The introduction of floating exchange rates and fiat currencies backed by nothing more than government guarantee really took hold of the world economy in August, 1971, when Richard Nixon took the American dollar off the gold standard. Since then, money supply and credit growth have absolutely exploded.
For extra credit this weekend, we will ponder (and we hope you’ll join us) whether this explosion in credit and money supply has led directly to a massive misallocation of human and physical capital. But you won’t see that misallocation in huge, superfluous monuments like the Pyramids in Egypt (although modern sports stadiums are the equivalent).
The humongous global misallocation of capital since 1971 is simply the population of the planet, whose growth is all out of balance with the natural rate of the last 5,000 years of human history. More people are not a bad thing in principle. We are, after all, one of those persons whom cheap energy and cheap credit have made possible.
But we’re just wondering if the planet has the resources to support this many people. And if it doesn’t, what will happen next? Wars? Famine? Pestilence? Death? That would all be a cycle too, of a more timeless sort.
Back to technology, what’s obvious is that while profits from intellectual property can be high, they may not last long and are nearly impossible to defend. Yesterday internet-based calling company Vonage (NYSE:VG) settled a patent dispute with US-based Verizon (NYSE:VZ). The dispute cost Vonage US$32 million, and it’s already facing a similar complaint from AT&T.
Meanwhile, Microsoft (NASDAQ:MSFT) is finding it tough to extend the cycle of software profits. Software, like technology itself, has become commoditised with expansion of the global workforce and the vast new number of producers. So now Microsoft makes money selling video games and is taking a flyer on social networking.
The middle-aged innovator from America’s northwest reported a 27% rise in first quarter revenues to US$13.76 billion and a 23% rise in net income to US$4.29. The growth is impressive—like a receding hairline suddenly reversing itself. But what’s interesting is where the growth has come from—and where it will have to come from in the future if MSFT is to keep expanding.
“The strongest part of Microsoft's business was its entertainment and devices division,” reports CNN Money. That division, “includes video games like ‘Halo 3,’ the Xbox video game console and the Zune digital music player….The company said the release of Halo 3’ was ‘the biggest entertainment launch day in history.’”
So much for business innovation and controlling the desktop. It’s all about video games these days. But that can be profitable in a culture of permanent adolescence.
Speaking of which, Microsoft also likes what it sees in social networking website Facebook. Microsoft announced it would take a US$267.77 million stake in Facebook, a site based on adults behaving as if they were still in high-school (disclaimer: we have a page on Facebook too, but only so old flames from high school and college can track us down, and vice versa).
Microsoft says, “We think this expanded relationship will allow Facebook to continue to innovate and grow as a technology leader and major player in social computing, as well as bring relevant advertising to the more than 49 million active users of Facebook.”
Maybe this is how technology evolves from novelty to utility. Where will the profits come from? Or will they?
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 26 October 2007:
Dan
The other day I said that the American technology sector would continue to do well. It will because innovation will often be rewarded and the US companies have market clout.
How they maintain their market clout is another question. The manufacturing requirements for “US products” shifted to Asia decades ago. Then they found it cheaper to get quality code cut in India and elsewhere. The last bit to go more fully offshore is innovation (which as always some from around and about)product development and R&D. So while the companies may prosper, Silicon Valley based workers may not. Mumbai graduates are equally skilled, motivated and capable but they don’t ask for the same salaries and entitlements.
Actually there is a growing shortage of high level skills in the IT sectors of so called developed countries. Perhaps Americans, Australians and Brits and others find it easier to so make money selling sub prime real estate. I agree on that point!
Comment by Li on 27 October 2007:
My lecturer for Information Systems posed the interesting question the other day, of whether or not the whole idea of patents and "information as property" was not, in the long run, doomed, if poverty and unsustainability is something we would like to see reduced.
If Open Source shows that innovation and creativity does not have to be incentivised by temporary market monopoly, the last pillar holding up the IP roof may collapse.
A world where all information is public, balanced by secure property rights and hard money...
Comment by Li on 27 October 2007:
If fiat currency does lead to massive capital misallocation, which has led to a rise in(and indeed, economic reliance on) adolesecent consumerism, Environmentalists everywhere should be on the front line for pushing for hard money. An ally for gold bugs to cultivate/convert/educate perhaps?
Comment by Li on 27 October 2007:
I apologise for the post bomb everyone. Here's another model of how the de-legitimation of IP could work:
http://www.ultimate-guitar.com/news/general_music_news/radiohead_make_10_million_from_in_rainbows.html