Monday, February 28, 2011

Public Pension and Healthcare Costs and Financial Common Sense

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If we set aside ideological biases and seek financial common sense, we can see that the public sector costs are simply unsustainable.

I'm going to ask you to do something very difficult before reading further: please leave your ideological biases, certainties and emotions at the door, for the goal here is Financial Common Sense, something which is in desperately short supply in the "debate" over public employees and their unions, taxes and State budgets.

Let's scrape away all the ideological baggage and just look at the numbers, shall we? If you must assign a point of view, then let's take the POV of someone who is, broadly speaking, sympathetic to unions and wants to "do the right thing" but who is also a private sector worker who has seen his/her income and assets fall in the past three years even as inflation, official and otherwise, has further eroded the purchasing power of his/her stagnant income. As a result, paying higher taxes is a direct reduction in disposable income and thus a serious sacrifice.

There are about 106 million private sector wage earners and about 24 million public sector employees in the U.S. for a total of about 130 million jobs.

Here is a graph of the GDP growth of the U.S. since 2000. Broadly speaking, GDP grwoth is the foundation of higher taxes and higher incomes. If GDP is flat, then household incomes are also flat. The State (broadly speaking, all government) cannot increase taxes above the growth rate of the GDP without crimping private-sector households.

For context on Central State borrowing (Federal deficits): Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

2008: $458 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.5 trillion (est.)
2012: $1.6 trillion (est.)

(CBO estimate for 2011)

total: $6.258 trillion in five years.

And this isn't even the real total being added to the national debt, as "supplemental appropriations" for war costs and other large expenditures are "off budget" and not included in the "official" Federal deficit. The same is also true of funds appropriated to bail out mortgage giants Freddie Mac and Fannie Mae and other financial institutions. (source)

This is why gross debt increased by $1 trillion fiscal year 2008, $1.9 trillion in 2009 and $1.7 trillion in 2010—considerably higher than the "official" deficit numbers. This is roughly 11.5% of the nation's GDP, and $4.6 trillion in a mere three years.

Note that the 2009 $787 billion Stimulus Spending runs its course in 2011 (a few billion remain to be spent in 2012 and beyond) and the hated TARP bailout of banks and Wall Street officially ended in 2010. So higher spending and deficits in 2012 cannot be attributed to "recessionary" spending measures. (Recall that the recession officially ended in August 2009.)

Federal spending has leaped up $1.5 trillion—a staggering 60%--in just six years,from 2004 to 2010, and $1 trillion—36%--just since 2007. Though the Great Recession officially ended in mid-2009, Federal deficits just keep going up.

Meanwhile, the U.S. economy has been treading water. In adjusted-for-inflation dollars, the U.S. Gross Domestic Product (GDP) in 2010 was almost precisely the same as it was in 2007: $13.363 trillion in 2007 and $13.382 trillion in 2010.

Remove this extraordinary rise in Federal spending, and the GDP would have declined by about 11%.

Does anyone seriously think this is sustainable in the long term? Of course not. But the players--the State and its fiefdoms, including public employees, and the State's partner, the Financial Cartels/Elites--are all pleased to continue the charade as long as "the music keeps playing," i.e. the public and the global bond market keep acting as if it is all sustainable.

Anyone who thinks the U.S. economy is suddenly going to start growing rapidly organically--that is, via private-sector growth, not ever-rising Federal borrowing and spending--is delusional.

Now let's overlay the pension costs for public employees in one small city as an example of what's happening to pension costs nationally. Let's take the city of Berkeley, Calif., which provides substantial services to its 102,000 residents (about 30,000 of whom attend or work for the University of California) but in general goverance is typical of many other town-gown cities in the U.S.

While these numbers may be higher than your local city, county and state, they track national trends in public pension and healthcare costs.

As we can see, pension costs are rising significantly faster than GDP. Even if we assume the $2 million pension costs in 2000 were far below what should have been paid, and kick that starting point up to $10 million (the light-blue line), the line doesn't really change: it's still a steep ascent while GDP is either flat (i.e. dependent on unprecedented Federal borrowing and spending) or declining (if we factor out the massive Federal spending spree).

Next, let's add public employee healthcare costs, which according to the Berkeley Voice newspaper, have been rising an average of 11% per year in the decade since 2000.

Here is what happens to $1 in healthcare costs which increase 11% per year:

1 (2001)
2.08 (2008)
3.15 (2012)
4.78 (2016)

By 2012, these costs have more than tripled and by 2016 will have jumped five-fold. Once again: does anyone seriously believe these trends are sustainable?

Here is another chart to ponder:

Many public employee pension and benefit packages were "sweetened" during the 1990s stock bubble, based on the hopelessly unrealistic expectation that pension funds could count on huge annual capital gains increases from stock and bond funds to pay for higher pensions and benefits.

Adjusted for inflation, stock gains since 2000 have been negative, even counting dividends. The S&P 500 has declined from over 1,500 in 2000 to around 1,300 in 2011: a 13% decline that must be added to a reduction in purchasing power (inflation) of another28%. Not counting dividends of around 2% a year, that's a decline of 42%. Just to stay even with inflation, the SPX would have to be above 1,900 now.

A 2% annual dividend yield compounded since 2000 turns $100 into $124.34. So buy and hold pension funds have experienced a 24% gain since 2000 and a 42% decline: net-net, an 18% decline.

So much for 8% returns forever.

These charts make it clear where we're going in terms of public pension and healthcare costs. The real economy isn't growing at all, or is actively shrinking if we remove massive Federal stimulus, and long-term returns in stocks are negative.

But let's make the happy-story assumption the U.S. economy is about to resume its long-term GDP growth rate of abour 2% per annum.

A 2% (inflation-adjusted) growth rate in the real economy compounds to a 24% increase over 11 years, while an 11% annual increase in pension and public employee healthcare costs compounds into a 315% increase.

Is that disparity sustainable? Clearly, it is not.

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Saturday, February 26, 2011

Chart of the Week: Dow-Gold Ratio

The Dow-Gold ratio chart suggests valuation extremes lie ahead.

Knowledgeable correspondent Brendan O. recently sent me this long-term chart of the Dow-Gold ratio. I have reduced the chart a bit and marked it up with what I see: a stupendous megaphone (pennant) pattern, which if extended targets a Dow-Gold ratio of less than one.

The ratio is simple: divide the Dow by the price of gold per ounce: 12,130 divided by $1,409 = 8.6.

This is already already outside the channel--not surprising, as gold has quadrupled from its lows around $300, and tripled from the $400 level of just a few short years ago.

This chart suggests two possibilities to me:

1. The ratio could spike back up into the channel, meaning gold could briefly fall in price and/or the Dow could briefly rise. Just such a retrace spike occurred in 1970s.

2. If the megaphone pattern extension plays out, then either gold must rise significantly from current levels, or the Dow must lose much of its value, or some combination of the two.

The Dow could fall to 2,000 while gold rises to $2,200/ounce, for example.

Nobody knows if that extension will pan out, or what will happen with either gold or stocks, but this chart suggests the ultimate extremes may well be ahead.

As always, please review the HUGE GIANT BIG FAT DISCLAIMER below, which explains that this is not investment advice, it is only the freely offered random notes of an amateur observer.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

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Friday, February 25, 2011

Oil: We Need It, they Got It

A snapshot of the oil market and the American lifestyle (consumption).

It's pretty easy to sum up America's role in the global market for oil: We need it, they got it. Here are the numbers, via the U.S. Energy Information Administration for 2009 (last year data available).

U.S. oil consumption: 18.8 million barrels per day (MBD)

U.S. oil production: crude oil: 5.36 MBD; all oil (including liquids from natural gas, etc.):9.14 MBD. 48.6% of consumption

Oil exporters sell us: 9.67 MBD 51.4% of consumption

Where we get the oil from (top 15 suppliers to the U.S.)

World oil production: 85.5 MBD

World oil consumption: 85.6 MBD

Percentage U.S. consumption of global total: 22%

Interesting statistical note: many commentators use the total consumption of 18.8 million barrels per day and the 5.35 MBD of crude oil production to then conclude the U.S. only supplies some 28.5% of its oil consumption. This is not true; including other liquid oil supplies drawn from natural gas wells, etc., the U.S. still produces about half of the oil it consumes. The U.S. remains the Number Three producer of oil, just behind Russia and Saudi Arabia. The U.S. produces roughly the same amount of oil as Canada, Mexico and the United Arab Emirates combined (numbers 6,7 and 8 in the list of top oil producers). The U.S. is also far and away the world's top consumer of oil. (China may consume more energy, but much of this is coal, not oil.)

Oil, like all commodities, is priced on the margin, meaning that a relatively small imbalance between demand and supply can produce large swings in price. What would happen if oil supplies were reduced by 1 million barrels day? Or 5 MBD? Who wouldn't get their previous allotment? How much would the winning bidders have to pay per barrel?

Those are questions that the market may have to answer if turmoil in the Mideast and North Africa seriously disrupt global oil exports.

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Thursday, February 24, 2011

Egypt, Libya et al.: Demographics, the Oil Curse and Post-Colonial Karma

What is unfolding in North Africa and the Mideast is a full-blown crisis of legitimacy.

To reach an integrated understanding of current events in the Mideast and North Africa, we must place them in these broad contexts:

1. Demographics. These nations have experienced the usual population explosion which accompanies reduced opportunities for women, and as a result the majority of citizens are young, better educated than their elders, and unemployed, underemployed or scratching out a living in the informal economy.

2. The oil curse, or more generally, the the resource curse, since it works just as well with diamonds, gold, etc.

Nations "blessed" with abundant extractive resources such as oil have few incentives to nurture innovation, opportunity, democracy or a broad-based integrated economy, as the Ruling Elites find controlling the resource (oil) to be more than adequate for their basic needs: acquiring personal wealth via diverting the profits from the resources into their personal palaces and Swiss bank accounts, and in providing sufficient funding to feed and bribe an Army and oppressive secret-police to control the populace.

Nations rich in extractive resources become progressively more impoverished compared to their resource-poor counterparts: Venezuela, for example, once had a per capita income far above that of South Korea. Now Venezula is the backward, corrupt poverty-stricken cousin of developed-economy Korea: the oil curse in full flower.

3. Post-colonial Karma. Most of the "developiing" world is still working through the consequences of 19th century Imperial/colonial domination--the "karma" of post-colonialism. Even the rare exceptions which avoided direct Imperial control such as Thailand were still shaped by the carving up of the globe by European Empires in the 19th and early 20th centuries.

Though entire volumes have been written about the post-colonial era, here is a quick sketch of the critical issues playing out now.

Arbitrary national borders. The Imperial/colonial powers carved up the world to suit their own needs of the moment, in many cases literally establishing national borders (Iraq, for instance) on a map spread out on a table in London.

Rewards, punishments, quasi-idealistic notions, haste, expedient "solutions" and subterfuge were all played out in this process of setting national borders. The prime example of unintended and unforeseen consequences might be India and Pakistan: India once included the lands now called Pakistan and Bangladesh. Pakistan was carved off in the post-colonial partition partly as a reward for those groups which had supported the Allies (in effect, Great Britain) during World War II.

As for Muslim and Hindu populations: today, India contains as many Muslim citizens as does Pakistan.

Creating nations with a stroke of the pen, so to speak, does not create cultural equivalents: nations poor in infrastructure, education and legitimate institutions were shoved into the nation-building process with few resources and no road maps.

Nations such as Thailand which evaded direct control of Imperial powers were still hobbled by backward governance (Monarchy) and stagnant or narrow educational and economic institutions. Which is to say, successful development is not guaranteed by an avoidance of Imperial intanglements; it is at best rendered somewhat less complicated.

Reliance on local despots and Power Elites to enforce governance. At the height of the British Empire, the Empire required less than 10,000 people "in theater," so to speak, to control the vast nation of India. They accomplished this remarkable level of remote control by empowering the local Power Elites which they had conquered or won over by military force.

This pattern can be seen in Vietnam (France), Indonesia (The Netherlands), India (Great Britain) and elsewhere.

The key (and generally under-appreciated) feature of this system is its reliance on the willingness of the governed to accept it. The U.S., which haltingly approached the Imperialist roundtable only in the waning days of the 19th century as a fledging wannabe-Empire, found to its dismay in the Philippines that peoples who refused to consent to foreign rule could not be controlled at a distance, no matter how brutal the repression and war waged on the resistance.

The French discovered the same truth in Algeria in the 1950s, when the people walked away from consent, and in Vietnam in the early 1960s.

The people in the Mideast and North Africa are withdrawing their consent to be governed, and no amount of repression can force that genie back in the bottle.

Local Power Elites simply transferred the colonial machinery of expropriation to themselves. Though high-minded idealism flourished in the initial euphoria of the post-colonial era, on the ground local Power Elites simply took over the reins of concentrated political and financial power (control of the media, resources, whatever infrastructure had been constructed to serve the colonial resource extraction, etc.) and carried on the colonial pastime of suppressing dissent and amassing personal fortunes.

A senior economist from India recently told me that there is an estimated $400 billion in Swiss accounts owned by the Power Elites of India. That is of course only a guess, but it is indicative of the great wealth that has been plundered even in post-colonial democracies: expropriation as a model of governance remains extremely attractive.

Perhaps the key feature of colonial rule is the suppression of any other legitimate institutions other than those directly required for colonial rule. Unfortunately, the post-colonial karma of most former colonies is a continuance of this policy, for one basic reason: legitimate institutions eventually offer up challenges to concentrated, central control, and thus the Power Elites have chosen to weaken their nation's institutions, except for those required to enforce passivity and compliance: the Army, the government-controlled media and the secret police.

Keeping institutions weak is only the visible part of the trade-off: for all the critical elements of broad-based development must also be sacrificed: innovation and opportunity, for example, must be limited, as both innovation and economic opportunity could eventually threaten the Status Quo.

This is how you get a situation in which most people in the formal economy work for the central government and the Army controls a significant chunk of the entire economy. This is true of Egypt and was once true of China, where the Peoples Liberation Army retains shadow ownership of vast companies and industries.

Delegitimizing every institution other than the Army is the acme of backwardness and misallocation of capital.

What is unfolding after four decades of suppression is a full-blown crisis of legitimacy. Regardless of their purported ideological flavor, the ruling Elites all relied on the same system of governance: offer a simulacrum of public purpose to the world and the populace, and ceaselessly pursue private confiscation of national income and resources.

Now, at long last, the consent and compliance of the ruled has dissolved.

It's certainly valid to place responsibility on the colonial powers for leaving behind socially and economically crippled nations with hastily drawn borders; but that would be leaving out the opportunities squandered for half a century by the local Power Elites which took the reins of power from the colonial empires.

What could have been done in the post-colonial transition--the slow, careful construction of legitimate, transparent institutions to channel development, education and investment--was not done. Instead, the concentrated control and culture of expropriation of national assets and income streams for private consumption and acquisition was continued. The iron fist of Empire was neatly covered with the attractive glove of "freedom," but that freedom was elusive and illusory.

What was not done in 1947-1967 remains to be done: the assembly of legitimate institutions, the diversion of national resources from Power Elites to the common good, and the unleashing of innovation, not just technical but institutional, and lastly, of opportunity.

Until those processes are underway, then these regions cannot escape backwardness, oppression and turmoil.

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Wednesday, February 23, 2011

Wait for the Retrace?

Too many people have been waiting for the stock market to correct. Maybe waiting for a retrace/rebound is in order.

The global stock markets' big dump yesterday has long-frustrated Bears salivating. Everyone knows the market has traded up for months on thin volume and heavy intervention by the Federal Reserve, so it makes a certain sense to expect the markets to cascade downward once the charade ends.

Everybody also knows the tradewinds that have filling the markets' sails--record profits, impressive gains in overseas revenues, the expectation that China alone would fuel a commodities boom for decades to come, to name but a few--have all suddenly ceased, and in the stillness, a storm--oil over $100/barrel--is gathering ominously on the horizon.

But too many hedge fund managers and other traders have been waiting for a big dump to make their year, which means the big dump is suddenly less likely. We might also anticipate that the Powers That Be aren't going to let their pride and joy, a manipulated market, roll over and expire just because Libya imploded and oil is heading over $100/barrel.

One possibility is a quick recovery after a few days of uncertainty and a retrace back up, ideally to a double-top. That's what we're looking at on the 10-year chart of the Nasdaq: a big fat double-top screaming "look out below." This is really a beauty to behold: technically, it doesn't get any better than this.

It would be handy if the U.S. dollar confirmed the change in trend by breaking out of its trading range to the upside. Nobody knows what will transpire, but it's something to look for.

As always, these are just the ramblings of an amateur observer, and do not constitute advice nor are they intended as advice--please read the HUGE GIANT BIG FAT DISCLAIMER below for more.

When this market does break down--and it will--then the fireworks may begin. Alternatively, it could just torture everyone with stutter-steps and false breakdowns for a few more weeks or even months. We'll just have to wait and see.

I intended to focus on social media this week but events call for a quick change-up; more on social media next week.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

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Tuesday, February 22, 2011

How I Friended a Dead Guy and Became a Social Media Zombie

Joining, "friending" and "liking" within social media require near-zero time, effort and commitment, and so their value is often over-rated.

I confess that I friended a dead guy, and my excuse is that I didn't know the poor gent had passed away. Over the past year or so, kindly readers have occasionally emailed me a "want to be Facebook friends" request. A few months ago I overcame my reluctance, caved in to curiosity and created a Facebook account.

This was the same model I followed with MySpace, LinkedIn and Twitter. I had first read about MySpace back in 2003, before it had become well-known, when its raison d'etre was providing bands a site to share their music and upcoming gig dates with fans.

As a musician in occasional garage bands and as someone with a number of musician friends, I thought this was a smashing-good idea. Then MySpace morphed into a platform for Channels of Me, and the focus shifted to expressing your personality via playlists and favorite bands, the background and design of your page, and linking your page to all your friends' pages.

Once the goal shifted to monetizing the site, all sorts of non-music-related groups and forums popped up, along with adverts and a near-infinite stream of hype about how permanent and mighty MySpace had become.

Though the value proposition in MySpace (other than a novelty site for teens) appeared to have been lost in the sea of hype (valuations in the billions, etc.), I signed up our Waimea garage band and posted a song.

The page is still up, untouched since December 2005 when I created it: Waimea Bunker Band. It's indicative of my feeble belief in any payoff that the song I posted wasn't even recorded by the Bunker Band--those songs were WAV files and I was unmotivated to transfer them into MP3 format just for this page. So instead I posted a studio song by my friend Mike Dakota that I'd played guitar on.

(If you're overcome by curiosity, you can listen to the Bunker Band's raucous jams and Mike's song on my music page.)

I tried joining a few of the writing groups, but after a few visits it was clear I wasn't going to get any return on the time invested in reading them--and indeed, ditto for MySpace as a whole.

And so I became a Social Media Zombie: still a "member" that was included in various counts, but long gone as a participant investing time and effort in the site. Sites which are mostly "inhabited" by Zombies become Zombie sites.

MySpace in its first flush of mimetic desire and novelty was bought for $800 million by an Old Media company; recently, MySpace laid off half its staff in preparation to being sold for $30 million or less: the valuation of a Zombie Site.

In other words, there has to be a payoff for the investment of time and effort. I have concluded there are four payoffs to social media sites like MySpace and Facebook:

1. Mimetic desire: We want what we perceive others wanting--that is, we value what others desire. If everyone "cool" is talking about their Facebook channel, then we want one, too, and thus a herd mentality is birthed.

2. Novelty. As noted yesterday, humans crave novelty, and so there is a big initial payoff to joining and exploring a site with limitless numbers of participants, links and opportunities for interaction (friending, posting on others' "walls," "liking" posts, etc.)

But alas, novelty wears off in relatively short order. This is the dynamic of social networks and teens I describe in my little book Weblogs & New Media: Marketing in Crisis: first you enroll in NeoPets, then after you burn out on that, you graduate to another social media; eventually you tire of that, and then it's on to the next.

The collapse of MySpace shouldn't surprise us: the novelty wore off.

3. The ability to keep up on our friends' (public) lives efficiently. There is a great efficiency in Facebook: with a few dozen clicks and a few moments per page, you can keep up on your friends' photos and posts without having to get in touch with them via texting, email or their (probably not updated) blogs.

If you want to leave a quick note, then it's quick and efficient to do so, but there is no obligation to do so: the "exchange" is opt-in on both sides. (Thank you, CNF, for describing how our young friends leverage this efficiency.)

This is a legitimate value proposition, but it has a number of limits, the most important of which is that this social media minimalist exchange does not replace or substitute for conversation or the magic of making or having real friends.

4. Owning a Channel of Me enables people to play around with their identities. Just like switching clothing styles, eradicating once-desirable 'toos, changing majors, etc., the Channel of Me is a mallable expression of "Self" with a capital S.

This process of identity experimentation and formation is part of growing up, so it shouldn't surprise us that the Channel of Me is intrinsically attractive to youth. I am sympathetic with this process of exploring identity, ideas and convictions, and it's the thematic core of my novel I-State Lines (Sample Daz and Alex's adventures here.)

But there is something innately superficial about this detached, online "self." The very fact that it can be changed so easily and with so little consequence renders it weightless.

There is something deeply unsatisfactory about this experience, a subtle state of deprivation and eclipse which can lead to isolation and depression. I am not at all surprised to find articles such as How to Avoid Social Media Depression making the rounds.

Since I focus much of my attention on the politics of experience, then it seems to me that the current models of social media are intrinsically inauthentic on several important levels. I think that's one reason among three I don't find the experience compelling or interesting.

Another is that these social media sites are devoid of opportunities to learn. And without any opportunity to learn, then novelty wears off very quickly and ennui soon rules. These sites are a form of "entertainment"--one more interesting than the vast majority of TV content, to be sure--but there is a distinction between Twitter and Facebook. When I skim the tweets from the several hundred people I follow, at a minimum I get a valuable sense of the cultural zeitgeist in a few moments of effort--what I referred to in yesterday's post as a meta-value. The investment is modest in terms of time and the payoff is occasionally substantial.

Perhaps others get this same value from Facebook: if so, then I would say Facebook has real value to them.

The third is the snippets left on "walls" don't really express much: in aggregate, perhaps, they express something true and thus interesting about the person, but they lack the personality of an email or a lengthier blog post.

I have followed dozens of personal blogs over the years, and some entries remain indelibly imprinted on my awareness, for the writer captured something true and universal in a paragraph or phrase that was crystallized by their purposeful, expressive blog entry. If these individuals quit posting, I feel a loss, because their personality was expressed in their posts: of longing, indecision, memories.

Perhaps it a reflection of our culture that social media of the Channel of Me type is superficially focused on the externalities of life, identity and ideas (where I went, who I was with, etc.). Yes, these are important to the participants, but there are limits of authenticity and meaning to these jumbles of snippets.

I realize those of us who have worked through our identities in the main find Channel of Me social media less engaging than those youth actively sorting through identity and authenticity. But since joining, "friending" and "liking" within social media require near-zero time, effort and commitment, I suspect their value is often over-rated.

Back to my friending the dead guy. A few days after accepting everyone's invitations, I thought I should invest a few moments in finding out who my new "friends" were. At that point I discovered my "friend" had died.

The hype surrounding Facebook (it's worth $142 billion!) has reached a fever pitch which typically marks the high-water mark of enterprises founded on mimetic desire and novelty.

Is Facebook the Last Next Big Thing? Somehow I doubt it. The mere fact that parents and grandparents are joining in droves should sound the gong of Doom. But more on that tomorrow.

Social Media Week: 800 Million Channels of Me (February 21, 2011)

On a related topic: Weblogs & New Media: Marketing in Crisis (free bits) (Kindle)

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Monday, February 21, 2011

Social Media Week: 800 Million Channels of Me

Now that anyone can create a channel with global distribution, then channels have lost their value. Now that content is super-abundant, it too has lost value.

In commenting on social media this week, I am veering dangerously close to "the pot calling the kettle black," for this site is situated uneasily in the wild borderland between social media and independent journalism. First, an important caveat: while I don't claim a comprehensive understanding of social media, as a participant and citizen it is of intense interest to me. So this week's commentaries are not so much coherent attempts to "explain" social media as much as a collection of "obvious" observations and speculations.

Can someone whose photo and name anchor his weblog critique the other 800 million people operating their own channel of Me? To the degree that is just another Channel of Me, then I would certainly be the pot calling the kettle black. To the degree that is more than a Channel of Me--that is, a channel of thousands of pages of content with hundreds of thousands of visits per month and uncounted thousands more views of that content from aggregator sites and other blogs, it offers a roosting point with views over both the landscape of social media and the rocky terrain of independent journalism.

I also work in the rapidly changing territory of professional journalism as a paid writer for AOL's Daily Finance website (View my Daily Finance archive of articles) and in the vast hinterland of self-published authors who sell books in both print and digital formats.

Not only do I not understand social media, I don't even understand my own (amazing to me) success in assembling a modest audience in the unfettered meritocracy of the blogosphere.

I think my "job" here, if running can be viewed as "work," is to present you with ideas to disagree with, but to do so in such a way that the process enriches our mutual understanding of important issues. I could be wrong about that, and I am actually doing something I don't even feel the edges of, much less comprehend. I am acutely aware that what I "know" is contingent and constantly open to review, critique and modification.

In other words, I don't know nuthin' about nuthin'.

From that auspicious starting point, let's stipulate that value arises from scarcity. Back in the days when the radio was the only mass medium, then radio broadcasting stations were scarce, costly channels of distribution.

When music could only be heard live or on the radio or purchased for home use on vinyl records, then the channels of distribution were limited and thus quite valuable. Ditto television broadcasts; when millions gathered around TVs to watch the historic moon landing in July 1969, we all watched one of three networks.

Though the broadcast spectrum remains inherently limited, the larger limitations were imposed by central government (broadcasting licenses) and the high costs of broadcasting and content-creation--what many call "moats" or high entry costs which limit ownership to extremely wealthy individuals and enterprises.

Thanks to the World Wide Web, anyone with an Internet connection and a web browser can launch their own channel--a channel with near-zero entry costs and a global distribution. That is a remarkable turn of events.

Since channels of global content distribution are no longer scarce, they have little inherent value. The value, then, flows from what the channel distributes: content.

Content was once scarce. Television and film studios were costly to establish and operate, and so the three networks dominated content broadcast on television.

Radio stations were less capital-intensive, and so they could proliferate more easily. But even radio stations require substantial sums to operate, and once advertising revenues fall below operating costs, then the station is sold off and someone else attempts to lure enough listeners and harvest enough adverts to profit from the ownership rights to distribute music for free (though that "free" required purchasing a radio and putting up with the adverts).

Now there is more content than anyone can possibly consume. In addition to new content-creators like HBO (which now has multiple channels of "premium content"), we have a vast and ever-growing universe of content created by users: YouTube videos and animations, playlists, online magazines, blogs, forums, etc.

This explosion of content has been accompanied by inter-activity. Now we need not passively absorb the content--now we can post our own comments, engage in discussions online, rate others' content, and so on.

As a result, content and inter-activity in themselves no longer have any value.They've completely lost their scarcity value. The only value remaining is in scarce content, a list that shrinks by the day as digital tools enable people with little capital to create products which once were immensely costly and thus rare: musuic mastered in recording studios, film productions, animation, etc.

People will pay to see a first-run Hollywood film because the content is still relatively scarce: the experience of the large screen, the still-costly special effects, the celebrity actors and actresses, etc.

There is also a time element to this scarcity value: people attach more value to being first to see the content, and hence they will pay to see a new film during opening week but not after everyone else seems to have seen it; its inherent novelty value--novelty being a permanent holder of intrinsic scarcity value--will have degraded to zero.

Which brings us to the 800 million Channels of Me. That number is probably an underestimate; I arrive at it by adding Facebook's 500 million users to an estimated 300 million other global developers of social media channels (pages). If we count each person's online presence as a channel--a LinkedIn presence and a Facebook page, for example--then the number balloons.

But whether the number is one billion or 800 million doesn't matter much: the point is that everyone can now broadcast their own Channel of Me.

What becomes scarce in a universe glutted with content is a stable audience. Note the word "stable": having a 100,000 visitors one day and near-zero from then on offers both the satisfaction of fame and the ennui of its loss. What is truly scarce in a world of abundant/free/valueless content is a stable audience which returns to consume content day after day.

This is the promise of aggregators and platforms: the content might not be compelling, but the variety and thus the novelty of the content constitutes a meta-value of relative scarcity.

Thus a site which randomly lists YouTube videos offers no meta-value, while a site that promises "the 10 best videos of the day," and manages to deliver some visible editorial selection, would then provide some scarcity value to visitors: rather than slog through hundreds of videos, they can visit this site and get a selection of the "best" (i.e. highest novelty or production or historical value) in a short period of time.

Our time, after all, is scarce, and thus it has value.

Channels of Me offer content on that most interesting subject: me. Most creators of social media channels aspire mostly to serve a narrow audience of their friends and family.

This offers many levels of creative satisfaction and exchange value--the "social" in social media--but people seem to crave novelty and scarcity value.

In other words, we all crave the scarcity value of a large audience. We can all be stars on our Channel of Me, but since there are 800 million other stars on their own Channel of Me, then the value proposition is rather thin gruel to our desire to stand out in a media-saturated culture.

Collecting a lot of "friends" is one way to acquire the veneer of a large stable audience, but it's a thin veneer because many of the "friends" are not stable visitors; they come and go, or become Zombies, social media presences in remorselessly clingy digital bits only; their actual time invested in viewing your channel is zero.

Thus the satisfaction in having a lot of "friends" or followers, whose investment to list themselves as such is trivial in time and effort, is ultimately exceedingly thin. What is scarce is a stable audience. Zombies inhabiting a social media Potemkin Village is not an audience.

As "adult content" sites have discovered to their dismay, people crave novelty.Now that amateur pornography is apparently so abundant that it is free, then what value is there in "professional" "adult content"? As with other forms of content, pornography was once scarce and therefore the distribution channels were valuable. That no longer appears to be the case; the novelty is gone, the scarcity is gone and so is the value.

Novelty is a tricky commodity. This is why TV shows tend to have their best years early on; once the novelty wears thin, then the boundaries get pushed to "jumping the shark" levels and the audience tires of the creators' visible effort to maintain novelty.

Which brings us to the old Hollywood cliche that there's only three stories. Others boil it down to one: a stranger comes to town. As Jean-Luc Godard noted, "All you need to make a movie is a girl and a gun."

Add the stranger coming to town, and voila, there's your three stories.

The novelty, then, resides mostly in the characters, not the story. Alas, most of us are average (by definition)--I know I am--and thus the intrinsic novelty of our lives is rather modest. But each of us remains an interesting character, if we can find a way to reveal that character in accessible expression.

That is the difficulty in operating a Channel of Me: the "me" is intrinsically novel and universal, and what is difficult--that which remains scarce and thus valuable--is expressing that character in an honest, profound and compelling fashion.

As for "news" and commentary, cliched, derivative content is super-abundant and thus has no value. Insight, illumination, and solidly grounded reporting, however, remain scarce, because they remain difficult to tease out of chaos.

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Saturday, February 19, 2011

Leviathan and Meme Theory (guest essay)

Leviathan and Meme Theory By Eric A.

Meme Theory and Markets

I wrote last time about how a nation might undergo the same psychological process as an individual, such as Kubler-Ross' "Stages of Grief." Is this in any way real or appropriate? We talk about nations as if they are people: phrases such as the existence of “Young nations”, “National Character”, and “National Embarrassment,” so clearly in the colloquial sense we generally believe it, and it broadly makes sense. But why?

In speaking of how a nation is like a person a picture is worth a thousand words:

This is the illustration from Thomas Hobbes book “Leviathan”, one of the earliest examples of “social contract theory.” Hobbes was a royal apologist in an age pushing Enlightenment and self-determination, but notice his argument. The King’s body is composed of the body of his subjects. They are his arms and legs and from where he gets his strength. In a very real sense this is true. What is “Germany” or “America” but the minds and arms of the men deciding in Congress and the Presidency what “we” will do, or executing those decisions, from the driest bureaucracy to the sharpest soldiers at “tip of the spear”? If there is any such thing as a “Nation,” surely they are it.

But a cursory glance shows this extends to human thought as well. What are OUR bodies made of? Where do we get OUR thinking? While no one really knows, one could say that physically we’re composed of millions of individual cells, each with their own specialization and needs, each dependent on the whole body. Cells cannot live outside the body: food, water, energy is delivered to the cells, and wastes are taken away. In exchange for this, the cells collectivize, cooperate, and work, each to their own specialty. Is this somehow different than US households getting their food, water, and energy delivered to them, their sewage and garbage taken away, in exchange for the work they do for the national body? Not really. It’s embarrassing how similar they are.

And psychologically, where do our thoughts come from? It is not, as some meme theories suggest, that we have a crowd of competing thoughts most of the time, and the loudest or most persuasive thoughts prevail, in the same way that an election crowd shouts to a candidate? If you watch your own thoughts as they arise, you can see this effect in yourself, and how our own decisions are made.

Interesting how much a simple form, a cell, has consciousness and is like more advanced, complex forms like individuals or nations. A sort of fractal form appearing again and again from the small to the large. Is there really any difference between individual, living cells creating your body and the individuals, the household cells creating the nation? Between the agitation for pre-eminent ideas in your mind and those agitating for attention and enforcement in public interest groups, think-tanks, and the media? Not really.

Interesting theory. But what good is it?

Remember I spoke of the Kondratiev Cycle, a 72-year wave of human activity?

What a coincidence that the wave exactly matches the average age of a human being! What a coincidence that as the human lifespan has increased, the cycle has lengthened to match! In fact, too much a coincidence to be believed.

What if instead of looking at Kondratiev, we expand our theory and say this is the chart not of a nation, an economy, but of an individual instead? An individual who has a specific birthday, specific events that shape his life which occurred at specific, measurable times. Up-Down, Up-Down, like the turning seasons. In-Out, In-Out, like breathing. It’s a big body: it should breathe slower, think slower, move slower than the quickly respiring and passing cells that compose it.

What does this have to do with markets? Easy. This has to do with what Ben Bernanke, Timmy Geithner and all the other rocket scientists in power are trying. The idea is to “stimulate” the economy. To prevent it from going down the long, dark slope into a 70% contraction in prices, a 25% drop in economic activity.


Aren’t they saying we should have a summer without a winter? An up without a down? We can forever breathe in, getting larger and larger, and never exhale?

Let’s look closer. Notice that the uptrend takes the 3 quarters, the “seasons” of spring, summer and fall, but that timewise, winter is roughly 1/3rd of the whole wave.

What is “winter” anyway? Quiet. Rest. Withdrawal. But something else too: renewal. Getting back to brass tacks. Shrinking back to what’s important and what needs to be done. Getting your feet back on the ground.

Winter” in seasonal terms is what “Sleep” is in human terms.

Alan, Ben, Hank, Timmy and the rest are often accused of “Spiking the punchbowl” –a reference to William McChesney Martin’s famous quote that the Central bank is “the fellow who takes away the punch bowl just when the party is getting good.”,_Jr.#cite_note-0

Instead of taking away the punchbowl, they are accused of spiking it with yet more easy money to keep the party going. How does this work for our theory?

Pretty good. Look at that red line of wholesale prices. Straight up past its topping date and although it took an initial topple in ’08, is still going up to this day. Clearly, spiking the punchbowl with 0% rates and unlimited quantities of free money in the multi-trillions is working: the National Body is still wide awake. GDP may have flatlined, but it hasn’t crashed. Stock prices are on par with 10 years ago instead of cut in half. The national government and consumer model hasn’t had to cut back. All good things, right?

That depends. What happens when there’s a raucous party and it’s after midnight and people are trying to go home? In fact, why DO we go home? Because we need to rest; we need to return to work in the morning. The market called the party over in 2001 with the stock boom. That was the scheduled date for the Kondratiev winter to begin.

Greenspan said in 1966 and afterwards that he wished he could be Fed Chairman when the winter began to stop it from happening. He had to hold the chair well beyond retirement to the age of 75, but he finally got his chance. In 2001, he used every policy measure in the Fed’s arsenal to prevent Kondratiev's winter. He quickly slashed interest rates to 1%, but more than that, he used his position as key bank regulator and adviser to Congress to allow and encourage lending standards to deteriorate to the point where it was common for homeless men to buy multiple houses with no money down.

Now THAT’S what I call stimulus. That’s not spiking the punchbowl, that’s piping the room with crystal meth.

And it worked! The revelers did not go home! They partied for another seven years, proving the Federal Reserve and Federal Government had the power to hold back winter; and like King Kanute, to command the tide to come ashore no more!

Greenspan was vindicated; showing the Central powers, the insider billionaires their power over reality was truly unlimited! This was popularized in a quote at the same time, commonly attributed to Karl Rove:

guys like me [are] "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."[2] --NY Times

They had done it! They were smarter, stronger, better than all the kings and emperors who had ever gone before. By controlling perception, through psychological control and propaganda, they now controlled reality itself!

Until 2005, that is. By then, cracks in the housing bubble were already showing. Although the new Masters of the Universe DID control perception and use the media to re-create history, they neglected to re-construct one other thing: the laws of mathematics. Without increasing incomes, it was mathematically impossible for asset prices such as housing to rise, just as it was mathematically impossible for ever-increasing debt to be serviced, much less repaid. Keynesianism was now officially dead, as the largest stimulus the world had ever known remained helpless before the simple power of mathematical law.

Seeing this, Greenspan began a hasty search for a suitable replacement, as all the other Greenspan-era Fed Governors demurred and quickly retired. It was difficult to find someone who still believed in Keynes and yet couldn’t see it coming, but in 2006 Greenspan retired, Bernanke was installed, and predictably in 2007, the housing market imploded anyway, and with it the stock market, the financial sector, and the economy itself. Although on Greenspan’s advice Congress had doubled the national debt from $6 to $12 Trillion, and the Greenspan-led public doubled their per-capita debt from $30,000 to $55,000 in 4 years, bankrupting the nation—yet the predicted Kondratiev winter was delayed by only 6 years:

Today, Bernanke and Geithner continue the same failed effort, a rear-guard action as the Insiders feverishly sell out at ratios of 1000:1 and plan the inevitably monetary collapse and transition to a new system.

Question: if the market needs to rest, if the people need to sleep, what happens if you don’t let them? What happens if you take their car keys and force them to mainline cystal meth after their eyes are already red for want of 30 years' rest?

Let’s look:

Sleep deprivation is the condition of not having enough sleep; it can be either chronic or acute. A chronic sleep-restricted state can cause fatigue, daytime sleepiness, clumsiness and weight loss or weight gain.[1] It adversely affects the brain and cognitive function.”

Among other symptoms:

Really? How interesting. And what is this “psychosis”?

“…a generic psychiatric term for a mental state often described as involving a "loss of contact with reality"… People experiencing psychosis may report hallucinations or delusional beliefs, and may exhibit personality changes and thought disorder. Depending on its severity, this may be accompanied by unusual or bizarre behavior, as well as difficulty with social interaction and impairment in carrying out daily life...”

Sound like anything that’s been happening nationally since 2001?

Q: What happens when you don’t let the national body rest and sleep when it should, when it needs to?

A: It exhibits classic signs of sleep deprivation.

Is the National body—a supra-body composed of all of us—similar to an individual’s body? You decide.

Regardless, the lesson is the same. Life moves in cycles. You can’t have an eternal summer without a winter. You can’t have an up without a down. You can’t forever inhale and not exhale. And no matter how many drugs you take, you can’t stay awake forever.

How do we solve the national crisis, with over-wrought people increasingly violent and divorced from reality? How about a little financial rest, some time to come back to reality and get our feet back on the ground?

That’s what these economic “Depressions” are in human cycles: winter, sleep, rest, recuperation.

Contrary to the present theory, the Depression, the contraction isn’t the problem: the boom is. The boom over-expands, over-stimulates, over-creates, overdoes it in every way, most noticeably in the creation of unsustainable debt, and “malinvestment” in the capacity to make things people don’t actually need. Reminds that what comes before, “If you find you're in a hole, stop digging” is “if you don't want a hole, don't start digging.”

Once there’s a boom, then to get the economy and finance back to a level matching real demand and real people requires contraction: all the dumb and reckless companies, the dumb and reckless party people are wrung out and their assets are handed to the smart, prudent, and hard-working. The assets aren’t destroyed; they’re simply transferred to stronger owners. Depression doesn’t wipe out anything but our illusions about what is possible on a limited planet with limited resources—just as our self-aggrandizement on alcohol or drugs is merely an illusion easily rectified by the painful reality of the morning after. More drugs will not help but only fray the health of the body more. The only way to sense and good health is to sleep, rest, recover and restore. And that takes time--8 hours of your day, 1/3 of your human life. It takes rest and a lot of doing nothing, or at least very little. Same as a “Depression”, where the country rests, repairs, and restores.

Now this isn’t my theory: this is your basic Austrian economic theory, the theory that, before Keynesianism was considered simple common sense, back when the idea of printing your way to prosperity was the purview of madmen and crackpots. But it was true then and it’s true now.

If you have too much debt in the system, adding more debt won’t help.

If your people are cracking up from stress and overwork, demanding more work by raising their costs and lowering their wages won’t help.

If you already built too much capacity, adding more capacity with the mantra of “Growth” and “Expansion” won’t help.

If your people are over-stimulated nearly to death, more “stimulus” won’t work.

What will work? Well, clearly LESS debt, LESS capacity, LESS work, LOWER prices and an end to artificial stimulation via free money and 0% interest rates. –Just as happened in every other cycle before going back 500 years. Kings, Emperors, Despots—all powerless to stop it, despite every threat, death penalty, and intervention.

One other thing. People wonder why Americans aren’t marching, rioting, protesting, fighting. And the simple answer is in this theory: they’re tired. But more than that, now is not the time for fighting or protesting. It’s time for resting. Demographically the US is aging, just as happened in 1930 and other Depressions in history, just as happens in the “4th Turning” of Strauss and Howe. The Boom and bust were predicted decades before by demographers such as Harry Dent.

It’s common, natural, and perfectly predictable. We’re not in the “marching and rioting” phase of life—young nations such as Egypt and the Middle East are. Nationally, we’re in the resting and recovering stage. Government, bankers, policy makers are doing everything they can to keep us awake, overworked, and on ever-increasing quantity of their drug, debt. It will fail or we will collapse trying, then fail anyway.

As Zeus said, what is most likely to happen from here? Further growth? No. Riots and civil wars? Not now. People simply withdraw from a system that no longer works for them and stop supporting it. They simply stop working so hard. In common language, they rest. GDP falls and we adjust to reduced activity and expectations. Later—much later—it starts over again, perhaps with a “Great War” internal or external, but later. Not in the “sleep” cycle.

Q: When you’re in too much debt, what happens?

A: You default or pay it back.

Q: When there’s too much capacity, what happens?

A: Factories close and real estate falls as the overcapacity is absorbed.

Q: When taxes are too high to bear, what happens?

A: They must fall.

Q: When government is too big to support, what happens?

A: It shrinks.

Q: When people are over-worked, over-stimulated, overwrought, what happens?

A: They either rest voluntarily or become so overstimulated they collapse.

Economic Conclusion

We’re going to reduce debt, have high personal and corporate bankruptcy, and high long-term unemployment. In fact, Ben has already publicly admitted as much. With it, GDP and in real terms the stock market will inexorably fall, economic growth will slow, and with it commodity prices. People will be forced back home to do what little there is to do and all that they can, shifting to much more modest and realistic expectations and direct actions. Being at home, family and community will return, small sustainable businesses will form, and economic and personal safety will return. Drug and debt use will fall. As the economy inexorably shrinks, tax revenue shrinks and the government shrinks as well, being seen as incompetent and irrelevant by a whole generation, who no longer looks to it for answers, but works and creates for itself, expecting nothing.

You might notice that increasing relative wages, decreasing debt, decreasing income disparity, repair of family and community, increase in small business, decrease in government and increase in Liberty and a return of common sense is what our leaders and policymakers call a “Depression,” to be avoided at all costs.

Put that way does “Depression” sound so bad, and does “Stimulus” seem like a practical alternative?

Rest. There’s a long battle out there, an epic struggle years in the future, and we’ll need all our strength at that time to face it.

And that is the story of Leviathan, of the nation viewed as one person.

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