Category: Facebook

Calibrating the Narrative

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October 27, 2019

by Steve Stofka

Mr. Z, the man himself, head of Facebook, showed up in Washington this week to testify before a House committee about privacy and money (C-Span, 2019). Congress is worried about Mark Zuckerberg’s desire to create a digital currency. Several committee members expressed their concern that a private company with a large global influence might wrest control of the world’s currency away from the American government.

Article 1, Section 8 of the Constitution – the enumerated powers section – gave Congress the power “to coin Money, regulate the Value thereof, and of foreign Coin.” The United States has a powerful influence on the international payments system because 52% of transfers are in U.S. dollars (SWIFT, n.d.). The U.S. does not want to give up that global control to Facebook.

As I listened to the exchange between members of Congress and Mr. Zuckerberg, I was reminded that money itself is a narrative. Who gets to dominate that narrative? China and other countries would prefer that U.S. politics did not control the global financial market. When the British controlled the world’s dominant currency, the pound, more than a century ago, the U.S. didn’t like the influence that British leaders had on American lives. The sun never set on the British empire. Now its the U.S. that operates the world’s merry-go-round and the tickets are priced in dollars.

In the digital age Google and Facebook control many of the social and financial exchanges between people around the world. The U.S. government is the 800-pound gorilla in the room and doesn’t like challenges of its dominance. As Facebook and Google get larger and more influential, they become the 600-pound gorillas, but with one important difference. They don’t have an army and a court system like the U.S. does. When Presidential candidate Elizabeth Warren campaigns on breaking up the digital giants because of their monopoly power, those giants pay attention. There is a mood change in Washington that reminds me of the attacks on Microsoft in the 1990s.

We can expect that Facebook and Google will continue their heavy lobbying campaigns and trust in the paralysis of our system of government. The strength of that system lies in the checks and balances built into the Constitution. However, the past decade has shown that those same checks and balances stymie a lot of policy making in Washington. During the worst financial crisis since the Great Depression, it was difficult to enact fiscal policy because that requires legislation which requires consensus, compromise and maturity. Not much of that left in Congress these days.

The chief response to the crisis was handled by a small group of central bankers at the Federal Reserve whose reach is limited by law. Its monetary tools are designed to work with and for banks. Because of that, Wall Street got bailed out during the crisis but not Main Street. Mr. Trump got elected partially on a promise to remedy that situation, particularly in rural America. He was the rainmaker, a billionaire who could get things done that no politician could. No person – even the President of the U.S. – has that much power. Despite the low employment numbers, many communities throughout America have not fully recovered. Mr. Trump’s performance has been theatrical, to say the least. His popular twitter barrage dominates the Washington narrative every day.

And that brings us back to that august body where Mr. Zuckerberg appeared this week. His motives are good, he assured the House committee. A third of the world’s population is unbanked, he noted. Facebook’s promotion of the digital currency Libra and its integration within the Facebook app can help. Calibra is not live yet but the web site will give you a taste of the future (Calibra, n.d.). Concerned about the attention from Congress, large financial institutions like PayPal, Visa and Mastercard have dropped out of the Calibra consortium. Or did Mr. Zuckerberg call it a partnership?

Every criminal organization around the globe is hoping that Mr. Zuckerberg will succeed. Moving $100 bills around is so inconvenient. Mr. Zuckerberg has a solution to help government track down criminal transactions and prevent the digital currency from being used for illegal activities. Law abiding citizens can stay anonymous. How will he accomplish this? It’s a secret. He will tell us soon – very soon.

Even though Calibra will be headquartered in Switzerland, Mr. Zuckerberg promised several times that Facebook will not go through with these digital currency plans until it meets all the concerns of U.S. regulators. There are a lot of regulatory agencies in the U.S. and that very plethora of regulatory bodies contributed to the financial crisis. Investment firms played off one agency against another until they found an agency they liked. Will Mr. Zuckerberg do the same?

Who will control this narrative? The big guns of the U.S. government or the billions of dollars of profit to be had by Facebook if it can scrape just a few pennies per transaction off the trillions of dollars traded around the world each year? My bet is on Mr. Zuckerberg. He is sometimes inartful, but he stumbled on a way into the lives of a few billion people around the world and he has quite artfully capitalized on that.

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Notes:

C-Span. (2019, October 23). Facebook CEO Testimony before House Financial Services Committee. [Web page, Video]. Retrieved from https://www.c-span.org/video/?465293-1/facebook-ceo-testimony-house-financial-services-committee

Calibra. (n.d.). A connected wallet for a connected world. [Web page]. Retrieved from https://calibra.com/

Public Domain. (n.d.) Obverse of United States one dollar bill, series 2009. [Image]. Retrieved from https://commons.wikimedia.org/w/index.php?curid=23332139

SWIFT. (2015, December). Worldwide Currency Usage and Trends. [PDF]. Retrieved from https://www.swift.com/node/19186

Re-pricing the Market

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January 31, 2016

In the closing moments of one of the “big ape” films, the very large gorilla Mighty Joe Young saves the girl, placing her on a boat as an island in the Pacific, broken by a volcano, falls back into the sea.  The bandaged hand of the big ape reaching out of the roiling waters is the last we see of the movie’s star.

On Friday morning, the Bank of Japan (BOJ) surprised the world by cutting it’s funds rate to a negative .1% from a positive .1%, vowing to fight the deflation and lack of growth that has plagued the Japanese economy for two decades.  As the island’s economy collapses under the weight of its aging population and lack of immigration, the bank thrust its arm above the Pacific waters to save – well, the entire Japanese population.  Could be the script of another big ape movie or a Godzilla sequel.

The first estimate of fourth quarter GDP was released Friday morning and the news was not good, which meant that the news was good, get it?!  GDP growth for the last quarter was positive, not negative, but less than 1%, so traders figured that the Fed will not raise interest rates again in March.

#3 in the combination was positive earnings surprises from Microsoft and Facebook, among others. Thursday was the busiest day of the earnings season.  #4 The price of oil continued to climb above the near rock-bottom benchmark of $30.  All of these factors were the impetus for a stock market surge of 2-1/2% on Friday and helped soften a really bad start to the year.  For the month, the index fell 5%.  During the month, revisions to earnings estimates for 2016 fell about the same amount – 4.7% (Fact Set).  In short, the stock market re-priced itself.

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Taxes

As the primary season approaches and millions of Americans receive their W-2 earnings record in the mail, Americans turn their attention to the cheery subjects of incomes and income taxes.  Here’s a Heritage Foundation chart of the effective payroll tax rates and income tax rates for the five quintiles of Americans based on income.

Those in the lowest quintile making less than $25K pay a combined rate of 2.1%.  Those in the next quintile making less than about $47K pay a combined rate of 6.6%.  Those in the next higher quintile making less than $80K pay 12.2%.  The top two quintiles pay 14.7% and 21% respectively.  It is easy to understand why many in the upper quintiles feel that they are already paying their fair share of taxes.

The fault in these calculations is that they neglect the employer’s portion of the payroll tax which is paid indirectly by the employee in the form of a lower wage.  Including that portion would add another 7.5% to 8% to the lower quintiles, a bit less to the top two quintiles.  Here’s a chart showing the total payroll tax burden since the Social Security Act was passed in the 1930s.

Should the rich pay more in taxes?  Yes, says Democratic Presidential contender Bernie Sanders.  Many Americans do not realize that we are in the top 10% of global incomes, the world’s fat cats.  Should Americans pay a global fairness tax of 10% or so?  This money would then be redistributed to poorer people around the world.  That is the world that Mr. Sanders is aiming toward.

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Consumer Problem Survey

Over the past several thousand years people have developed numerous tools to predict the future.  Reading chicken bones, tea leaves and other forms of augery have given way to mathematical and statistical modeling.  The folks at Georgetown have developed a predictive tool to estimate consumer spending. Using a survey methodology researchers ask consumers what problems they have and which ones they are planning to solve in the coming months. These can be the payment of taxes, needing a new computer, iPad, or cell phone, the purchase of new home, etc.  Based on these responses, the researchers compile a Problem Driven Conumption Index (PDCI).  In the spring and early winter of 2014, the predictive index badly under-estimated retail sales.

However, the approach brings an essential understanding of the challenges American families face.  In a 2013 survey, respondents reported having many problems for which they see no solutions.  We learn that men and women have a few problems in common but confirm the axiom that each sex really does see the world differently.  The researchers are able to chart the shifting patterns of problems as we age.  This problems based approach is another statistical tool in the field of behavioral finance.