Saturday, March 24, 2018

Influence, the Currency of the Next Economy?
Joe El Rady

With the advent of social media, influence (fame/prestige) has gained importance in many people’s lives—important enough to be monetized (high YouTube followings attract big advertising dollars, high numbers of Twitter followers lead to product placement fees) and even used as its own currency by others (Instagram influencers are invited to exclusive parties etc.).

The importance of influence as at least monetizable if not outright currency will only continue to grow as automation takes over the economy. Economists today study a society that operates due to and under the influence of scarcity. Indeed, scarcity is the founding principle of our economic system. But how might society function without scarcity. A society without scarcity has solved the problem of labor—people no longer need to work to sustain themselves because machines complement work, allowing humans to escape the most dreadful effects of scarcity (poverty, hunger, etc.). In a world where robots do most of the work and replication machines (3D Printers, for example) create many of the goods, the marginal cost of production falls to almost zero, making anything affordable to anyone who works even a few hours per week (or even not at all).

In such a world, no one works to increase wealth; people will only work to increase their reputation, their prestige (their place in the world) and, as such, their ability to influence. Rather than working in order to hoard capital, engage in conspicuous consumption, or obtain the necessities in life, people work to increase their reputational capital. Social media has already provided a hint at what that world would resemble. From Instagram to Vine to Twitter, users expend large amounts of time and energy simply to gain a certain amount of reputation. Clearly, the Internet has begun to demonstrate how much people will work, for no money, just for reputation.

Regardless, of whether scarcity, and therefore money, exists in the future, the monetization of influence and the use of reputation and prestige as currency will. In a capitalistic world with a market economy, influence and reputation can be monetized for FIAT or used as an alternate currency. This alternate currency can exist on the Blockchain, denominated by crypto tokens and coins. In a post-scarcity, post-capitalism, post-money world, reputation serves as the very purpose of work. Furthermore, even in a post-money world, some items will remain scarce (such as rooms at a resort in Fiji). Gaining entry to such difficult to schedule locations will require good reputation, and potentially fame. Therefore, such a future requires an element of connections and building good relations—the foundations of which many have started to build on and through social media.


Saturday, March 10, 2018

Digital ID, the Next World Changing Development
Joe El rady

Identity verification comprises one of the biggest problems of modern technology (and life). The transition to a digital economy requires radically different identity systems. Distributed Ledger technologies, such as Blockchain, may hold the key to solving this vexing and lingering problem.

As financial and other transaction disintermediation accelerates with the advent of new financial technologies and infrastructures, portable, scalable, extensible, verified digital identity will become essential. Consumers will need user centric, verified, hard to forge/counterfeit digital identity verification (what Dick Hardt calls Identity 2.0). Most importantly, every person’s digital identity should be consolidated to one record of truth—all the information should live in one place.

Usernames and passwords (existing frameworks such as OpenID, OAuth and SSO) have not and cannot solve this problem. Passwords do not and cannot identify a person, they can only authenticate a person—they can’t prove that you are you, they can only prove that you are a directory entry.

Furthermore, a significant portion of the world’s population lacks the necessary digital credentials to fully participate in the digital economy. Access to health, banking, and education remains difficult for more than 1 billion people, including refugees and displaced populations, without ID. This issue is currently being investigated by the United Nations, Microsoft, the Linux Foundation, MasterCard, Visa and many others. This problem seems analogous to the land-line telephony situation in the Developing World (given the difficulty of constructing landline telephony networks in underdeveloped places such as rural Latin America and Sub-Saharan Africa, the idea was abandoned in favor of cellular telephony—this is called skipping a generation—indeed, a landline network may never be built in these places). In the same way, given the difficulty of providing paper ID to 1.1 billion people, governments may choose to skip a generation of technology and just give them all digital forms of ID.

Where does Blockchain fit here? According to Peggy Johnson, Executive Vice-President of Business Development, Microsoft: “technologies like blockchain can play a powerful role in creating a secure, portable, personal solution”. Almost everything we do today leaves a digital signature. Yet this signature is scattered among different services that use it primarily for their, rather than our, benefit (creating wide dispersion and narrow segmentation, all of which creates economic value for the services that own pieces of our information—Google knows what we look for, FaceBook knows what we talk about, Apple knows where we go). One main promise of blockchain is to rebalance that dynamic so we can reclaim and consolidate our digital identities.

In reclaiming and consolidating our digital identities, we decide who gets to see what and how much. (A great analogy would be showing a Driver's License to a bartender in order to prove legal drinking age—all the bartender needs to see is the picture and and the birthday, but, in the process, he also sees your address. Blockchain would allow us to share only enough information to verify identity and drinking age, without sharing address and other information.)

In fact, one of the breakthrough features of blockchain is its usage of zero knowledge proofs to manage data. This allows users to disclose their ownership of certain certifications and grant access without revealing the information contained within. The dream of this type of encryption is that end-services can verify identity while the data is hashed. For example, imagine a bank running a credit check on you, while only handling your credit history data in encrypted form, so that even if that data were stolen it would be useless. These zero knowledge proofs provide an opportunity for private companies to participate in digital identification, overcoming government inertia. Companies can, for example, create relay services that take identification verification requests from end users, relay those requests to government server repositories, and then relay the only the positive or negative verification with no further information shared. Finally, beyond identifying and verifying people, Digital ID will need to expand to devices and legal entities with the adoption of the internet of things expected to connect 200 billion+ devices to the internet by 2020.

A consortium of companies, including uPort and Microsoft, recently announced the creation of the Decentralized Identity Foundation. One aim of the DIF is to create universal protocols for identity verification— similar to global standards for financial transactions, or DNS protocols, which transcend borders. The time is ripe now for private industry to step in.


Tuesday, March 15, 2016

Just finished a radio interview on Business Credit Radio. Discussed the risk of another global financial crisis and also the systemic risk caused by the shadow banking sector and the ballooning notional value of derivatives. Listen to it here:


Wednesday, June 18, 2014

Corporate Strategy 101: Microsoft Needs to Get with iCloud Drive
Joe El Rady

Strategically, Microsoft should support Apple’s handoff/continuity features, as well iCloud Drive. When Microsoft launched Office for iPad, they included two “hooks” to drive their cloud business. However, driving cloud storage comprises a tactic rather than a strategy since commodified cloud storage comprises a feature rather than a product. The strategic “hook” for Microsoft involved increasing their recurring SaaS revenues and reinforcing their ecosystem: in order to edit documents, users need to subscribe to Office 365; and, in order to open, store, and save documents, users must use OneDrive. Clearly, Microsoft understands the short and medium term imperative strategic business path of focusing on cloud services (the long term future may not include the Cloud, but rather data portability on small devices that serve as personal servers, I will discuss that in a future post) as well as the requisite immediate tactic of dislodging DropBox and the Google ecosystem, including Google Drive, Google Docs, Gmail, Calendar, Contacts, and of course, Android. While an intense, scorched earth, zero sum fight against DropBox and Google provides Microsoft with the best strategic plan to fight the ecosystem war, such a strategy against Apple and its iCloud Drive provides no such benefit. In fact, the benefits of embracing iCloud Drive and allowing it as a second storage option for Office for iOS greatly outweighs the cost.

First, Microsoft must realize that serious Apple users will not switch their cloud storage to OneDrive. Any attempt at compelling them by using Office for iOS as bait will only backfire as serious Apple users will likely switch to iWork. Those Apple users who have switched or will switch to OneDrive, are likely only iOS users and not Mac users, receive corporate/enterprise OneDrive storage, or use the free version of OneDrive to store only those documents they need to edit on iOS. Regardless, Microsoft must realize that serious Apple users will leave Google Drive and Dropbox in favor of iCloud Drive. Any nudge by Microsoft in offering iCloud Drive as an Office for iOS storage option will tip many fence-sitters to the Apple side. In this zero-sum game, Microsoft benefits greatly from de-populating Google and Dropbox.

Second, Microsoft must realize that the truly indispensable Excel is only indispensable to advanced business users while the average Word and lackluster PowerPoint are easily replaced by Pages and Keynote— with the exception of enterprise users. In order to guard the revenue generating fortress of Office, Microsoft needs to ensure that Mac users do not defect to iWork. Giving Mac users the ability to open the Office documents from their Macs on their iOS devices through iCloud Drive would stem defection while also providing Microsoft with incremental recurring Office 365 revenue.


Sunday, May 25, 2014

Never Send a Word Doc, and Other Trouble for Microsoft
Joe El Rady

I don’t own a printer. No printer, no pens, no paper—the 21st century! Printing is quaint… no antiquated. In a world of desktops, laptops, tablets, and smartphones, who needs paper? Need to jot a quick note, use your notepad app. Need to keep detailed notes and notebooks/collections, use Evernote or OneNote. I try to receive only soft copies of documents. Anything important that arrives as hard copy, I scan. I used to email outgoing documents, now I post to the web or onto a cloud server and send a link—the modern form of “publishing”. My main rule: never send a Microsoft Word document.

Word is a content creation tool, not a content distribution format. If you want to collaborate with the recipient, then send a Word Doc; however, if you want to send a “published” document, Word is not the proper format. PDF is the modern equivalent and format of a “published” document.

Of course, I’m not writing an entire post on e-etiquette and modern standards. This is a business and economics blog. The use of Word (as it was intended) as a content creation tool rather than a content distribution format, hurts Microsoft. A main impetus of Microsoft’s growth during its fervent period stemmed from positive network externalities. People used Microsoft products because other people used them. As such, Microsoft facilitated a standard of interchange.

For its part, Microsoft recognized this, and built all sorts of additional, mostly unnecessary, and generally unused features into Word such as document permissions and credentials management. Microsoft built a whole infrastructure around SharePoint and SharePoint Server to allow enterprises to save, publish, and distribute “document libraries” and manage access to those libraries in a granular way. Nobody I know uses any of these features (and I have a corporate background). Microsoft expected that their content creation tool would also become a content management and distribution tool, and so, even people who did not need Word and all of its bloated features, would purchase it, since it served as a medium of exchange.

This strategy worked, but has recently started to stutter. First, modern methods of “publishing” include posting to websites and sending links from cloud servers to documents that are PDFed. In fact, PDFed is a verb now. Even if you insist on emailing documents, you usually email or receive PDFs. Second, people increasingly rely on mobile: tablets and phones. Until recently, Word was not available for Android or iOS, so people started to move away from reliance on it as a distribution method. In fact, use of iOS and Android has shown people that content creation tools such as GDocs and Pages work just as well as Word, and in some cases, better! Third, those realizations, along with the halo effect of Android and iOS pushing people to use Google Apps and OS X, have further driven people towards GDocs and Pages respectively. Even the last bastion of network effect, the need to collaborate, no longer pushes Word sales since, in many ways, other tools, such as GDocs, provide better collaboration for content creation.

As Microsoft struggles to find its way under a new CEO and diminished dominance in a world moving away from PCs as well as big corporate IT and moving towards mobile and BYOD, it needs reconsider how to market and maintain much of its software offering, starting with Office. Microsoft makes three kinds of products: garbage, good (even excellent) but not irreplaceable; and, irreplaceable. Unfortunately for Microsoft, only Excel lives in the third category, and Word, lives in the second.


Sunday, March 25, 2012

Unease About the Global Economy
Joe El Rady

The financial meltdown of 2008 continues to fray nerves among investors and policymakers. A pall of unease still shrouds global financial markets that seem spooked by the limited efficacy of policy tools and the complete inefficacy of the policymakers employing them.

The unease has manifested in high volatility and low volumes. It has fogged investors' visibility of the future. Coupled with fear about high levels of sovereign debt and potential defaults, the unease has shortened investor horizons. The product: short term thinking and planning.

The reality of our current state: monetary policy has shown limited efficacy and malignant side effects while fiscal policy has, mostly due to political hijacking rather than economic underpinning or planning, fallen flat.

In many countries, exchange-rate issues have constrained monetary policy. The members of the Eurozone discarded exchange rates as a policy tool when they adopted a single currency. On the fiscal side, policymakers don’t know how to handle the fiscal issues posed by the financial crisis. Doubts about the sustainability of sovereign debt loads produce sudden surges in interest rates, as risk premiums (VIX) rise dramatically with perceptions of likely default.

Welcome to the post-crisis world.


Monday, February 28, 2011

The Recovery is Unsustainable
Joe El Rady

The statistics don’t lie, the economy has moved from recovery to expansion; however, even if the nightmare scenarios and black swans I have discussed in previous posts remain only lurkers on the horizon, more pedestrian headwinds will likely retard the economy’s escape velocity. During the first three quarters of 2010, GDP grew at a very slow rate, especially for a post-recession period. The fourth quarter changed all that. GDP grew by 3.2% due mostly due to a very strong increase in consumer spending. In fact, as the figures clearly show, growth in consumer spending accounted for almost 100 percent of the increase in GDP. As I tweeted at the time, however, the growth in consumer spending did not occur due to higher levels of employment or increasing real incomes; the growth occurred due to decreases in personal savings. Such growth will ultimately prove unsustainable.

As everyone knows by now, the great recession changed savings patterns in America. Household savings rose from less than 2 percent of after-tax incomes in 2007 to 6.3 percent in the spring of 2010. However, by December 2010, the savings rate fell to 5.3 percent. At the same time, real personal consumer spending grew strongly at a rate of 4.4 percent (with spending on consumer durables soaring by 21 percent). All of this coincided with the steep ascent of the stock market (15 percent between August and December of 2010). While it is never statistically easy to infer causation from correlation, the link between that stock market rise and the Federal Reserve’s actions is fairly strong. In fact, Chairman Bernanke’s entire rationale for QE2, as he announced at the annual Fed Conference in August of 2010, sought to compel bondholders to shift their wealth to equity holdings due to the falling yields caused by the Fed’s open market purchases of treasuries. As the Fed predicted, the rise in equities would induce consumer spending by creating a wealth effect.

First, no reason other than the Fed’s actions seems to exist for the rise in the stock market. Second, the magnitude of the relationship between the stock-market increase and consumer spending rise fits the data. Examine this: share ownership (including mutual funds) of American households totals approximately $17 trillion. Thus, a 15 percent increase in share prices raised household wealth by approximately $2.5 trillion. The empirical relationship between wealth and consumer spending provides a function that predicts four dollars of additional consumer spending for every additional $100 of wealth. Just performing the calculation, the increase in the stock market should have produced a $100 billion increase in consumer spending. That figure very closely (and pretty uncoincidentally) matches the decrease in household savings and the resulting increase in consumer spending. Since US households’ after-tax income totals $11.4 trillion, a one-percentage-point fall in the savings rate creates a decline of saving and a corresponding rise in consumer spending of $114 billion.

Excellent, so now we know why the economy has seemed so strong lately, at least in terms of growth from consumer spending. But what does this predict about future performance? Given that no other reason seems to exist for the stock market to continue rising at the rapid pace it showed in 2010, and that the Fed has scheduled to end its Quantitative Easing by mid-2011, it does not seem likely that the savings rate will continue to decline, meaning that the pace of consumer spending will not continue to rise. Added to these realities, home prices have been falling and will continue to fall in 2011; and, the labor market remains weak. Furthermore, artificial support by central bankers has created asset-price bubbles that may be perilously close to popping. All of this contributes to the unsustainability of the current situation.