Sunday, November 28, 2010

Week 46: The Three Wise Men

It should be apparent to regular readers that I very much enjoy a good wine or beer. Over a glass of wine this Thanksgiving weekend, the conversation turned to a different alcoholic beverage: whiskey. While I have thus far enjoyed my limited exposure to whiskey, there is no question that I am by all accounts a rookie. Recognizing the risk of coming across as an alcoholic, I have nevertheless chosen to plow forward on my brief introduction to the three wise men - none other than Johnnie Walker, Jim Beam, and Jack Daniels.

Whiskey was allegedly invented by Irish monks roughly 1,000 years ago. Its Gaelic translation (ulsce beatha) means "water of life", and if the monks said it, it has to be true, right? The major producers of whiskey are Scotland, the US, and Canada, followed by Ireland and Japan. While only the world's number two producer, the United States is by far the world's largest consumer of whiskey. Globally, whiskey is second only to vodka as the spirit of choice. But whiskey is hardly a homogenous drink... Why does my good friend make fun of Jack Daniels and instead drink some esoteric, unpronounceable single malt from Scotland? What makes a bourbon different from other whiskies?

The one similarity shared by all whiskies is that they must be made of some type of grain, whether from corn, rye, or barley. The key differentiators between whiskies are the type or blend of grains used, the nature of the distillation process, and how long the whiskey is aged. After finishing this week's research, it is clear that whiskey producers, for reasons of taste, process and perhaps most importantly pride, are to be divided and explained geographically.

We will start with arguably the most notorious whiskey producer. As of 2008, Scotland produced over 750 million liters of whiskey per annum. This staggering supply comes from Scotland's 90 distilleries, and makes whiskey Scotland's top export, accounting for roughly $6 billion in annual revenues. While Scotland produces many whiskey blends, it is most famous for its more expensive single malt scotches. "Single" refers to the fact that the whiskey is made from one distillery, and "malt" refers to the fact that a scotch has been made exclusively from malted barley. Calling something a "scotch" - in spite of the fact that the Scottish do not themselves call their whiskey by this name - typically means the whiskey has been distilled and matured in oak barrels in Scotland for at least three years. Popular scotches include Johnnie Walker, Glenlivet, Auchentoshan, Talisker, and Glenfiddich (althogh my colleagues would probably be annoyed if I didn't also include Oban and Macallan). Lucky for me, the dinnertime discussion that inspired this blog post also inspired my parents to send me back to New York with a bottle of Glenlivet that had been stored in their basement for some time. By volume, Glenlivet is the second largest producer of scotch, and its distilleries use an incredible 30 tons of malted barley and three million liters of water per day. Any serious whiskey drinker's collection will start with Scottish whiskies and branch out from there.

Of course the Irish would take issue with my deference to Scottish whiskey; after all, it was in Ireland that this wonderful experience started! Irish whiskies use both corn and barley to produce their flavors. Distinctive to Ireland is a triple distillation process that creates a much more smooth, silky texture to its whiskey. This in turn allows for more floral or fruity flavors to come through. Irish whiskies are aged in used bourbon barrels, as "virgin" barrels would destroy their coveted light flavors. The most popular brand of Irish whiskey is Jameson; since 1998 Jameson has doubled its production to 25 million liters per year. Anecdotally I can say this is in large part due to Jameson's appeal to a younger generation of whiskey drinkers. Whether you prefer straight Jameson, or as part of your Irish Coffee or Irish Car Bomb, you can count on the Irish for a good whiskey experience.

I was somewhat surprised to learn that the US, too, has a very strong whiskey tradition. It is one that dates back to President George Washington, who by the time of his death had become the largest distiller of whiskey in the United States. And like tea, whiskey has an 18th century anti-taxation story of its own. The Whiskey Rebellion was a strong, armed response to the newly created federal government's attempts to tax the whiskey trade as a means to pay back the debts incurred during the Revolutionary War. Washington had to send the milita to Pennsylvania to subdue protestors, and ended up sending more troops to fight the whiskey revolters than he did to fight the British!

In terms of modern production, we have to focus on Tennessee and Kentucky, the homes of Jack Daniels and Jim Beam, respectively. The difference between the two is that Jim Beam is a bourbon, while Jack Daniels is a straight whiskey. Jack Daniels filters every drop through sugar maple charcoal, giving it a distinct flavor. By definition, bourbon cannot have any flavor modification and must be distillate and water, aged in oak. Also distinct to Jack Daniels is its iron-free natural spring water supply. The lack of iron affects the fermentation and by extension the taste. Jack Daniels is the world's best selling whiskey at 24 million gallons per year; while it is sold in over 135 countries, it amazingly cannot be sold in the dry county in which it is made! JD is a blend of 80% corn, 12% barley, and 8% rye, but according to the company, over 50% of its flavor actually comes from the wood sugar of its oak barrels. As for bourbon, Jim Beam is the world's top seller. Bourbon must be made from at least 51% corn, and the corn must be tested for proper moisture, weight, and lack of disease. Unlike barrels used in other whiskies, bourbon barrels can only be used once for making bourbon; they are then sent to Scotland, Ireland, or Canada for use making other styles of whiskey. Outside of Kentucky and Tennessee there is a nascent craft whiskey movement, similar to the beer movement I wrote about in week 28. One new whiskey maker in Colorado described the movement as "another rebellion against the homogenization of America." Among other experiments, these whiskey distilleries are making the first American single malt whiskies - exciting stuff!

We now move north to Canada, whose whiskies tend to be a blend of rye and neutral grains. The Canadian whiskies represent the lightest and most delicate in the world, and are therefore among the easiest to embrace. Because of this lighter flavor, Canadian whiskey is known for its use in mixed drinks. The most famous Canadian whiskey is Canadian Club, a corn distillate with most of its grainy flavors distilled out. Of particular note historically is Canadian whiskey's rise to prominence during the Prohibition. Al Capone and others developed a substantial whiskey trade with the Canadians, allowing approximately 80% of liquor made in Canada during the Prohibition to end up in the United States.

It's clear that I have my work cut out for me if I want to become a whiskey connosieur. This blog has only scratched the surface, so please let me know if you have any thoughts or recommendations. Until then, I'll work on that bottle of Glenlivet - my first bottle of scotch - and perhaps get started on the list of the top 10 NYC whiskey bars.

Sunday, November 21, 2010

Week 45: Viktor Bout

Viktor Bout's story has been a long, winding, mysterious tale that has recently come much closer to resolution. Arguably the most notorious international arms dealer in history, Bout now sits in a jail cell less than a mile from my apartment, following the end of a prolonged extradition battle between Russia and the United States. Thai authorities had been holding Viktor for over two years thanks to a Thailand-based sting operation executed by an elite US Drug Enforcement Agency (DEA) team. There are quite a few public sources of information on Viktor - he was on tonight's episode of 60 Minutes, you can find dozens of links on his Wikipedia page, and there are even more news articles featuring the man. In spite of this trove of readily available information, I ultimately decided I couldn't NOT write a post about Viktor Bout.

Most interesting to me is not that Bout was able to both arm the Taliban while simultaneously flying hundreds of shipments on behalf of the US government. Or that he carried out these US shipments while an executive order from President Bush expressly prohibited Americans from doing business with him. Or that the Taliban hijacked one of his planes ten years prior to again doing business with him (business that allegedly included sending planes full of jihadis from Sharjah to Afghanistan). While all these nuances and sub-plots are fascinating, I am most interested in two things; first, I am in awe of the technical proficiency and savvy with which he operated his business, and how this allowed him to navigate and survive unbelievably treacherous waters over a long period of time. Second, it is always amazing when we - the non-CIA, special ops, or shadow world operators - are given a tiny glimpse of the world's underbelly. It is an underbelly we all know exists, but is a part of the world about which most of us know very little. These types of stories are by their nature so complex that a simple official script cannot overwrite or explain away the underlying realities. With a little reading between the lines, it is through these stories that we can learn more about the global push and pull of power.

Perhaps I should start with the basics: Bout is a man suspected to have multiple identities, fluency in six languages, and a staggering $6B in personal wealth. Shortly after starting his career as a Soviet military translator (rumor is he's ex-KGB), Viktor Bout took advantage of a crumbling USSR and purchased a few planes, which he then used to transport cargo to and from various places. He soon built, deal-by-deal, a fleet of some 60 airplanes that would quickly and efficiently deliver whatever you needed, wherever you were located. From his headquarters in Sharjah he and his fleet filled a massive void in Africa in the 1990s; while others were pulling out in the face of multiple civil wars, he and his fleet were going in. In particular, Bout's many front companies did significant arms business with Charles Taylor in Liberia, with both sides of Angola's bloody civil war, and with rebels in the Republic of Congo.

Over time Bout developed a reputation for being a "door to door" service; he could fly his planes into very dangerous situations, load or unload aircraft cargo, and exit. There are many people around the globe with weapons, many with contacts, and many with strong logistical capabilities. Bout's services pulled them all together. And by the end of the 1990s he was no longer a niche player. He was global, integrated, and dynamic. For prospective clients, best of all was his complete lack of an ideological bent. He would sell his services to radical Islamists, Americans, Colombian guerillas, African warlords, you name it. And he seemed to be immune to prosecution. The NSC wanted to arrest him in the 1990s, but could not figure out how to do so given problems of jurisdiction. According to the New York Times, as of 2000 the US government had never once prosecuted a case of arms trafficking. Bout was famous for being one step ahead of whatever authority might be on his tail. He would register an aircraft in Liberia, then move the registration to the Central African Republic, followed by Equatorial Guinea and then Moldova. By the mid-2000s when he was being traced by the Americans for violating UN sanctions, he would simply shut down the companies on the "problem" list and re-open new companies, using the same planes, crews, and technology. It would take months for the new companies to be identified and forced to shut down, at which point the cycle would repeat itself.

But in the late 2000s it was becoming increasingly clear to the Americans that his existence was not acceptable. In the past, he had been tolerated because his pilots were among the few who could and would complete the perilous flights into Iraq. But it was also clear he had access to huge stockpiles of former Soviet weapons, possibly including nuclear weapons. In 2006 he was suspected to have been operating with rebels in Somalia and Hezbollah in Lebanon. It was obvious that he had no qualms arming enemies of the United States, from FARC rebels to Al Qaeda. And so the American authorities devised a plan: the DEA hired a former acquaintance of one of Bout's lieutenants to approach his friend about an arms deal. In this fake deal, the DEA pretended to be FARC operatives seeking surface-to-air missiles, among other weapons. Bout's employee apparently trusted his old friend, and took the deal proposal to Bout. The undercover FARC rebels pushed for a face-to-face with Bout, initially suggesting Bucharest as a meeting place. When it became clear to Bout that he was not welcome there, Thailand was chosen as the destination. Upon arriving at a five star hotel in Thailand, Bout and his colleague were arrested, not for arms trafficking but for conspiring to kill Americans.

As described above, his legal situation remained in limbo for two years while he and the Russians fought extradition. In a very brief prison interview, Bout said: "In my case the charges are very general. There is no concrete data: what time, where, what happened. No! They just say: he is bad, he is dangerous... Whatever there is in my story today... it's a Hollywood movie." And in fact, a Hollywood flick - "Lord of War" - was based on Bout's escapades. But Bout's point relates to the same difficulty the NSC had prosecuting him in the 1990s. Could the US prove beyond a reasonable doubt that he had intent to kill Americans? That question will be answered in the coming months as Bout heads to what is sure to be a high profile trial.

However none of the tactical drama surrounding the sting operation or his arrest get to the crux of the issue. Why did the Americans want him so badly, and why were the Russians defending him so aggressively? The Christian Science monitor came up with a few good reasons for the American arrest: it sends a message to smugglers around the world that the United States is still the global policeman. Alternatively, Bout probably has a tremendous amount of valuable intelligence on Russia and on other conflicts with relevance to the United States. The conspiracy theorists - and Russian defenders of Bout - claim the US wanted to put him out of business because he had taken such a chunk of the CIA's illicit dealing business. Of course it is possible that the US was just tired of him supporting its enemies, and no longer needed his help in Iraq and Afghanistan.

As for the Russians, there are a few ways to interpret their intense, public support for Bout. It is possible that Bout made a deal with the Russians whereby in exchange for his mobility, freedom, and access within Russia, he kept Russian security services updated with the on-the-ground intel his business generated. Alternatively, it is possible that Bout was a part of something much more vast. I hesitate to speculate here, because it is very much outside of any expertise I have. But what if Bout were nothing more than the underworld "public face" (ironic, given his secrecy) of a broader international smuggling ring endorsed by the Russian government? They would certainly be angling for their man... A fascinating 2003 New York Times profile seems to support this idea: "I began to understand why Bout was both eager to talk and reluctant. Cornered by multiple governments, selling off his assets and hounded by the press, he wanted to complain that he had merely become the fall guy for a criminalized -- and quasi-legal -- political structure much larger and more significant than Victor Bout. But if he revealed too much, he said, he would be perilous."

As is the case with most high profile geopolitical mysteries, I'm sure that over time these questions will be answered. At a minimum, the reverberations of his capture supported that Bout had become the leading global operator in his field. It is also evident that one way or another, there is a hell of a lot more going on here than what meets the eye. In terms of his actual capture, it seems like a surprisingly amateur move on the part of Bout and his lieutenant. Bout knew the supposed FARC rebels were not senior leadership, and apparently did not bother to do background checks, choosing instead to trust his associate. Why would he be so careless after decades of meticulously covering his tracks? Why did he feel like he needed so badly to do this deal? Perhaps the freezing of his assets by the US Treasury was affecting his liquidity needs... Perhaps he needed to show he was still the preeminent global trafficker... Perhaps he was too trustworthy of his closest advisors... Or perhaps he was just tired?

Saturday, November 20, 2010

Week 44: Bye-bye Blockbuster

For those of you who know me it will come as no surprise that I am hilariously, sadly behind in the great American pastime that is watching movies. A few weeks ago, a group of guys at the office went through a list of the basics, and I hadn't seen 90% of them. I'm talking Indiana Jones, Tommy Boy, Ferris Bueller's Day Off kind of basic... Embarrassing, I know. For some reason I've instead been spending my time learning about random topics and forcing Sunday night writing deadlines on myself. As a kid, I was too busy learning state and country capitals to watch movies (thanks, Mom and Dad.... no, really). I can't tell you how many times someone has quoted something, everyone laughs, and I say "what's that from?" It is basically a miracle that I have been able to exist in a very social, often judgmental line of work without knowing where "Show me da money!!!!" comes from.

So with an eye toward the inevitable end of my 52 week project, a new service has entered my life... One that might just fill my soon-to-be void. I'm talking of course about Netflix. My girlfriend and I recently signed up for a free 30 day subscription to Netflix. I can feel your eyes rolling. Why am I writing about a service you not only know, but likely already use? I want to frame the Netflix story in a very specific way, because like my prior posts on ePublishing and on Apple, the Netflix case study represents how understanding and embracing a new way of thinking is the only way to succeed going forward. Any entrepreneurs out there, listen up. Four years ago I wanted to make a website that would help people identify and remember the songs they heard in random places, or had stuck in their heads. My idea was to create a collaborative, web-based community that could somehow help users based on just the few song snippets they knew or remembered. One year later the iPhone came out, the Shazam app was invented, and my idea seemed antediluvian. Needless to say, I felt pretty stupid. But it was a great learning experience. To succeed in the future, you have to recognize that any business you create must be flexible enough to survive and adapt to not just a more connected world, but to an exponentially more connected and efficient future world. Your assumptions must not be lazy or based on what has worked in the past, and more than ever, you must be laser focused on the convenience and functionality of your service or product.

Let me start by telling you what Netflix it is not. It is not Blockbuster. An ex of mine worked at Blockbuster, and I could never figure it out. To me it was an enigma - why were people were willing to drive all the way to a store (often to find that their desired movie was not available), wait in line, pay $4, and then drive back to drop it off? And oh by the way, they would then slam you with late fees if you didn't return that sucker in a few days! What a crappy business model... Netflix understood that while some people for some period of time would go through the tedium described above, in an increasingly digital world, the Blockbuster model could never succeed. So they started with a monthly subscription service that delivered DVDs of the movies you picked to your house. You would watch the movie, and could keep it for as long as you'd like. When you were finished, you would put the DVD into a pre-paid envelope, place it in your mailbox, and it would be sent back to Netflix. All for $8.99 per month. More convenient, less expensive. Pretty cool.

This delivery based part of the service continues to exist, but most recently Netflix has moved to a newer, better model: streaming video. As I type this from my iPad (which can stream Netflix content from anywhere, by the way... as can the iPhone), my roommate is streaming a movie from Netflix, as is my girlfriend on a different laptop. The TV is turned off. Neither of them know my post is focused on Netflix, and that they are my guinea pigs. But this wireless, on-demand delivery of video entertainment is becoming increasingly common. Movies and TV had to be the laggards to eBooks and iTunes. The file sizes are large by modern standards, and the bandwidth and infrastructure had not been enough to support wireless mass distribution. Given the ubiquity of 3G and now 4G phones, as well as wireless internet, this is no longer the case. From your phone you can now video chat with someone else, so why not watch TV and movies in real time, from anywhere?

This is not to say that TVs are obsolete, by the way. Sony has recently come out with a new, internet friendly television powered by Google TV. Netflix predicts that within one or two years all TVs will have wifi, and therefore movie streaming capabilities. Think about this. Cable companies must be shitting themselves. No wiring necessary. This is the future, ladies and gentleman. I've harped on this in prior weeks: brick and mortar book chains are done, Blockbuster is done, cable companies will be brought to their knees. And they deserve it. In New York City each time a person moves to a new apartment, Time Warner charges an "installation fee", as if that unit had not been wired up fifteen times previously. Again, crappy business model.

The retort here is simple: Blockbuster has already filed for bankruptcy, and everyone already knows about Netflix. Fine, conceded. My point relates specifically to DISTRIBUTION - Netflix's new streaming strategy is the future. Blockbuster thinks it is reinventing itself by copying Redbox's $0.99 rental kiosks. This is laughably short-sighted. Who cares about a DVD rental kiosk for $0.99 when your TV is connected to the internet and you have a streaming service that delivers in real-time the content you want? Nobody. I will say it again: bye-bye DVDs, bye-bye new and improved Blockbuster.

Thanks to Netflix, last night I checked off one of the must-sees: Jerry McGuire. That's right -- I now know where show me da money comes from. You can bet I will be laughing with the rest of them next time. And you can bet I'll pay the $8.99 per month once my free subscription expires.

Sunday, November 14, 2010

Week 43: 20 Million Lives

A few weeks ago, my boss asked me the following: what country experienced the second highest number of World War II deaths? I got the answer wrong multiple times before giving up.

The Soviet Union had the highest casualty figures, with an inconceivable 24 million total deaths (civilian and military combined). Following the Soviet Union, surprisingly, was China, with an estimated 10 to 20 million total deaths. Chinese official statistics estimate 20 million dead and 15 million wounded - truly staggering figures. The overwhelming majority of Chinese casualties came at the hands of the Japanese, who invaded China beginning in the early 1930s. As World War II became a global war - waged on both the Pacific and European fronts - the China/Japan conflict (officially called the Second Sino-Japanese War) became a part of the broader strategic calculus. But let's not get ahead of ourselves: why did the Japanese invade China in the first place?

In 1927, the Japanese Emperor allegedly asked his Prime Minister, Tanaka Giichi, to develop a plan to take over the world. This plan, since referred to as the Tanaka Memorial, was based on the premise that global domination could only happen if China were conquered first. The strategy was first to invade the resource rich province of Manchuria. Following this would be a broader attack that would force China into surrendor, thereby guaranteeing Japan access to cheap Chinese labor. Japan would then move south to the Indies and would finally attack the US. The initial phase of this plan took place in 1931, and the Japanese were quite successful in taking Manchuria. The Chinese were in an almost hopeless position; Japan was economically and technologically advanced, while China was basically a country full of peasants. Politically China was divided, and the internal struggle to consolidate power prevented a unified leadership that could adequately defend the country. In short, Japan was a focused, organized, military imperialist regime fighting a diffuse, fractured and poor China.

While Japan continued its assault on China in the ensuing years, most historians agree that the war between the two countries did not start until 1937. By now, Japan was focused on phase two of the global domination plan - in other words, they wanted to crush the Chinese into submission. Perhaps the most noteworthy - and horrific - event was the Nanking Massacre, an attack on the Chinese capital that is also referred to as the Rape of Nanking. The Japanese army quickly destroyed Chinese forces, and went on to slaughter hundreds of thousands of men, women and children. The city was bombed, large groups of people were buried alive, and many women were forced to become sex slaves. It is estimated that tens of thousands of Chinese women were raped by Japanese soldiers. This sickeningly barbaric display was a crushing military and psychological defeat for China.

One positive from the Japanese attack was that it dramatically accelerated Chinese unification, and Chiang Kai-shek was soon firmly in control of China and its war strategy. This strategy shifted significantly following the attack on Nanking. Aware of their inability to defeat the Japanese army, China developed a strategy based on two assets of which they had an abundance: land and people. First, the Chinese retreated to the west in what is now considered to be the largest mass migration in history. As they moved, they employed a scorched earth policy, destroying roads, bridges and villages. They were effectively trading space for time in an effort to slow the advance of the Japanese and give themselves the opportunity to regroup. Most incredibly, the Chinese military destroyed massive dykes in the Yellow River, causing a massive flood that by some estimates killed 500,000 Chinese civilians. The move was intended to slow the Japanese army, and in this regard it seems to have been successful. However, the decision to destroy the dykes without first informing its citizens (to maintain the element of surprise) has been justifiably criticized.

Once the Chinese leadership and people had migrated west, they launched a massive mobilization that included women and even children receiving military training. Additionally, millions of Chinese worked together to build new roads and underground factories, often by hand. In the more eastern areas (where Japan continued to have control), Chinese farmers often launched guerilla attacks on the Japanese and then blended back into their roles as farmers. By 1939, China had managed to reach a stalemate with Japan.

Eventually Japan decided to move forward with its global domination plan in spite of having not achieved its phase two goal of forcing China to surrender. With the US getting stronger every day, Moscow bogged down and Britain hurting, Japan could no longer wait to attack the US. When Japan bombed Pearl Harbor, the US officially brought China into the Allied forces. Incredibly, at different times in its war with Japan, China was allied with Germany (earlier), the Soviet Union, and later the United States. With Allied technological support and air cover from the famous Flying Tigers, a group of US pilots who were given the mission to fly for the Chinese, the battle dynamics were significantly changed. The Flying Tigers recorded 300 destroyed Japanese planes, compared with losing only 12 of their iconic shark-faced planes. Obviously the Japanese had a significantly more difficult, global fight after atacking the United States. The war with China continued until the Japanese were defeated and forced to surrender at the end of World War II. This ended almost fifteen years of fierce, ruthless fighting on Chinese soil.

It is a very fine line to discuss war casualty statistics. Life is precious, and a number on a webpage of course does not do the meaning behind the number any degree of justice. However, reseraching this week's topic helped me remember how the proportions of these events can be lost on people. How can I even begin to give perspective on what 20 million deaths means? How can we as a society know so much about certain wars - in which total deaths can be measured by the thousands - and so little about one country's immense suffering in a war that ended not even a full generation ago? Is it any surprise that China continues to attack the Japanese Prime Minister for each year visiting and worshipping the country's war "heros"?

If you're so inclined - a simple moment of reflection or prayer on the unmeasurable pain experienced by those tens of millions of Chinese civilians, who like so many others unfairly became collateral damage in just one of humanity's many wars.

Sunday, November 7, 2010

Week 42: USPS Blues

In early August, I read a WSJ article headline that astounded me: Postal Service Reports $3.5 Billion Loss. Even more astounding was the article's revelation that this was a QUARTERLY and not an ANNUAL loss. In other words, at this run rate the postal service would lose $14 billion in one year. As a society I think we've lost sight of just how big that number is - what with the Federal Reserve printing hundreds of billions of dollars and Travis McCoy flippantly singing about how he wants to be a "billionaire, soooo friggin bad"... At this rate each American citizen (children included) would have to pay about $50 per year just to make up the USPS gap. How is this possible? What is going on here?

The most illuminating source for answers came, ironically, from a government agency - the Government Accountability Office. The US Postal Service's financial viability was discussed as part of the GAO's regular watchdog report, and in 2009 the USPS was put on its "high risk" list. This list "calls attention to agency and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, or mismanagement, or are most in need for broad reforms." The GAO cites the most obvious reason for the terrible financial figures at the USPS: "declining revenues." There is no question that mail volumes have dropped significantly, with both the advent and widespread acceptance and use of email and, frankly, the better reliability of services provided by FedEx, UPS and DHL.

But like any comprehensive financial evaluation, the revenues only tell part of the story. What about costs? As of 2009, the USPS employed 630,000 full-time employees and 94,000 temporary employees - almost 0.5% of all adult workers in the US! I hope I'm not the only one who thinks this is insane. To its credit, the USPS has gotten it down to about 584,000 by offering early retirement packages. Unfortunately, this only marginally reduces costs, as benefits are paid out for life (and early retirees by definition will be receiving these benefits for longer than "usual" retirees). The post office in 2009 operated 38,000 facilities, 37,000 of which were retail operations. The bi-weekly payroll of the postal service was $2 billion, or roughly $52B per year (here we go with the big B again). Hell, the post office has to pay about $5.5 billion annually just to fund its pension liabilities! Out of curiosity, I decided to look up FedEx's comparable statistics. For the last year FedEx paid slightly over $8B in "salaries and employee benefits" for its roughly 280,000 employees. This would suggest that FedEx's rough cost per employee of $28,571. As for the USPS? Over 2.5 times this number. Is it any surprise that FedEx reported net income for its last quarter of $380 million compared to the postal service's $3.5 billion loss? No. Of course not.

Before this becomes a diatribe, I will continue with my findings. After hearing all of these basics, I decided to listen to about an hour of the Congressional testimony given earlier this year by Postmaster General John Potter (who two weeks ago stepped down after nine years at the helm). If you've never taken the time to listen to Congressional hearings, it is imperative that you do. The almost laughable ignorance, hubris, and sheer idiocy from both sides of the political aisle never ceases to amaze me. They did not disappoint. The politicians said things like "we are meeting here to ensure the post office continues to thrive" (only in Washington is a $3.5B quarterly loss considered "thriving"), or "the decline of the postal service is through no fault of its own, given private competition", or my personal favorite, "given all the cuts to date, it is hard to believe there are more efficiencies that are possible at this point." You literally cannot make this stuff up. Another congressional member spoke conspiratorially about a "so called 'decline in volume'" (as if the downtrend was even remotely debatable), while many others focused on what I guess is the biggest political problem: the Postmaster General's pay of roughly $800,000 for the prior year. While I agree there are some screwed up things going on here - namely that "employee job satisfaction" is a key driver of the postmaster general's pay - this is the epitome of losing sight of the forest for the trees. The post office has a clear structural problem that will end up costing you and me billions of dollars, and the committee members want to spend their only five minutes of questioning focusing on a figure that does not move the needle.

The broad outlines of a "solution" according to the politicians and the postmaster general, revolved around a plan to switch from six delivery days per week to five delivery days per week. More specifically, mail would no longer be delivered on Saturdays. One relatively astute Congressman asked why they would not stop delivery on a different day, like Monday? The postmaster general responded something to the effect of "my employees and I like our weekends, too." Sounds like a good way to check off the "employee satisfaction" part of his bonus conversations, if you ask me. Apparently this move to five days would save north of $3B per year (ignoring, of course, the possibility that revenue declines because fewer people will use a service that operates only five days per week). The postmaster and politicians also heralded $2 billion of cuts that have already taken place.

Let's call a spade a spade: this whole discourse is disingenuous. We just saw the numbers - how does $2 billion (existing savings) + $3B (expected savings) even get close to the $14 billion run rate of losses per annum? Why won't the trends of increased labor costs and decreased volume continue? (Never mind the fact that the politicians rejected the strong recommendation of the USPS, and the cut to five days never happened.) The post office recently failed in its efforts to again raise stamp costs, from $0.44 to $0.46.

The operations are not fiscally sound, and they are not fiscally sustainable. The American people are not stupid - if they use the US Postal Service, they will continue to buy more and more forever stamps thereby mitigating or eliminating gains from stamp price increases. They cost the same as regular stamps, and will hold their value in perpetuity. Of course, like many other government led initiatives, the forever stamps program was intended to be temporary and is well on its way to becoming permanent. Witness the official USPS "Forever Stamp Fact Sheet" - this fact sheet, still on the USPS website, claims "there is only one Forever Stamp — it features an image of the Liberty Bell." Also on their website is a recent press release heralding the new "Holidays Forever" forever stamp, featuring not a liberty bell but a pine cone. Right. So what's the lesson here, besides the obvious tale of government inefficiencies and unintended consequences? It is, simply, that the Forever Stamp represents the greatest investment opportunity out there: it is a combination of the US Government's sterling credit rating AND a hedge against inflation! You get all the upside of holding a US treasury bond with none of the downside inflation risk. Now all we need for the bankrupt cycle to continue is for Wall Street to invent "Forever Stamp Futures"... Stay tuned.