Virtual Economics

Pig chimney

Incidentally the forecasts I've seen for the economic consequences of a swine flu pandemic appear to grossly understate the likely impact on business. In the event that 100,000 people a day fall genuinely ill over August anyone who fancies an extra week off in the sunshine will simply claim to have gone down with swine flu too. (Try getting a sick-note out of the NHS during a swine flu pandemic - there will simply be no way to distinguish the genuinely sick from the malingerers.) 

The show must go on (and on, and on)

Ricky Gervais today became the latest in a long line of performers to rail in fury against the elementary workings of supply and demand. From his blog:

"Tickets for my Edinburgh show are changing hands for £200. Please don't buy them. The people selling them are scum...I have tried to stop this happening but I can’t. I’ve tried holding tickets back for sale on the night. I've tried putting gigs on sale at the last minute so people don't have time to put them on eBay, but nothing works."

And, indeed, nothing will, short of playing more nights so that the supply of performances matches the demand for them at whatever price Ricky imagines fair. Want the after-sale ticket price to fall below £200? Put on more shows. You'll know you're doing enough shows when the price on eBay falls to the face value.

Bankrupt Britain

After Jim Rogers advised US investors to pull out of UK equities and sterling on grounds that Britain is finished we've seen a lot of speculation surrounding the possibility of actual national bankruptcy. Here's some from today. Here's some from, err, last November. Here's some from a few days ago. Here's some from mid-2007 (if you begin to get the feeling this really isn't a new idea you're not alone).

Are we - UK Plc - potentially bankrupt? Better than that - we're already, actually bankrupt. Here's Mencius on Maturity Transformation, the underlying design error of the global financial system (I'd read the whole post, or this won't make any sense). Here's Arnold Kling discussing the same concept. According to the Maturity Transformation view, UK Plc is solvent only by the extraordinary accounting fiction that it can buy money from the future and pay for it with money it has only borrowed today. In other words - and as Taleb said of banking profits a couple of years before the crash - it is obvious that UK Plc's solvency is "simply cash borrowed from destiny with some random payback time". A financial system operating Maturity Transformation (MT) is always a bank run in potentia because under MT the short-term liabilities (massively) exceed short-term assets and you merely hope that everyone won't ask for their money back at once. For potential bankruptcy to become actual bankruptcy only requires that hope not to be realised, once. Don't get me wrong - I'm hoping. But I wouldn't want to put any money on it.

Sure, I'll be the last scoundrel

This from Timothy Garton Ash in the Guardian: "It must be obvious that the planet cannot sustain 6.7 billion people living as does today's middle class in North America and western Europe - let alone the projected 9 billion world population in mid-century. Either a large part of humankind has to be excluded from the benefits of prosperity or our way of life has to change."

So, let's try and answer that question honestly. Are you planning (and therefore by implication are you pushing your elected leaders towards planning) to radically change your way of life, voluntarily becoming in material terms very much poorer? Or are you planning (etc) to leverage your current political, economic and above all military advantage to make sure that some other portion of humanity gets excluded from the benefits of prosperity? Honestly...I'm going for option 2. The alternative is trusting everyone else on earth to match what sacrifices I make for the common good and I don't fancy my odds. Looks to me like a big - indeed the biggest, humanwide - collective action problem, an enormous tragedy of the commons played with energy sanctions and, ultimately, nuclear weapons to preserve a way of life that even if we are all willing to give up we have to trust everyone else to be willing to give up too.

Cheery stuff for the New Year? We've all read bleaker today already. Happy 2009.

"Once-in-a-lifetime stock buying opportunity"?

In September I took my money out of the stock market on grounds it was about to tank. (Admittedly the reasons I thought it was going to tank were nonsense, so you still shouldn't be coming to me for financial advice - getting out before the markets collapsed was basically dumb luck.) Now I'm with Scott Adams, and back in (a little bit) - "the market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn't matter how I invested, or it is a once-in-a-lifetime stock buying opportunity." 

Update: turns out Warren Buffett agrees with me (or, a more humble man might say, vice-versa). Time indeed to be greedy, now everyone is so definitively fearful.

Greedy bankers

I am heartened by the hysteria that currently surrounds the demands that "we" (who?) somehow punish the Greedy Bankers who are popularly imagined to have occasioned the global financial crisis. (See what Google News throws up for the term "greedy bankers", it's a hoot.) I can't offhand think of anything that will drive the FTSE more rapidly to a properly sustainable support level than the reasonable fear of wealthy investors that some portion of their assets are about to be seized to propitiate the mob. Still, once the bulk of Britain's wealth has finished fleeing to numbered Swiss bank accounts we can have a look at what's left and start again from there.

Update: I really like this from Paul K on nationalising the banking system: "There currently is no banking system, if by that you mean a network of organizations lending to one another and to quality companies in a predictable way...Instead, there are a bunch of paralyzed deposit-hoarding institutions stuck in a game theory experiment that no-one understands or can exit." 

A willingness to contemplate what is happening

Most of the time (or "ostensibly" as Shane Richmond put it, to my unabated delight) this is a blog about media economics. In the midst of the largest financial crisis in living memory it's worth taking a moment to remember that we have much bigger things to worry about than which new website is shiniest, so I'd like to pass on some excellent advice on what to do about the current financial crisis from Roger Ehrenberg's Information Arbitrage:

"To survive what could be a multi-year recession, a nuclear winter of sorts, people at all levels of the wealth spectrum need to get the big things right. And what, exactly, are those things? Liquidity: Do you have at least a few years worth of ready cash, in case the job is lost or prices of key household items unexpectedly skyrocket? Volatility: Can you live with your financial profile, understanding that the worst of the economic downturn might still lie ahead? Stability: Do you have expenses coming up in the intermediate term that could materially impact your financial picture, should the recession last longer than anyone expects, e.g., tuition expenses, new car, loan amortization payments, etc.?...I am not saying to sell all your equities. Not at all. But I am suggesting that the lion's share of most households' time should be spent answering the three questions I've listed above, and not on whether Google is a buy at $350. Because while the answer might be yes, you'd be missing the forest for the trees."

For what it's worth my money is still in cash and has been since the start of September. Sure, this looks like a bottom. Friday looked like a bottom and not so long ago 5000 on the FTSE looked like a bottom. It's a good time to realise we can't predict the future. We're not at the point where your best investment is a shotgun, a mountain fastness and a decade's worth of tinned goods. But I think we're a long way past the point where your biggest worry should be whether Google looks cheap at today's prices. The future, as the man says, will be discontinuous. Perhaps alarmingly so.

(And yes, I am aware that to some extent the crisis is made out of market and consumer confidence, and that some people hope we can talk our way back out of it. I resort at this point to my favourite quotation - McLuhan's "there is no inevitability provided there is a willingness to contemplate what is happening". Sure, positive sentiment is what we need next but let's not get all cargo cult about it. We aren't going to collectively trick ourselves out of the economic crisis.)

A very easy way to make money from your blog

A few weeks ago Robin Hanson over at Overcoming Bias pointed out that, as he put it, "pundits are moles" Political commentators and columnists spend a long career achieving and maintaining credibility; "they may even usually give thoughtful reasoned commentary on issues of moderate importance"; but every now and again, notably in election years and moments of significant crisis, they close ranks, stop pretending to be moderate or objective and come in to bat for "their side". The pundits cash in their reputation when push comes to shove - as Michael Porter might say, they harvest it.

I mention this because the latest share plunge occasioned by an inaccurate bit of financial journalism  - the brief Apple plunge caused by the rumour that Steve Jobs had been carted off to hospital - comes hard on the heels of a very similar plunge at United Airlines. As Jeff rightly says - again - this isn't a failure of "citizen journalism" (though it might be a failure of open systems). Personally I have no sympathy for people who lose money because they trade shares on the say-so of one rumour they found on the Internet but let's face it, something isn't working when a guy with ten minutes on his hands can slam Apple stock by making stuff up about the CEO's health on a single website.

The Apple and United Airlines crashes point to a very obvious way of making money from blogging. Here's my four-point guide that you can cut out and keep.

Step one. Start a blog that talks about technology, media companies and economics (a bit like this one, in fact, by a funny coincidence. Or here are some better-known examples.) 

Step two. Do...you know, the things that make a blog successful. We all know what they are by now. You don't need another TechCrunch or Gawker for this to work. Just a credible third-rank blog in the right space read by the right people. 

Step 3. After let's say a couple of years, once you've built up enough readers and credibility that your company-specific posts get picked up by the main blog aggregators, by Seeking Alpha, by Yahoo Finance, by the New York Times etc et al, harvest that work and reputation by shorting the hell out of Google stock and ten minutes later posting the headline that Sergey and Larry have flown their plane into a mountain with Eric on board. Or whatever works in your own section of the blogosphere. Pharma bloggers can pull the same trick with Glaxo Smithkline. 

Step 4. Close out the short position at the right moment, which will be once the markets have responded to the rumour by hammering Google stock but before the mess has been cleared up and everyone realises it was just another error/hoax/scam.

There is a window of perhaps another couple of years where this will work, probably as many times as anyone can be bothered to do it. While this feedback loop between the remains of mainstream media and content created by the former audience is in place; while news organisations cut sub-editors to the point that pretty much anything can end up on the homepage; while an increasingly understaffed Wall Street continues to rely on under-developed trading programmes that respond semi-autonomously to newsflow; while no-one's quite finished rolling out the authentication tools that would prevent it; there's a system just sitting there waiting to be gamed. What we saw happen with United and Apple doesn't look to have been gaming, but the principle has been tested twice in a couple of months. It's so simple to work it's practically trivial.   

Sounds like a lot of work? It sounds to me like a lot less work than most ways of making money. It sounds like something you could do in less than a couple of years in your spare time (I started this blog in 2006; I write it when I get an odd moment; if I mention Google in the title of a post various aggregation systems seem to ensure that it ends up on the relevant page of Google Finance and the New York Times). And when it seems more and more people are just burning out when they've been blogging for a few years, you could even argue that one last big shorting hoax is pretty much the best use you've got for a blog you've given up writing anyway. In a global recession people are going to be scraping around for ways of making money, and some of them are going to be desperate. So watch out for the next one. People who know how to take a short position are going to be cashing out their blogs with one big company-specific disaster story, and soon. 
   

The price of telling the truth

So in the wake of the macropalypse bankers on both sides of the Atlantic have decided to blame short-sellers and the FSA has prohibited future shorting of finance shares. Robin Hanson and Michael Lewis tell the apparently unpalatable truth about the short-sellers, calling them "the small group of informed financial people who have been trying to tell the truth to the markets" and pointing as a case study to David Einhorn:

"...for some time now, he's been standing up in front of large audiences, announcing that he was short Lehman Brothers stock, and then explaining in great detail its dubious accounting practices. The SEC responded by demanding to see his firm's e- mail, hinting darkly that he was part of some conspiracy to drive Lehman Brothers out of business, and generally making him feel that he'd pay a price for telling the truth."

A market works when it reflects the honest opinions of the people with skin in the game. Ban the people who think shares are over-valued from playing, and the market breaks down. 

Perhaps regulators are confident that if they ban short positions, in the future shares will only ever go up.  

Update: ooh, look- it worked! FTSE is up 6% now people can only go long. Welcome to the happy hunting ground.

Who economists think will be best for the economy (or The Dilbert Survey of Economists)

In case no-one else has pointed you toward it yet, Scott Adams' self-funded poll to discover which US presidential candidate economists think will have the most positive impact on the US economy is finally released. If you get to vote in the US and think the economy is an important issue in this election, take a look - as far as I'm aware this is the only useful data currently available on the subject as to which candidate should get your vote.