The Ingenesist Project

The Next Economic Paradigm

Tag: volatility

The Interesting Thing About Interest Rates

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On February 17, 2010

In General Information

Money represents human productivity, but the interest on money represents risk. This means that the lender collects interest because that represents the risk that they assume in departing from their money. Meanwhile productivity fluctuates naturally and can be affected by a many external forces.

The problem is that risk can never be negative, therefore interest rates can never be negative – that is called “breaking he buck”. Risk is a measure of volatility, or, “deviations from what is considered normal”. While there is certainly good deviations and bad deviations, there can never be a “negative” deviation from normal – it is a mathematical impossibility, a glitch.

The result is that productivity must always be driven up and up and up – sometimes in unnatural ways, such as forcing consumption. Constant production is unacceptable – it must always increase. Vacations, free time, family time, and leisure are not acceptable. What if we had a currency that could accommodate a negative interest rate?

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Critical Value of Conversational Currency

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On September 25, 2009

In General Information

Can the value of conversation fluctuate when compared to a “basket of conversational currencies”?  The translation is as follows;  If several conversations are taking place at the same time, does yours hold more or less value depending on the value of the others?

Same as a Lie?

If you ask a newspaper whose lead story was trumped by an unexpected celebrity death, the answer is yes.  If you tell a political activist whose rational message is lost to  more radical activists, the answer is yes.  If your speech is interrupted by a heckler, the answer is yes.  If you are caught lying about your Nuke Plant, the outcome is unintentionally the same – a loss of credibility, value, equity, and associated increase in risk, volatility, etc.

In today’s world of floating currencies, almost every currency rises and falls against other currencies at one time or another. But a currency that is persistently weak or continually falling relative to others presents a problem. If the dollar’s value were to continue to fall to new lows, eventually this would trigger rising inflation pressures. That’s because inflation can be defined as the loss of purchasing power of a unit of currency.

Inflationary Pressure on Conversational Currency?

Likewise, weak and falling conversational currencies are also bad for growth, since they scare away investment by another conversant. Who wants to invest time and knowledge in a conversation if there exists the real possibility that one’s investment will be eroded by a falling currency? At the very least investors require special incentives (i.e., premiums) to invest in an conversation with a weak currency.

Incentives Packages of Social Media Space

Weak conversational currencies are symptomatic of a variety of factors: cheap talk, lack of references, weak economic growth prospects, lack of confidence in the other participants, weak currency demand, and bad fiscal policies (e.g., wasteful discussion, high cost of participation, low quality venue or presentation). Strong conversational currencies, on the other hand, typically reflect tight topic control, vetting policy, strong growth prospects, confidence among participants, strong currency demand, and good fiscal policies.

The Critical Breath Mint

For better or worse, in order to “mint” conversational Currency, a discussion must be made accessible to largest audience possible.  The discussion must also be directed to those most “qualified” to engage in the discussion. When the value of the conversational currency reaches a low level threshold in either factor, the discussion ends with no resolution to continue and no tangential discussions taking place.  This can often be attributed to disruptive innovation making old conversations obsolete.  But it can also happen to worthy conversations infected by a parasite such as spam, hecklers, radicalization, flame wars, and emotional versus rational articulation, vendetta, sabotage, etc.

Critical Level of Conversational Currency

The critical level of conversational currency is where supply and demand cross.  The value of conversational currency will be determined by the ability to match the most worthy knowledge surplus with the most worthy knowledge deficit.  We use the financial analogy because the idea is the same – a currency is a currency.  Many of the same rules, methods, and calculus hold.  What is missing in Social Media are an inventory and accounting system for knowledge assets. While such systems are emerging on FaceBook, Twitter, Linkedin, etc.  Some intervention is needed to integrate a social media system we can bank on, literally and figuratively.

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The Value of Social Currency

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On July 9, 2009

In General Information

How big is this opportunity?

Roughly 10% of the US gross Domestic Product can be attributed directly to the process of evaluating or examining transactions.  This represents a 1.4 Trillion Dollar of value in a system that may be better organized, captured, and preserved through social networks and the conversations that they produce.

Social vetting on a scale that would allow social networks to monetize would require that communities organize their knowledge assets specifically for deployment to a market.  All that an entrepreneur needs to do is fill this need.

What happens if they don’t?

The true cost of vetting may be calculated by what happens in the absence of oversight, transparency, and disclosure. When the vetting process fails, so too does the industry.  The continuing financial crisis of 2008 was fueled by a failure to regulate mortgage backed securities.  The financial Crisis of 2002 arose from a failed accounting (CPA) profession.

The losses due to the absence of vetting mechanism exceeds by many times the cost of having a system in place.  The financial crises of 2002 and 2008 have together wiped out nearly 20 Trillion dollars of value and incurred high volatility to financial systems due to failed vetting mechanisms.   The people who held the knowledge about the impending doom had no effective medium to share.

Who vets KNOWLEDGE assets?

The flow of money lives and dies by the vetting mechanism.  CarFax, Experian, Ebay, Google owe their existence to the ability to vet information – However, they do not vet knowledge.  The ability to deliver the right knowledge asset to the right place, at the right time for the right price is tantamount to being able to “manufacturing innovation”, that is, to print money.  Inversely, the ability to foresee the result of specific knowledge assets deployed to specific business conditions is the Holy Grail of entrepreneurs.

Social networks can carry out this very important function of the Innovation economy; organize, locate, and develop knowledge assets in a form which can emulate a financial instrument.

How are things changing?

Emerging ideas such as conversational currency, relationship economics, innovation economics,. nd new ways to value intangibles are appearing in research blogs across the web.  Disruptions to Global finance, environmental policy, and the emergence of global currencies are setting the stage for a huge transformation in how society organizes itself.  Traditional industries such as print media, advertising, and banking are failing. Nothing is sacred except change.

Where are these communities, and what do they want?

Many communities exist today in a variety of forms and functions such as communities of practice, fellowships, service organizations, professional societies, trades groups, affinity groups, etc.  Increasingly they are moving to Social Media such as Facebook groups, Linkedin groups, Affinity groups, aggregation groups, and political action groups.  Communities are using social media technology to engage the knowledge domain contained within them.

As such, they will soon have ability to foresee the result of specific knowledge assets deployed to specific business conditions.  This is the Holy Grail of modern civilization.

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The Next Global Currency

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On May 26, 2009

In General Information

Charging interest on money was at one time illegal.  The concept of “interest” was legitimized by the argument that lenders needed to be compensated for the risk that they assumed.  As such, currency is married to risk and not necessarily actual productivity.

Whoops.

Risk can never be negative because it is a measure of volatility where zero is the lowest possible value.  There is such thing as good volatility (winning the lottery) or bad volatility (my 401K) or zero volatility, but volatility can never be negative; hence the term “Breaking the Buck” which is considered a failure of the monetary system.  Interest rates respond causing inflation or deflation relative to other currencies, causing more volatility, thereby inducing more risk, etc.

Who wants to be a numéraire?

The dollar is a “numéraire” – the standard by which value is compared.  Recently there has been a strong call for a global currency to change the numéraire to something else.  Ideally, the numéraire should be able to manage negative interest rates to keep volatility pegged to real productivity and not speculative emotions.  This would keep the system from crashing in a whirlpool of volatility that incessantly feeds on itself.

So what are the practical implications?

With a positive interest rate, I am penalized for borrowing currency since I need to pay the risk premium to a lender while I produce something with the currency.  On the other hand, I am rewarded for lending currency because someone pays me the risk premium to borrow it.

With a negative interest rate, I am rewarded for borrowing currency (because the lender is deeply penalized for not lending it) so that I can produce something with the currency.  Then I am penalized for not lending (or spending) the currency that I made from the thing that I produced.

Enter Social Media:

The whole idea of risk as the justification for interest does not make much sense any more.  In fact, during periods of deep inflation or deflation, currency becomes divorced from actual productivity and people hold some other store of value instead.

People are flooding to social media because information, knowledge, and innovation are behaving like currency.  Social currencies are perfectly suited to accommodate negative interest rates.  For example: if information were a currency, I would be rewarded for giving it away and penalized for hording it.  If knowledge were a currency, I would be rewarded for sharing it with others and penalized for withholding it when it is needed.  If innovation were a currency, I would be rewarded for crowd sourcing and penalized for patenting.  Does this sound familiar?

The Next Economic Paradigm

Conversation and relationship are two of many denominations of the new global currency called the ‘rallod’ which is allowed to float against the dollar. Continual development of social media tools, systems, economics and aggregation will facilitate the exchange of social currencies by increasingly enabling the ability to store, form, access, and exchange them.  Social networks and communities of practice will allocate social currencies as factors of production: social capital, creative capital, and intellectual capital – for the production and dissemination of innovation.

The Next Numéraire; human productivity

Let countries compete in the economy where net human productivity is the standard by which all value is compared.  With the constraint on land, labor, and capital, this is the game we all need to play now.

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Putting the System Back into Social

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On March 12, 2009

In General Information

Social Media is a demanding master with the uncanny ability to determine the absence or presence of checks and balances.  As a self correcting market, what you do not say can have a greater impact than what you do say.

Of Profit and Peril:

There are great perils in getting social media wrong and great profit from getting it right.  Kids posting negative images can be haunted forever.  Corporations hawking wares can erode their brand. Egocentrics touting their own magnificence can find themselves isolated.  Yet every day, people are controversial, people are selling stuff, and there are is no shortage of egomaniacs in social media space – what are they doing right?

Family Values:

Corporations and individuals are finding out that the social media space requires a much larger degree of disclosure than traditional media simply because markets are most efficient in an environment of perfect information – that is, when the buyer and the seller have the exact same information as the other when negotiating a transaction.  Only then can the magic of supply and demand arrive at one correct “valuation”.

By contrast, an inefficient market of imperfect information cannot arrive at a true price, rather, somewhere in a range of prices.  This is defined as volatility.  When the price is unknown, transactions fail to occur, and markets devalue.  Volatility is the enemy.

Perfect Strangers:

As entrepreneurs have increasingly perfect access to information, it is no longer a successful dominant strategy for corporations to withhold information.  The corporation no longer competes with their nearest competitor; they compete with perfect information in the reputation market.  So what may seem like the wisdom dance of an enlightened industrial complex is really a shrewd and long overdue acknowledgment that perfect information is in the best interest of everyone.

Neighborhood watch organization:

The next step for Social Media will be the most powerful manifestation of perfect information ever to be crowd sourced; systems of checks and balances.  Where checks and balances are in place, information improves.  If not, information decays.

An easy way to determine the presence or absence of checks and balances is to remove one element form the relationship and see if the other two become disassociated.  Inversely, one way to creating checks and balances is to associate two elements by means of a third:

Triangulation:

1. Information, knowledge, and innovation;  Without one, the other two have little value.
2. Social Capital, Creative Capital, and Intellectual Capital; Without one, the other two have little value.
3. Openness, communication, and accountability; Without one, the other two have little value.
4. Trust, self expression, and connections; Without one, the other two have little value.

Etc.

Putting the System back into Social

The difference between success and failure depend your ability to systemize the social media presence.  Sound confusing?  It shouldn’t be. When you think about it, there rules are not much different between managing social media relationships and off-line personal and business relationships.

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Options, Options, What Are My Options?

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On December 20, 2008

In General Information

In finance, an option is the right, without the obligation, of taking a financial position some time in the future.  As with any financial term, options are associated with “code speak” such as: volatility, exercise, strike, call, put, etc., glazing over many an eye.  At the same time, people want, buy, and trade options all day long in everyday life without even knowing it.  Options have value; otherwise people would not want them.

The ROI model of valuation fails when applied to social media.  The number of hits per ad dollar just does not translate to brand loyalty or scale into rivers of cash flow.  There is little surprise that corporations have great difficulty socializing because they simply don’t exist, except as a folder labeled “ROI” in the filing cabinet of an attorney in Bermuda.  In fact, losing control of the message makes for an expensive funeral in that same filing cabinet.  The Social Media industry is trying to live in the ROI structure and struggling to create revenue.

The cardinal rule of business is to collect assets and shed liabilities.  A “right” is an asset while an “obligation” is a liability.  An option is an asset without the liability, to make a decision some time in the future.  As such, options favor long term planning and strategic nurturing rather than short term profit taking of the ROI model. Asian countries and corporations set a good example of buying options in the future through product quality, education, and economic patience.  American corporations should do the same if they hope to benefit from social media.

People do not want ROI, they want options.  They want the option to separate peers from mentors from friends from family.  They want the option to experience before buying.  People want the option to meet their physical, mental, emotional, and spiritual needs.  They want the option to be anonymous or public in their interaction.  They want the option to collaborate and support others.  They want the option to overcome physical barriers.

People want to meet new people, get new ideas, and hold the option to act on those new ideas or collect on past ideas shared with others.  If they exercise an option and discover another along the way, they want the option to pursue many options to meet a changing market. If they create something in one market, they want the option to apply it to adapt it and access other markets.  If they help someone else up the ladder, they want an option to access what that person, in turn, has created from their help. If they make a friend, they want the option of meeting their new friend’s friends.

Likewise, when people are in trouble, they will turn to their collection of options and start exercising them as society has for millenia.  The great financial transformation will occur when on-line society gets threaded into the fabric of off-line society through the trade of options.  This is the area that needs to develop so that all the pieces can fall into place.  This may in fact become the lasting legacy of the financial meltdown.

Options can be the traded like money throughout and across on-line and off-line social networks if there were a way to keep track of them.  While The Ingenesist Project specifies promising strategies for trading options in a social network with varying levels of practicality, we can say with great confidence that it this next paradigm of economic development will never happen with an ROI mentality.

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