opening competitive markets. Americans were also concerned about China's rapid military modernization and China's lack of transparency into the purposes of this buildup.


    The full text of Zoellick's speech is no longer available on the US Department of State website, but it can be accessed via the following link:




    I don't believe it is possible to summarize this speech in a sound bite, but the following excerpt may help to put the thought process behind the decision to admit China to the WTO into better perspective:


    "If it isn't clear why the United States should suggest a cooperative relationship with China, consider the alternatives. Picture the wide range of global challenges we face in the years ahead -- terrorism and extremists exploiting Islam, the proliferation of weapons of mass destruction, poverty, disease -- and ask whether it would be easier or harder to handle those problems if the United States and China were cooperating or at odds."


    Knowing what we know today about China, the question may be whether the desired cooperation with China is a realistic expectation.
    3 Sep 2011, 10:56 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » According to "The Law and Policy of the World Trade Organization," an undergraduate/graduate level textbook on WTO law authored by Peter Van den Bossche, a Professor of International Economic Law,


    "The WTO Agreement does not provide for a general procedure for the expulsion of a Member. There is no procedure to exclude States from the WTO that systematically breach their obligations under the WTO agreements. There are also no rules or procedures for the expulsion of Members that are guilty of gross violations of human rights or acts of aggression. The expulsion of a Member is, however, provided for as a possibility in the specific case of the non-acceptance of an amendment."


    Footnote 161 to the penultimate sentence in this paragraph explains;


    "Note, however, that the UN Security Council could impose trade sanctions or a trade embargo on such Members and that, pursuant Article XXI of the GATT 1994 and Article XIV bis of the GATS, other Members would be able to apply these sanctions or that embargo...."
    9 Sep 2011, 12:34 PM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message
    The last time the Security Council was used to enforce sanctions against China was during the Korean Conflict.
    9 Sep 2011, 12:48 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » So far, the portion of the TREM '11 Conference that I have chosen to focus upon are the discussions that fit within a conceptual framework regarding the interplay between the government and the private sector. The purpose of the conference, after all, was to provide an opportunity for participants to join representatives of the private sector to engage in a dialogue with representatives of government, including the military, in an effort to better understand the issues surrounding metals needed for energy and security, and to influence the policies that affect the way America produces, imports and uses technology metals.


    I was not expecting the interplay between the public and private sectors, in and of itself, to become one of the focal points for discussion, but it was and this is a topic that I have focused upon in many of my previous posts so obviously one that I think is very important. It was clear to me that: (1) many policymakers have replaced reliance upon the proper functioning of market forces; (2) that markets have not functioned as we would have expected; and (3) now the question is what to do about. This begs the question of what the proper role of government in the economy should be, and unfortunately stirs up a lot of tertiary debates that may be best categorized as mud slinging -- primarily between the public and private sectors, but within the public sector and within the private sector as well.


    I have attempted to develop some threads that would form the basis for a point-by-point logical discussion of the steps necessary to restore the functionality of market forces, but it occurs to me that I haven't fully framed the issue in this regard, and that this is also very important because without this framework some of the debates over how to solve our problems may not be as productive as they could be. The debate that we are engaging in within the context of the rare earths industry is a debate that is engaging many in a much broader context as well.


    I believe there are two large gaps in the conceptual framework within which these debates are occurring. Most importantly, when we refer to the interplay between the public and private sectors, this seems to imply that there are only two categories of potential participants in the markets. There is, in fact, a third constituency, and this is the banking sector. The banking sector plays a major role in the functioning of markets. Many in the public sector seem to view the banks as part of the private sector, and vice versa. The terminology that we use to refer to the lender of last resort here in the US -- The Federal Reserve -- makes it understandable why many in the private sector would consider it to be part of the federal government, when in fact it is owned by privately held banks. And yet, many unique characteristics of the banking sector give it qualities and priveleges that we might more closely associate with the government, such as:


    - the fractional reserve banking system that allows this sector to employ far more leverage than that any publicly-owned company in other industries would be permitted to employ;


    - and oh, by the way, the power to create money.


    I have discussed this in previous posts, so for now, let me continue onto the next important gap in the conceptual framework in which our debates over the role of government in the economy. When we evaluate the health of our economy and whether the private sector needs a lending hand (no pun intended) in order to get markets to function better, we tend to evaluate only the role that our own government plays in the health of our economy -- indeed, sometimes only the role of the President. What too often goes unnoticed is the role that governments in other countries play in the global economy of which we have become increasingly intertwined. Heavy government involvement in the economies of other countries, and the growth of the economies of many emerging market countries particularly the BRIC's -- Brazil, Russia, India, and China -- has a growing impact on the global economy, and thus the manner in which markets in the US "function." Some of the trends manifested by the growing influence of these foreign economies seem to have roughly coincided with our Presidential cycle, causing many to confuse the source of some of the negative economic developments with which we are now so concerned.


    Let me return now to the Federal Reserve, who we all now seem to turn to in order to "jump start" our economy by "priming" the markets which is expected to restore stability to the housing market and to reduce unemployment. This can distort markets, not heal them, and may not even be the proper cure for us to be relying upon in the first place. For example, I believe the USTR can play a more important role in reducing the US unemployment rate than the Chairman of the Federal Reserve can.


    Some might argue that actions by the Federal Reserve are less intrusive into the private sector, since easy money is available to all therefore expresses no favoritism to any particular individual or company who chooses to borrow. However, there are a couple of problems with this.


    First, Ben Bernanke himself in a speech that he gave at Jackson Hole, Wyoming several years ago pointed out that bank borrowing in the modern era is skewed heavily toward individuals (we used to be called Americans, now we're known as "consumers"), since corporations have developed other means of financing their activities. Furthermore, the main reason for consumers to borrow is to finance the purchase of a home. With home prices inflated to levels that nobody can afford based upon a normally amortizing mortgage without an artificially low "teaser rate", many consumers, even those with jobs, are hesitant to purchase a home because they are afrid that home prices may continue to fall. So, lowering interest rates has not had the stimulative effect that it had in the past, when it was understood that home prices would always rise. The resulting decline in consumer demand for homes means that "the monetary transmission mechanism" is broken.


    As such, efforts by the Federal Reserve to stimulate the economy, restore health to the housing sector, and reduce unemployment in the process are much less effective, and their actions, together with actions taken by the US Government, may serve to simply bewilder consumers, investors, and business owners, who then find it increasingly difficult to make long-term capital committments and also reduce their spending, accordingly. Cash piles up "on the sidelines" as a result. In other words, creating more cash doesn't stimulate the economy; it acts as a drag on the economy by causing more cash to be pulled to the sidelines -- which is quite remarkable given that yields on cash are at historically low levels, maybe even negative after you deduct fees. But, there is also gold, which represents the ultimate misallocation of capital. Just like artificial monetary policies led to misallocations of capital that led to an internet bubble, and then to excessive allocations to unproductive homes, it is now leading to excessive allocations to the most unproductive asset imaginable. In the meantime, governments in other countries, who command much of their wealth, are directing capital into much more productive assets.


    Second, money created by the Federal Reserve doesn't ooze into the economy in the same manner that water might ooze into a colander lowered into a sinkful of water. No, it enters the economy through the banking system, and banks may use this low cost money to lend or invest about ten times as much of the amount borrowed thanks to our fractional reserve banking system. Given the reduced demand for loans, and tighter standards imposed to qualify for loans, much of this money seems to be directed into investments -- possibly overseas (China seems to be an attractive place to invest), or high-frequency trading activities that benefit those with the fastest [most expensive] computers. When most of us refer to the private sector, I don't believe that this is what we had in mind. There may be a corollary between community banks and individual borrowers, but government actions largely precluded them from gaining market share after big banks that were too big to fail were bailed out instead. And, some big banks are now contemplating shedding their loan businesses because they are so much less profitable than their other lines of business, such as proprietary trading activities. I find this ironic, since making loans is one of the few justifications I can think of for allowing banks to borrow directly from the Federal Reserve at rates lower than those available to others further down in "the food chain," and for allowing banks to employ leverage at levels multiples of those permitted by publicly-owned companies in other industries.
    7 Sep 2011, 07:15 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Concentrations of power leading to market distortions (and negative consequences in broader contexts as well) can also result from "majoritarianism.". This is often overlooked and misunderstood, yet can have consequences as severe as those resulting from excess power in the hands of too few. In fact, even though majoritarianism seems to be at the other end of the "power spectrum'" there is a linkage between majoritarianism and authoritarianism that can cause power distributed among "too many" to translate itself into power distributed among "too few."


    To put this into perspective, conduct a Google search for "Constitutional Republic.". This simple task would dispel myths that seem to cloud the thinking of huge swaths of society. As such, I wonder why it is not required reading for anyone seeking US citizenship, and possibly even for Americans at important later junctures in life -- similar to how religious organizations might require their members to confirm their beliefs through some form of "rite of passage" subsequent to their initial membership.


    Just as we have a constitution defining the rights and responsibilities of American citizens and the manner in which power vested in the various branches of our government are to be kept in check, perhaps we need a constitution that accomplishes more or less the same purposes for participants in financial markets.


    Here is an excerpt from a Wikipedia article under the topic Constitutional Republic that may help to put the above comments into better perspective:


    John Adams defined a republic as "a government of laws, and not of men."[2] Constitutional republics attempt to weaken the threat of majoritarianism and protect dissenting individuals and minority groups from the "tyranny of the majority" by placing checks on the power of the majority of the population.[3] The power of the majority of the people is limited to electing representatives who legislate within the limits of an overarching constitutional law that a simple majority cannot modify.


    No single individual is allowed to exercise executive, legislative and judicial powers. Instead, these powers are separated into distinct branches that serve as a check and balance on each other. In a constitutional republic, "no person or group [can] rise to absolute power."[4]
    8 Sep 2011, 08:09 AM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message
    "No single individual is allowed to exercise executive, legislative and judicial powers. Instead, these powers are separated into distinct branches that serve as a check and balance on each other."


    One key element of a comprehensive institutional reform agenda, then is a uniform standard of conduct that applies to Financial Institutions authorized to perform defined functions in the Global Arena.


    The "best of the best" concepts of governance can be applied to incorporate such universal concepts as peace, justice, and social as well as economic returns on investment.


    There is no reason to assume that initiatives to promote actions to ensure that such values and principles cannot be developed and implemented internally by existant institutions.


    However, in order to assure adequate and timely progress, a proper role of government(s) is to establish the common legal framework and regulatory structure from which such reforms can be monitored and regulated in a manner that ensures the fundamental rights of the citizenry , e.g., life, liberty, and the pursuit of happiness, are respected and protected.
    8 Sep 2011, 10:30 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Here is a link to the Wikipedia article on the topic "Constitutional Republic" referenced in my comment above.




    Note that there is no reference to what some now refer to as the "fourth branch of government" namely the Federal Reserve, which has been granted the not so insignificant power to create money. What checks and balances do we have on the power of this institution, and the influence that it may have on our representatives in government?


    This article also quotes Alexander Tsesis, in "The Thirteenth Amendment and American Freedom: A Legal History" as saying, to him,


    "a constitutional republic means a 'representative polity established on fundamental law, [under which] each person has the right to pursue and fulfill his unobtrusive vision of the good life. In such a society, the common good is the cumulative product of free and equal individuals who pursue meaningful aims."


    This is consistent with my modified articulation of Adam Smith's thesis that "the good of the whole is maximized when each indivdual pursues his or her [enlightened] self interest."


    However, what we are instead experiencing today is a polarized government and a polarized society in which power is concentrated at the two extreme ends of the "power spectrum."


    While campaigning, politicians claim that they will attempt to address the resulting dysfunctionality by reaching across the aisle, but in practice it seems that the only way for them to reach that far is with the benefit of a new form of "invisible hand" belonging to "invisible aisle sitters" representing past and current representatives of this or that special interest group, including representatives of the banking industry with a particular investment bank seeming to play a disproportionate role.


    What's next? Will the future title for the Chairman of the Federal Reserve be modified to take on the moniker that Idi Amin once reserved for himself, namely,


    "His excellency, President for Life, Field Marshal {insert name of Federal Reserve Chairman here} VC, DSO, MC, Lord of All the Beasts of the Earth and Fishes of the Seas and Conqueror of the British Empire in Africa in General and Uganda in Particular,"


    or will that not be enough. Perhaps we will need to add Chairman of the Board of {insert name of investment banking firm here} and perhaps King of Scotland.
    8 Sep 2011, 10:50 AM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message
    Systemic Dysfunctionality, then is a direct result of the disproportionate influence of special interests.


    Perhaps the same sort of no-nonsense approach of the Truman Committee can be effected to stimulate necessary reforms of the financial industry.


    Edited Excerpt from wiki :


    "Truman gained national visibility by fighting waste and mismanagement through the "Truman Committee". The Roosevelt administration had initially feared the Truman Committee would hurt war morale, and Undersecretary of War Robert P. Patterson wrote to the president declaring it was "in the public interest" to suspend the committee. Truman replied that the committee was "100 percent behind the administration" and did not intend to criticize the military conduct of the war. The committee is reported to have saved at least $15 billion and thousands of lives. Truman's advocacy of common-sense cost-saving measures for the military attracted much attention. In 1943, he appeared on the cover of Time. He would eventually appear on nine Time covers and would be named the magazine's Man of the Year for 1945 and 1948. After years as a marginal figure in the Senate, Truman was cast into the national spotlight after the success of the Truman Committee."
    8 Sep 2011, 01:18 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » EA, I think more far reaching fundamental reforms are necessary, although the sum of individual actions can accumulate to achieve meaningful benefits. I would cite David Walker's book "Comeback America" as an example of the type of analysis and solutions required. For example, he notes that the US government, unlike virtually all private businesses, lacks a mission statement. How do you monitor progress toward the achievement of goals if you haven't even defined the goals?


    At the same time, he analyzes various departments and programs and describes recommended solutions comparable in some cases to the type of budget cutting efforts implemented by Truman. He didn't adress the financial system, but in my opinion, the actions required extend way beyond a search for ways to cut costs -- in other words, with respect to reforms of the financial system and financial institutions, we need an approach that extends beyond arranging deck chairs on the Titanic.
    8 Sep 2011, 02:05 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » That seems well intentioned but some of the outcomes that you suggest should be mandated are soft and difficult to evaluate. Holding institutions responsible for achieving such ends may also impede upon individual rights. It may be more practical to regulate that profitable undertakings are undertaken in a manner that is not harmful according to some more concrete rules. And such regulations should not be so complex that only the largest institutions can afford to hire all the regulatory compliance personnel required to satisfy them.


    The keys are to make the regulations effective, not necessarily exhaustive and complex, to ensure that the means of monitoring compliance are effective, not necessarily burdensome and expensive, and to enforce non-compliance rather than simply creating an increasingly complex, confusing, burdensome, and expensive regulatory framework that punishes the presumed innocent and shareholders rather than those who are actually guilty of violations.


    However, where benefits are conferred upon a particular industry or institution because it's thought that this is necessary in order to achieve some social good that this industry or institution may provide, there must be checks and balances to ensure that those benefits don't allow the industry or institution to use those benefits to achieve power that competitive market forces can't keep in check. FNMA and FHLMC, the revolving door institutions for retiring politicians and political appointees are one example of how such privileges can result in very negative consequences. Permitting other financial institutions privileges such as lower borrowing costs, or higher permitted leverage, can also allow some financial institutions to become very powerful, perhaps even too big to fail, and these also seem to attract a lot of retiring politicians who are rewarded very well for their limited tenures at these firms. Might politicians be aware of the benefits of pleasing the lobbyists for these companies, and perhaps somewhat fearful of the consequences of not catering to the demands of those who hold their purse strings?


    I will be listening for any references to China, another "holder of the purse strings" during President Obama's speech on jobs this evening. If you want to reduce unemployment, a good place to start would be to appoint a US Trade Representative who is up to the task to stand up to China's flagrant practices which favor state owned enterprises and other state champions that are managed in a manner that focuses primarily on creating jobs for Chinese Communist Party supporters. This is a fundamental problem that is not of a monetary nature, yet we insist on addressing unemployment primarily with the favored tools of monetary policy and increased government spending, both of which result in higher levels of debt, increased interest payments, and bigger government. Who does this really benefit and what can those who are ultimately expected to pay the price do about it?
    8 Sep 2011, 05:46 PM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message
    President Truman's experience as a reformer in the Senate as a means to effectively provide for the common defense established the basis of understanding how to guide the Federal Reserve as an instrument of Administration Policy designed with the clear intent of providing for allocation of national resources in a way that best provides for the general welfare of US Citizens.


    His proactive approach to governance is a good example of how determined and capable leadership can produce positive results in light of competing constituencies in accordance with established Liberal Democratic principles within the context of a Republic.


    "From Truman's perspective, the conflict with the Federal Reserve was as much a matter of fairness as it was of economics. While Secretary of the Treasury John W. Snyder made the argument that releasing the peg on interest rates would hurt the fiscal position of the federal government during a crucial period, Truman wanted the Fed's cooperation on the principle of protecting the small town investor. During World War I, Truman had had a personal experience with buying government debt when he bought Liberty Bonds. He then felt cheated when the interest rate on the Liberty Bonds rose after their issue. The value of the bonds declined with their rise in interest yield. Truman remembered this incident as an insult to his patriotism. Now that he was President, he felt an obligation not to let the price of government bonds decline."


    "The Fed forced a resolution of the issue when in February 1951 it informed the White House that it was no longer willing to support the current situation of pegged interest rates.4 Truman called a meeting with the Chairman of the Board of Governors, Thomas McCabe, Allan Sproul, who was the President of the Federal Reserve Bank of New York, and other government policymakers. In that meeting Truman advocated direct credit controls as an alternative method for slowing inflation. This method would allow interest rates to remain unchanged. But the Fed representatives regarded Truman's alternative as a return to the bureaucracy that tightly controlled and rationed the economy during World War II. They also saw this suggestion as part of an attempt by Truman to keep the Fed under the administration's control."


    "The dispute was settled on March 3, 1951, with the Treasury-Fed Accord. Chairman McCabe would officially resign from his position just six days after the statement of the Accord was released.5 Truman selected Martin to be the next Chairman of the Board of Governors, and the Senate approved his appointment on March 21. This decision bothered some on the Board of Governors, for prior to his appointment, Martin had been with the Treasury and had in fact negotiated the Accord on behalf of the Treasury. However, Chairman Martin in fact worked to solidify the Fed's independence that had been made possible by the Accord."


    9 Sep 2011, 10:48 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » As expected, there were references to the need to increase exports, but no references to China eating our lunch. Perhaps that's just because this was not the appropriate venue for such a discussion, and moves are actually afoot elsewhere. For example, yesterday Reuters posted the article below in which Democratic Senator Ron Wyden urged President Obama to use US trade laws to restrict surging imports of solar panels from China in a sign that high US unemployment is increasing trade tensions.




    This news would be more significant if such actions were being urged by US Trade Representative Ron Kirk. Until then, it seems to represent merely an idea blowing in the wind, but interesting nonetheless. Note that the Washington law firm of Stewart and Stewart is also mentioned in this article.
    9 Sep 2011, 12:25 PM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message
    "...making loans is one of the few justifications I can think of for allowing banks to borrow directly from the Federal Reserve at rates lower than those available to others further down in "the food chain..."


    Mike, you have thought this through better than anyone.


    However, you will find on further examination that as made clear by Bernake, that the role of the Federal Reserve is to ensure liquidity, while responsibility to implement effective fiscal policy in response to longstanding issues when obvious remedies are varied and obvious, which as you pointed out early in your essay, policymakers have replaced proper governance with reliance upon the proper functioning of market forces.


    The next question then, in the view of this concerned observer, is how best to correct this blatant and persistent systemic failure.
    7 Sep 2011, 07:49 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » EA, the primary role of banks should be to make loans, in response to market demand for the same. The primary role of the Federal Reserve should be to act as a lender of last resort to the banks if fluctuations in market demand for loans requires the banks to borrow from the Federal Reseve in order to raise the necessary funds.


    The Fed may have evolved into an entity that perceives it's role to be one of exercising control over the economy, but the fact that it wants to possess such control doesn't mean that it should be allowed to do so. Ugandan dictator Idi Amin wanted to be the King of Scotland. Should he have been allowed to do so on that basis?


    Having said this, you have correctly identified one of the most perplexing questions, namely how do you undo the past without causing painful disruptions in the process? It's much easier to identify what should have been done than it is to identify how to get back on the right track. However, if the track that we are on is truly the wrong track, it eventually leads to a dead end that may require painful adjustments regardless. That may be the appropriate time to restructure to a more sustainable model.
    7 Sep 2011, 09:22 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » As for the reliance that military leaders have placed upon the proper functioning of markets, I did not intend to suggest that they should have instead relied upon government interventions into the economy. In fact, that is another source of market distortions that prevent military leaders, and many others, from being able to place reliance on the proper functioning of the markets to an extent that they should rightfully expect to be appropriate.


    I have stated, however, that the source of government interventions is not limited to our own government. Foreign governments, particularly the Chinese government, have learned to manipulate markets, rather than adopt free market policies, and that causes markets to breakdown as well. I may not have given enough attention to the fact that some private sector market participants also take actions periodically that can distort markets. This can be more of an issue when these market participants grow to be much larger than other market participants. The point then is that concentrations of power within markets often lead to market distortions and steps must be taken to avoid this. In a nutshell, power tends to corrupt, while absolute power corrupts absolutely.
    7 Sep 2011, 09:59 PM Reply Like
  • Economic Analyst
    , contributor
    Comments (3860) | Send Message


    Here is a previous comment related to your concern with what can be referred to as externalities. There is at this time no consensus on how best to bridge gaps in governance that properly accounts for the complex relationships, interactions and interests. A flow diagram that captures and defines what currently exists can provide the basis for simulation and optimization of a new architecture.


    8 Sep 2011, 12:03 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Thanks, EA. You made some interesting comments, and I look forward to reviewing the full 9/21/2009 report by the UN on their recommended reforms to the "International Monetary and Financial System." I saw some economists on the panel responsible for preparing this report that I associate with those in favor of policies favoring a government role in the economy and levels of control that I believe the founders of our Constitution would find to be both excessive and dangerous, but at a minimum, it may help to compare their views with my own and with others with greater expertise in this area from which much of my knowledge is derived.
    8 Sep 2011, 12:05 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1869) | Send Message
    Author’s reply » Investors in rare earth mining companies, in fact virtually all investors, have recently experienced heightened levels of market volatility accompanied by declines in the value of shares in many companies. This has caused some investors to flee the markets for the perceived safety of cash, Treasuries, or even gold. This volatility has given the mood of the market a somewhat schizophrenic quality. One minute, investors are focused on seemingly reasonably valued shares of companies pursuing attractive opportunities in the private sector, but the next minute markets seem to be driven by fears regarding excessive levels of debt in the public sector and the potential impact that this may have on financial institutions, which can, in turn, serve as a conduit for problems in the public sector to transform themselves into more direct challenges for private sector businesses.


    As such, I believe that my recent posts attached to this article on Part One of the TREM ’11 conference are unfortunately quite relevant to investors interested in rare earth mining companies. However, just as global macro risks have served as an unwelcome distraction for investors, I suspect that comments about these global macro risks might similarly be viewed as an unwelcome distraction by those potential readers of my Insta-blog who wish to focus on topics more directly relevant to the rare earth mining industry.


    So, I am going to create new articles that will serve the purpose of organizing relevant content by topics. It is my hope that doing so will also better facilitate the search for solutions to each of the various obstacles that must be overcome in order to develop a rare earth mining industry, as well as related downstream industries, outside of China.


    These articles will appear under the banner “Epilogue to TREM ’11.” Issues to be addressed will include:


    • First and foremost, public/private sector initiatives that must be taken in order to establish rare earth mining companies and related downstream industries in the US


    • Restrictions placed by China on foreign access to rare earth based materials and the potential implications this has for US national security, the health of the US economy, and the fates of high tech companies


    • Potential applications for rare earths in various industries, and an evaluation of potential substitutes


    • A more focused look at potential applications for rare earths in the transportation sector, and the outlook for electrification of automobiles


    • A more focused look at potential applications for thorium in the nuclear power industry


    • Global macro risks that jeopardize investments in rare earth mining companies and the development of the rare earth mining companies themselves


    In these articles, I will also attempt to emphasize the use of citations to primary sources of information, hopefully derived from credible experts in fields related to the topics being discussed. In this manner, information accumulated in these categorized discussion threads is likely to be of greater benefit to those dedicated to developing meaningful solutions to the challenges posed by our dangerous exposure to the existing monopoly in this industry and by our reliance on imports for this strategic commodity.


    Finally, I hope to create an environment similar to a virtual version of the main reading room of the Library of Congress in Washington DC. Feel free to review my related comments under my article titled “Prelude to TREM ’11 – A Visit to the Library of Congress.”
    9 Sep 2011, 07:07 PM Reply Like
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.