EDNESDAY, APRIL 06, 2016
The Network Effect, Jobs and Entrepreneurial Vitality
All the incubator projects around the world are attempting to kickstart an entrepreneurial Network Effect.
We have all experienced The Network Effect: the more people who start using a service, the more valuable that service becomes to every user. Examples include the telephone, the Internet, and social media sites.
Each new user is only seeking to add value to their own life, but in joining the network, they add value to every user and the network.
As the network adds participants, it become more attractive to new users, and this increase in network value generates a positive feedback loop.
This automatic maximization of mutual benefit is at the heart of Adam Smith's Invisible Hand of transparent markets (as opposed to exploitive markets controlled by rapacious monopolies, cartels and central states).
The Network Effect is expressed mathematically in Metcalfe's Law: the value of a communications network is proportional to the square of the number of connected devices/users of the system.
The Network Effect cannot be fully captured by Metcalfe's Law, as the value of the network rises with the number of users in communication with others and with the synergies created by networks of users within the larger network, for example,ecosystems of suppliers and customers.
In other words, the Network Effect is not simply the value created by connected users; more importantly, it is the value created by the information and knowledge shared by users in sub-networks and in the entire network.
(Let's call this The Smith Corollary to Metcalfe's Law: the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network.
I discuss this broader definition of The Network Effect with Drew Sample in Money, Automation, Permaculture (1:08 hr podcast)
The basic thesis here is that the entrepreneurial vitality that generates jobs and widespread prosperity is a function of The Network Effect.
The Network Effect is the heart (along with the Eight Essential Skills) of my book Get a Job, Build a Real Career and Defy a Bewildering Economy.
I am (mostly) based in the San Francisco Bay Area, and Drew is (mostly) based in Columbus, Ohio, so our conversation bridges these two cultures/regions.
What makes the conversation interesting is Drew is actually living the entrepreneurial life: while holding down a paying job, he is pursuing enterprises as diverse as a comedy club and a local network of permaculture suppliers. One part of this project is working with the city of Columbus to start a community garden on a trash-filled abandoned lot in his neighborhood.
As anyone who has attempted to start community projects and enterprises knows, nothing is easy. Obstacles arise, money is tight, some things work, some things don't, and it takes a huge amount of work to move the needle.
Here's an example of The Network Effect: on a brief visit to Los Angeles after attending a permaculture confab in San Diego, Drew was hanging out with L.A.-based comedians within a matter of hours.
This kind of "plugging into the network" is only possible if the network already exists, and is dynamic enough to enable easy connections with new participants.
The reason why the S.F. Bay Area has added 531,000 jobs since 2011 is the incredibly vibrant Network Effect of the region. With 7.2 million residents, 2.6 million households and 3.5 million workers, generating over 500,000 jobs in five years is quite a statement. (Some percentage of those positions replaced jobs lost in the recession.)
Yes, the herd of Bay Area tech startup Unicorns is about to be drastically thinned (and it's about time), but the Unicorns are only a small slice of the region's startups and entrepreneurial vitality.
All the incubator projects around the world are attempting to kickstart an entrepreneurial Network Effect. Although many nations and cities have attempted to create a regional entrepreneurial Network Effect, it isn't that easy. While there are modest successes here and there, Silicon Valley (broadly speaking, the entire S.F. Bay Area) still dominates in terms of venture capital invested and network connections that lead to new enterprises that scale up to dominance or disrupt existing business models.
In contrast, regions dominated by a single corporate/state employer have little entrepreneurial vitality and few nodes in the critical sub-networks of suppliers, customers, mentors, collaborators, etc. When the big factory or military base closes, the region typically slumps into dependence on government social-welfare programs. In effect, the region is a desert for entrepreneurs: there are few of the ecosystems/networks needed to support and nurture new enterprises.
Having a high-tech workforce does not innoculate a region against the collapse of a dominant employer; look at the wreckage left when Nokia imploded. There are Noke-alumni startup efforts, to be sure, but these are not generating the tens of thousands of jobs lost when Nokia collapsed.
Regions that seek a dominant employer as the answer to their stagnation are doomed to further stagnation when the dominant employer downsizes, moves away or implodes. The only sustainable vitality comes from fostering and nurturing an entrepreneurial Network Effect.
The first enterprise in an entrepreneurially lifeless zone has a very tough path, because in addition to trying to earn enough revenues to stay alive, it must create the sub-networks every enterprise needs to survive: suppliers, workers with the needed skills and experience, customers, customers who actively promote the new business, other entrepreneurs, mentors, city officials anxious to help, a landlord willing to offer cheap rent for a few years, etc.
In a place with a vibrant entrepreneurial Network Effect, a new business practically self-assembles itself. In a place with near-zero entrepreneurial Network Effect, every step of the process is arduous and time-consuming, as nobody knows how to successfully start, launch and nurture new enterprises, and the necessary workers, suppliers and tools must be assembled one at a time.
There are countless examples of this: starting a new locally-supplied restaurant in a lifeless downtown; a new small manufacturer in a region that's lost all its workshops, etc. The first cafe has to find or even help launch local sources of fresh food; it has to recruit an experienced chef; it has to set up a modern kitchen; it has to promote itself in a neighborhood that has few other businesses, and so on.
Once there are a half-dozen restaurants in the neighborhood, The Network Effect kicks in and the area becomes a destination. Since the sub-networks are in place, someone planning to open a brew pub will find it much easier to find the right staff, source equipment and supplies and attract customers.
The Network Effect is the foundation of my The Mobile Creative credo: trust your network, not the corporation or the state.
Money, Automation, Permaculture (1:08 hr podcast with host Drew Sample)
Get a Job, Build a Real Career and Defy a Bewildering Economy
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TUESDAY, APRIL 05, 2016
The Panama Papers: This Is the Consequence of Centralized Money and Power
Technologies such as the blockchain are enabling alternative ways of creating and distributing money outside central banks and states.
If we don't change the way money is created and distributed, we will never change anything. This is the core message of my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.
The Panama Papers offer damning proof of this: increasing concentrations of wealth and power that are free of any constraint (such as taxes) is not just the consequence of centralized money and state power--this inequality is the only possible output of centralized money and state power.
Here is a graphic portrayal of just how concentrated global wealth really is: the top .7% (less than 1%) own 45% of all global wealth, and the top 8% own 85%.
Here is a depiction of wealth in the U.S.:
Here is my description of how centralized money and finance inevitably creates debt-serfdom as its only possible output:
Once the creation and distribution of money is centralized, the corruption of political power is inevitable, as wealth can always buy political favors, such as tax evasion schemes.
Concentrations of private wealth and the central state are simply two sides of the same coin. Private wealth, monopolies and cartels are all protected and enforced by the state/central bank: the status quo exists to protect the privileges of the few at the expense of the many.
Well-meaning but hopelessly naive people are constantly proposing "reforms" of the status quo--reforms that are doomed from the start because they fail to change the way money is created and distributed.
As long as central banks create and distribute money to banks, which are free to use the money for speculation and lend vast sums at near-zero rates of interest to corprorations and financiers, nothing can possibly change.
Recall that the central state enforces moral hazard: if banks reap vast profits on their gambles, they keep the winnings and can use a sliver of this wealth to buy political favors from politicos like Hillary Clinton.
If they lose the bets and are insolvent, the federal government and the central bank (Federal Reserve) bail them out by transferring the losses to the public or by rigging the system to funnel cash to the banks via paying interest on deposits held at the Fed (while slashing interest income to the serfs to near-zero).
There is another way to run the world: if money is decentralized, i.e. created by a distributed, decentralized system that pays people directly for their labor, rather than being distributed to banks to lend at interest, the sort of concentrations of wealth, power and exploitation enabled by central banking would no longer be possible.
Technologies such as the blockchain are enabling alternative ways of creating and distributing money outside central banks and states. I describe a labor-backed crypto-currency in my book A Radically Beneficial World. The potential of the blockchain to disrupt and bypass central banks' monopoly of money creation is revolutionary, which explains why Goldman Sachs and their cronies are desperate to own their own versions of blockchain technologies.
But the cats are out of the bag, and central bankers and their cronies will have a difficult time herding these new technologies back into the enforced serfdom of central banking. The only way to bring down the corruption created by the concentration of wealth and power is to dismantle the monopoly of money creation held by central banks and their private-bank cronies.
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MONDAY, APRIL 04, 2016
Triffin's Paradox Revisited: Crunch-Time for the U.S. Dollar and the Global Economy
The reality is that we're one panic away from foreign-exchange markets ripping free of central bank manipulation.
While all eyes on fixated on global stock markets as the measure of "prosperity" and "growth" (or is it hubris?), the larger force at work beneath the dovish cooing of central bankers is foreign exchange: the relative value of nations' currencies, which are influenced (like everything else) by supply and demand, which is in turn influenced by interest rates, perceived risk, asset purchases and sales by central banks and capital flows seeking the lowest possible risk and the highest possible return.
Which brings us to Triffin's Paradox, a topic I've covered for many years:
Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)
The Federal Reserve, Interest Rates and Triffin's Paradox (November 19, 2015)
The core of Triffin's Paradox is that the issuer of a reserve currency must serve two entirely different sets of users: the domestic economy, and the international economy.
The U.S. dollar (USD) is the global economy's primary reserve currency. When the Federal Reserve lowered interest rates to zero (Zero Interest Rate Policy, ZIRP), it weakened the dollar relative to other currencies. In this ZIRP environment, it made sense to borrow dollars for next to nothing and use this free money to buy bonds and other assets in other currencies that paid higher yields. Many of these assets were in emerging market economies such as Brazil.
As a result of this enormous carry trade, an estimated $7 trillion was borrowed in USD and invested in other currencies/nations.
Once the Fed started making noises about "normalizing"/raising interest rates in the U.S. (i.e. signaling the markets that a trend change was at hand), the dollar strengthened and the carry trade started reversing: those who had bought assets in other currencies with borrowed USD started selling those assets, which pushed emerging market currencies and markets off a cliff.
Meanwhile, since China pegs its currency the yuan/RMB to the USD, the rising dollar dragged the yuan higher thanks to the peg. A strengthening yuan made China's exports more expensive and less competitive, the last thing China needed as its domestic credit bubble ran out of steam.
So while the Fed needed to "normalize" rates in the U.S. before the next recession required more Fed stimulus, it also needed to weaken the USD to protect China from a destabilizing currency devaluation.
Those holding millions of soon-to-be-devalued yuan in China were naturally anxious to convert their yuan into USD before the devaluation robbed them of 25% of the purchasing power of their money, and this has created an unprecedented capital flow of cash out of China and into USD and other Western assets, such as chateaux in France, homes in Vancouver B.C., etc.
This mad rush of capital out of China is adding another destabilizing factor to China's already wobbly debt bubble economy, and China's weakness has weakened an already wobbly global economy crippled by stagnation and the decline of emerging markets and commodities--two consequences of the rising USD.
This has created a no-win conundrum for the Fed: if it normalizes rates (as it should, after seven years of ZIRP and stimulus) in the domestic U.S. economy, that will strengthen the USD, further pressuring China's yuan and emerging markets, which in turn will further pressure an already-tottering global economy.
There are no winners, regardless of what policy the Fed chooses to pursue. This is why we see such absurd waffling in the Fed: one statement suggests interest rates hikes are on the way, and the next dovish cooing suggests rate hikes are so far away that global markets can safely ignore the possibility.
This push-pull is reflected in the chart of the USD:
As the Fed waffles in response to global markets, the USD has swung up and down in a trading range.
Sorry, Fed: you can't have it both ways. Eventually, the domestic economy will pay the price of essentially zero interest rates, or China and the global economy will pay the price of a strengthening USD.
No nation ever achieved global hegemony by devaluing its currency. Hegemony requires a strong currency, for the ultimate arbitrage is trading fiat currency that has been created out of thin air for real commodities and goods.
Generating currency out of thin air and trading it for tangible goods is the definition of hegemony. Is there is any greater magic power than that?
In essence, the Fed must raise rates to strengthen the U.S. dollar (USD) to keep commodities such as oil cheap for American consumers. The most direct way to keep commodities cheap is to strengthen one's currency, which makes commodities extracted in other nations cheaper by raising the purchasing power of the domestic economy on the global stage.
Another critical element of U.S. hegemony is to be the dumping ground for the exports of our trading partners. By strengthening the dollar, the Fed increases the purchasing power of everyone who holds USD. This lowers the cost of goods imported from nations with weakening currencies, who are more than willing to trade their commodities and goods for USD.
What better way to keep bond yields low and stock valuations high than insuring a flow of capital into U.S.-denominated assets?
There is one more destabilizing possibility: the markets may push the USD higher, regardless of what the Fed says or does. The currency markets trade $5 trillion a day--more than the Fed's entire $4 trillion balance sheet.
Once traders realize China will have to devalue the yuan by a lot more than a few baby-step devaluations, the stampede into USD could overwhelm even coordinated interventions by central bankers.
Of course no central banker will ever admit that markets could wrest free of central bank control, but the reality is that we're one panic away from foreign-exchange markets ripping free of central bank manipulation.
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SUNDAY, APRIL 03, 2016
The Future of Money
The cartels and state organs are frantically trying to co-op, outlaw, corral or control this disruptive technology.
To say that the future of money is blockchain-based crypto-currencies and payment platforms is to state the obvious nowadays. If this wasn't the case, then why are Goldman Sachs et al. (i.e. the global too big to fail banks) rushing to patent their own proprietary versions of blockchain technologies? Why are banks investing heavily in companies that are trying to establish a global blockchain platform for banks?
The reason is that banks understand their core reason to exist is threatened by peer-to-peer, decentralized payment platforms and currencies. If payments no longer need to be routed through a centralized trusted institution, then one core function of banks disappears.
If peer-to-peer lending and securitization becomes easier and cheaper due to the blockchain, then banks' function of allocating capital also vanishes.
Gordon White and I discuss The Future of Money (and its connection to meaningful work) (1:11 hrs; be forewarned we cover a wealth of topics, from philosophy to higher education to gardening to creating value in an economy that is being disrupted.)
Since money--currency that serves as a medium of exchange--no longer needs to be issued by central banks/states, central banks/states are also in danger of being mooted/bypassed as enterprises and people realize they can escape the relentless destruction of their purchasing power by inflation-seeking central banks/states.
If you aren't familiar with blockchain technologies and crypto-currencies, and how these innovations are disrupting centralized banking and state-issued currencies, here are a few articles to start with:
“The premise of the Bitcoin platform—a decentralized, trustless, replicated ledger of transactions—is the virtual opposite of the centralized, trusted, guarded, model of modern securities processing, which has long relied upon DTCC, among others, as a central authority,” reads a treatise the organization released alongside that canned quote from its CEO. In other words, the DTCC realizes that it’s embracing an existential threat.
All that is needed, blockchain boosters argue, is a “killer app” to find a use for the breakthrough, in the same way that web browsers made the internet useful. Some still think that a currency is the most promising application, but plenty of engineers are throwing other ideas against the wall to see what sticks.
“For an entire industry to be focused on a new technology within three years [of it being known beyond the initial core of enthusiasts] without it actually even disrupting them even 1% yet is an interesting reality,” says Chain.com CEO Adam Ludwin. For instance, he notes that in 2000 the recording companies’ reaction to Napster was not to invest in digital models but instead to sink money into lawsuits.
Nobody can predict precisely how blockchain technologies will disrupt centralized banking and currencies, but we can predict the blockchain will disrupt the current cartel-state arrangement that benefits the few at the expense of the many.
The cartels and state organs are frantically trying to co-op, outlaw, corral or control this disruptive technology. Here's an analogy: North Korea has managed to co-op, outlaw, corral or control the Internet, and how prosperous and productive is North Korea?
We cannot let the banks and central banks/states co-op, outlaw, corral or control blockchain technologies. If they "win," our economy will stagnate and the slide to complete implosion will be unstoppable.
The Future of Money (podcast, 1:11 hrs, with host Gordon White)
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