Tag Archives: economics

Microsoft Invades WSJ

It appears that Microsoft may be paying the Wall Street Journal to ban Google from indexing their web site. Since they made a contract with Yahoo to provide web search, it appears Microsoft is taking the next step to compete with Google. Interestingly, Nicholas Carlson at the Business Insider agrees with my assertion that Google is profiting from other companies’ content, or at least understands the objective is to make Google pay for content. It also seems that Microsoft intends to make this happen on a large scale, starting a war with Google in Google’s back yard for a change.

BlogWriMo: The Long Winding Road

In conjunction with Katherine’s efforts this month on NaNoWriMo, I have decided to write some blog entries which provide a look into our novel creation process from my point of view using the work she is working on this month as an example. I will be posting about the fiction and science that have inspired my ideas as well as some of the content from my notes and our conversations on the world and the story.

This project is in many ways very raw since Katherine first bugged me to get something together maybe two weeks ago when I was working on a paper for my cellular and molecular neuroscience course. As a result, I started work in earnest on Thursday the 29th, a few days before NaNoWriMo started. It also is a very old project, derivative of many failed attempts to bring coherent science to a gritty post-apocalyptic world where the mind and body can do things that would seem like magic to us.

In the past, I have been left unsatisfied with my efforts to define such an environment because it is very difficult to justify radical changes that just aren’t possible with any reasonable derivative of human physiology. In a nutshell, mutation through radiation, biological agents, or natural processes aren’t going to suffice. The leap from here to there is just too large. Drastic physiological changes would need to occur at the sub-cellular level, which would completely derail the organismal developmental process, which is very sensitive to small changes in fundamental characteristics such as the structure of a protein or the presence of an engulfed organism such as mitochondria or chloroplasts.

Almost two years ago, I had an idea that was a result of a discussion about spirituality, which convinced me that the only way the things I wanted to have happen could occur was through influence from outside our universe. Therefore, I would introduce supernatural phenomena through the influence of another universe with completely different physics colliding with ours. Beings and phenomena from that universe, the alterverse, could physically influence ours in ways that defied the laws of physics. Further, some individuals in our universe were magnets for beings of the alterverse and could influence their actions, which would give them the potential I wanted. The phenomena from the alterverse could also have a cataclysmic effect upon civilization.

It seemed like I’d created something that might provide me with what I was after. However, the more I worked on the specific dynamics of the alterverse and my local environment, Phoenicia (what remained of Phoenix, Az), the less satisfied I was. I’m prone to get bored with ideas as I work them out, but this idea was getting away from me, becoming less and less what I’d set out to create. We were about three years into the Weordan project, which still needed a lot of attention, so I just dropped the project.

It’s been churning around in my head ever since.

The solution to my problem may have been hanging around in my head since the first post I made to this blog. Interestingly, this site and blog are a product of what was going on with the alterverse project, which was also called the continua project. Therefore, it seems appropriate that this project has come full circle to the idea that evolution for homo sapiens is primarily occurring through changes in social organization rather than biological changes. Here are the first words I wrote on the blank sheet I started with on Thursday.

Homo Sapiens was constrained by developmental parameters that no longer applied with the development of advanced medical technology and the support systems of modern civilization. Through natural mutation outside of previous survival parameters, new developmental sequences might emerge, eventually being radical enough to cause speciation. However, the same medical technology that enables survival during abnormal development cycles also allows manipulation of genetic and epi-genetic factors to produce novel development cycles and radically different phenotypes.

From this, it should be evident that I like to think about systems to get the ball rolling on an idea. In this case, I had already decided that the source of my unusual capabilities would be a result of human engineering, a process that I’ve come to realize is more complex than just genetics. There has to be an allowance for an organismal development cycle to build exotic structures capable of producing novel capabilities.

This is related to my earlier posts on the singularity in that the continual evolution of social systems would necessitate specialization of humanity into highly specialized, genetically enhanced species that might not resemble the original and would become increasingly insulated from other specialized groups by economic and communication protocols designed to enhance the efficient exchange of information, goods and services. Further, at some point, the system would become so interdependent that a small group of disruptions could cause a cascade that could lead to the collapse of the whole system. This might give me the kind of environment I’ve been looking for, though there are a multitude of complications still to be dealt with.

I Hope They Have a Leash For That Rabid Dog

Apparently, the EU is being asked to help online content providers receive revenue from search engines and aggregators that deliver their content. The EU is the entity most likely to regulate in the most backward socialist manner. So, if you want a competitor regulated, you go to the EU, which will flex its regulatory muscles with glee. I wonder how concerned management at Google is that the U.S. Congress may consider this solution. I think they should be concerned that they might find themselves on the wrong side of a class-action lawsuit.

Google Killed the Newspaper Man

While Congress debates how to save the newspaper business, they don’t seem to be asking the right questions. In their print form, newspapers have thrived on classified ads and local ads. However, just having classifieds doesn’t garner enough of a readership interest advertisers. By providing compelling content, a newspaper could establish a large, interested subscriber base. On the internet, sites like EBay and Craigslist grabbed the classified ad market by being first or by being free, leaving newspapers without that avenue for obtaining revenue. That is OK, because it doesn’t make sense for an online news source to have classified ads.

It is more natural for the news source to have ads related to the content they are producing. Ads may be placed prominently alongside the news. This can provide revenue, but clearly isn’t rewarding enough to keep companies afloat in tough times. To really solve the problem, one needs to only ask who is taking the profit from the content that online newspapers provide. The answer is that search engines are. Google, Yahoo, Microsoft or any other search engine is the equivalent of a delivery man. They take an order for information an deliver it to the customer. Only, unlike in the real world where the producer of the product gets paid, on the internet, they aren’t. The AP is starting to understand that the search engines need the AP more than the AP needs search engines. However, it should be a rather simple exercise for major news sites to make an exclusive agreement with Yahoo or Microsoft on licensing fees to reference their copyrighted material and subsequently tell the others to cease and desist. This should hold up legally, because all any search engine is doing is taking the content and re-packaging it to make a product that produces a profit. It certainly won’t be difficult to show that there is significant financial damage being caused, nor is it difficult to understand that the search engines rely upon content providers in order to produce revenue.

Oil Cartels Just Aren’t Sexy Villains Anymore

Now that commodity prices are going down as quickly as they went up, it seems to be accepted wisdom that “speculation”, specifically investment speculation on the part of investors such as hedge funds, had a substantial part in where the prices peaked.  At first blush, this seems a reasonable assessment.  However, the more I’ve thought about markets and commodity markets in particular, the less I’m inclined to agree so whole-heartedly.

Basic market economic theory is based upon the principles of supply and demand. Supply and demand curves work very well for markets where buyers and sellers are flexible to change their consumption and production. They work less well to accurately represent how basic commodity markets work. When I say basic commodities, I mean natural resources or basic goods produced directly from natural resources. Things like fuel and food. The idea that these markets are particularly inflexible is probably not a new thought, but it certainly isn’t a popular thought since everything I read on the matter treats the basic commodity market as just another market when it clearly isn’t.

There is a single underlying principle that undermines using economic principles such as supply and demand when basic commodities are concerned. Flexibility. Consumers are very flexible with regard to how much they will pay for basic commodities if they have to and will strongly resist adjusting their consumption. Likewise, production of basic commodities takes considerable time, planning and infrastructure. Producers are not very flexible when it comes to altering their production.

This difference in flexibility, specifically the issue of planning which strongly affects the basic commodity market, results in a new dimension being added to the problem. Basically, there is a high cost associated with change because of the planning, time and infrastructure involved. As a result, consumers and suppliers look to recent history when making decisions, not just the current price. Consumers will likely do little in the very short term when prices increase to reduce their consumption of food and fuel because it won’t be worth the effort to change if the price increase is short lived and prices return to normal. Suppliers are even less sensitive to change because they have long production cycles and need to develop significant infrastructure for production. A new reality must establish itself before behavior changes. In short, people make these kinds of plans based upon trends, which take time to develop.

In the most recent rise in basic commodity prices, demand was augmented by new wealth in Asia. The inflexibility of demand quantity in the rest of the world and in supply quantity drove up prices. Eventually, demand gave in a little. People began to change their lives to conform to basic commodity shortages that would clearly be in short supply indefinitely. The problem was that suppliers were not capable of reacting quickly enough to keep up with demand. Undoubtedly, they also could remember the 90s and weren’t so sure they wanted to react quickly. Then there is the problem of those that try to corner the market.

In normal times, cornering the market on a basic commodity like grain, metals or energy is rather difficult. Eventually, you will have to sell to realize a profit and selling ends up increasing supply in an environment where suppliers are more likely to be maximizing their capacity through efficiency or shortcuts and consumers are more likely to be conserving. This will likely lead to a loss on the part of the one cornering the market and consumers, and a gain for suppliers. It only makes sense to try and corner the market if you’re a supplier like OPEC for instance. If you are a speculator, market timing (short or long) is your only real ally. Buy low and sell high.

All of this relates to the recent behavior of basic commodities markets in that it characterizes the situation and motivation of the players. Inflexibility on the part of suppliers and consumers means that basic commodities markets inclined to go up very fast when supply gets tight and go back down fast when it becomes plentiful.

Compounding the price fluctuations due to inflexibility are those who might want to profit from the situation. Wall street most certainly is going to be attracted to the projected trends for commodity prices and make investments to make profit. However, they represented a total investment in the low billions for this one commodity in a market of between 80-90 million barrels per day. At $100 oil, this is $8-9Billion/day. I would think that an organization that controls roughly 35% of oil production would have much more control over the market. There are also oil companies with incentives to wait to deliver their products until prices went up. Suppliers will be inclined to make shortages worse when they occur because unlike a speculator they don’t have to play games to profit, they can collect those paper gains from prices rising through their regular sales. They have more incentive and more power to manipulate the markets, so why is all of the attention on Wall Street?

One Strike Against Consumers

Our current economic situation is a result of two forces: commodity demand from the developing world, primarily China and India and an unrestrained appetite for profit today. Analyses like this one in the NY Times look at economic forces in terms of the symptom rather than the cause.

The rising prices of commodities like food, fuel and building materials have been largely driven by demand in Asia where large populations are seeing their disposable income increase. They could also be driven in some part by market speculation. There have been abnormalities in grain prices and there might be an oil bubble.

The housing bubble was driven by the same forces. The price of building materials increased due to increased building in Asia, as well as here and many other countries. Speculators got into the market buying and selling real estate as well as selling risky loans predicated on the notion that prices would go up forever, eliminating the risk of loss if they were to default. The primary driver was the large appetite for profit today and very little consideration for the future.

While there is some element of coincidence to our current situation, it really boils down to one real problem. The current investment and management climate is exaggerating the impact of major economic developments. It happened with the internet in the late 90’s then moved on to housing and commodities since then.

Using Fear of Identity Theft to Fix the Credit Industry

According to an article in the New York Times, there is an effort ongoing by the Information Card Foundation to establish a central manager for online accounts. On the surface, it seems like this might help block security holes in online accounts by making phishing mostly obsolete and eliminating the use of browser password tools. However there is more to this initiative than to protect people from fraud.

Equifax, one of the three major credit bureaus, is a member of this foundation. They might be interested in the data related to financial transactions. Further, Google, Microsoft and Oracle all are heavily involved in writing search software, something that would be necessary to extract useful data from the service’s logs.

The motivation for a move like this is that there is little confidence in the credit bureaus. Lending institutions have drawn back their willingness to lend because they don’t have an accurate picture of who it is they are lending to. While a lot of the credit problems were caused by irrational expectations with regards to the future values of homes, there was also rampant credit rating manipulation in the sub-prime market where credit repair services were and are being used to manipulate the system. One strategy is to contest legitimate black marks in your credit report. If the credit bureau doesn’t investigate in 30 days , they have to remove it.

Lenders were avoiding looking too carefully at those they were lending to because they wanted to do more business and mistakenly thought there was little risk. Now, they still want to do more business so they can make profit, but they still feel the pain from earlier mistakes. A credit bureau that were to differentiate itself by offering more information to skittish lenders might seize more business in an environment which is probably not very good currently.

I am not fond of the notion of a centralized system keeping track of my activity online so I’m not fond of this “product”. However, it is obvious that the credit bureaus have to improve the methods they use for compiling credit ratings. They currently put too much weight on having had significant debt in the past, which makes someone that has had modest loans look an awful lot like someone with a checkered past, unreliable. They need to get a better look into all of the times someone pays a bill and a better idea of how someone handles their finances. This will require a better system. Maybe it will be this one, maybe another.

An Evolutionary View of Economics

I recently became aware of an article on the Singularity in the IEEE periodical Spectrum. It resembles to some extent my previous post on the topic, but misses some fine details. The key attribute of the explosions in growth is hierarchy, which is powered by specialists collaborating. The Industrial Revolution was a case of collaboration in a factory. What Hanson mistakes as an “agriculture” revolution was actually the beginning of civilization, which is collaboration in a town or city. Previous to that was collaboration between different regions of higher thought to create a complex world model. The next earlier step was collaboration between the internal and external senses to produce learning. The next earlier step was the collaboration of cells to produce a multi-cellular organism. And the first step was the collaboration of molecules to produce a single cell organism. There are the nasty little exceptions like mitochondria and chlorophyll, which are technically subsumed in the cell of a larger organism. However, those can be reasonably lumped in the cells collaborating category.

This makes six generations instead of five as mathematically estimated by Hanson. It might be argued that there is very little value in the human’s ability to model their environment that doesn’t merely lead to civilization. This would lead to five steps, and considering that there need to be changes previous to the actual addition of a new level of hierarchy, the 100k-200k years is probably not too long a preparatory step considering the previous step was hundreds of millions of years earlier. As a result, I can accept that there have been five hierarchical events.

The growth graph from Delong suggests that we are on the cusp of another growth explosion. I think it is already happening. It is being driven by modern communications which enable the worldwide scientific community to collaborate. As an example, even though designing electronics is getting harder, the rate of advance is speeding up. Electronic agents perform more complex tasks for us every year. They do searches for us, manage our computer hardware, gather items for shipping in warehouses and many other things. Clearly, hordes of electronic specialists will be a big part of the next level of hierarchy, just as will the communication system we use to communicate with them. Beyond that, it will be rather difficult for an individual human to comprehend the next hierarchy, even if it is staring them in the face.

Thoughts on Why U.S. Markets Have Been So Unstable

Seeing yet another commodity bubble headline at USAToday , I feel compelled to make a short post on this topic, which had been my originally planned topic last week.

Over the last decade, there have been at least two speculative bubbles of considerable magnitude, one in stocks and one in real-estate. There might also be a third that has formed in commodities as well. Historically, speculation on of this magnitude is not common. Having back-to-back events indicates that there are forces present in the investment community that are fueling these events that probably weren’t present in the recent past, though might have been present in the early part of the 20th century.

There are many forces of change out there with the rise of far eastern economies and globalization. They are most certainly a big part of the rise in the price of commodities, which to some extent also drove the housing boom. However, there has been a change in behavior on the part of investment managers, corporate executives and bankers. The appetite for risk is ridiculously high. At the height of the internet stock bubble, buying shares on margin had greatly increased. This has continued with the private equity funds that have bought companies wholesale, largely with borrowed capital. Companies like Blackstone are not doing so well. In banking, the sub-prime crisis is an example of banks racing to discount the risk premium in their loans to get in on the “can’t lose” boom. The same mentality is common amongst company executives, who are only worried about the next quarter.

The important question is, what is happening now that is causing this appetite for risk to be prevalent? My answer is that the tax system isn’t forcing investors or executives to worry about having income in the future. This is because the tax code isn’t sufficiently progressive as to make it worthwhile to put off profits in the future. If I’m not going to pay significantly higher taxes on my second ten million than my first ten million, why should I not try to cash out immediately? This leads to the decision to immediately monetize a brand or asset. This is why we’re seeing sequels out the wazoo in the movie theaters. Overexposure isn’t a concern, because there is a rape and pillage mentality. And it is all driven by the tax code which has ridiculously low taxes for unearned income and little increase in tax rate for high income. This is due in part to the consistent lowering of high tax bracket rates over the last twenty odd years and the income of the very wealthy growing far beyond the scope of the tax schedule.

Having made the argument that taxes on the very wealthy are lower than is healthy for our economy, I will also counter that we don’t want the top 10% of earners paying 30+% either like was the case in the 70s. My concern is more with the top 0.1% and above to make sure that they have some disincentive to not cash out all of the opportunities they have. There needs to be more disincentive to only think about today. There needs to be better accountability for money managers and corporate executives when things go wrong for this to happen, but there also needs to be a change in the incentives for investors so they will not want someone that only cares about today handling their assets.