Reasons Unbeknownst

I can sum up the point of this whole post in one sentence. If real democracy cannot exist without a free press then real capitalism cannot exist without the Internet.

A few years ago I paid $10 for access to an online discussion board frequented by Noam Chomsky and I asked him a question. “How has the Internet affected your understanding of the media?” His response was “I’m an innocent as far as the internet is concerned. I don’t even know what blogger.com is. Better raise the question with others.”

I haven’t tried to understand his work in linguistics but I think his analysis of the media is brilliant. He is a mesmerizing speaker but I was always disturbed by his notion that capitalism is fundamentally flawed. In “Manufacturing Consent” he talks about a requirement of rational central planning as an alternative to the evils of capitalism.

Here’s what I think was going through his head. He buried himself in the study of media and realized the disastrous consequences of communication monopolies when applied to democracy. Those media monopolies were allowed by capitalism which may explain his fear and loathing. And he was absolutely right at that time. His mistake was failing to predict how fast the Internet would break down the system as it existed when he wrote “Manufacturing Consent”. You get the sense that he assumes alternative media will always be crushed due to the inefficiencies and corruption associated with capitalism. Howard Dean and Ron Paul are living proof that the Internet is starting to allow the spread of previously taboo political beliefs.

Chomsky gets communication. He doesn’t get technology (as evidenced by his reply to my question) and based on his insistence upon “rational central planning” as a way forward it looks like he also doesn’t really understand economics or at least the power of emergent order, which is a bit strange considering his love of democracy. My plan is to bump into him some day so I can ask these questions.

You can get a sneak peak at the site I’ve been working on by clicking on the logo and entering woofwoof as the password. We’re going to launch publicly in the not too distant future.

Radiohead’s new free album is killing the environment.

The Federal Reserve hasn’t hidden their absolute terror of a deflationary spiral. Bernanke is a student of the Great Depression and has vowed to never let it happen again. Greenspan and now Bernanke slash rates at the first sign of trouble because they can simply gloss over inflation with a questionable CPI. People are less forgiving when they suddenly lose their job when compared to paying more for eggs. And the foundation of this whole crazy debt laden financial system relies on constant inflation.

If the new Radiohead album does well the music industry as it currently exists is pretty much toast. Music is the first to go only because songs can more easily be squashed into small files. Movies will go the same route eventually. The deflationary forces of technology are no doubt freaking out the Federal Reserve. In fact, Ray Kurzweil’s new AI book has an entire chapter on deflation. At least in the ’30s entire industries weren’t forever vanishing, people just bought less for a while. If music goes free there will be no CD revival in five years.

So here’s my justification for the thesis. The Fed is watching the deflationary forces of technology bring down massive industries. They’re also watching the end of the housing bubble. The trillions of dollars recently created flowed to housing prices instead of food, energy, etc. Housing prices aren’t used when calculating inflation. The end of the housing bubble means a couple of things. One is the need for a new asset bubble which can hide inflation, the other is the risk of deflation due to the tsunami of foreclosures we’re witnessing.

The powers that be are currently worried or they wouldn’t have cut rates 50 basis points. Environmental regulations are only going to put downward pressure on the economy regardless of their potential long term benefits. If the Fed cared about the long term they wouldn’t have nearly completely devalued the dollar. As technology kills off gigantic industries you can bet the people at the Fed are telling the powers that be not to do anything that will destabilize this already battered ship.

Photo by FB42 on Flickr

I posted this in The Big Picture comments but it exceeded my 100 word maximum so I had to repost it here.

Had an epiphany while watching Kudlow today. The gray haired perma-bull who hangs out on Wall St., forget his name, (ed. Bob Pisani) said “Capitalism is a Religion! It only works when people believe in it.”

I thought: “No, leverage is a religion”. Capitalism still works when people lose faith but over leveraged credit bubbles end when investors lose faith.

This guy is an evangelist for a religion that doesn’t exist. I suddenly understood why the media shamelessly pushes the bull case even in the face of overwhelming evidence: They truly believe that without their Tinkerbell/Pollyannic brainwashing, capitalism would collapse. The Hedgies and Fed have them drinking the Kool-Aid.

I’m just imagining Bernanke calling up Kudlow at home:
“Hello?”
“Hi Larry it’s Ben… Look, with great power comes great responsibility. You are a very powerful and handsome man. The fate of capitalism rests with you and your show on CNBC. If your viewers lose faith in the system, capitalism will collapse and the socialists will arrive at your mansion with burning torches and unanswerable questions. Capiche?”
LK: “Wow, that sounds reasonable, and you’re right, I am terribly handsome, I’ve seen Bartaromo checking me out… OK, deal. I’ll spread the word to my co-workers.”

Photo is “The Winter’s Tale” by Nameless Yeast.

I signed up as a tester long ago but finally got the invite. This is some really cool technology. (Edit: After using it a bit, I’m convinced this will be gigantic).

They’ve basically created something like Wikipedia but instead of being limited to documents you get to create your own objects (called types, see image). For instance, a film type would consist of a director, actors, rating, etc. Once created, anybody can update the data ala Wikipedia. Wikipedia has this capability but it’s not nearly as structured. For instance, I can search for Scorsese on Wikipedia but on Freebase I can search for Scorcese films released in the ’80s featuring Robert Deniro. Or all Porsche models released between 1967 and 1971 with engines greater than 3 liters. It has the structure that Wikipedia has been lacking.

This is the promise of the semantic web. A database of structured searchable knowledge. In theory you could write software to look for patterns in movies which could make suggestions. For instance. If Deniro is in a bunch of Scorsese movies and a bunch of Speilberg movies a recommendation system would know you like Scorsese and suggest Speilberg movies. Not even remotely possible with Wikipedia.

If they can create a quick way to import Wikipedia data they could crush the competition in short order (update, looks like this is what they’re doing “The Film domain is one of the most complete domains in Freebase with nearly 23,000 films, about 9,700 of which have structured information loaded from Wikipedia infoboxes.”). Wikipedia is an encyclopedia. Freebase could be an encyclopedia but also a replacement for IMDB, the Census Bureau and just about any other data source you can imagine. I just updated San Diego County and it works like Wikipedia but with much better use of AJAX.

The really interesting thing is that you can use their database in your applications. So I can write a front end application to navigate through movies on my computer using data from Freebase. Then if someone finds cover art for an old movie residing on my PC it would automatically show up in my application.

(Ed. Photo now links to the Flickr page and yeah, that’s the number) I signed up for Sirius today. Not the satellite service, just the internet streaming for $12.99 a month. Ad free, good music is a prerequisite for working at home on code. Compared to the local stations it’s absolutely incredible, like HBO for the radio. Sure it’s not free but then how exactly were radio stations supposed to charge for their signals back in the dark ages? They couldn’t, hence ads.

I could buy a satellite receiver to lug around but at some point cell phones will have unlimited internet access built in and I can just stream it over the internet without the expense of a satellite capable receiver.

To listen over the internet you need windows media player. Why? Probably because they don’t want Sirius on your cell phone. So Sirius keeps up this nonsense until they go under because they love their shiny orbiting birds.

In ten years radio stations might look a lot like Digg. Except instead of a list of articles you get a customized play-list. Maybe artists will even wise up and realize that they’re only going to make money off of concerts and merchandising so it might even be free of charge, and ads.

My finance professor in college had a newspaper clipping stuck to his door. On it was a successful chimp with a dart standing in front of a wall-mounted newspaper stock chart. The impression left was that it’s impossible to beat the street. Markets are supremely rational and trying to out rationalize emergent intelligence is futile.

The housing bubble changed that perception. Even in 2004 it was evident that something was seriously amiss. I was making decent money yet there was no way I could afford a home based on the typical 2-3x income number used to determine affordability. Especially here in San Diego. This agitation led to my research on liar-loans, piggybacks, 80/20s and the general decline of lending standards.

So back on June 23, 2005, after a lot of research and head scratching, I wrote this on my blog.

If I had equity right now I’d sell my house, buy a NASDAQ index fund and rent for the foreseeable future.

There are two reasons I could have been right. It was either luck or some failure in the market system. Why a failure? Because I don’t think I’m smart enough to predict the future. But my ego is just big enough to try an explanation of market failure.

Journalists will track down corruption, cover car accidents, etc. But how enthused would they be about driving the news van to the scene of an accident involving their own family? They might tell the audience “They are all going to make it, everything is going to be ok.” Which would be totally understandable though maybe not totally accurate.

Newspaper circulation was declining sharply due to monopoly crushing web competition precisely as the housing boom was ramping up. Perpetual home price appreciation was the light at the end of the tunnel for a lot of job-insecure, home-owning journalists. Ad revenue from home builders, furniture suppliers, and mortgage lenders was the only thing keeping a lot of these people employed.

Occam’s Razor. No conspiracy theory needed. Wall Street probably knew about the mortgage problems but were content to let the stucco orgy rage on, unchecked by reporters. In the dank, econ aware part of their brain, journalists probably knew too. The average consumer had no reason to doubt the bullish, commission crazed mortgage broker and realtor because the “bubble” was something only talked about by the occasional grumpy renter-relative(that would be me).

When reporters tend to drive drive half million dollar Fords you’re probably going to hear a lot more about Toyota’s problems. It would have been nice if, following these breathless articles about the miracle of real estate, writers would have added the following disclaimer…

The views, opinions and conclusions expressed by Lois Lane are those of the author, who has a zero down, negative amortization, stated income loan on a ridiculously over priced condo. She is about to lose her job due to competiton from blogs.

Next time. The Fed – Nefarious Middle Class Squashers or Overpaid Delayers of Inevitability?
Image is by Satanoid on Flickr.

From ARS Technica today “In a nutshell: DRM’s sole purpose is to maximize revenues by minimizing your rights so that they can sell them back to you.”

Sounds simple enough right? That sentence’s elegant simplicity had me at nutshell. Evil capitalism vs. the unstoppable force of digital freedom. But I was scratching my receding hair line and marveling that I can fit a prairie vole’s entire DNA sequence on my key chain memory stick and wondered: How would the common assumption about digital freedom be interpreted when applied to cloning? If data wants to be free then what’s wrong with grabbing some hair from your roommate’s brush and surreptitiously overclocking your hair genes in a Rogaine branded centrifuge?

The ARS quote above could easily be applied to Blockbuster’s digital-freedom-robbing habit of making me return 1s and 0s in the form of DVDs through a squeaky aluminum hole in their wall. They’re missing a fundamental point about price and products. They’re assuming that we’re too stupid to demand a lower price in exchange for our freedom. If late fees aren’t DRM I don’t know what is. Are DVD rentals an unethical digital liberty abyss? No. So why the assumption that I will pay for a product suffocated by restrictions? If the product, including DRM, sucks, people will not buy it. Fair use isn’t something that needs to be legislated. If the movie industry pisses us off we’ll buy video games instead. There are so many alternatives today that they cannot simply crush our liberties with a campaign contribution any more.

It’s a bit ridiculous to assume that the industry doesn’t care about piracy when every movie ever made will fit on a keychain sized device in the near future. And piracy will eventually win because at some point living room walls will be smaller than TVs with DPI reaching a level of diminishing returns. And the keychains will just catch up. We’re at the point with 8Gig flash drives that you’ll be able to decrypt and carry a two hour DVD around for less than $50 by the end of this year.

Now the industry has historically been pretty stupid. The attempted outlaw of VCRs springs to mind. But digital is entirely different as anyone who has watched a 14th generation VHS dupe of some leaked celebrity home movie can tell you. With home theaters rivaling movie theaters in terms of sound and visual quality the opportunity to generate cash to pay for Beowulf render farms which in turn bring Ring Lords to life are dying a exponentially un-slow death. Flash memory sticks are going to kill DVD revenue in short order. Home theater systems will finish off the movie theater business. Even HD-DVD and Blue Ray are no match for these tiny USB terrors.

And so in 2010 we will see Lord of the Rings IIX rendered on a pair of aging E-Machines with a 10BaseT hub interconnect. Well maybe not that bad but movie budgets will plummet. I’m a huge fan of Clerks which was financed with a Visa if I’m not mistaken but I imagine it wouldn’t have sucked with color and a few explosions. Musicians can always sell concert tickets. I’m just not sure I’m ready for Rocky 12 on Broadway.

What follows is a comparison of two articles, one published on the blog Global Economic Analysis on Wednesday, September 27, 2006 at 9:40AM and the other published on roughly a day later at 8:29AM, September 28th on TheStreet.com. I’ll leave it to the reader to draw any conclusions so I don’t get sued.

Exhibit A – A comparison of two blocks of text referring to a DR Horton advertisment.

The Blog: “That is a 30% haircut… Any flipper who paid full price is now 30% underwater (not counting interest expenses, insurance, property taxes, etc).“

TheStreet.com one day later: “You just took a 30% haircut on your inventory, not to mention carrying costs of a mortgage, real estate taxes and expenses to keep up the property (landscaping, utilities, etc).”

Coincidence? Maybe. Weird? Absolutely.

Exhibit B:

The Blog: “Add in real estate commissions and that flipper may be down by as much as 50% or more.”

TheStreet.com one day later: “…you have to pay a real estate agent a 6% commission. That speculator… is now out, by my calculation about 50%.”

Exhibit C:

The Blog: Uses a quote from David Lereah… ““We do expect an adjustment in home prices to last several months, as we work through a buildup in the inventory of homes on the market,” he said in a written statement. “This is the price correction we’ve been expecting — with sales stabilizing, we should go back to positive price growth early next year.”“

TheStreet.com: Uses the same quote… “We do expect an adjustment in home prices to last several months, as we work through a buildup in the inventory of homes on the market. …This is the price correction we’ve been expecting — with sales stabilizing, we should go back to positive price growth early next year.”

Exhibit D:

The Blog: Right at the bottom of the ad in large type is the message “Realtors Warmly Welcomed”… That is a dramatic change and right off the bottom line of builders.

TheStreet.com: Consider the dramatic sale of D.R. Horton (DHI) homes in the Daytona Beach market in Florida. Please note the message at the bottom of this advertisement: “Realtors Warmly Welcomed!” That’s never a good sign.

I was wrongly accused of plagiarism in my final semester of college by a professor who was convinced that I couldn’t have written a paper in a weekend. I eventually won but it wasn’t a fun process. I don’t take this sort of thing lightly.

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Notes:
“Editor’s note: This column by Doug Kass is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on Sept. 28 at 8:29 a.m. EDT.”

The blog post, if the clock is right, was online at
“9:40 AM” on “Wednesday, September 27, 2006″

Click on the photo to visit Flickr for the photog’s comments.

Psychology, media, technology, economics. It occured to me that everything I write about revolves around those four ideas. And that the world basically lives in two camps. Those that think we’re collectively smart enough to manage ourselves through a democracy, and those who think power needs to be wrestled from the hands of short-sited voters who will destroy the environment and economy if left to their own devices.

You also have the more defined idea of emergence: From Wikipedia:

Emergence is the process of complex pattern formation from more basic constituent parts or behaviors, and manifests itself as an emergent property of the relationships between those elements.

Some examples are free market pricing, evolution, and in the case of Democracies, Law. Evolution requires DNA, pricing requires educated consumers, and democracies require informed voters. When consumers aren’t informed about what they’re buying you get scams and economic crises. Option adjustable rate mortgages are an example of consumers doing themselves harm due to a lack of knowledge about money. When voters don’t know what they’re voting for they get politicians acting recklessly in an attempt to stay in power.

Without DNA, knowledge of economics or knowledge of products you will not get emergent order in the form of life, liberty or the pursuit of happiness(property). I guess I should define knowledge as understanding combined with selflessness. You had a problem with slave owners who knew that what they were doing was wrong but continued because they were comfortable with the status quo.

Joeseph Schumpeter commented on the problem with a lack of knowledge when applied to democracies:

“There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities will vote themselves the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure.”

As did Bastiat in “The Law”

“According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it. Woe to the nation when this latter purpose prevails among the mass victims of plunder when they, in turn, seize the power to make laws!”

Bastiat says we’re screwed if we choose Socialism and Schumpeter argues that Socialism is inevitable in a Democracy.

Brain is giving out. Still haven’t covered accelerating change, emergent price and leadership, globalization, tech-deflation + fiat currency, asset bubbles, or why those supposedly in control would let Iraq happen. To be continued…