No Rate Hike Before Elections

At 2 pm today, the Federal Reserve will come out with their statement on economic projections and Chairwoman Janet Yellen will hold a press conference. Investors are keenly waiting for FED’s signal on the rate hike and borrowing costs for the near to long term. Janet Yellen will come out and speak for “hike”, but they will not raise the rates now because of the proximity to the election. Any rate hike now will only lead to pricking the stock market bubble, and that will look bad. Nobody wants to see a repeat of 2008 pre-election months. So that puts the hike off the table at least till 2017. Who knows if she will continue as the chairwoman after the election. But the reality is that the rates have to be higher. Prepare yourself.

Time to Revisit Water Privatization?


CNN Money recently reported seven publicly traded water utilities that have seen new highs and an average year to date performance of at least 7%. The anticipation that the recent water pollution crisis in Flint, Michigan would initiate several states and municipalities to involve private water utilities for managing their water supply may have motivated the investors to long these stocks. Several of these publicly traded companies are part of the National Association of Water Companies, a consortium of private water companies that provide a broad range of water services. Private water companies serve almost one-quarter of the countries population.

Shika Dalmia of Reason magazine has a comprehensive coverage of the water crisis and the mishaps of the governance at various levels. It started with choosing the less expensive Karegnondi Water Authority (KWA) over the Detroit Water and Sewage Department (DWSD) for a new contract and re-opening the Flint water treatment plant in the interim. Cash-strapped cities like Flint can benefit from privatizing their water utilities as private enterprises would make investments needed to meet the stringent water quality standards. Their long term infrastructure investments would perhaps compensate for the past under-investment in the water infrastructure. Flint particularly has a receding population base with at least a billion dollars in unfunded liabilities.

Perhaps, the first modern privatization of waterworks dates back to 1989 when England and Wales, under the leadership of Margaret Thatcher, sold ten public water utilities. Caroline Van den Berg from the World Bank, in her article in viewpoint in 1997, reported that these reforms delivered a volume of new investments in water supply systems, full compliance with the drinking water standards and have lead to a higher quality of river water along with more transparent water pricing system.

Privatizing water comes with resistance. The two primary arguments against privatization are the public good and the natural monopoly ideas. Public good by definition has to be non-excludable and non-rival in consumption. Non-excludable for water as good is the fact that the entity providing it cannot exclude the access of water to people who do not pay for it. Nonrival in consumption of water is the fact that one person’s use does not reduce somebody else’s.

Recently, DWSD and Baltimore Water Department (both public water utilities) shut off water for customers with delinquent accounts. Clearly, water as a commodity in not non-excludable in the eyes of public water utilities, especially when they are up against decreasing revenues. Water is also rival in consumption. If I use X gallons of water for my lawn, those gallons of water are not available for my neighbor. One could argue that water supply is unlimited, making it practically non-rivalrous, and hence, the marginal utility of water is zero. Try winning that argument with a farmer in Central Valley, California or resident in San Fransisco. Hence, on both accounts, water as a public good fails.


The nature of water industry, some argue, necessitates a natural monopoly since it requires massive fixed costs and economies of scale in the production of the good. Hence, in the long run, two or more companies that started off operating as competitors, would eventually have to yield to either one that could expand and achieve lower unit costs with increasing output. The inconvenience caused by having to deal with many water and sewer lines underground further supports this argument. It is reasonable for anyone to, therefore, think that there will be one company that will capture the entire market and start exploiting the consumers with higher prices.

Assuming that the monopolistic company has in fact raised the water rates, a rational customer, in the absence of any competing companies (for the time being) will respond to this rate increase through under consumption and rationing –thereby decreasing the revenue for the monopolistic utility. Residents of California, in 1976, have demonstrated a rationing of 40% to 50%, thus drastically reducing the revenues of their respective water districts.  The customer will prioritize his needs and budget the super expensive water supplied by the monopolistic company for essential needs. The client would respond to price increases in the same way as he would to water supply shortages — “conservation.”

He will consider purchasing bottled water if it is cheaper that the current water rate. The price signal is already out, and a different company can provide water trucks to the community at a more competitive rate. Recall that the customer is only stuck with this company as there is no one else who can come into the market, lay the pipes and start providing water. Bottled/truck water is rather mobile for any new company to come into the market. If the rates are exorbitant, to the point that the customer cannot afford any water, he is then compelled to create his own by rainwater harvesting and traditional water purification techniques. Remember, at that price level, his time value of developing water resource for survival is still much cheaper than the water rate he was offered. Price gouging so-called natural monopolies can seldom sustain. Economist Thomas DiLorenzo, in his article on “the myths of natural monopoly” has a comprehensive treatment of this concept, starting with the origins of the term “natural monopoly” in economics.

In the last two years, Flint switched three utilities (all three public) for providing water. DWSD whose contract expired on 2014, the new KWA, which was supposed to provide water from Lake Huron in two years time and the interim water supplier from the Flint River. Suffice to say that this is proof enough to bring in private utilities who would compete for market by providing lower rates and better services. The Department of Environmental Quality of Michigan and the Environmental Protection Agency, responsible for ensuring quality checks, might, in fact, be more vigilant on the private companies than their public counterparts. The private companies are also liable to class action lawsuits in the event of such incidents. The municipality, on the other hand, may claim sovereign immunity.

Steve Hanke and Stephen Walters, in 1987, presented the ideas of how a privatized water system can work. They proposed a franchise bidding system where the company wins based on the water rates and services it offers. They also provided examples of private waterworks from France. In the United States, economist Charles Howe, in his national academy of press’s open book in 2002, presented a comprehensive assessment of issues and experiences from privatization of water services.

It is time to revisit these issues and reflect on private water provision in the US.

Random Thoughts on National Debt



The United States of America’s nation debt clocked 19 Trillion last week.

This decision to continue taking on more debt is analogous to a bankrupt family applying for a new credit card to pay its old “maxed out credit card bills”.

How can a proper credit check on a family with huge debt = F, but the rating of US treasury bonds be always AA+?

My FICO score instructs me to pay off the revolving balance to be in good standing. Shouldn’t the same hold for the national debt. Whoever lent us this money is in for a big haircut or should get ready for a Zimbabwean style pay off.

My share of the national debt as of today is $158,902. Are we planning to pay it off honestly with savings? I am generally a stingy person, but I cannot catch up with this year after year.

Has the NYC Taxi Medallion bubble burst?

There are 13,437 medallions, the license to operate a taxi in NYC. This artificially imposed limited supply has lead to an exponential rise in the price of medallions over the decades. The recent advent of UBER has increased the vehicle supply, reduced ride fares and more importantly, pricked the medallion price bubble. The price of the NYC taxi medallions is falling rapidly from a peak of $1 million in less than one year. The stock price of the Medallion Taxi Corp is plummeting. Reason TV has done a great job in covering this story.

Should the companies that invested in inflated taxi market, or the people who borrowed (multiple refinancing) again the medallion  be bailed out now?

Yellen is the Road to Weimar

I wrote about Janet Yellen and her thoughts on gold when she was appointed as the Fed Chairman. She will have to come out with QE infinity to hold the slipping stock market. Here are my thoughts on her (I wrote this blog on December 4, 2013).

“She’s a very bright lady,” Greenspan said of Yellen on CNBC. “I think she will surprise everybody, I mean in a positive way.”

The only person who should be happy about Janet Yellen’s nomination as Federal Reserve Chairman is Uncle Ben himself. Just like how Greenspan got out of dodge before the housing bubble burst, Ben Bernanke is getting off the hook before the next economic collapse. During his term, Bernanke managed to double the stock market with his QE 1 – QE 4 and Operation Twist. He can now leave without tapering and claim credit for putting the economy back on track in five years. However, for this fake growth (bubble) to sustain, Janet Yellen has to take QE4 to QE infinity and destroy the purchasing power of the dollar. Yellen is oblivious to inflation and doesn’t believe in sound money or austerity.

“Nobody has a good model of what the fundamental value of gold is or should be”, stated Janet Yellen in her hearing before the Senate. If one cares about the value of gold (the Fed Chairman should be the first person to care), we do not need “models”. We need to open up our eyes to the fundamental theory of money and realize that it is the very inflation of the fiat money supply that causes the price of gold to rise. With such crazy inflation all around the world now, Weimar Republic and Zimbabwe will only become median statistics in history. We are going to witness, in our lifetimes, the tail of this distribution. Get some gold and crash proof yourself.