Why The Next Financial Crash Will Be The Last

or, an Outline of Everything I’ve Read on Twitter in 2020 so far

  1. The most basic criticism of capitalism is that it is inexorably tied to growth.
    1. Capitalism is the most efficient way to allocate resources.
    2. Efficiency always favors scale.
    3. Scale favors inequality, because greater extraction of resources is enabled by more underclass, so resources are effectively allocated to create larger and larger underclass, with an elite class almost as byproduct. 
  2. We are now at a scale where resource extraction of some form will break some kind of infrastructure required to maintain growth.
    1. The key types of infrastructure that enable large societies are: finance, energy, water, food, housing, military and policing, politics, and environment.
  3. Of infrastructure types, finance is the most fragile and environment is the most vital. So finance will likely break first, and the environment will probably break last – reserving a healthy respect for the combined odds of an unlikely explosive event in any of the other types.
  4. What we are seeing in 2020 is a large scale demonstration that money isn’t an undeniable law of the universe – it is a social convention that is strong enough to call fact, but weak enough to deny as real. In shorthand, we can label people who both see this and feel this as “radicalized.”
    1. We can call people who act on this as “extremist” – while acknowledging that there are many instances where what is now considered just was first considered extreme.
  5. In the current demonstration of financial fragility, we can already see that the owners of the capitalist system will succeed in maintaining the most efficient allocation of resource to reward scale without destroying the system. 
    1. The underclass will receive the minimum concessions required to continue to reach greater scale for continued extraction of resources.
  6. Scale is now at a level that enables the largest and fastest dissemination of information in all of recorded history. The percentage of radicalized people is a minority, but it is larger both in size and in proportion than it has ever been.
    1. There are many very cool things about the dissemination of information and associated technologies, but these are a side show.
  7. Since information feeds radicalization, there is no way to stop the growth of radicalization other than increasing authoritarianism, which is the only way to decrease the flow of information at this point.
  8. Capitalism will therefore allocate resources to authoritarianism because that maximizes the scale of the underclass required to extract maximum resources.
    1. The underclass will receive only the amount of goods and services required for them to accept the devil’s bargain of surviving for further exploitation under authoritarianism.
  9. The size of the radicalized population is large enough to foretell a kind of civil war in the United States. Capitalism is efficient enough to allocate resources to preventing this war from becoming one of blood, though with a “blood and soil” culture as a potential byproduct of the authoritarianism required to slow radicalization.
  10. The most peaceful outcome to hope for is a slow balkanization of the United States. It’s hard to see that trajectory ending in anything other than states not united – not culturally, politically, economically, or legally.
  11. Hopefully a bloodless war is coming first, even if a bloody war might follow later. Since the financial system is the most fragile of infrastructures required to support capitalism, it should not be surprising to see it collapse first.
  12. The collapse of our financial system has now been demonstrated in periodical financial system shocks going back almost four decades.
    1. This started with the initial petrodollar shock of the ’70s – finance is intertwined with energy extraction, which of course drives environmental exploitation.
  13. The observable cracks in the financial system are so large now that it’s hard to believe that an even larger financial system could possibly survive the next crash, which would be due to come in about another decade.
  14. The real limit is not the size of the cracks but that the efficient allocation of resource required for the masses to accept authoritarianism is becoming increasingly indistinguishable from what authoritarians want people to call socialism.
    1. In other words, the next blowup will only be repairable by allocating even more resources to the underclass, which increases the ability of the underclass to communicate and understand radicalism.
  15. The capitalist system will stop short of allowing socialism to end capitalism. As a last gasp, it will empower authoritarians who would kill people if helpful to maintain capitalism.
    1. These people would be largely but not exclusively radicalized. There will be plenty of collateral damage.
    2. These people would be almost exclusively underclass.
  16. The peaceful Hail Mary to hope for is the rapid advancement of technology that would replace human labor with robots and artificial intelligence.
    1. The excess humans would be placated with limitless entertainment, legalized drugs, and universal basic income.
  17. Despite our best hopes, the most likely outcome is that the next financial shock will be the last, either through failure to scale or a war that necessarily includes the destruction of the financial system, which can theoretically be rebuilt under an authoritarian regime. 
  18. There are really funny jokes about each and every one of the points and subpoints above.
    1. The ones about the subpoints are the funniest ones.
    2. A plurality of the jokes are about sex, which means they are the most obvious ones, but doesn’t mean they’re not the funniest ones.

FAQ

WTF is this?

A few months ago, I decided to radically increase my consumption of Twitter. Reading a constant stream of information, I never really took the time to try to assemble everything I’ve learned into a coherent narrative. Now that we are in Covid-19 shelter-in-place, the combination of a huge amount of free time and a rapid amplification and culmination of every message I’ve read previously compels me to write an outline of everything I’ve read recently.

Do you want to argue about this?

No. This is not an argument. This is an outline of everything I’ve absorbed on Twitter in 2020, in the order of a coherent narrative. I’m aware that there are arguments against every single point. I did not include any of them.

I’m aware that my sources are biased, both in my selection and in their content – that is how Twitter works. I’m aware that there are many omissions. I’m aware that some terminology is clumsy, or confusing, or potentially offensive. I’m aware that there are missing perspectives, and there’s a glaring lack of data or even citation. The lack of citation may seem particularly galling to many people. I’m not interested in arguing about any of this.

Are you aware that you’ve made an error? If I explain it to you, will you fix it?

No – if I was aware of an error, I wouldn’t have made it. If you try to explain something to me, I might listen, but I probably won’t go back and “fix” this outline because there is nothing to fix – it’s an accurate outline of what I’ve read on Twitter. Perhaps if there is another pandemic and that gives me free time instead of killing me, I will include your explanation in another outline. I don’t think I’ll want do do this again during this pandemic. I should probably get off of Twitter.

Are you aware that people smarter than you disagree with you?

Yes.

Do you think you’re original?

There is nothing original here. It is an outline of what I’ve read, which means that someone else said it.

Don’t you think you’re missing something?

No. This is an outline. By definition, it excludes the vast majority of content. It also excludes a huge number of relevant historical events, fascinating theories, and all sources not mentioned frequently in my Twitter feed, which necessarily favors time in recent living memory. 

Whatever it is you think I’m missing: If I’m aware of it, I left it out on purpose. If I’m unaware of it, then I didn’t find out about it or didn’t remember it for this outline anyway.

You don’t even mention the pandemic – don’t you think it’s relevant?

The pandemic is a proximate cause of many points in the outline, and gave me time to write the outline, but is not intrinsically important to the points of the outline. The exact same outline could have occurred in an event of an alien attack, assuming the aliens were defeated. In theory either the pandemic or the aliens would end up making this outline irrelevant, but I did not find that theory interesting enough to outline.

Whoa, you mean like how Adrian Veidt fabricated a fake alien octopus to attack the Earth in the hopes of uniting everyone in peace? Do you think that Elon Musk is like Veidt? Do you think the Chinese regime fabricated the novel coronovirus as a subtle act of war, or even as a devious act of peace, à la Veidt?

I too loved The Watchmen. Sorta, he wishes, and no.

What do you think about this technical solution?

This is an outline of what I’ve read on Twitter, it’s not a problem solving session. In any case, all relevant technical solutions are covered in 6.a., 16, and some of 16.a.

Aren’t 5.a and 8.a the same?

No. 5.a. refers to monetary concessions to the underclass in an attempt to repair a financial shock. Such a repair attempt was just passed by the U.S. Senate, and is a current example of point 5. 8.a. refers to goods and services produced by a capitalist system for the underclass, which even under the authoritarianism noted in point 8, can be relatively comfortable. That is why it’s called a “devil’s bargain.” 16.a. is the best case outcome of the devil’s bargain.

Why are there main points and subpoints?

It just seemed to me that some points were not truly necessary to a coherent narrative, but very helpful to understanding a related point. I put these in as subpoints but maybe could have made them main points or probably could have left them out entirely. 

Also, as mentioned in the outline, subpoints tend to inspire the best humor.

Your jokes aren’t funny. Also, there are many things I don’t like about you. I demand that you explain or prove anything you’ve written. I challenge you. You are worthy of neither attention nor admiration, only my unending scorn.

That is not a question. This is a FAQ, which means Frequently Asked Questions.

Do you believe anything you’re saying here? Does this outline align in any way with your personal beliefs or political positions?

Yes, some of it and somewhat.

So then is this your manifesto?

No. This is an outline of everything I’ve read on Twitter recently, assembled in the order of one coherent narrative. This is my manifesto.

Again, WTF is this?

Again: this is March 2020 and we’re under a shelter-in-place order. There’s not a lot to do.

twitAARRR

People are talking about a report that Twitter has a low proportion of “active” users.  I saw a similar debate rage a few years ago around the definition of users of Second Life.

Amusingly (and presumptuously), today’s report claims to define “True Twitter users” as active.  They say that a True Twitter User has at least 10 followers, follows at least 10 people, and has tweeted at least 10 times.

Why should we accept this definition?  Analyses like this often come from a position of functional ignorance.  I believe that only the company can have a “Truly” meaningful definition of “active” users, and there are often good reasons that the company shouldn’t waste time debating this definition with external observers.

This is especially true when a company has an evolving revenue model.  In those cases, “active” is only meaningful in the context of a business model cycle that some people call “Startup Metrics For Pirates” because of the acronym AARRR:  Acquisition, Activation, Retention, Referral and Revenue.  “Active” is the second “A” here, and what matters in the definition is that customer acquisition efforts lead to active users, who participate in activity that they want to repeat and tell their friends about, which ultimately results in the company getting paid.

So if Twitter had zero customer acquisition costs, and tweeting was both addictive and viral (obviously, none of these things are strictly true), then the only definition of “active” that would matter is “user who tweets once.”  Or, if Twitter charged only users with 100K followers, and only users who had 100 followers in the first month ever get to 100K followers in their lifetime (again, not true), then the active user definition might be “user with 100 followers in first month.”  My dumb revenue models here are not the point; the point is that “active” only has meaning in context, and only the company understands that context, especially in a pre-revenue company.

Twitter, rather famously, has not publicly settled on its revenue model.  Undoubtedly they have dozens of ideas, and so they have many dozens of potential definitions of “active” – and they’re not obliged to share any of those ideas with you or me.  They don’t need to waste time with ignorant and disinterested people (myself included):  it’s no use picking over these definitions with people who are not deeply invested in the business (as employee or investor), and who therefore lack the information and commitment required to contribute productively to the discussion.

betting on failure

It’s interesting to watch reaction to the news of Twitter’s financing at a $1 billion valuation.  The vast majority of commenters seem appalled (or at least cynically amused) at such a lofty valuation for a company with no meaningful revenues.

The shocked reaction misses an important point:  Everyone believes that investments in companies like Twitter are likely to fail, including the investors in Twitter.  For the most part, people who invest their money in companies like Twitter are not putting their life savings into a single company; they are investing their portfolio (or an allocation of it) into high-risk, extremely-high-return-potential companies.  For that high-risk portfolio, it could be rational to invest in companies with a 90% chance of failure, if there is sufficient return for the other 10%.

Now, there aren’t many actual portfolios that are (intentionally) structured with any allocation to a class of investment with a 90% failure rate.  But it would be completely typical if every single non-employee investor in Twitter made their investment from an allocation that has a greater-than -50% failure rate.  In other words, most Twitter investors believe that it’s likelier than not that Twitter will fail.  (Here, “failure” means that the investment will fail to reach the modeled return, not that the company will completely go out of business.)

It’s easy to say that Twitter will probably fail, but how many critics are confident that there is a less than 10% chance at a 10X return?  Investors in Twitter don’t bank on Twitter, they plan that either Twitter or one of the other companies in that allocation of their portfolio will make an outsized return.  Many of those investors have been right time and time again about their projected portfolio performance, which means that as a reward they will continue to invest in companies that are likely to fail.

trademarks gone wild

I try to avoid drawing parallels between trendy tech issues of the day and my own past experiences – generally I believe that to move forward you have to treat most of your past as irrelevant.

But the parallels are too strong in watching Twitter make a controversial attempt to trademark the term “tweet,” bringing them into a cycle of uncomfortable conflict and limited accommodation with their own developers.

Second Life faced exactly the same issues – a passionate and well-meaning developer community using many terms associated with Second Life that the company hoped to protect as trademarks.  We ultimately came up with a comprehensive policy that was and remains a subject of derision in the SL community (see comments to the linked blog post).

It can be very difficult to engage in a productive conversation about trademark law, because even the basics are hard for nonlawyers (and some lawyers) to absorb, and yet because we’re just talking about using the English language, it seems like anyone who speaks English good should be able to comment intelligibly.  [Yes, the usage error in that sentence was intentionally ironic.]

I think everyone – the company and the commentators – could make better progress by ignoring the legal issues, and just focusing on the marketing questions.  Now, marketing is another one of those disciplines that requires a lot of expertise, and is nonetheless discussed with fervor by anyone who has a couple of IQ points to rub together.  But I think the marketing questions here are simple enough even for me to understand.

1st question:  Is there a name for the product or service that the company should be able to control?  The answer to this question is almost always yes for at least one name – companies are generally better off when they control the primary name for their offering.  Once you reach that answer, following trademark law in order to implement that answer is a straightforward process, and having good customer communication around that process is a requirement.

2nd question:  When there are words associated with the product or service that facilitate the use or adoption of the service, is that facilitation improved or hindered with greater company control over those words?  Marketers and lawyers almost always have the same bias for control (though for different reasons).  The bias itself is always wrong – I don’t mean that it’s always wrong to have that control, I mean that it’s always wrong to approach this question with bias.

Does it really do any good for Twitter to own the word tweet?  Some brand marketers and lawyers will raise the specter of genercide (basically, losing control over your brand name), but this fear should not be the primary analysis unless we are talking about the primary name.  When we are talking about those strongly associated words that help spread the gospel of the company, the analysis should not be of the law and certainly should not come from a place of fear.

The analysis should dispassionately examine whether unrestricted use of the words will help spread that gospel.  And it will often make sense to have less control over these words, not more.  If religion were a business, it would probably make sense to trademark “The Holy Bible” – but trademarking “Christ” would probably make for a lot fewer Christians.

hey facefeed, let’s just be friends

I can’t help wondering if Facebook’s acquisition of FriendFeed isn’t an overreaction by the giant social network, in response to the deafening buzz around Twitter.

It must have irked Facebook that the tech blogosphere has been obsessed this year with Twitter Twitter Twitter – Facebook’s growth has been just as impressive, arguably more so since it’s rarer to grow a large base much larger than it is to grow a small base into a medium-large base.

So in the past year, Facebook has tried to buy Twitter and has copied features of both FriendFeed and Twitter.  And this acquisition appears to be about bringing the values of FriendFeed to Facebook.  Among those values are an emphasis on product openness and sharing beyond your circle of friends.

But what if users don’t want to be more open?  Could it be that Facebook grew so fast because its users regarded the service as a safe place to share their lives with only a close circle of friends?  If Facebook becomes more like Friendfeed, will the service become less attractive to a mass audience?  (I’m certainly going to have to rethink my social media use.)  Maybe it’s only folks like the 250 that believe that everyone wants to share everything all the time.

Oh sure, Facebook has and will have a variety of privacy settings that give people choices about what to share – but these are terribly confusing and difficult to use.  More importantly, a company has to choose a single dominant brand image.  Will Facebook remain the place where friends can share their lives?  Or will it continue to morph into a knockoff of its less popular competitors?

Early indications are that Facebook will integrate FriendFeed’s staff, which is likely to lead to shuttering the FriendFeed service.  I think that could be a lost opportunity.  Facebook might do well to reaffirm its core brand as a more private place for friends, and retain FriendFeed as a brand extension that focuses on open data and public sharing.  That way they can serve the mass market and the avant garde with different product philosophies and branding.

advertising in 3 E-Z slides

Has the Internet ushered in a revolution in advertising, or is web advertising destined to fail?

I couldn’t begin to have an opinion without some basic context about advertising, so I gave myself a crash course.  Here’s the 3 most important things I learned:

1.  Advertising has multidimensional sectors.

Two of the fundamental axes in advertising are the lines between brand and direct response marketing, and between online and offline ads.

ad status

I can’t do the differences justice here, but essentially brand marketing is intended to make you feel a certain way about a product, while direct response is intended to make you take an immediate action regarding a product.

The concepts seem simple, but whenever new media arises, it can be quite tricky to determine what kind of advertising is suited to the media.  When the Web first burst into mass acceptance, some advertisers treated this new medium as a branding opportunity, plastering their logos and flashy campaigns wherever they could.  Google was among the first to realize that direct response principles fit the Web much better than branding – deliver ads against search results and you have a natural audience to act upon that hyperlink.

But the Web continues to evolve, giving continued opportunities to make the wrong choices about ads.  When social networks like Facebook reached mass popularity, many advertisers tried to deliver targeted direct response advertising to demographics discovered through the social graph.  But “banner blindness” and the very social intent of these sites combined to make pure direct response ads ineffective.  The better strategy for advertisers in social networks is to build a community and create engaging viral media to enhance the brand.

So the lesson here is that advertisers have to make very savvy choices between brand and direct response advertising as the evolution from offline to online continues.

2.  Online and offline ad spending patterns are currently inverted.

In the excitement about the growth of online advertising, it’s easy to forget that offline is still much bigger, with online making up roughly $23 billion of a $137 billion U.S. ad market.  These numbers are even more interesting when examined along the divide between brand and direct response.

 

According to one estimate, around 75% of offline ad dollars are spent in brand marketing, while 80% of online ad dollars are spent in direct response.  Because offline is so much bigger than online, that means that direct response offline (a.k.a. “junk mail”), makes up around $28 billion.  Yep, junk mail is bigger than the entire Internet ad industry.

Now here’s a point that’s a little more abstruse, but I hope it’s worth the time to understand it:  the advertiser’s spending pattern is inverted in online vs offline.

Offline brand advertising is expensive to create, but reaches a mass audience, so the spend per viewer is low.  Take a Super Bowl ad:  a 30-second commercial can cost $4 million (for air time and a lavish production cost), but with 95 million viewers, that’s only 4 cents per viewer.  Let’s call this low cost per viewer a mass spending pattern.

Offline direct response advertising total cost is lower, but higher per person reached.  For example, it can cost $50K to produce and mail a catalog to 10K recipients.  At $5 per person, that’s 125 times more expensive per person than a Super Bowl ad!  But it works because of the targeting – those 10K people have been identified by the advertiser as being likely to be interested in the product.  This low threshold, high cost per viewer is a targeted spending pattern.

The patterns are rewired online.  Search advertising and email campaigns are direct response in that there is a clear desired action (usually a click).  Though the cost of the keyword or email campaign can be relatively low, the distribution is very broad, so the cost per viewer is extremely low –  this is a mass spending pattern.

Conversely, doing effective brand advertising on a social network requires really identifying the target demographic and crafting a creative campaign to get that ballyhooed viral explosion.  That means relatively high creation cost and a specific audience, resulting in a high cost per viewer – this is targeted spending.

So offline, brand advertising is mass spending while direct response is targeted spending.  And online, brand advertising is targeted spending while direct response is mass spending. Or at least, that’s the way it is today . . .

3.  Successful advertising tactics will seek equilibrium.

Pundits are always rushing to declare failure, or any new method the death of all old ones.  But offline advertising feeds online, and online direct response may morph into “brand response.”  Advertising, like nature, restlessly searches for equilibrium.  The story above is heading towards a more stable balance so the value of the spending better matches the returns.

ad future

It’s not controversial to suggest that offline ad dollars will move online – that’s more an observation than a suggestion at this point.  And it’s also been an observable trend that offline direct response marketing is declining at an even faster rate than offline brand marketing, because Internet direct response has rapidly become effective for larger audiences.  But I’m adding two conjectures that aren’t easily observable today.

First, online brand marketing will grow at a faster rate than online direct response.  This means that social media like Facebook and Twitter (like them, not necessarily those two) will grow revenues faster than Google.

Second, online brand spending will revert back to the offline spending pattern of mass rather than targeted, and online direct response will similarly go to targeted spending rather than mass.  I believe that dominant social media sites and practices will arise that allow brand advertisers to reach a large audience at a low cost per viewer.  At the same time, increasingly effective data collection on Internet consumers will allow data holders to sell highly targeted direct response ads at premium prices per consumer.

What does it take to get from here to equilibrium?  In monetary terms, holding the total ad industry constant at $140 billion (not a safe assumption):

  • $50 billion will move from offline to online
  • $15 billion will move from offline direct response to online direct response
  • Online direct response will grow by $20 billion, while the revenue per viewer seeks a relatively high number
  • Online brand marketing will grow by $30 billion, while the revenue per viewer seeks a relatively low number

That is a lot of money sloshing around, in a lot of different directions.  I think it’ll happen within 5 years.

that’s entertainment

Is social media entertainment?

Of course it is, whatta silly question, you say. When people spend their leisure time engaged in updating their profiles, messaging each other with pokes and posts and status updates, posting and viewing photos and videos – well, that’s entertaining. The answer to the question from the user’s perspective is undeniable. But of course the fun in any analogy is to see how far you can extend it, so I’m really wondering if social media is entertainment from a business model perspective.

Think of a big-budget movie. A group of people get together around a concept, script or performers. They raise financing in excess of $100 million from traditional studio and independent interests, often pre-selling shares in future revenue stream. Many dozens, sometimes hundreds of people are employed in executing the vision into the reality of the work on screen. Distribution occurs not just in theaters, but downstream on DVD, TV, and of course the Web. A successful blockbuster returns hundreds of millions of dollars in a burst, and a continuing annuity essentially forever.

Is this so different from what we’ve seen in social media? From Tribe to Friendster to MySpace to Facebook, it’s been a hits-driven business. People assemble around a concept and produce, and it seems that there is a limited window for the concept to catch fire with the broader public. If and when it does catch fire, there is a period to maximize revenue during the peak of popularity, and then a long slow decline. Maybe the curve is a little more like a successful TV series than a blockbuster movie, but the dynamics are the same: the production of a media experience that has temporal value for audience entertainment.

This is certainly an analogy that most social media companies would resist. They prefer to think of themselves as technology companies, building a platform for media delivery, or even becoming a fundamental part of the infrastructure of communication.

It’s not easy to define a platform on the Internet. You would think the concept of infrastructure is simpler. It’s relatively easy to envision the most concrete elements of the communications infrastructure: the physical wires (be they fibers, cables or tubes), the hardware of routers and switches and terminal devices, the often unglamorous stuff that moves the bits and bytes around. Database and storage are surely infrastructure components as well.

But can a software service company become part of the infrastructure? This isn’t a question of offering infrastructure services in a cloud of computing – it’s a question of whether a service that is not about transport and storage of information can be considered essential to modern communication.

In areas where that can be considered a serious question, we have an enormous market. Search is the prime example. Without search, the way we communicate and create on the Internet would be severely hampered, in the same way it would be hampered if we didn’t have significant storage or large databases. And search is a good example of a putative infrastructure element that must be provided as a service – which means a business can be built around it. Coming up with a protocol like TCP/IP may give birth to the Internet, but it doesn’t necessarily give rise to any dominant business for its creator.

So are the companies involved in today’s creation of social media making infrastructure? Can essential services be built in social media that become a fundamental component of communication? Even if so, is the social graph going to be as enriching as TCP/IP (that is, in more of a spiritual than monetary sense)?

Or is it all “just” entertainment?