Category Archives: Economics

War and Peace by Leo Tolstoy

I read War and Peace – and subsequently Anna Karenina – many years ago now. It was one of the most extraordinary and greatest books I had – and have – ever read. He is the Beethoven of literature.

Here I’m excerpting pieces.

“And by old habit he asked himself the question: “Well, and what then? What am I going to do?” And he immediately gave himself the answer: “Well, I shall live. Ah, how splendid!” The very question that had formally tormented him, the thing he had continually sought to find – the aim of life – no longer existed for him now. […] And this very absence of an aim gave him the complete, joyous sense of freedom which constituted his happiness at this time. He could not see an aim, for he now had faith – not faith in any kind of rule, or words, or ideas, but faith in an ever-living, ever-manifest God. Formerly he had sought Him in aims he set for himself. That search for an aim had been simply a search for God, and suddenly in his captivity he had learned not by words or reasoning but by direct feeling what his nurse had told him long ago: that God is here and everywhere. In his captivity he had learned that in Karataev God was greater, more infinite and unfathomable than in the Architect of the Universe recognised by the Freemasons. He felt like a man who after straining his eyes to see in the far distance finds what he sought at his very feet. All his life he had looked over the heads of the men around him, when he should have merely looked in front of him without straining his eyes. In the past he had never been able to find that great inscrutable infinite something. He had only felt that it must exist somewhere and had looked for it. In everything near and comprehensible he’d had only what was limited, petty, commonplace, and senseless. he had equipped himself with a mental telescope and looked into remote space, where petty worldliness hiding itself in misty distance had seemed to him great and infinite merely because it was not clearly seen. And such had European life, politics, Freemasonry, philosophy, and philanthropy seemed to him. But even then, at moments of weakness as he had accounted them, his mind had penetrated to those distances and he had there seen the same pettiness, worldliness, and senselessness. Now, however, he had learned to see the great, eternal, and infinite in everything, and therefore – to see it and enjoy its contemplation – he naturally threw away the telescope through which he had till now gazed over men’s heads, and gladly regarded the ever-changing, eternally great, unfathomable, and infinite life around him. And the closer he looked the more tranquil and happy he became. That dreadful question; “What for?” which had formerly destroyed all his mental edifices, no longer existed for him. To that question, “What for?” a simple answer was now always ready in his soul: “Because there is a God, that God without whole will not one hair falls from a man’s head.”

Remembering Caspar Bowden

Very saddened to see that Caspar Bowden, first director of FIPR, and tireless digital rights campaigner has passed away. Fine obituary from Ross Anderson in EDRi-Gram:

Caspar moved to Microsoft in 2002 and worked for them for nine years as their Chief Privacy Adviser for Europe, the Middle East and Africa. What that actually entailed he described in a talk at the The 31st Chaos Communication Congress (31C3) that is linked at the bottom of this article; he was responsible for briefing and coordinating some of the activities of about forty executives, each of which managed the company’s relationships with some particular country. He pointed out to them that the The United States Foreign Intelligence Surveillance Court’s (FISA Court’s) powers meant that governments entrusting their data to US clouds were giving unfettered access to the US intelligence services. He was subsequently fired.

For the last four years of his life he was a strong critic of US surveillance and the failure of European institutions to do anything effective about it. He was a gifted communicator who could explain complex technical issues around wiretaps, surveillance and cryptography to policy and lay audiences.

Slow Tech

A thought from a recent a recent Digital Supper: just as there is “Slow Food” do we need a “Slow Technology” movement – technology at a human pace.

A key difference is that this can’t work just from individual action – though that will help – we would need coordinated action if tech were to evolve slower.

All of our lock-in fears prove justified – Twitter

Having acquired Gnip, Twitter is cutting off bulk access (the “firehose”) for everyone else – see e.g. Datasift announce and piece on recode.

Twitter have also been gradually shutting off / increasing control of access over the last few years. E.g. RSS shut down, then they changed API terms of use and got increasingly aggressive about that use.

It was always likely what the direction of travel would be for these “free” services – after all, somehow they’ve got to make money whilst providing “web-scale” service. But there’s nothing like an existence proof to give a distant predictable reality an immediacy that justifies action.

Of course the tough thing is the very reason we all use Facebook or Twitter or even Google is the immense direct and indirect network effects. That’s what makes it so tough for us individually to do much. However, as the need to monetise and protect their monopolies grow I think we are nearing the tipping point where we get some interesting innovation and disruption.

For a good review here see: whose final paras i esp like:

Twitter’s story in many respects makes me think of Google: both companies started out benefiting greatly from openness and the power of both connecting users to what they were interested in and opening up powerful APIs to developers. The monetization model is even similar: note the AdSense reference above. Over time, though, Google has pulled more and more of its utility onto its own pages (and the revenue balance in the company has followed), just as Twitter focused on its own apps, and now Google is even starting to eat its best customers like travel websites and insurance agents (members-only), just like Twitter ate Datasift.

Frankly, the arc of both companies is simultaneously understandable and saddening to me. I’ve loved them both for the ways they have connected me to truly new ideas and new people, and it’s frustrating to see the growth imperative push both companies to turn increasingly inwards. One does wonder if they might find salvation in each other.

Enlightened [TV Series]

I have nearly finished the first series of Enlightened, a TV Series created by Laura Dern and Mike White. The series is extraordinary – even in a world where TV series have become over the last ten years a leading entertainment and art form.

It is not an easy or “fun” series, which probably accounts for its cancellation after just two seasons – I’m sort of amazed it got made in the first place – I imagine Laura Dern had something to do with it.

In fact, it is often profoundly sad – and darkly funny – as we watch the small tragedies and ironies that attend upon Amy (Laura Dern) and those around her. Amy herself is a great tragi-comic creation who remains all too human and un-enlightened despite her initial “enlightenment” at the meditation retreat at the start of episode one.

The best way to describe the series is to imagine it is what Raymond Carver might have produced had he switched from writing short story miniatures of the small desolations and tragedies of suburban America and made TV instead.

Amazon Twitch Acquisition – Paying 70x Sales

Just an aside from reading the recent Amazon 10-Q. In Note 4 on acquisitions they state:

On September 25, 2014, we acquired Twitch Interactive, Inc. (“Twitch”) for approximately $842 million in cash, as adjusted for the assumption of options and other items. During the nine months ended September 30, 2014, we acquired certain other companies for an aggregate purchase price of $20 million. Acquisition activity for the nine months ended September 30, 2013 was not material. We acquired Twitch because of its community and the live streaming experience it provides. The primary reasons for our other 2014 acquisitions were to acquire technologies and know-how to enable Amazon to serve customers more effectively.

and then in th pro-forma add:

The acquired companies were consolidated into our financial statements starting on their respective acquisition dates. The aggregate net sales and operating loss of the companies acquired was $12 million and $3 million for the nine months ended September 30, 2014.

This means that Amazon acquired Twitch for approximately 70x sales! (Earnings multiple is negative since Twitch was losing money it would appear).

Steve Wynn on Impact of QE on Businesses and Consumers

Saw this nugget buried in a recent earnings call of Wynn Resorts Management. This is Steve Wynn responding to a caller question:

Well, we finished our financing recently. The last tranche was a $750,000 — $750 million bond. We sold it at 5.09 with no covenants nonrecourse to the parent. And that brought our total financing for Cotai to $3,850,000,000 at an average cost of 3.3%. Or to put it another way, we rented the $3.85 billion for $125 million.

Now on one hand, as a businessman, I’m thrilled. Never dreamt that we would see anything so tasty and wonderful as that. On the other hand, it’s a reflection of questionable fiscal and monetary policy in the United States that is artificially depressed interest rates because of quantitative easing by the Fed, which is also sort of killing the value of the dollar and the living standard of the working people.

So the good news is, if you’re a high-class borrower with good credit rating, this is one of the most tastiest seasons of all time for 2 reasons. You’re borrowing money at artificially depressed rates. And you’re most likely going to pay them back with 85-cent dollars.

It’s a perfect storm for a businessperson unless you look at the truth of the matter and the impact it has on your customers and your employees. And that’s a much darker story. It doesn’t lend itself to a soundbite, but it’s — for every businessman in America and any economist that has their heads screwed on right, it’s an ominous situation.

But in terms of our moment in history, in commercial history and our projects in Cotai, along with our colleagues in the industry, it’s nirvana. Capital structure now is — these are mostly at the Venetian and the Wynn, things of beauty. They’re lovely, better than you could ever want. I mean, they’ve got everything, low interest rates, long maturities, low covenants. What else do you want? I mean, it’s great.

If you look at it from our point of view, look at it from a consumers’ point of view or a working person’s point of view, who’s paying for all this cheap money? Well, right now, the Fed is. I thought Bernie Madoff went to jail for that. But anyway, that’s my answer about your capital structure.

Lombard Street: A Description of the Money Market by Walter Bagehot

A few weeks ago I had the pleasure to read Lombard Street: A Description of the Money Market by Walter Bagehot (1873, my edition a reprint of the 1910 Dutton Edition). Insightful, incisive and straightforwardly written in the kind of limpid but expressive prose that seems to have gone out with the 19th century. It also includes some very useful data points, some of which are included in the excerpts below.

Excerpts from the [Gutenberg version]( (not clear what edition but checked against my copy). All emphasis added.

Dividends of Banks (p.39)

This is the natural desire of all directors to make a good dividend for their shareholders. The more money lying idle the less, caeteris paribus, is the dividend; the less money lying idle the greater is the dividend. And at almost every meeting of the proprietors of the Bank of England, there is a conversation on this subject. Some proprietor says that he does not see why so much money is kept idle, and hints that the dividend ought to be more.

Indeed, it cannot be wondered at that the Bank proprietors do not quite like their position. Theirs is the oldest bank in the City, but their profits do not increase, while those of other banks most rapidly increase. In 1844, the dividend on the stock of the Bank of England was 7 per cent, and the price of the stock itself 212; the dividend now is 9 per cent, and the price of the stock 232. But in the same time the shares of the London and Westminster Bank, in spite of an addition of 100 per cent to the capital, have risen from 27 to 66, and the dividend from 6 per cent to 20 per cent.[^1] That the Bank proprietors should not like to see other companies getting richer than their company is only natural.

[^1]: In 1905 the Bank of England paid a dividend of 9 per cent, and the London and Westminster Bank a dividend of 13 per cent. At the end of 1905 the sshares ofthe Bank of England were quoted at 293.5 and the those of the London and Westminster Bank at 58.

Some part of the lowness of the Bank dividend, and of the consequent small value of Bank stock, is undoubtedly caused by the magnitude of the Bank capital; but much of it is also due to the great amount of unproductive cash—of cash which yields no interest—that the Banking Department of the Bank of England keeps lying idle. If we compare the London and Westminster Bank—which is the first of the joint-stock banks in the public estimation and known to be very cautiously and carefully managed—with the Bank of England, we shall see the difference at once. The London and Westminster has only 13 per cent of its liabilities lying idle. The Banking Department of the Bank of England has over 40 per cent. So great a difference in the management must cause, and does cause, a great difference in the profits. Inevitably the shareholders of the Bank of England will dislike this great difference; more or less, they will always urge their directors to diminish (as far as possible) the unproductive reserve, and to augment as far as possible their own dividend.

Origin of Banking in Ensuring Currency Quality (pp. 80-82)

The real history is very different. New wants are mostly supplied by adaptation, not by creation or foundation. Something having been created to satisfy an extreme want, it is used to satisfy less pressing wants, or to supply additional conveniences. On this account, political Government—the oldest institution in the world—has been the hardest worked. At the beginning of history, we find it doing everything which society wants done, and forbidding everything which society does not wish done. In trade, at present, the first commerce in a new place is a general shop, which, beginning with articles of real necessity, comes shortly to supply the oddest accumulation of petty comforts. And the history of banking has been the same. The first banks were not founded for our system of deposit banking, or for anything like it. They were founded for much more pressing reasons, and having been founded, they, or copies from them, were applied to our modern uses.

The earliest banks of Italy, where the name began, were finance companies. The Bank of St. George, at Genoa, and other banks founded in imitation of it, were at first only companies to make loans to, and float loans for, the Governments of the cities in which they were formed. The want of money is an urgent want of Governments at most periods, and seldom more urgent than it was in the tumultuous Italian Republics of the Middle Ages. After these banks had been long established, they began to do what we call banking business; but at first they never thought of it. The great banks of the North of Europe had their origin in a want still more curious. The notion of its being a prime business of a bank to give good coin has passed out of men’s memories; but wherever it is felt, there is no want of business more keen and urgent. Adam Smith describes it so admirably that it would be stupid not to quote his words:—’The currency of a great state, such as France or England, generally consists almost entirely of its own coin. Should this currency, therefore, be at any time worn, clipt, or otherwise degraded below its standard value, the state by a reformation of its coin can effectually re-establish its currency. But the currency of a small state, such as Genoa or Hamburgh, can seldom consist altogether in its own coin, but must be made up, in a great measure, of the coins of all the neighbouring states with which its inhabitants have a continual intercourse. Such a state, therefore, by reforming its coin, will not always be able to reform its currency. If foreign bills of exchange are paid in this currency, the uncertain value of any sum, of what is in its own nature so uncertain, must render the exchange always very much against such a state, its currency being, in all foreign states, necessarily valued even below what it is worth.

‘In order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid, not in common currency, but by an order upon, or by a transfer in, the books of a certain bank, established upon the credit, and under the protection of the state, this bank being always obliged to pay, in good and true money, exactly according to the standard of the state. The banks of Venice, Genoa, Amsterdam, Hamburgh and Nuremburg, seem to have been all originally established with this view, though some of them may have afterwards been made subservient to other purposes. The money of such banks, being better than the common currency of the country, necessarily bore an agio, which was greater or smaller, according as the currency was supposed to be more or less degraded below the standard of the state. The agio of the bank of Hamburgh, for example, which is said to be commonly about fourteen per cent, is the supposed difference between the good standard money of the state, and the clipt, worn, and diminished currency poured into it from all the neighbouring states.

‘Before 1609 the great quantity of clipt and worn foreign coin, which the extensive trade of Amsterdam brought from all parts of Europe, reduced the value of its currency about 9 per cent below that of good money fresh from the mint. Such money no sooner appeared than it was melted down or carried away, as it always is in such circumstances. The merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain.

‘In order to remedy these inconveniences, a bank was established in 1609 under the guarantee of the City. This bank received both foreign coin, and the light and worn coin of the country at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage, and the other necessary expense of management. For the value which remained, after this small deduction was made, it gave a credit in its books. This credit was called bank money, which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money. It was at the same time enacted, that all bills drawn upon or negotiated at Amsterdam of the value of six hundred guilders and upwards should be paid in bank money, which at once took away all uncertainty in the value of those bills. Every merchant, in consequence of this regulation, was obliged to keep an account with the bank in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for bank money.’

Appointment of the Governor (& comments on the French Manner of Doing Things) (pp. 231)

… In France the difficulty of finding a good body to choose the Governor of the Bank has been met characteristically. The Bank of France keeps the money of the State, and the State appoints its governor. The French have generally a logical reason to give for all they do, though perhaps the results of their actions are not always so good as the reasons for them. The Governor of the Bank of France has not always, I am told, been a very competent person; the Sub-Governor, whom the State also appoints, is, as we might expect, usually better. But for our English purposes it would be useless to inquire minutely into this. No English statesman would consent to be responsible for the choice of the Governor of the Bank of England. After every panic, the Opposition would say in Parliament that the calamity had been ‘grievously aggravated,’ if not wholly caused, by the ‘gross misconduct’ of the Governor appointed by the ministry. Or, possibly, offices may have changed occupants and the ministry in power at the panic would be the opponents of the ministry which at a former time appointed the Governor. In that case they would be apt to feel, and to intimate, a ‘grave regret’ at the course which the nominee of their adversaries had ‘thought it desirable to pursue.’ They would not much mind hurting his feelings, and if he resigned they would have themselves a valuable piece of patronage to confer on one of their own friends. No result could be worse than that the conduct of the Bank and the management should be made a matter of party politics, and men of all parties would agree in this, even if they agreed in almost nothing else.

I am therefore afraid that we must abandon the plan of improving the government of the Bank of England by the appointment of a permanent Governor, because we should not be sure of choosing a good governor, and should indeed run a great risk, for the most part, of choosing a bad one.

Echoes of Today’s Extensive Attention to Deliberations of the “Fed” of the MPC (p. 243)

It has been said, with exaggeration, but not without a basis of truth, that if the Bank directors were to sit for four hours, there would be ‘a panic solely from that.’ ‘The court,’ says Mr. Tooke, ‘meets at half-past eleven or twelve; and, if the sitting be prolonged beyond half-past one, the Stock Exchange and the money market become excited, under the idea that a change of importance is under discussion; and persons congregate about the doors of the Bank parlour to obtain the earliest intimation of the decision.’ And he proceeds to conjecture that the knowledge of the impatience without must cause haste, if not impatience, within. That the decisions of such a court should be of incalculable importance is plainly very strange.

Profitability of Banks and its Cause (pp. 247-248)

‘But the main source of the profitableness of established banking is the smallness of the requisite capital. Being only wanted as a “moral influence,” it need not be more than is necessary to secure that influence. Although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital.

‘Experience, as shown by plain figures, confirms these conclusions. We print at the end of this article the respective profits of 110 banks in England, and Scotland, and Ireland, being all in those countries of which we have sufficient information—the Bank of England excepted. There are no doubt others, but they are not quoted even on local Stock Exchange lists, and in most cases publish no reports. The result of these banks, as regards the dividends they pay, is—

                               No. of Companies    Capital (L)
    Above 20 per cent             15                5,302,767
    Between 15 and 20 per cent    20                5,439,439
       " 10 and 15 per cent       36               14,056,950
       " 5 and 10 per cent        36               14,182,379
    Under 5 per cent               3                1,350,000
                                 110               40,331,535

that is to say, above 25 per cent of the capital employed in these banks pays over 15 per cent, and 62 1/2 per cent of the capital pays more than 10 per cent. So striking a result is not to be shown in any other joint stock trade.

Management and Supervision of Banks (pp. 262-263)

And an effectual supervision by the whole board being impossible, there is a great risk that the whole business may fall to the general manager. Many unhappy cases have proved this to be very dangerous. Even when the business of joint stock banks was far less, and when the deposits entrusted to them were very much smaller, a manager sometimes committed frauds which were dangerous, and still oftener made mistakes that were ruinous. Actual crime will always be rare; but, as an uninspected manager of a great bank has the control of untold millions, sometimes we must expect to see it: the magnitude of the temptation will occasionally prevail over the feebleness of human nature. But error is far more formidable than fraud: the mistakes of a sanguine manager are, far more to be dreaded than the theft of a dishonest manager. Easy misconception is far more common than long-sighted deceit. And the losses to which an adventurous and plausible manager, in complete good faith, would readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal, even with the utmost ingenuity. If the losses by mistake in banking and the losses by fraud were put side by side, those by mistake would be incomparably the greater. There is no more unsafe government for a bank than that of an eager and active manager, subject only to the supervision of a numerous board of directors, even though that board be excellent, for the manager may easily glide into dangerous and insecure transactions, nor can the board effectually check him.

Bill-broker commissions and operations (pp. 287-288)

As is usually the case, this kind of business has grown up only gradually. In the year 1810 there was no such business precisely answering to what we now call bill-broking in London. Mr. Richardson, the principal ‘bill-broker’ of the time, as the term was then understood, thus described his business to the ‘Bullion Committee:’

Mr. Richardson was only a broker who found money for bills and bills for money. He is further asked:

‘Do you guarantee the bills you discount, and what is your charge per cent?—No, we do not guarantee them; our charge is one-eighth per cent brokerage upon the bill discounted, but we make no charge to the lender of the money.

‘Do you consider that brokerage as a compensation for the skill which you exercise in selecting the bills which you thus get discounted?—Yes, for selecting of the bills, writing letters, and other trouble.

‘Does the party who furnishes the money give you any kind of compensation?—None at all.

‘Does he not consider you as his agent, and in some degree responsible for the safety of the bills which you give him?—Not at all.

‘Does he not prefer you on the score of his judging that you will give him good intelligence upon that subject?—Yes, he relies upon us.

‘Do you then exercise a discretion as to the probable safety of the bills?—Yes; if a bill comes to us which we conceive not to be safe, we return it.

‘Do you not then conceive yourselves to depend in a great measure for the quantity of business which you can perform on the favour of the party lending the money?—Yes, very much so. If we manage our business well, we retain our friends; if we do not, we lose them.’