Friday, July 28, 2006

Stagflation

Many readers out there aren’t old enough to remember the economy of the mid 1970’s. Jimmy Carter was President and we had both run-away inflation and a recession at the same time. This worst-case scenario became known as Stagflation. It takes a lot of government action or inaction to get us into such a mess. I’m sorry to say, it appears we are in almost exactly the same situation today.

But what about the FEDERAL RESERVE you cry? We had a strong respected Fed chairman back in the 1970’s, Paul Volker, if I recall correctly. But the combination of a major economic downturn and a severe lack of foreign investment capital can each overwhelm the minimal ability of the FED to control the situation. The result, we had to let interest rates rise to 18% to get enough capital to stimulate our economy out of near depression.

The Iran Hostage Crisis following a gasoline shortage and price spike added to the general pessimism and lack of consumer spending. Today, the conditions are very similar with another round of energy shortages and price increases plus the continued expansion of the same Islamic Fundamentalist Revolution centered on Iran. We never solved either issue and they are both back.

Economists will argue that the real cause of stagflation was our excessive amount of foreign debt (including years of $1 million/day spending in Viet Nam) that was not offset by exports or productivity inside the US. Eventually, our foreign creditors found better places to invest, more stable currencies (Swiss Franc) and of course gold which topped $350 an ounce for the first time in the late 1970’s. This time I expect it to double that figure.

Today, we have all the same issues but with much larger numbers. We have been spending over $1 Billion/week in Iraq for years, have the largest trade deficit in world history, and as much as $3 Trillion of debt held by foreign banks while our economy is shrinking at the same time much of the developing world is expanding. Investors know they will get a better return in China, Asia, India, Japan, Brasil, or even Russia than here in the US. The result can only be a massive exodus from Dollars to other currencies and a devaluation of our money. This will lead to unstoppable inflation as it takes more and more currency to purchase everything from bread to cars. The Federal Reserve can’t stop it and the Treasury Department printing more paper (as they have been doing for years) will only aggravate the problem.

A $Trillion in capital invested in US corporations will disappear overnight as the stock market drops to record lows causing further flight from the dollar and a steeper economic spiral downward. There you have it. Stagflation. Get ready for a rocky ride over the next three years. It will take at least that long to turn things around as we make drastic political and economic changes to try to recover. Free Trade, open borders, and foreign wars will have to stop so we can rebuild our industry and begin to recover economically. I only hope it isn’t too late. Ronald Reagan pulled us out the first time mostly by massive deficit spending and his special ability to gain our trust and confidence.

We will really need an exceptional leader or personality to turn this one around and more money than even our government can print or borrow. As usual we spent our way out last time relying on the military industrial complex. Most of the military spending was pure waste and did nothing to improve our national security or effectiveness. I was in the military and saw the massive fraud first hand. Somehow our economy survived and recovered but this time we don’t have an industrial base, have far more competition and trade rules that favor everyone else.

I certainly wish I could write about more interesting and positive issues, but since November 2000 America has veered dangerously off course and may already have gone too far to recover. We and our children must pay for that disasterous mistake.

Saturday, July 01, 2006

Inscrutable and Unstoppable

Inscrutable and unstoppable
Sometimes my imagination makes a feeble leap into one possible future. I've combined the facts of various news articles I've seen to come up with one scenario that is not only likely, but probable if not inevitable. Someone will always abuse power. Just look at the state of American or world politics if you don't believe me. Now let's take a few well documented trends and let our imaginations run.

The Chinese government has many massive projects to modernize and revolutionize the world's largest nation. Just the buildings being constructed for the 2010 World's Fair rival most previous wonders of the world. A less wondrous but no less significant project is the translation of the Linux computer operating system source code into Chinese.

It has been announced that China will produce and maintain an Asian version of Linux sometime in the next year or two. There are no doubt hundreds of English speaking Chinese computer programmers hard at work learning all the ins and outs of the Linux operating system kernel. They have been translating chunks of all freely available source code into Chinese characters and recompiling it into working code for years.

I've personally used an Asian knock-off of Open Office, the software I'm using to write this, called Supreme Office that is actually a bit better, faster, and slicker than the original. Whoever produced this clone of Open Office was very good at copying, learning and understanding it, then improving upon the original. While Supreme Office may have been a product of Taiwan, the mainland has become well known for just such technology copying.

Now, consider the subtle implications of a really great (globally used) operating system with source code written in Chinese. It is inevitable that within a few years of it's initial release,Asian Linux will become one of the most widely used operating systems in the world. After all, who ever looks at source code anyway. Microsoft's is a tightly held secret. The courts have only been able to force them to reluctantly share pieces of it.

Use of Asian Linux will skyrocket if it works well, is free to download and more importantly, free of the document rights management [copyright enforcement] being engineered into all future versions of Microsoft Windows, including the very next one.

We are due for a major break from Microsoft's OS monopoly. The combination of a declining money grubbing behemoth crumbling under it's own weight and the maturing of Linux into a respectable alternative lacks only one hot button issue to start a full blown stampede away from using Windows. The inclusion of record industry Spyware under the guise of document rights management as the only really new feature in Windows Vista may be just such an issue.

If not the spyware, then the crushing new hardware requirements and expense of Vista or Microsoft's attempt to make us all buy a monthly subscription to obtain bug fixes, anti-virus, and anti-spyware to fix it's defective OS will certainly stir a grassroots movement to dump Windows. Windows Live (subscription service) has been Steve Balmer's goal for years, moving M$ to the AOL monthly income model instead of once every five or six years. That reality is only about a year away. After the big sales push for Vista and Vista Office, Microsoft will offer a web-based subscription service that includes all future OS and application updates. Windows Genuine Advantage is part of the testing to insure Microsoft has the capability to track and manage billions of subscriptions & downloads.

Asian Linux may arrive at the perfect time to sweep across the globe as the new OS standard. With all the hardware already made in Asia and assembly plants being migrated there as well, it is only a matter of time before they wise up and include Asian Linux with tons of free Open Source applications in the standard build. The lower cost will benefit most PC makers and consumers.

This hasn't happened already because the biggest suppliers like Dell and HP pay the lowest price for Windows, adding up to a $57 profit margin over smaller vendors. This has insured the biggest PC makers will continue to provide Windows and forces all others to pay more to offer Windows. As long as Windows is perceived by customers to be valuable, this model holds up. But if buyers suddenly decide Linux is better, all small PC makers will immediately begin shipping Linux because it finally enables them to compete fairly on price against the big guys. This transition to the best Linux could be very swift.

If Asian Linux is even close to being the best Linux, as I expect it will be, almost all new hardware (from Asia) will come with Linux installed. This will allow vendors to overcome one of the biggest drawbacks of Linux, a lack of drivers for specific hardware. Once Asian Linux is adopted by Asian manufacturers, all hardware makers will develop Linux drivers for their hardware as they do now for Windows.

The transition will accelerate once Asian Linux adds into the OS standard software interface (boundary) layers for each kind of hardware so that only mini-drivers describing the specific features of the device are needed. Microsoft has already written these standard buffer layers for Windows but Linux hasn't.

Now for the inevitable part. As Asian Linux rapidly spreads around the world as the new defacto operating system, the US government will become alarmed. It will muster every Chinese speaking non-Asian computer programmer in the CIA, FBI, and Homeland Security who has a Top Secret Clearance to reverse engineer Asian Linux and examine the Chinese source code. The only problem is, there are NO such people in the US government. They would have to trust an Asian national which they couldn't do.

It would take years to train an American computer programmer to read and write Chinese. There are 3,000 -5,000 pictographic symbols in their alphabet. Even learning to use 750 simplified Japanese Kanji characters could take years of study. I've only mastered a dozen numbers and a handful of words in about 16 hours of lessons. It is still a giant step from Kanji to reading Chinese. For an American government bureaucrat learning Chinese would be all but impossible but Homeland Security would try and fail for years before admitting it.

Even if the Chinese publish their Linux source code to comply with Open Source standards, fewer than 1/1000th of one percent of the world's non-Asia population will be able to read and understand computer source code in Chinese. Eventually, someone in the Chinese government will take advantage of this fact and add a back door into the OS kernel, allowing remote control of your PC or sending your keystrokes to the Chinese Secret Police from well below the Presentation layer, beyond reach of any software firewall, or anti-spyware application you might use.

That is no more than Microsoft could be doing already on behalf of the US government or the RIAA. It is human nature to abuse power and the greatest source of power in the digital 21st Century will be at the core of the world's most widely used operating system. Take your pick of whom to trust, Microsoft and their big corporate partners or the Chinese Secret Police.