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  1. Why the Euro will ultimately fail.

    February 20, 2015 by max

    Trouble is, once again, brewing in the eurozone, and politicians, journalist and bureaucrats are doing their best to provide commentary and solutions to the ongoing crisis. Yet it seems that very few understand the root of the problem.

    This is an explanation of problem with the Euro, and the 2 possible solutions.

    Imagine a German and a Spanish carpenter shop.  In 1999 they both proudly present their new line of wooden chairs – the Spanish chair being made from Olive trees and the German one made by precision machinery. Both chairs are sold for €100. They’re both spectacular successes and all is well in both carpenter shops. But the Germans with their precision machinery are good at improving their production process. They buy better machines, they optimise their processes and they cut down on scrap wood. The Spanish aren’t quite as good at the productivity game, so their production process doesn’t improve as much. It seems Germans just have a knack for clever solutions that make the chair-building process better and faster.

    Because the Spanish workers aren’t as good as the German at optimising chair-making their chairs become more expensive over time. Let’s say that in 1999 a worker could make a chair for €75, and the carpenter shop made a neat profit of €25 – whether it was German or Spanish. As you can see in the graph below in 2005 a German worker could still produce a chair for €75, while a Spanish worker could produce it for €75*1.15 = €86. The German carpenter shop still makes a neat profit of €25 per chair, while the Spanish shop now only makes €14. All because of those pesky Germans and their knack for being ever more productive. For the Spanish shop things will only get worse, and in 2008 they start losing money on the chairs when they sell them for €100 since their unit labour cost has shot up. They just can’t compete with the Germans. Note that this isn’t necessarily because the Spanish workers are lazy, it’s just that the Germans have better machines, infrastructure and processes at their disposal.



    As you can also see in the graph this is a trend that reverberates around all the southern periphery of the Eurozone. Greece, Spain, Italy and Portugal are all in trouble because they can’t follow the German growth in productivity. Their carpenter shops go broke while the Spanish consumers start buying German chairs because they are cheaper. The German carpenters make boatloads of money because they sell lots of chairs to the Southern European countries whose carpenter shops have gone out of business because they can’t make chairs as cheaply as the Germans. They’re still slaving away at manual lathes while the Germans push buttons on a CNC machine.

    Before the Euro the Spanish central bank would catch the problem early on and pull some monetary policy levers to make the country competitive again. They could print more money, change the intrest rate or devalue the peseta. With these tools it was possible to make Spanish goods cheaper for Germans and other foreigners. For example, when the peseta was devalued by 24.6% in 1977 a German exchanging his D-mark for Pesetas would get 24.6% more pesetas, and thus be able to buy more Spanish wooden chairs for his D-marks, making Spain competitive again. This works the other way too of course, so a German chair (or a Japanese television) would become more expensive, which usually isn’t popular with the people that vote. This is why devaluing is a weapon that is only used in a crisis situation. A more common way of regaining competitiveness is printing money which raises inflation.

    Of course with the euro this isn’t an alternative. One euro is one euro, whether it’s in Spain or Germany. There is no Spanish Central bank to control Spanish monetary policy. There is only the European Central Bank that controls the Euro, and it has to follow a monetary policy that will work for both low growth countries and high growth countries.

    So Spain was screwed. Businesses started going bankrupt, people were fired and tax revenues dwindled. This, of course was a double whammy since unemployed people not only don’t pay taxes, they also cost the state money in social services. So the southern countries started borrowing money, amongst others from Germany which had plenty of them since their chair-making business was doing rather well. Germany also had an interest in keeping the southern countries afloat since they were it’s main export market, so they gladly spewed money to the south. Money flowed from Spanish consumers buying German wooden chairs, and back to the Spanish in the form of loans that they could then use to buy even more wooden chairs. This worked well because investors that lent money to the Southern European countries knew that the Euro was a safe currency – it was backed by rock-solid Germany after all. The Germans felt rich because their exports were stellar, and the Spanish felt rich because they could borrow unlimited amount of money at low interest. Nobody seemed to realise the problem until the Euro crisis broke out in 2010. Then everyone seemed to notice – and panic – at the same time. Greek and Italian borrowing costs went through the roof, Spanish unemployment went straight up, and everyone blamed Greece, Italy and Spain for spending too much money. Which was of course only half truthful since Germany had been making boatloads of money from selling wooden chairs and audis to the Southern countries for more than ten years. Nobody seems to talk about that though, it’s much easier to just blame those lazy Greeks (who by the way have longer working hours than Germans).

    In 2010 it was obvious that there was a divide between the North that had been gaining competitiveness and the south that had been losing competitiveness. As you would expect the southerne countries moved into deep recession, had massive debt and unemployment worse than during the great depression. Spain currently has unemployment levels exceeding 25% and youth unemployment of more than 50%. The Spanish carpenters can only stand and watch as the cheaper German chairs are imported.

    This disaster was entirely avoidable if the Euro bureaucrats had bothered to read Robert Mundall and Marcus Flemming’s seminal paper from 1962 which stated that according to well established macro economic models it was impossible to have domestic fiscal autonomy, fixed exchange rates, and free capital flows: no more than two of those objectives could be met. They won the nobel prize in economics for this in 1992, so it’s not exactly an obscure crackpot theory.

    Since the euro is, by definition, the currency used in the eurozone the exchange rates must be fixed. One euro in Greece is the same as one euro in Germany. The same goes for free capital flows, if you have one euro in Spain and can’t spend it in Germany the eurozone doesn’t make much sense. So if it has to work the Euro zone members must give up their fiscal autonomy. What does this mean?

    Fiscal policy is how a country taxes and spends it’s money. Tax rates, social spending, VAT, healthcare spending and infrastructure spending are all parts of fiscal policy. It’s basically a nations budget. According to the the Mundell-Fleming model, as it’s called, the only way forward is fiscal integration. A united States of Europe. There has been some talk of this in Buxelles, but few voters realise what it actually means. A fiscal union means that a substantial part of taxing and spending will be done from a central authority in Bruxelles – the EU. This means a loss of sovereignty for individual nations in the euro, and it also means pemanent fiscal transfers between member states.

    Fiscal transfers may sound innocent, but it is at its core an acceptance of the fact that countries like Greece and Spain are less competitive than Germany and need a permanent and continued handout of money every year to compensate for that. The Germans will need to pay the Greeks. Not once, not as a loan but as a steady flow of money year after year until Greece eventually becomes competitive. If they ever do. If trends reverse and Greek productivity starts to rise faster than German productivity the flow of money is reversed. Basically the rich countries pay for the poor.

    This may sound preposterous, but it’s actually quite common. Every nation has poor rural areas that need to be subsidised. Far-outish-upon-Grandalf with 1000 inhabitants and a closed factory in the North of England just isn’t a good business for England. But the government still pays for social services, public pensions, roads and schools because the British voters accept that even though far-outish-upon-Grandalf is pretty screwed up, they are after all British and you can’t just throw the poor bastards out of the Commonwealth.

    A better example is the United States. As the name implies it’s a collection of states, but they all consider themselves Americans first and New Yorkers, or South Carolinan’s second. They pay federal tax to the United States and state tax to New York or South Carolina. Because there is a strong social cohesion around being part of the greatest county on earth they accept that South Carolina is a piss-poor state that needs handouts from the federal government year after year. Last year South Carolina spent $2.34 for every $1 they collected in taxes. Courtesy of the federal government. The rich New Yorkers are OK with that because, hey they may be poor and not have a major league baseball team but they are Americans – just like us. We stand united! MURICA!

    So if the Euro is to survive in its current form fiscal integration is a necessity. There’s just one problem. Those damned voters. European voters aren’t Europeans first and Germans second. They’re Germans or spaniards or Greeks that happen to be members of this euro-thing they don’t quite understand, but it means they don’t have to change to pesetas when they go on holiday in Spain so it’s probably a good thing. But none of them fly the European flag with pride from their homes like the Americans do. None of them proudly announce that they’re Europeans when they go abroad like Americans do, and none of them feel like they have much in common with people from other countries in the eurozone. They aren’t really Europeans, and there is no way German, Finnish or Belgian voters will accept yearly handouts counted in billions of euro to Spain, Portugal and Greece. They don’t even speak the same language. It’s just not going to happen. The social cohesion isn’t there.

    The rhetoric of Angela Merkel captures the essence perfectly. “Those lazy euro-borrowing Greeks need to pay up. They also need to impose austerity, fire public workers, cut their budgets, spend less money and get their act together. Noway we’re going to pay for them” It’s pretty obvious that she, or maybe her voters, aren’t European enough to accept the fact that Greece will never be able to repay it’s debt, no matter how much they cut their spending. They’ve cut their spending by 25% since 2010, a staggering and unprecedented cut, but it isn’t enough for Germany. Because of the lacking growth in productivity it will never be enough. Meanwhile Greece is falling apart, a whole generation of youth is lost, poverty is rampant and Golden Dawn, a nazi party where half of the elected politicians are in jail for violent crimes, will likely rise to power at the next general elections if the current leader of the governing coalition Syriza doesn’t get a break.

    It’s also a trend that has been repeatedly shown in referendums around the eurozone – when put to a national vote the voters tend to say no to the Euro and European union. Most famously when the Danes, to the surprise of everyone, voted no to joining the euro in 2000 even though almost all parties endorsed it. A second referendum has been on the drawing board ever since, but has never been held because the polls clearly show that the Danes will vote no again. There’s just no popular support for it.

    It’s pretty obvious that the voting public of the Eurozone is lightyears away from considering themselves Europeans first. It’s just not going to happen. At least not within the foresseable future. There is noway the tides of public opinion can be swayed towards love of the union, especially not with the current crisis and accompanying finger pointing rhetoric used by almost all politicians. The Germans hate the Greeks because they can’t pay their loans, the Spanish hate the Finns because they impose ever more austerity on them, the Greeks hate the Germans because they think Merkel is trying to run their country. Everyone hate Cyprus because they do banking for Russian Oligarchs. It’s a total clusterfuck.

    This leaves one last option.

    A breakup of the Euro.


  2. The 1% open source license – a proposal

    April 24, 2014 by max

    The thing I found most surprising about the recent heartbleed bug in OpenSSL was the fact that “ In a typical year the OpenSSL project receives about US $2000 in donations”. This is maybe one of the most vital pices of open source software in use. Thousands of companies are dependent upon it working correctly and securely, yet none of them seem to have donated to it.

    If it’s so important why not?

    Here are some good guesses:

    • The programming team responsible for implementing software aren’t the ones controlling the money
    • Managers and accountants that do control the money may not be aware that they can or should donate money to the open source software they use.
    • If it’s open source you aren’t legally obliged to donate, so why should you?

    Therefore I propose the 1% license.

    The idea is fairly simple: It’s just like GPL (or whatever other open source license you may prefer) but with this line added:

    If you use this software for a commercial product you are required to pay whichever one of these sums is the smallest:

    1. 1% of the additional profit your business has made due to this software. You are allowed to make an informed guess.
    2. $1000 

    The payment is not due before you have actually had the additional profit. 

    As long as you use software with the 1% license for personal projects, community projects, small ventures or startups that still aren’t making money it’s free. But if you are making money from the software you need to donate some of it back to the community that wrote it. If you are Google, use the open source Nginx server and have saved trillions of dollars you can get away with paying $1000.   I don’t think this is an unfair proposal.

    Now the programmers in company X that use software under the 1% license can point their managers or legal department to this clause and remind them that they are legally obliged to pay a small portion of money for the software they use. Legal departments and project managers have a tendency to follow legally binding contracts, so there’s a fairly good chance they will comply.

    There’s of course a lot of wiggle room. How much additional profit has a company attained by using some specific open source component? That will always be a judgement. There will also be companies that don’t pay. But that doesn’t matter much since the additional copy doesn’t cost more than a the bandwidth cost of the download.

  3. Googles long-term strategy, and why they bought Boston Dynamics

    January 8, 2014 by max

    Google just bought Boston Dynamics, the company behind robots such as Big Dog and Petman. Why would Google, a search company, buy a robotics company?

    Because it’s part of their long-term strategy.

    96% of Googles revenue comes from advertising. It’s a golden goose that sprinkles the company in money. Last year they made more than $10 billion from advertising. This is what drives their whole business – without advertising there would be no google. Depending on one income stream is a risky bet for a large company, and Google knows that the advertising revenue might dry up at some point. Not now, not next year, but sometime in the future. A nimble competitor might come along with a better product, googles search dominance might wane thus giving them access to less advertising space, or the advertising marketplace might change completely in some unforeseen way. In the long run it’s dangerous to be dependent on one income stream. On top of this Google’s marketshare in the advertising business is now so large that growth is becoming difficult.

    Google is well aware of this. They know they need to look for other revenue streams to suppleant advertising. Since Google is a large company, and the advertising revenue stream is in the tens of billions of dolllars an alternative income model needs to come from a large market. Even if Google corners the market for dogfood completely it probably won’t make a dent in the financial statement of the company. They need a big market, and they need a big share of it. Otherwise it doesn’t matter.

    Other large companies facing the same problem typically try to diversify into other markets where they might have a technological or market advantage. When IBM’s mainframe business was under threat in the 80’s they (successfully) diversified into consulting because they already had the sales organisation in place.

    Moving into another market where you have an advantage is a classical strategy. There are 2 things that make google slightly different.

    First, they are making the move before their main business model comes uder threat. This is both a rare and visionary thing to do, and it offers the distinct advantage that since advertising still rakes in money they have the resources to stay in the game, even though it might not be profitable this quarter or next.

    Second, they don’t try to corner existing markets but look ahead to markets that might become billion dollar industries in years or decades. Robotics, self driving cars, Google Glass and Anti-ageing. The reason Google is able to look to new non-existing but potentially huge markets is that they aren’t in any immediate trouble. On the contrary, one of the hard things at Google HQ must be to decide what to spend money on. They spend it on securing a future where adwords is no longer their main revenue stream.

    Very smart.






    Google announced the launch of a new company called Calico on September 19, 2013, which will be led by Apple chairman Arthur Levinson. In the official public statement, Page explained that the “health and wellbeing” company will focus on “the challenge of ageing and associated diseases”.[77]

  4. Protected: Strategi og implementeringsforslag

    December 28, 2013 by max

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  5. Why newspapers are dying

    November 30, 2013 by max

    20 years ago newspapers were thriving businesses. They set the political agenda, shaped public opinion and uncovered large scandals. They also made lots of money. Most publishing houses had large headquarters placed in the most expensive parts of town as monuments to their fortune.

    From a business point they were in an enviable position. They were largely the gatekeepers between information and the public. If you wanted information you had to buy a newspaper. Gatekeepers typically make lots of money because they operate in a monopoly-like environment. If you want something you have to get it from the gatekeeper. Record labels used to be gatekeepers for music – if you wanted to listen to music you had to buy one of their CD’s. Hollywood studios used to be gatekeepers for movies – if you wanted to watch a movie they decided when it would be released in you country, when it would be on television and when you could rent it in blockbusters. They all made lots of money.

    Newspapers used to be gatekeepers for news. In a world without Internet this gave them a distinct business advantage. They had access to millions of readers. In the newspaper industry it’s no secret that actually producing news is a loss leader for the business that can be generated through the access to a large loyal audience that trusts the brand of the newspaper. A newspaper with only news can’t generate enough income to be sustainable.

    But that didn’t matter because seen from an business perspective news was the vehicle that allowed newspapers to bring their other business model to market.

    If you wanted to sell a house you paid the newspaper to be included in the homes section. If you wanted to fill a position in your company you paid the newspaper for an ad in the jobs section. On top of this came the normal ads. They made lots of money. The sunday papers were the size of phonebooks, filled with expensive ads, job listings and pictures of real estate for sale. They also wielded some serious political power since they controlled the flow of information to the public.

    Washington Post headquarters

    Washington Post headquarters – now it’s for sale.


    Then the Internet came along and ruined it all.

    With the rise of the Internet the newspapers gatekeeper role diminished. Slowly web-based services crept in and ate the newspapers lunch. Monster, linkedin and a load of other sites slowly ate the revenue generated from the job boards.  Yahoo real estate, zillow and a large number of smaller sites stole the income from the real estate listings. Craigslist stole the classifieds. On and on it went. A million smaller specialised companies eating away at the newspapers economic foundation.

    The sunday paper was slowly reduced from a cashcow the size of a phonebook to a trickle of pennies from a few loyal customers who still thought that a job posting in the New York Times was a pretty good deal. This started happening 15 years ago, without the newspapers taking notice. Or at least it appears that way since none of them put serious effort into developing competing services.

    Only within the last few years have newspapers started to take the Internet threat seriously. Years after it has taken away their businessmodel. A lot of them seem to think that they just need to convince readers to pay for online news, and then everything will be fine – like in the old days. But it won’t. For several reasons:

    • News was never the sole revenue driver for newspapers. Ads, classifieds, job postings and real estate postings made up a substantial amount of the revenue. Those are mostly gone.
    • Ads are cheaper on the Internet than they were in print. It’s a simple question of supply and demand. 20 years ago there weren’t that many possibilities if you wanted to reach consumers. Newspapers were one of them. This drove prices up. On the Internet the supply is nearly endless and drives prices down. Note that this is true both for online ads and paper ads. (Online ads are a substitute for print ads, and since they’re cheaper a lot of the money previously spent on print ads are now diverted to online ads, thus driving down the demand)
    • News is abundant and free. You can always find your news for free on the Internet. This means that the incentive to pay for your news is dwindling. Very few online publications can generate substantial revenue from online content, mostly in the financial press.
    • Competitors have taken over the lucrative income models such as job postings with dedicated sites that do one thing and do it well.

    So are newspapers doomed?

    Not necessarily, but they have a rough road ahead. And they need to start moving now if they want to be in business 10 years from now.

    There are only 2½ definitive truths in the future of newspaper economics:

    1) It’s a structural change, and the old days won’t come back. Like so many other industries the Internet has disrupted the whole business model and stripped the industry of its gatekeeper role, and thus its income model. This won’t change.

    2) Nobody has the obvious true answer.

    2½) In 10 years there won’t be any printed newspapers. (This isn’t entirely certain, but very likely – technology is fast paced, remember that 7 years ago Apple hadn’t even introduced the Iphone)

    So what should a newspaper do to survive? First, look at what unique advantages it has.

    • Brand value. Most newspapers have a brand that many online businesses would kill for. Who do you trust the most? New York Times or Instagram? Brand value is a key metric for driving sales.
    • An audience. A newspaper typically has a large audience that it connects to on a daily basis.
    • Journalists! The people whose job it is to create interesting and engaging stories that depict the world in which we live. A lot of them do it very well.

    So newspapers definitely have some value, what they don’t have is a way of capitalising it. In a way  newspapers are like startups. In the words of Silicon Valley legend Steve Blank  a startup is an organization formed to search for a repeatable and scalable business model.” The main difference is that newspapers are way ahead of startups in that they already have brand, audience, money and a dedicated staff. All they need is the business model.

    So how do startups find a repeatable and scalable business model? They try a lot of different things and see what sticks. It’s the exception rather than the rule that what a successful startup ends up making money on is what was envisioned in the original business plan. Paypal started as a digital wallet for PDA’s, Hotmail started as an online database business. Google didn’t have any idea how they would eventually make money when they started.

    This is the strategy that many successful startups use:

    • Get an idea and create the simplest implementation that could possibly work. Get it out to customers as soon as possible. In startup speak this is called the minimum viable product. The point is not to have a perfect product but to find out whether it’s something people will pay for. If it shows promise you can always improve it.
    • Continuous deployment: Put your minimum viable product out there and test it. Tweak it, make it better, change it a bit and see what happens. Do this continuously until it works. successful startups often deploy new tweaks multiple times a week.
    • Actionable metrics: If you don’t have metrics you don’t know whether a deployment is a success or not. Metrics can be users, acquisitions. readers or money in the bank.
    • Pivot. If your minimum viable product doesn’t work, even after tweaking and testing, drop it and think of something else. Repeat and rinse until you have a business model that works.

    Newspapers should copy this model. If 2 guys in a garage can make it work so can a news organisation that already has a brand, an audience, journalists and a solid infrastructure.







  6. The projected economy of Silk Road

    October 3, 2013 by max

    With the recent takedown of the illegal TOR-based merchant site Silk road some interesting numbers have been released in this (PDF link) criminal complaint . This gives a unique and interesting look at the economy behind the site.

    Here are some raw numbers directly from the linked criminal complaint:

    • Silk road was initially launched around January 27, 2011.
    • Dread Pirate Roberts, the alleged owner and main administrator of the site, has on July 21, 2013 received 3.237 transfers of Bitcoins to his account, virtually all of which are labelled “commission”.
    • The commission rates vary between 8 and 14% depending on the size of the transaction (larger transactions have lower commission)
    • Dread Pirate Robert’s Bitcoin account page on Silk Road held equivalent to $3.4 million on july 23, 2013.
    • A small administrative staff has helped police the forums, and do other tasks. They have received a payment in Bitcoins  equivalent to $1.000 to $2.00 a week.
    • During the 60 day period from may 24, 2013 to july 23, 2013 1.217.218 messages were sent through Silk Roads privte messaging system.
    • From february 6, 2011 to july 23, 2013 1.229.465 transactions were completed on the site involving 146.946 unique buyer accounts and 3877 unique vendor accounts.
    • The total revenue generated from these sales was 9.519.664 bitcoins
    • The total commission collected by Silk Road from the sales amounted to 614.305 bitcoins. These figures are roughly equivalent to $1.2 billion in revenue and $79.8 million in commissions at current bitrcoin exchange rates.

    So let’s look at the economics of being a large-scale criminal mastermind that runs a TOR-based drug trading commerce site.

    The site has been in operation for around 2 years, and in that timeperiod the owner has managed to turn it into a business with a billion-dollar turnover. Pretty impressive.

    To get an idea of the scale the maintenance and operations needed to keep the operation going we are given the following clues:

    • a little more than 1 million transactions were completed in the 2 years the site was operational. 
    • The site had around 150.000 buyer accounts and 4.000 vendor accounts.
    • around 2000 private messages were sent a day.
    • Dread Pirate Roberts has received a little more than 3000 bitcoin transactions in one day  on July 21, 2013.
    • On average around 1600 transactions have been completed every day since the start in 2011. Assuming a growth period this is consistent with the 3000 transactions received in one day as stated above.

    Assuming that 2% of the visitors to the site make a transaction this gives 150.000 unique daily visitors based on the assumed 3000 daily transactions on july 21, 2013. Behind this is a database holding transaction history of the 1 million transactions, user account info for around 150.000 users, and other maintenance stuff. On top of this comes a forum, which was run on a separate server. This is not a mom-and-pop website, but well within the reach of one dedicated and talented programmer/sysadmin – presumably Dread Pirate Roberts.

    The server and bandwidth cost of this operation should be negligible, and would probably come to a few thousand $ a month at most. On top of this comes pay for an administrative staff whose job it presumably is to weed out bad seeds, answer forum questions, settle disputes, etc. Assuming a staff of 10 people this comes to   around $80.000 a month.

    So from these guesstimates we can get a broad overview of the economics of the operation.

    Projected budget for 2013 – presuming the site was still operational:

    Revenue: We know that revenue was $1.2 billion over 2 years, we know that an average transaction was $976 ($1.2 billion/1229465 transactions), and we know that in one day in july Dread Pirate Roberts received 3237 Bitcoin transactions. Assuming that this was a normal day (which doesn’t seem unreasonable with the given numbers, accounting for some growth during the time the site was operational) this comes to a daily turnover of $3.159.312, giving a projected yearly revenue of  $1.1 billion

    Operating expenses (as explained above): $1 million

    Vendor expenses (Revenue minus commission) It is stated that the commission varied between 8 and 14%. If we assume an average 0f 9% this equals vendor expenses of $1001 million

    Profit for 2013 (assuming the site was still operational): $98 million

    Not bad for a 2 year old site. Too bad it was terribly illegal.

  7. Either there are no terrorists, or they are incredibly incompetent

    June 14, 2013 by max

    Think for a moment about how easy it is to make a terror attack. You can make incredibly poisonous gas and release it in the subway for less than $1000, you can set off huge forest fires in California by driving around with a few cans of gasoline on a hot and windy day, or you can simply buy a semi automatic weapon and start shooting people on Times Square. These are all obvious and easy DIY terror attacks. If you have a sliver of intelligence you can fairly easily come up with attacks that are much more devastating and equally easy to deploy (I won’t mention any, I really don’t want to give anyone good ideas even though I highly doubt that potential terrorists are reading this blog)

    There are examples of people without significant funding having successfully carried out attacks. The boston bombers and Anders Breivik come to mind. So we know terrorism can be done by individuals with limited funding and contacts.

    We hear about the dire threat from large well funded terrorist organisations on a daily basis, so the obvious question is: If it’s so easy to do, why aren’t there more terror attacks?

    I see three potential answers:

    1. There are no terrorists, or at least very few.
    2. The terrorists are incredibly incompetent.
    3. The NSA, CIA, FBI and other agencies are doing a stellar job of stopping terrorism.

    Let’s assume the three letter agencies are incredibly effective and thwart potential terror attacks all the time. How would we know? They operate in a veil of secrecy so it’s hard to know for sure. However, sometimes they testify in congressional hearings so that our elected representatives have a chance to find out whether the billions they receive is well spent. In this C-span clip NSA director Keith Alexander is asked whether the NSA has thwarted any terror attacks. His answer is “dozens”, yet he is unable to mention even a single concrete example, or point to even a single arrest. It seems to me that if you testify before congress, which is the NSA’s source of funding, and you have a shining example of why you’re worth your money you would mention it. But there isn’t one.  In an interview director of national intelligence James R. Clapper is asked whether he can give examples of terror plots that have been prevented. He mentions two episodes, both from 2009. The first is an attempted bombing of the New York subway. The second is the apprehension of David Headley who was involved in the Mumbai bombing (they didn’t catch him before the bombings took place) and the planned attack on the Danish Newspaper Jyllandsposten. But David Headley’s case could easily have been unfolded without the NSA. His two(!) wifes both notified the US authorities about his terror involvement in 2005 and 2007 to no avail.

    So we have two examples, where at least one is very dubious and the suspect could have been apprehended by other means. That’s not exactly a good track record. It seems to me that not that many terrorist attacks have been averted, if any.

    That leaves me with the conclusion that either there aren’t any terrorists or else they’re incredibly incompetent.

  8. How a true statesman would deal with a terror attack

    April 19, 2013 by max

    Terrorism seems to be rampant in the western world – if you look at the media reports you might think that the chance of being the victim of a terror attack is a real and constantly present threat. But it isn’t. Terrorist attacks are incredibly rare events.  According the the Global terrorism database  there has been less than 3300 deaths from terror in the United States since 1970. 2764 of these were in the World Trade center on september 11. 2001. This is 43 deaths per year. Acording to NOAA 51 people die each year from lightning strikes. In other words, you are as likely to die from a terrorist attack as you are to die from a lightning strike. In fact you are more likely to die by falling in your bathtub, falling off a chair, being scolded by hot water from a tap, being stung by a hornet, being poisoned or falling off a building than you are dying in a terror attack. In other words – terror attacks are very rare, and are generally not a threat to normal people in Western countries.

    Yet terror is perceived as an almost existential threat to our society. Why is that?

    There are three reasons.

    The first is psychological. We fear the unknown. This is why we are afraid of the dark and what might lurk in the deep water when we go swimming in the sea. We also fear situations where we don’t feel we are in control. This is why we feel safer in the drivers seat than in the passenger seat when we drive a little faster than we should, and it’s why some people are afraid of flying. Terrorism is unknown and we are not in control of where and when it might happen. That’s why it makes us afraid.

    But that’s not enough to explain the massive fear of terrorism. Being stung by a hornet or being poisoned is as unknown and uncontrollable as terrorist attacks, yet we aren’t as afraid of being poisoned as we are of terrorist attacks. Which brings us to the second reason.

    Mass media hypes and overexposes terror attacks. On the day of the recent Boston bombing, tragic as it was, there were more American fatalities from car accidents than terror attacks. But it’s spectacular and it’s a scary story that’s easy to write. People will read it. They see terror in every newspaper, every newscast and every radio show. They think it might happen to them. They think it happens much more often than it does because mass media inflates the story to crazy proportions. Then they will be afraid. And you can’t blame them, hardly a week goes by without some mention of terror in the news.

    The third reason is that our leaders play by the terrorists rules. Terrorism is assymetric warfare. It’s using very limited means to engage an enemy that’s much bigger and which would instantly crush any terrorist organization in a head-to-head fight. It’s a flee biting an elephant. But presidents and prime ministers don’t treat it as the nuisance that it is. They treat it as  a credible threat to national security, and something the general populace should be afraid of. This, of course, is exactly what a terrorist wants. The flee that bites the elephant is portrayed as a credible threat that we should all be very afraid of. Presidents and prime ministers step up to the podium with prepared speeches telling the people that this is a grave danger, but that we will throw every resource at the problem and eventually overcome the threat of terror. By doing so terrorists are put on a piedestal where they can get their twisted message across to more people than they would ever reach otherwise.

    In the immediate aftermath of a terror attack it soothes a nation when its leaders step up to address the atrocity, and it unites a nation around an external threat. It also scores some cheap political points – approval ratings shoot up when the president or prime minister can tell the people after an attack that every effort will be made to get the perpetrators, no matter what it takes. Now on the hook a president or prime minister will allocate huge resources towards fighting terror attacks, most of it unnecessary security theater designed to make people feel safe, but not really helping. On the contrary the media now run stories about airport security, possible targets and how much money is being spent on keeping us safe from terrorists. But people don’t feel safe. They feel afraid.

    This is a shortsighted strategy for several reasons.

    First, it makes the enemy look bigger and scarier than it really is. The president only steps up to the podium when something truly big has happened. When we go to war. When natural disaster strikes. It puts the terrorist on a much bigger piedestal than he deserves.

    Second, a disproportionate   response makes normal people scared. When the president has left the podium the press takes over and before you know it everyone is talking about terrorism while looking over their shoulders. They are terrified. Which is the point of terror.

    Third, it gives the terrorist and his organisation visibility, and can help recruit members. Al Qaeda grew significantly after the 9/11 attacks.

    A true satesman should be able to see through this and deal with terror differently. Underplay it. Ridicule it. Not put terrorism on a piedestal, but paint terrorists as the low-life scums they are.

    Norway did this in an exemplary way after the Breivik Shootings and bombing. The Norwegian prime minister got on the podium to soothe the people. But instead of fueling the fear and asking for retribution and revenge he told the Norwegian people that this was the work of a madman, and that it was an extremely rare event. People shouldn’t be worried, and shouldn’t be afraid. No never-ending war on terror. No security theater.  A week later Norway was back to normal. Breivik was treated like any other criminal and was unceremoniously put behind bars for life like any other twisted mass murderer.

    A true statesman will not put fuel on the bonfire of fear. He will extuingish it by telling us that there is nothing to be afraid of. That these acts are done by moronic twisted people that don’t deserve the attention. He will tell the people that they have nothing to fear but fear itself.



  9. The madness of the bailout in Cyprus

    March 17, 2013 by max

    Last night the finance ministers of the eurozone decided on a bailout package for Cyprus. The small country with around 1 million inhabitants has an overstretched banking sector that is in dire straits. The primary reason for this is that the Cypriotic banks hold a lot of Greek sovereign debt – debt that took a serious haircut a few months ago when the EU decided that holders of Greek bonds would only receive 60% of their money. Cypriotic banks have been sympathetic (and maybe under pressure from the ECB) and have loaded up on Greek bonds. This is the primary reason for the trouble in Cyprus. The rest of the economy (GDP per capita, debt, etc.) is around average for a euro country.

    But because the banks are stuffed to the gills with Greek bonds that are now only worth 60 cents on the dollar they need a bailout.

    The big problem for the government is that the banking sector is extremely large in comparison to how small an economy Cyprus is. This is partly due to the fact that the island has always been a bit of a tax haven, with sympathetic banks and a corporate tax rate of 10%,  the lowest in the eurozone. This means that the government is unable to bail out the banks. They just don’t have that kind of money. This is why The IMF and the ECB has stepped in and bailed out the banks. Rumor has it that without the bailout Cyprus two largest banks would be bankrupt in a matter of days. A situation no economy can survive, especially not one with a disproportionally large banking sector.

    The bailout, as usual, comes from  the other Euro countries through the ESM flanked by the IMF.

    Cyprus is a small economy (around 0.2% of the Eurozone), and bailing out its banking sector is cheap compared to Spain, Italy and even Greece. But since the EU and thus the Euro is basically a political construct a bailout has to make political sense as well as economic sense. Unfortunately sometimes the two seem to be two mutually exclusive. As in this case.

    The terms of the bailout are that all funds in Cypriotic banks will be subject ot a one-time tax of 9.9% (6,75% for accounts holding less than €100.000)  This tax is being withdrawn immediately from every Cypriotic bank account over the weekend.  Everyone with a bankaccount in Cyprus will find that when they when the banks open on tuesday (monday is funnily enough a bank holiday) there will be less money than there was on friday. This goes for everyone, from instutional investors, private savers, checking accounts and pensioners. If you had a lot of money saved up for your retirement stashed away in a Cypriotic bank, well bad luck for you because on tuesday only 90% of it will be there.

    What happened after this was announced was entirely predictable. A bankrun. People are currently lining up outside ATM’s to get their money out before they’re taxed. The response from central hold has been to close down all electronic banking and not restock ATM’s so people can’t get their money out before tuesday when the tax has been withdrawn from the accounts.

    Bankruns are what every economist, policymaker and banker fear the most. The whole banking system is based on trust, if even 10% of customers withdraw their cash from a bank it will be bankrupt in  matter of hours. No bank has the money in its vault to pay up if everyone wants their money at the same time. This is a vicious circle – when there is even the smallest doubt about a banks solvency some people will begin to pull their money. When people begin to pull their money everyone else will follow, knowing that the last one in line won’t get a dime. This is why most countries have a state-backed insurance in the case of bank bankruptcies. Even if the bank goes down the state will pay you the money you had in your account. It is paramount for an economy that people trust that their money is safe in the bank no matter what happens.

    This whole thing is entirely unfair for the people living in Cyprus. The average citizen had nothing to do with the banking sector stocking up on Greek debt, but now they have to pay for it. The reason, apparently, being that the other Euro members , headed by Germany, think it would be fair that the southern nations learn to pay for their excesses instead of relying on bailouts from the Northern countries. An assessment that is, at best, inaccurate.

    The result is that the Euro areas finance ministers have shown that freezing all bank accounts in a country and withdrawing 10% without warning is a tool they’re willing to use. They’re calling it a one-off and promise it won’t happen again, but it’s a large crack in the faith of the Europen banking system, and it sends a clear signal to all savers, companies and investors in the Eurozone: If you have funds in banks in a troubled euro country there’s a chance it will be taxed without warning. You could wake up one day and see that your €1 million has shrunk to €100.000 overnight. What does it matter that our money is federally insured against bankruptcy, if the state can just decide to take it away from one day to the next?

    So what do investors, businesses, and savvy savers do? They pull their money from banks in the troubled euro countries. No need to take the risk, even if it’s small.

    In other words: Because of the idiotic idea that the Cypriotic people should pay for the bailout of their banks by simply taking 10% of the funds in every single account in the country the market now knows that money isn’t safe in troubled eurozone banks.

    Don’t be surprised to see a bankrun in Greece, Spain, Italy or Portugal next week.



  10. Tesla’s ingenious strategy

    February 5, 2013 by max

    Tesla motors has huge ambitions. Tesla founder Elon Musk has said he envisions Tesla as an independent automaker, aimed at eventually mass producing fully electric cars at a price affordable to the average consumer. This is a very difficult goal to achieve for several reasons. If you want to produce cheap cars you need a finely tuned, automated and hugely expensive factory because that’s the only viable way of producing a cheap car. You also can’t expect to get it right the first time. There will always be beginners mistakes, inefficiencies, regulations, things you hadn’t thought of and all sorts of other hurdles you need to jump through before your factory is ready for primetime. Mistakes in a full car production environment are notoriously expensive.

    Maybe the biggest hurdle towards producing a cheap car is conservative customers. In an interesting focus group study that Phillips did to find out what color they should make a new electric kettle they invited groups of people to come in and discuss the merits of the different colored kettles on display. There were kettles in red, blue, yellow, green, and the traditional white. Most people liked the colored ones, and praised them for their looks and fresh approach. After the study they were told that as a thank you they could pick one of the kettles to take home. Almost all of them chose the white one. People are conservative creatures. Especially when it comes to big investments, such as a car. You need a history, brand awareness, and a fleet of cars already driving the roads to make average customers pick a Tesla.

    These are huge obstacles, and is probably why there hasn’t been a new major auto maker in the United States for 90 years. The fact that Tesla is making electric cars doesn’t make it easier.

    Tesla’s strategy for overcoming these obstacles is ingenious; Start at the top and work our way down.

    If you drive a roadster you're cool. And rich.

    Their first car was the ubercool, expensive Roadster that goes from 0 to 100 km/hr. in less than 4 seconds. Faster than most ferraris. It comes at a base price of $109.000 which, along with the looks and performance is sure to place it firmly in the “I wish I had one of those” category.

    The roadster is the first step in the grand strategy. The point isn’t to sell a lot of roadsters, it’s creating a brand. People that can afford a roadster are a minority and it will always be a niche car- Less than 2.500 have been sold to date. But since they are early adopters and thought leaders  it elevates the Tesla brand from unknown to somewhere between BMW and Ferrari. Every car enthusiast worth his salt talks about the merits of the Tesla Roadster, and lots of average Joes know it exists, and that Tesla is the coolest thing that happened to cars in the last 50 years. The low production volume also gives the company a chance to learn how to run a car factory on a small scale while mistakes are still cheap to make. If 10% of the cars fail, that’s 250 cars.

    If you drive a model S, you're still Cool and rich. But probably also a dad.

    The next step is the model S. With a price tag of around $50.000 (depending on which battery pack you choose) it’s still an expensive car, but with a broader appeal. Due to the lacking gasoline engine and accompanying drive shaft, gearbox and other heavy machinery it’s a very roomy family car. It’s got two baggage compartments – one in the front and one in the back. If anyone doubts the target market the baggage compartment in the back can be converted to two child seats with the children facing backwards looking out the rear window. With a broader appeal, and the brand recognition of the roadster it’s expected to sell well for a car in this price range. On January 30, 2013, it was reported that production had reached 400 per week. That’s more than 20.000 cars a year. The ramp-up in production will also teach Tesla motors how to do mass production.

    This is where we are now. Notice that this is a classical Silicon Valley strategy. Start by targeting early adopters with an expensive product, knowing that this demographic will be forgiving of small glitches as long as they get the newest and coolest tech. The heavy price tag pays for your research and development, and battle-hardens your technology. This is how cell phones, flat screen TV’s and laptops are sold. Use your initial experience to iterate on processes to make the product better and cheaper. Then lower the price and grab a larger market share.  Tesla is now an excellent brand, and has processes and production methods that are built from scratch and iteratively tested to deliver cost-effective cars.

    Notice how, unlike many other electric cars, Tesla doesn’t primarily market their cars as electric vehicles. They know that outside a small circle of enthusiasts nobody cares whether it’s electric or not. What they care about is how it looks, how it handles, fuel economy, range and how nice it is to drive. Tesla cars look great, they’re so concerned with the finish they invented a special red paint that has extraordinary depth and shine. All their cars handle extremely well due to the low center of gravity (the heavy battery pack is located under the car), the fuel economy is good, and the range is almost as good as a gasoline fueled car. They also know that if they are to take on the giants of the car industry they need an edge. With their knowledge of electric vehicles, batteries, and electronics, and some experience in mass production of these they are well positioned for a future of electric cars. Arguably Tesla has more expertise in this area than any other car manufacturer.

    The next step is to move one rung lower down the ladder with a cheaper car. This is the Bluestar with an expected price tag of $30.000 and a production schedule starting in 2015. This moves Tesla closer to the large and profitable consumer market, where cars are sold in volumes of hundres of thousands, if not millions. Eventually cheaper cars, specialised cars such as vans and trucks, and eventually self driving cars (Google is close by!) wil be produced in their Fremont production facility in California. The fact that the majority of the Tesla factory still sits empty waiting for the volume of the mass market is a sign of the ambition.

    If the future of cars is electric, and a lot of things point that way, Tesla is uniquely positioned to lead the market. They have the brand, they have the technology, they have the production expertise, and they have the facilities.

    If I was General Motors I would be afraid. Very afraid.