Applied Philosophy

More than a decade ago people expected to get more computing power, more memory and more storage capacity for less money. There was an Internet financial boom, the Linux desktop promise (see Desktop Linux on Wikipedia) was going to break the Windows monopoly and return control to the user. Professionals had their laptops so they could work everywhere. Dell was pioneering design and sales of personal computers. Everything seemed on an upward trend (or downward for prices). Then the party ended.

The Internet bubble imploded in the new millennium. The new hordes of PC owners wanted less not more control over their computer, killing the Linux desktop. Laptops became first fashionable then necessary as mobility was defined between the dinning room and bedroom. Life became more violent than games and gamers flocked back to game consoles. The PC business became a low-margin business with the competition in the low-end of netbooks (see Netbook on Wikipedia). Computing power surpassed the needs of the average user, while broadband made media streaming and cloud storage more important than storage capacity in the PC.

Then the tablet computer came back (see History of tablet computers on Wikipedia), successfully this time. People started paying the price of a laptop for less computing power, memory and storage capacity and they received a smaller screen, less control on the operating system and a lock-in into a vertical monopoly that controlled hardware and software. This was not a surprise, as people had already that they were more than willing to be locked into a system with their smart phones. This was the age of the tablet: an underpowered small light device, that can satisfy all the needs of the average user.

I want to show how a tablet offers less than a laptop for the same price, below I compare the technical specifications of the most successful tablet and a laptop from a brand name vendor. The two products are:

• Apple iPad 2 Tablet (32GB, Wifi, GSM) (see it on Amazon.com).
• Sony VAIO EG2 (see it on Amazon.com).

I added two peripherals to the laptop:

• USB GPS Navigation Dongle (see it on Amazon.com).
• GSM USB Modem (see it on Amazon.com).

Here is the comparison table:

A comparison between the iPad 2 (32GB) and Sony Vaio EG laptop

(Table made with LibreOffice. Image created with GIMP)

The laptop comes ahead eleven times, the same three times, while the tablet is ahead in four categories. I tried to find comparisons for the graphic processor and found nothing useful, I awarded it to the laptop because it supports a newer version of DirectX and OpenGL. The price is for the laptop and the two peripherals combined. The prices quoted are the listing price, actual price may be lower.

I am not against the tablet completely, some people need it and others want it and can easily afford it. The low weight might be of extreme importance for example. I myself was a sworn user of desktops until the day I needed a laptop and did not have one. Today my circumstances do not allow me to have a desktop, but a laptop (with an external mouse) satisfies all my needs, I only miss the wider keyboard. I had the idea for this comparison years ago only then it was between a laptop and desktop.

Computers come in every shape and size and people can buy whatever they want or fit their needs best. I only note in this post the changing general view and the declining importance of computing power, memory and storage. Today people are willing to pay for a high-margin device that has less computing power, memory and storage in return for mobility, operating system integration and supervised application market. All is not lost we still have the Linux desktop (see DistroWatch.com for a selection) and the $25 computer is within reach (called the Raspberry Pi).

See also:

• The Degradation of Work in the Twentieth Century, guess what the name of this post was going to be.
• Apple Should Put its Money in iBank, see what Apple is doing with all the money it makes.

Update: The tablet with GSM cost $130 more, I updated the table and the tally, now the laptop is ahead in one category (GSM) for just $30.

God is dead

Fred

Fred is dead

God

—The Benny Hill Show, circa 1985

I remembered this joke when I heard the latest remarks by Warren Buffet about investing in gold. I clocked Buffet the first time I read his Wikipedia page way back in 2006, I realised then that he is a financial creature and not an economy investor (I described him as ‘odious’ in December 2008). The general public were quite taken with the sage but mistrust started when he stood up to defend the financial sector in 2008. Dislike came from seeing how much he was cosy with the Obama administration and China. Today a lot of people are turning away in disgust as he disparages gold buying.

The real problem is not Buffet but the gold enthusiasts who advertise gold as an investment: gold is not an investment. With friends like these gold is an easy target for a viper like Buffet. Gold is physical wealth that functions as money, it is not an investment. I would buy gold because I know that fiat money will lose all exchange value in the market sooner or later, but I would not buy it as an investment, because gold is not an investment (I said it three times now).

If gold is money then what are dollars? The dollar is a Federal Reserve Note, i.e. a zero-interest rate debt security that never mature, Treasury notes on the other hand pay interest and mature in less then a year. Some people who advocate gold say that there have been 10 years of growth, but in reality there has not been any growth. An ounce of gold ten years ago is still just an ounce, it did not germinate and produce a hundred ounces nor did it get pregnant and produce an ouncelet. What has happened in the last ten years is that the dollar lost value:

The Dollar Priced in Gold (Feb 98 - Jan 12)

(source The World Bank, Graph made with LibreOffice. Image created with GIMP)

This is the correct graph that reflects reality instead of illusions. You can not in invest in gold, but you can profit from a falling dollar to make real money. First you have to adjust the way you carry your accounts: all accounts have to be in gold instead of dollars and profit measured in gold and not dollars. Success means increasing the weight of gold owned and not the amount of dollars. A typical account book would look like this:

Example of accounting with Gold instead of Dollars

(Table made with LibreOffice. Image created with GIMP)

I personally would carry silver apart and other bullion with gold. I take into account the physical premium when converting dollars to gold so the price of dollars is set lower than the market rate. Receivables are any promise to deliver physical gold at a later date or on demand. I do not add a haircut on receivables to account for counter-party risk, but that can easily be done; it might be also useful to separate receivables according to risk. Other assets, stock or real estate, can be added in the same way. The bottom line is in gold, growth can only happen by increasing the bottom line.

Now we can do three different things: the first is to do nothing. This will result ultimately in a lower bottom line as the value of the Federal Reserve notes go to zero. The second option is to convert all dollars to gold, this will leave us without any legal tender and in case of an emergency we will have to buy dollars at a loss. The third option is to invest in dollars to increase the bottom line.

How do you invest in dollars? Easy all we have to do is to apply the old rule of buying low and selling high. We buy dollars when the price is low (translated: sell gold when the price is up) and sell them when the price is high (translated: buy gold when the price is down). You have to be nimble to take advantage of declines (gold price spikes) and spikes (gold price declines), but a careful trader without using margin can probably grow his gold every year.

Earning gold through the future markets is nearly impossible (a single contract is 100 oz. and taking delivery is very difficult). Having a retail shop is great, you would buy bullion by weight and sell it marked up; a shop requires independent means of living (so you would not eat your capital if people stop buying) and a culture of buying gem-less jewellery. Most people can increase their gold by earning dollars and buying bullion from the government mint (some private mints give good prices for bulk buying).

See also:

• Human Freedom Rests on Gold Redeemable Money (PDF) by Howard Buffet, congressman and father of Warren.
  
• The S&P 500 went DOWN 13% in 2010, the stock market measured in gold.
• Will the Fed ever Get Paid Back, why the dollar is going down.
• Will the Real Gold Standard Please Stand Up, relationship between silver and gold.
• The Difference between Past and Future Labour, why gold is money.
• High Treason in Zimbabwe, specifications for a new gold coin.

The Problem

Apple said in its annual results filing that its cash and investments – worth $81.6 billion at that stage – earned just 0.77 percent in the fiscal year ended September 24, 2011. That was a hair above the 0.75 percent return earned the previous year and down from 1.43 percent in fiscal 2009 and 3.44 percent in 2008.

—One area where Apple lags: Its low returns on cash

Apple Inc. does not pay dividends, profits that are not re-invested are accumulated as cash (probably in short-term high-quality notes). With the success of the iPad coming after the iPhone and the iPod, coupled with the high margin that Apple has on each device and the stream of income from the iTunes web-shop the corporation has built a cash-stash of almost a hundred billion dollars.

Big shareholders do not want the cash paid out to them, if the whole amount would be paid in one go the market capitalisation of the company would be reduced by a similar amount overnight and the share price would decline accordingly. If the money is to be paid in instalments, then the income stream can be capitalised; this at first would boost the share price, but as payments are made the net present value of the income stream and the net value of the company would decline, eventually a hundred billion paid would reduce the capitalisation by a hundred billion.

Both big shareholders (funds managing money) and the management would not like to see a declining share price, they have no use for the money and would only lose part of it to taxes, so Apple keeps the money. The problem, as the quote above demonstrate, is the low interest earned on the cash-stash. Shareholders want to earn higher return, than 0.75%, on their money so they demand that Apple either invest it or return it to them.

The Solution

The solution is simple: Apple Inc. should set up a bank-holding company, iBank, with about a third of its stash. Banks, even the timid Federally insured commercial banks, can leverage their equity many multiples to increase their earnings, helped by the Federal Deposit Insurance Corporation and the Federal Reserve System backing. The following graph shows the average yearly leverage (total assets/total equity) for banks in the US:

Leverage for All Insured U.S. Commercial Banks

(Graph from St. Louis Fed).

Leverage did decline from above ten times equity to about nine times equity after the financial crisis of 2008. As a new bank with no sub-prime assets on its book iBank can easily leverage a third of a hundred billion ten times to a third of a trillion. This will make it one of the top ten banks by assets:

Top 10 bank holding companies as of 31 Dec 2011 with iBank shown

(source National Information Center, table made with LibreOffice. Image created with GIMP).

Banks are very profitable with some earning 20% return on equity. We will take the average return on equity for insured banks in the US in the last few years:

Return on Equity for All Insured U.S. Commercial Banks

(Graph from St. Louis Fed).

As a new bank iBank can easily achieve 8% return on equity. Apple should deposit one third of its cash-stash with the new bank. The total earnings would be: 8% for third of the money and at least 0.75% for the deposited third. The total earnings from two-thirds of the cash-stash would be 3.8 times the money earned on the whole cash-stash in 2011. The last third can be returned to the shareholders.

The Prestige

iBank would solve the cash-stash problem by doing three things simultaneously: pay dividends, increase earnings and lift the share price. Once you own a bank, however, the limits to what you can do are as high as the central bank funding you get. For example Apple can leverage its design and retail knowledge (both in store and on the web) into making new banking processes, then license its patented methods to others. Just imagine walking to a hip iBank branch where everyone carries an iPad and uses an iMac.

Apple can use iBank as both a sandbox for developing enterprise products and an early adopter. Payment with iPhone and other monetary products will have one of the ten largest banks in America as a guaranteed partner. A native app will let customers access their accounts with an iPhone or an iPad.

The History

This is neither a joke nor an absurd idea. This is a serious idea based on historical evidence: Rockefeller turned his oil money to the Chase Manhattan Bank. The Harriman rail road fortune was turned into Brown Brothers Harriman & Co..

You might object, dear reader, that those were generational shifts; probably the sons of industrial barons growing up surrounded by accountants and advisers found finance a more suitable environment than industry, but many industrial families remained in industry and did not make the transformation into finance; what characterised those two families were huge profits made thanks to a monopoly. Rockefeller had a monopoly in the oil business and Harriman consolidated the railway business in the north-east. After obtaining a high return for many years and amassing huge liquid profits (i.e. cash) they moved to finance.

Apple has amassed the cash-stash thanks to high-margins on its ground-breaking devices; sooner or later the margins will decline and Apple will withdraw from the competitive market, concentrating on exclusive products. As Bill Gross said (quoted in my last post) the best way to make profits today is to “use money to make money”. Companies are driven to finance by three factors: high profits, lack of investments, low return on cash. Of course the great facilitator is the financial modern economy with a central bank willing to lend to banks at rates lower than the market. I will give two modern examples of corporations that used their industrial base to wade into the sea of finance; one was an ultimate failure that went bankrupt (due to bad management over decades) and the other is still one of the largest and most profitable US corporations.

The first is GM—the original company and not the Frankenstein monster that walks the earth today—which had GMAC (founded in 1919) which, in 2008, provided financing to 75% of the 6,450 GM dealers (source Ally Financial) it also engaged in insurance, online banking, mortgage operations, and commercial finance. GM made so much profit from lending people money to buy its cars that the joke was that “GM was a bank that happened to make cars” (source Seven reasons GM is headed to bankruptcy). In 2006 GM sold 51% of GMAC when it needed cash (when you fall on your luck the first to go is the most profitable part). Today GMAC is a bank-holding company called Ally Financial and it is majority (73.8%) owned by the government.

The second is GE which has a financial services unit called GE Capital which provides commercial and consumer financing. When the crisis hit in 2008 the chief officers of GE repeated in the media that they would not lose their AAA rating, they did in March of 2009. Today GE is rated AA by Standard and Poors and Aa2 or Aa3 by Moody (source: What’s the Deal with GE?). The downgrade did not hurt them badly as their industrial units benefited from the increased spending. The share of GE Capital revenues to total revenues fell from a third in 2010 to about 28% for Q4 2011 (source GE 2011 fourth quarter performance PDF and Annual Report 2010 PDF).

See also:

• Bagehot on Money a 5-part series discussing Bagehot’s book on money markets and banking.

Forbes Magazine has found a niche market: silly useless lists (a list of lists is on the list-maker par excellence: Wikipedia). The problem with this obsessive—and profitable—listing is that people are starting to see those lists as authoritative; another problem is the lists’ contribution to a decadent obsession in celebrity and the celebration (in the worst sense) of public figures.

The most famous list—and I believe the first—is the world richest men or I should actually say the world richest shareholders of listed companies; the list does not count many whose wealth is not public. This list is an estimation based on public records and stock prices with broad estimation of wealth in the form fixed property or private wealth (e.g. art, jewellery, et cetera), it is almost impossible to know what people own or how much illiquid assets are really worth.

The really silly stuff are found in the “most powerful” and “most inspiring” kind of lists, lists which are subjective fun at best and propaganda for the status quo at worst. Sadly the continued degradation of Wikipedia resulted in incorporating the Forbes Richest list into its content as “fact”; as Hegel once said: so much for the facts and so much for Wikipedia.

I found an interesting post on this blog, thank to the wordpress.com tags system. The writer, a western woman, visited Grameen Bank in Bangladesh. Her first-hand account is full of gems, here are some quotes (all emphasis is mine):

Our first day at Grameen was a debriefing on Grameen and figuring out our schedule.  It was mainly a huge waste of a day, until the end of the day when Muhammad Yunus came to the office to show the screening of a video on Grameen in America.  The movie was extremely interesting, and Yunus gave a little speech after it was finished, although not in English.

Self-glorification and propaganda. First thing is to set an image in the mind of the visitor to paint everything they will see or hear later on. It seems it had little effect on this visitor.

There is no way you could intern at the Grameen Bank and feel like you’ve walked away helping anyone, or learning anything from their mistakes or issues, as everyone continuously claims that everything functions near perfectly.  Maybe it does, they didn’t win the Peace Prize for nothing.

The only thing they are concerned about is preserving their image, that is how they ‘won’. It is all a show.

Most employees seemed so concerned with protecting the Grameen model that they wouldn’t answer the questions as fully as I’d hoped.   Or other times, my translator would often leave out any negative feedback someone might provide.  The meetings with the clients using simple questions and allowing them to answer by raising their hands was a much more effective approach to get any information.

Has there ever been a study about this ‘miracle’ bank by an independent public commission? No. The whole image has been built up by the media (ultimately owned by banks) and the seal of approval was given by the Norwegian Nobel Committee.

[I]t was interesting to find that the majority of the women took loans for their husband’s.  There were only 2 or so women from each center of over 50 who had their own businesses.  What was even more interesting was that no one at the bank had any issues with this.  I do agree that it is still helping to empower them as they are providing the money for the family and they are responsible to pay it back.  Bangladesh is a much different cultural setting for women as well compared to many other places–20 years ago most women were unable to leave their homes to do shopping and other activities.  However, I also found that nearly no one (1 women out of over 200) had invested in any training for themselves.  As Grameen Bank only provides financial services, it seems impossible that they would be able to learn a trade or skill–especially when none of their fellow members have businesses either.  I suppose it comes down to the question of whether credit is enough to empower women or must it be paired with training and other support.  And the answer is almost always that the credit is wonderful, but when put with training it can be a lot more effective.

To understand life first-hand experience without solid philosophical foundation is of little value. The writer thinks that usury-bondage is a wonderful thing, which should be celebrated. She thinks that destroying the family structure of the poorest people in one of the poorest countries in the world is “help”.

Having wealth, power, technology, et cetera. The West decided to make its life easy by rejecting sound philosophy; the result is the decline and imminent fall of the West.

“American slavery was profoundly different from, and in its lasting effects on individuals and their children, indescribably worse than, any recorded servitude, ancient or modern. The peculiar nature of American slavery was noted by Alexis de Tocqueville and others, but it was not until 1948 that Frank Tannenbaum, a South American specialist, pointed to the striking differences between Brazilian and American slavery. The feudal, Catholic society of Brazil had a legal and religious tradition which accorded the slave a place as a human being in the hierarchy of society — a luckless, miserable place, to be sure, but a place withal. In contrast, there was nothing in the tradition of English law or Protestant theology which could accommodate to the fact of human bondage — the slaves were therefore reduced to the status of chattels — often, no doubt, well cared for, even privileged chattels, but chattels nevertheless.”

—Daniel Patrick Moynihan in The Negro Family: The Case For National Action.

Nathan Lewis is an economist from the United States who has a rustic website where he publishes his opinion on economic and social questions (link in the blogroll). It seems that he has travelled and lived abroad and gained a valuable insight into the way Americans live, which he used to understand a very important social point, namely city design. He de-constructs the origins of the American city design in his three-decker article Let’s Take a Trip to an American Village.

He also successfully points out the errors of non-historical solutions (see his article Let’s Kick Around Carfree.com), although he did stick to an historical approach his solution of the Traditional City is also not good. The problems is in the scale: what works for a hundred thousand, will not work for ten million. Crowded cities might be fun when you live there a year and then go back to your huge home with the equally huge backyard, but it is not fun if you have to spend all your life in a tiny apartment going crazy from noise pollution.

Lewis seems to have experienced the Japanese crowded cities with narrow streets, but I wonder what his opinion would have been if he had experienced crowded life in Cairo or Lagos. Large-scale crowded urban areas are found all over the world and most of them are, or are becoming, uninhabitable.

“There are several causes of an urban heat island (UHI). The principal reason for the nighttime warming is that buildings block surface heat from radiating into the relatively cold night sky. Two other reasons are changes in the thermal properties of surface materials and lack of evapotranspiration in urban areas. Materials commonly used in urban areas, such as concrete and asphalt, have significantly different thermal bulk properties (including heat capacity and thermal conductivity) and surface radiative properties (albedo and emissivity) than the surrounding rural areas. This causes a change in the energy balance of the urban area, often leading to higher temperatures than surrounding rural areas. The energy balance is also affected by the lack of vegetation in urban areas, which inhibits cooling by evapotranspiration.”

—Urban heat island, Wikipedia

The most glaring example of an urban heat island comes from Lewis’s favourite country:

Tokyo is a 900 square kilometre heat island

The problem list is very long, including air and noise pollution.

Lewis mentions again and again in his writings that Americans go on vacation to traditional cities, that might be true, but very few Americans actually immigrate to traditional cities while a lot of people leave those ‘wonderful’ traditional cities and go to America, where you can get a big house with a garage for the same price you used to pay for your small flat back in the old country.

Lewis thinks that Venice is a sustainable city (see his article Let’s Take Another Trip to Venice), in fact the city foundations are constantly being rebuilt. The city needs constant protection from the sea and if a new project costing billions is not executed the city will drown. The city has been a tourist city for a couple of centuries (like most European cities Lewis gives as an example), but with cheap flights it has transformed into a resort driving all natives away.

Nathan Lewis has some very good points, but I would not let him design my cities.

“It is the conviction of those who were best informed, that no other panic was ever so fatal to the middle class. It reached every hearth, it saddened every heart in the metropolis. Entire families were ruined. There was scarcely an important town in England but what beheld some wretched suicide. Daughters, delicately nurtured, went out to seek their bread; sons were recalled from academies; households were separated, homes were desecrated by the emissaries of the law. There was a disruption of every social tie. The debtors’ jails were peopled with promoters; Whitecross Street was filled with speculators; and the Queen’s Bench was full to overflowing. Men, who had lived comfortably and independently, found themselves suddenly responsible for sums they had no means of paying. In some cases, they yielded their all, and began the world anew; in others, they left the country for the continent, laughed at their creditors, and defied pursuit. One gentleman was served with four hundred writs; a peer, when similarly pressed, when offered to be relieved from all liabilities for £15,000, betook himself to his yacht, and forgot, in the beauties of the Mediterranean, the difficulties which had surrounded him. Another gentleman who, having nothing to lose, surrendered himself to his creditors, was a director of more than twenty lines. A third was Provisional Committeeman to fifteen. A fourth, who commenced life as a printer, who became insolvent in 1832 and a bankrupt in 1837, who had negotiated partnerships, who had arranged embarrassed affairs, who had collected debts, and turned his attention to anything, did not disdain, also, to be a Railway promoter, a Railway director, or to spell his name in a dozen different ways.”

—A History of the English railway By John Francis

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I am really tired of writing articles that no one read; I had promised an article about the Gold Standard, the above diagram was prepared months ago.If you want to read the article that should have accompined accompanied the above picture leave a comment below and in a week’s time I will write a paragraph for each IP address (so no cheating!).

“Governments can and do change rules when in a corner,” Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris, said in a note. “Governments are sovereign and they can surprise and badly hurt investors when their backs are up against the wall.”

—Nakheel Bonds Plunge on Dubai Standstill Request

In Liquidating the Debt of the United States I wrote:

When investors give money to sovereign nations they do so without any protection, only the complete trust in that sovereign nation’s ability and willingness to repay them back. Sovereign nations can enact any kind of debt restructuring, capital control or exchange control without prior discussion, negotiation with or even notification of their creditors.

Click to view

from 24hgold.com

One plus one equals zero
Fuel and a match are nothing

One plus one equals one
Water and water is water

One plus one equals two
A man and another man are two men

One plus one equals three
A man and a woman are parents to a child

One plus one equals four
A product of two lines is a square

One plus one equals five
A line on a square makes a pyramid

One plus one equals six
A man and his peacemaker are six shots

One plus one equals seven
And one man in his time plays many parts,
His acts being seven ages.

I could go on, but Shakespeare seems a good point to stop.

“But our people could not be got to see how artificial our prosperity was—that it all rested on foreign trade and financial credit; that the course of trade once turned away from us, even for a time, it might never return; and that our credit once shaken might never be restored.”

—George Chesney, The Battle of Dorking

Though mad Almanzor rhymed in Dryden’s days,
No sing-song Hero rants in modern plays;
Whilst modest Comedy her verse foregoes
For jest and pun in very middling prose.

-Byron

A seven part series, ‘Recipe for Famine’, on bloomberg.com charts the effects of neo-liberal policy on agriculture in the third world:

• Part 1: Dead Children Linked to Aid Policy in Africa Favoring Americans
• Part 2: How Famine Lurked Behind Vienna Toast Where Joe Cocker Crooned
• Part 3: World Bank’s ‘Wrong Advice’ Left Silos Empty in Poor Countries
• Part 4: Government Bribes in Cameroon Divert Funds From Food Amid Riots
• Part 5: Wasting Enough Rice to Feed 184 Million Is Habit Only Rats Love
• Part 6: Corn Futures Spark Riots as Speculators Take Trading to Limit
• Part 7: Eating Isn’t Option When Minnesota Corn Burns in Houston Cars

‘What is sauce for the goose is sauce for the gander’ or to paraphrase:  ‘What causes famine in poor countries causes famine in rich countries’.

  Read the rest of this entry »