Keith Hennessey does a spectacular job of explaining the complicated process of arriving at the federal budget and where it is currently stuck in this week’s Econtalk.
He also breaks down who has the power to move things forward right now. It’s so good I was tempted to transcribe selected bits here, but I just don’t have the darn time.
Got another call from the Obama campaign today who I spent a lot of time and energy supporting last election. I don’t support either party currently because I’ve evolved into an economic conservative but still socially liberal which leaves me stuck with no party to support.
So just for the hell of it I tried to convert the volunteer into a Hayekian liberal. After 5 minutes he still wouldn’t bite.
He did mention he’s had a rough day. Surprised, I am not.
Yesterday FT.com’s Alphaville posted a graph showing that the US treasuries CDS graph had inverted for the first time ever.
What that means is that the cost to insure against default on 1 year US Treasury Notes costs more than it does to insure a 5 year note. This goes contrary to economic liquidity preference theory – meaning that investors generally see bonds with a longer maturity as being riskier so to insure them usually costs more.
So why does it cost more to insure a 1 year treasury bond? Investors see the risk for the US government as significantly higher in the short term and that psychology creates this weird effect.
Footnote: I’ll make this clearer in another blog entry but for now I’d like to add that I see the risk of an actual default by the US government is extremely close to zero. If we don’t get our act together by August second, we don’t automatically default. We just have to gradually make harder and more irresponsible decisions about who to pay and what to defer. Those decisions have a forcing effect on our political system as pressure will rapidly mount beyond calls from disgruntled constituents to calls from creditor’s lawyers.
Here’s a little reminder that sovereign debt is unsecured. Greece just defaulted. And for some reason only Reuters are calling it like it is. Expect fireworks tomorrow. Here’s the story:
http://blogs.reuters.com/felix-salmon/2011/07/21/greece-defaults/
My new favorite economist Tim Harford did a great TED talk recently chatting about our assumption that an expert approach is needed to problem solving. He argues that instead we should rely more on trial and error, a method that has proven very effective both in nature and business.
If the loading animation won’t disappear then try viewing the video on this page.
David Skeel of UPenn’s law school talks with Russ Roberts on econtalk about the mechanics of bankruptcy law and whether the government should have bailed out the auto industry. Bear in mind you’re getting the Hayekian view on Russ’s show (to which I subscribe). For the Keynsian argument, check out NPR’s Planet Money blog and podcast.
Skeel discusses the bankruptcy process including voting rights, creditor seniority and the role of a judge in an ordinary bankruptcy which is required knowledge for any entrepreneur. Even though this is the last thing anyone aspires to, you should know the worst case scenario, the process and your options and rights.
I’ve had this blog entry saved as draft for a month, and Tom Buck’s post earlier today titled “Failure: Building a $50/month web app” inspired me to post this. He remarks in his post “My mistake quickly became obvious: I had built a tool for an audience that didn’t like to spend money.”. Here’s my take (and my verbatim draft from a month ago):
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” — Friedrich von Hayek
Hayek’s wonderful quote captures both the wisdom and arrogance of economists and their field, so consider it my caveat for the observations below.
The canonical example of adverse selection comes from the industry that invented the term: In the insurance industry, customers who are more likely to die tend to buy more life insurance. Because the insurer doesn’t have all information on the health of buyers, life insurance as a product tends to select the wrong customer i.e. customers who are less profitable because they die sooner.
In the online world, “Free” is a popular model for gaining “Traction”, meaning access to many customers. The assumption is that a reasonable percentage of those free customers will at some point become buyers. Therefore success is gauged by growth in the population of a company’s free customers because at any time a company can pull the “revenue lever”.
The problem and a realization I had during the last year, is that “Free” can adversely select against paying customers.
Customers who use many free products online are less likely to pay for a paid service. Conversely, customers who have recently paid for an online service are far more likely to pay for other online services. And what you may view as incentives to upgrading may be further selecting against customers who will pay in future.
One might argue that this is simply the old sales adage that customers who are most likely to buy something from you are those that just bought something from you. But I’d argue that this works across company boundaries e.g. if a business refers customers who recently bought their service to another business, those customers are far more valuable than referrals from a free service – because they’re the kind of customer that pays.
Adding disincentives to using your free product (or incentives to upgrading if you flip it around) strengthens the adverse selection problem because those who adopt your free product, presumably prior to upgrading to paid, have a strong desire to never pay. Their desire is so strong that they will tolerate whatever irritant you’ve introduced in the free product which makes the likelihood of them upgrading to your paid product even less.
So is Free useless? No it’s not and it can be a method of establishing a relationship and trust provided you target free customers where other criteria qualifies them as likely to pay in future and the free product doesn’t disqualify them.
For example, you could choose to only provide your free service to customers who have recently paid for an online service somewhere else. In addition, the free product must not adversely select against those customers once you’ve recruited them e.g. Your free product must be something that a paying customer is more likely to use and like, rather than a gatekeeper that irritates until the customer either leaves in frustration or upgrades.
Free works, provided it targets the correct customer and continues to incentivize them on their journey to becoming a future paying customer.
Money talks. Or, in this case it doesn’t.
Have you noticed that the vast majority of published ideas will not increase your business or personal revenue? If someone has a truly great idea for increasing earnings or creating new revenue out of thin air, they will implement or trade it themselves and will never share.
At the point a great (tech sector) business concept is shared, it enters the highly efficient ideas market that is the Tech Echo Chamber (HN, Reddit, Slashdot, TC, etc..) - which efficiently propagates it out to the rest of the world’s population of innovators. At this point the idea is undifferentiated, rapidly being implemented by all, and you’re in a price or other kind of efficiency war.
This, combined with the truism that it’s not a bad idea to completely ignore your competitors and focus on your customers, makes it a pretty darn good idea to avoid spending too much time on tech publications and social media outlets. You will learn nothing new and what you will learn loses much of its value the moment it’s published. The temptation to imitate will probably harm your business as you’re bounced along in the current of swarming incompetents.
The main (possibly only) thing I use blogs and social media reporting on tech news for is to keep track of landscape changes. Changes in the economics of a sector or changes in technology. Either of these almost always signal the start of a firestorm of innovation.
Focus on your customers, find the truly brilliant ideas that solve customer problems and beware of sharing them too early.
Footnote: The concept I’m describing relates to Efficient Market Hypothesis and Information Asymmetry if you’d like to read more.
The wannabe economist in me has been following the BitCoin phenomenon with great interest during the last few months. The algorithmic side of bitcoin is fascinating, but a few things bugged me about the system. One of them was that the maximum number of bitcoins that can ever exist is limited to 21 million.
Most of the coverage on bitcoin has been bubbly-positive even though it’s not certain you can reliably convert bitcoins into real currency.
Adam Cohen took a wonderfully lucid stab at bitcoin on Quora recently, focusing on the built in deflation that is a result of the hard limit on the number of coins that can exist. He makes the point that early adopters holding bitcoins will automatically get richer and it smacks of a scam.
While scam is clearly not the intention of the creators, deflation is any economists worst nightmare and built-in deflation will probably result in bitcoin being stillborn.
It’s been a year long break from blogging and getting back to writing and getting a so many new visitors this soon is cool. [Thanks HN!]
This blog runs on the smallest available Linode 512 instance for $20/month. It runs several sites including family blogs and hobby sites. I run nginx on the front end and reverse proxy to 5 Apache children which saves me having to run roughly 100 Apache children to handle the brief spikes of around 20 hits per second I saw yesterday.
Technologies like event-servers (Nginx, node.js, etc) and cheap and reliable virtualization may seem like old hat, but in 2005 Linode was charging $40/month for a 128Meg instance (it’s now $20/month for 512Megs, 88% cheaper) and Nginx was only going to hit main-stream use two years later. In fact Nginx only hit version 1.0 last month.
Five years ago many companies or bloggers would have used a physical box with 3.5 Gigabytes of memory to handle 100 apache instances and the database for this kind of traffic. About $300/month based on current pricing for physical dedicated servers from ServerBeach which hasn’t changed much since 2005.
With the move from hardware and multiprocess servers to virtualization and event-servers, hosting costs have dropped to 6% of what they were 5 years ago. A drop of 94% in a variable cost for any sector changes the economics in a way that usually causes disruption and innovation.
So where is the disruption and innovation happening now that anyone can afford a million-hits-a-month server?
Footnotes: An unstable version of Nginx was available in 2005/2006 and Lighttpd was also an alternative back then for reverse proxying. But it was for hardcore hackers who didn’t mind relatively unstable and bleeding-edge configurations. Mainstream configuration in 2005 was running big memory servers on dedicated machines with a huge number of Apache children. Sadly, much of the web is still run this way. I shudder to think of the environmental impact of all those front-end web boxes. I also don’t address the subject of Keep-Alive on Apache. Disabling Keep-Alive is a way to get a lot more bang for your hardware (specifically you need less memory because you run less apache children) while sacrificing some browser performance. The norm in 2005 was to leave keepalive enabled, but set to a short timeout. With Keepalive set to 15 seconds, my estimate of 100 apache instances for 20 hits per second is probably way too optimistic. With Keep-Alive disabled you would barely handle 20 requests per second with 100 children when taking into account latency per request for slower connections. Bandwidth cost is also a consideration, but gzip and running compressed code, using CDN versions of libs like jQuery that someone else hosts and running a stripped down site with few images helps. [Think Craigslist] With a page size of 100K, Linode’s 400GB bandwidth allowance gives you 4,194,304 pageviews.