Now look at the axes on that chart. Something strange? Well, last time I checked 371 is not 6 times more than 222. Here’s what the chart should have looked like:

Looks a lot more reasonable, doesn’t it? The Liberal Party is guilty of one of two things here. Either they are bad at mathematics and graphing, OR they are deliberately trying to deceive the public. One way or another, these are not the type of people I would want to have run the country.

Imagine you live in a society where things seem to be a little off. You have all of your physical needs provided for you in this society. You receive some health care, shelter and enough food to keep going. Your diet consists of a mix of food provided to you by ‘the government’ and whatever you want to pick in the area in which you live. Life is pretty easy, but not that interesting.

You have apparent freedom, however when you trying to push the boundaries in terms of your travel, something always pushes you back, like Truman in The Truman Show. A storm closes the airport. Your ship sinks. You can explore a pretty big place, but something gets in the way and prevents you from escaping further. When people get to a certain age (say about 60 years old), they are ordered underground, like in The Time Machine. No one really knows why people go underground, but it is a seeming requirement of being in this society so everyone generally just goes with the flow.

Your suspicions increase, and eventually you realise the grand conspiracy; your whole society is controlled by super intelligent ‘Aliens’ that have a taste for human flesh. You decide to follow those subterranean bound individuals, and split from the group. You find the Aliens, and confront them. They explain everything. You and all of the humans you know are bound to be meat products.

The Aliens tell you about their rules. They have to treat the humans well. They are required to ensure that the humans suffer as little as possible while growing up to become the food of the Aliens. In fact, they tell you that humans in the areas controlled by the Aliens live much more comfortable lives than ‘wild’ humans. ‘Wild’ humans die of predator attacks. They die of infections. They suffer in their deaths a lot more than the farmed humans. The upside of being a ‘wild’ human is that you have somewhat more freedoms, but you still aren’t completely free.

They tell you that humans never occupied as much space on the planet as they used to. The Aliens facilitated the expansion of the space that humans occupy to about 10 times the amount of space that humans formerly occupied. They tell you that many Aliens don’t eat human meat, because they think it is cruel and they know that the food needed to feed a human to make meat is a LOT more than what is needed to eat other foods.

They tell you that the human eating Aliens and vegetarian Aliens made a deal; if a human ever discovered what was happening, they would give that human the choice to determine the fate of the other humans. You have a choice: either you allow the continued ‘farming’ of humans for the food of the Aliens, or the Aliens would pack up farming operations. The packing up of the operations would occur over one generation, and the last of the humans in the farm would be allowed to live out their lives, but not reproduce. It would be the end of your line and the line of all the humans you know. The space used for farming the food for humans would be turned over to farms for food to feed Aliens (and the number of Aliens will subsequently increase). The total number of humans following the phasing out of human farming would be reduced by around 90%. It would likely see the extinction of your ‘breed’ of human, and only a very small number of slightly different humans would exist as ‘wild’ humans.

What would you choose, as this human?

A jaffle iron

I was walking through K-Mart and was reminded of this concept. Pictured is a jaffle iron. You put buttered bread in it, together with your spaghetti bolognaise left overs (or baked beans, or whatever you want), close and lock it up, and within a few minutes the ingredients are transformed into pockets of mouth burning bliss (tasting kind of like a pizza pocket with the same pain waiting for the impatient). When I was a child (1990s), a product of this quality would cost around $40. You would expect that given inflation over that time you might expect to pay $50 or $60 today, right? Wrong. This product is priced at $8 (everyday price, not sale price). What is even more amazing is that most retailers mark up at roughly 100%, so K-Mart only paid $4 for this item to the factory that produced it.

While it is true that this product is made in China, and part of the reason this is so cheap is that the labour used to make it is priced so poorly, most of the reason this is so cheap is due to technological advances. It should be remembered that the ancestors of these jaffle irons from the 1990s were also regularly made in China or Taiwan which both had very low wages. The reason why these are so much cheaper now is automation. Machines are making the plastic exterior and the metal plates. Machines are making the cords and the elements, mostly without human intervention. Machines are even cutting and folding the boxes! Humans are responsible for the ever diminishing number of tasks that are too awkward for machines to do at the moment (but soon even those tasks will be performed by machines). All that will be left for humans to do is to make sure the machines are working correctly. In addition to this, many advances in labour optimisation and administration have reduced labour costs and company overheads. Production lines are designed to ensure that bottle necks don’t occur to ensure that labour is used efficiently. Overhead costs like accounting have been reduced through the information technology revolution. Today, one accountant can make the payslips, transfer funds and file the taxes for tens of thousands of employees. 30 years ago such tasks involved a lot of paper, a lot of hand written work and many more people. Computers and information technology have allowed companies to cut much of their overhead costs.

As I walked through K-Mart, I felt that the only reason why I wouldn’t buy more of these appliances is that I don’t have a space to put it or a real desire to use the appliances. I could walk out of that K-Mart with 10 reasonably high quality appliances for under $100. The only reason why I didn’t buy more than I did is because I would be unlikely to use these appliances often enough to justify this token payment. This is why I feel like we live in a partially post-scarcity era: a lot of things that we want are produced at such cheap prices as to make the number on the price tag irrelevant. It doesn’t matter whether the price tag says $5 or $8: it’s an appliance for under $10! The only question that matters is “Do you actually want a jaffle iron?”

In the post-scarcity era, things would likely not be free, but would be very cheap indeed. There needs to be a token payment attached to the items to stop excessive waste. When I was very young, the local bus company would give away free timetables, and as a result they were losing thousands per year on printing them. Each time people got on the bus, they would ask for a new timetable, then lose or throw away the timetable almost instantly. So instead of looking after this timetable, the bus riders were wasting something which was very close to free to produce, but the waste was on such a scale as to make the provision of timetables extremely expensive. The bus company had a simple solution: charge people 5 cents per timetable. 5 cents appears to be not much money to the everyday person, which makes this solution interesting. Even more interesting is that the timetables cost the bus company closer to 15 cents to produce. However, this token payment acted as a very slight economic pressure to those handful of wasteful commuters to not make excessive waste. A post-scarcity world is not one in which you can have a whole planet for free, but a world in which almost all your needs are provided at an extremely low cost.

Although we may not be entirely in the post-scarcity era now, we are certain heading towards this direction. For many items that we can purchse, the cost of purchase is little more than a token payment. Further automation and technological developments will only bring us closer to a world in which people have the basic things that they need.

What is a bank deposit guarantee?

The purpose of a bank deposit guarantee is to ensure confidence in banks. It does this by guaranteeing that the money you put in your savings account up to a certain amount is safe, even if the bank becomes insolvent. If depositors did not think that their savings were permanently safe, then bank runs would be much more likely. A bank run occurs when the depositors of a bank thinks that the bank is going to fail, and hence try to take their money out of the bank.

There are two serious problems with bank runs. Firstly, banks carry only a very tiny fraction of the total deposit amount in physical cash. By the time the first few people in the queue have taken their money, the tellers have no more cash to give to the customers, which leads the masses to think that a bank is in much more trouble than it is. Secondly, people taking money out of banks quickly causes them to become under capitalised. This means that the amount of money the bank holds as deposits is very close to the amount of money out on loan. If the loans in the bank’s loan book experience any hardship such as mortgage delinquencies or foreclosure, then this translates to real losses on the depositors accounts.

A bank run is a perfect example of how humans can react en masse trying individually to preserve themselves, while actually causing themselves and others much more harm, like people pushing and jamming up the exits in a nightclub during a fire.

Regional Perspectives

It is important to think of the differences between financial systems before deciding whether strategies such as bank deposit guarantees are useful or not. In the US the bank deposit guarantee is called depositors insurance, and is run by the Federal Depositors Insurance Corporation (FDIC). The FDIC was established to ensure that when banks experience serious financial hardship, the bank will fall under the control of the FDIC. When this happens the bank is either sold to another bank (with all of the depositors funds intact) or the depositors are paid out in a cheque. The US is different to Australia in that Australia has only 4 major banks and very few small banks and credit unions, while the US has some extremely large banks but also hundreds of small banks.

During the height of the financial crisis the Australian federal government declared that it would guarantee deposits in Australian banks up to the amount of $1 000 000, worried that the analogies of a highly leveraged real estate present in both the US and Australia might result in systemic failure down under, bank runs included. There are a few interesting realities about Australian banks that make a guarantee discussion quite complicated:

• Australia has most of its money concentrated in a very small number of extremely large banks. These banks are considered quite large when compared to many developed nations around the world. Of course there are mega giants like Bank of America and CitiBank in the US, but it is very rare to have so few banks (we only really have 4 major ones which deal with roughly 90% of accounts). If a major bank failed (for example the Commonwealth which has a massive exposure to retail mortgages), the federal government would find it difficult to find the money to pay out each of the depositors 100%.
• If one of the major banks fails, there is unlikely to be a bidder that would be happy to take on the loan book and accounts of another extremely large bank. For a situation to arise in which a very large Australian bank were to fail, the other extremely large banks would also be under considerable pressure as well, making purchase difficult.
• The guarantee is only up to $1 000 000. It wouldn’t take that many large accounts wiring money out of the Australian banking system to cause the banks to be undercapitalised.
• Australia sources a lot of its funding from overseas. Complicate questions arise about whether the governments should pay private bond holders, and the implications on our currency and government borrowing.

Why are Bank Deposit Guarantees a bad thing?

You might be thinking “If bank deposit guarantees give economic stability, then they are a good thing!” However, there are several reasons why they are a bad thing:

Cost

In certain situations, yes they are good, but there is no such thing as a free lunch. To ensure stability in these banks, you must back the insurance up with capital. If a bank goes bust and there is a difference between the value of the loans and the deposits, the government has to pay, which means that you have to pay in your taxes. This is not so much of a problem in Australia, as we haven’t had any true bank failures in the last few years. In the US this is a much bigger problem. In 2008 there were 26 bank failures. In 2009 there were 140. In 2010 there were 157, and there were 92 in 2011. The cost to the US tax payer in bailouts of banks after the GFC is measured in trillions (thousands of billions).

Not properly pricing risk

It may come as a surprise to some people, but the money you put into the bank does not generate money just by sitting in your account. The money that you deposit has to be invested by loaning money to other people to charge them a lot of interest so that they can give some back to you. These funds might go to home loans, business loans, loans to governments or credit card loans. Each of these contain a certain amount of risk.

I have my money saved up in an account that offers 4.75% interest. Such a high rate of interest is only possible because they lend my deposits out to people who use my money for margin lending: high stakes speculation on the stock market. They charge margin lenders 9.5%. While the lending of money to people for margin loans is typically an extremely profitable business, if the Australian stock market were to open 30% lower tomorrow because of a massive crash on Wall Street, almost everyone would be in margin call with very little capital and basically no stock assets to back themselves up. However I get the same government guarantee just like anyone else.

Economic theory generally assumes that investments with potentially higher returns entail a greater risk of losses. It’s a trade-off between risk and profit. Bank guarantees remove the incentive to choose safer investment strategies by ignoring the way in which the deposits are invested. This is bad because it reduces the desire for individuals to make rational decisions about risk when choosing where to place their money (including which institution to have their savings accounts with), which can lead to economic bubbles and other market mayhem.

Deferred risk

Another problem is deferred risk. By insuring bank deposits, we defer risk to other people and future times. I’m possibly putting risk on to the government (and therefore fellow tax payers) by investing cash in Comsec. I’m getting more return for the same risk to me, which is essentially zero. Depending on who you ask, some people would say that I am almost stealing from others because Comsec is much more likely to fall as a lender. Others would say that the Commonwealth is much more of a risk than other banks because their loan book is almost entirely home loans (and hence putting all of the bank’s eggs in the same basket).

Insurance also defers risk to later times. With insurance stopping runs on banks, financial transactions run a lot more smoothly. A functioning financial system is necessary for effective capitalism to continue. Hence if a number of banks fail, the whole system doesn’t come down with it when all depositors try to take their cash out. It sounds good, but when many, many large banks all fail at once, government and society faces massive pressures. Firstly taking on the debts of banks to guarantee the savings in people’s deposits adds to government debt, which must eventually be paid off. This leads to situations similar to the US, where the massive cost of providing financial backing to the banking sector has in part caused the US to have debts which seem difficult to pay off. While education budgets and health budgets are suffering, the government is required to service these new loans. A governmental default (in addition to massive bank failures) is likely to cause large and on going consequences for the country involved. If the size and the number of failures are big enough, then the government may be unable to pay out all depositors, rendering the whole concept of deposit guarantees useless.

A world without deposit guarantees

If we think that deposit guarantees are a bad thing, what would the world look like without them? I can think of 3 scenarios which could be either likely outcomes or could work.

Scenario 1: Business as usual

I see this as the mostly likely outcome, but to me is also the least satisfactory. Currently consumers are left in the dark as to how their deposits are invested and what their deposits are earning in interest rates. This void of information for consumers is a deliberate move by the banks to ensure that they don’t understand the size of the difference between the rates the banks charge for loans and the rates they give you for your savings. By not knowing how your money is invested, you don’t understand how at risk your money is, especially if bank goes bust.

This issue is compounded by the fact that money is mostly electronic these days. A very small percentage of the total money supply is actually physical cash. That means that the days of hiding your money under the mattress are long gone. Essentially there is no way for you to take all your cash and keep it somewhere where it won’t disappear. We don’t have  0% interest “under the mattress” accounts where cash is guaranteed to be paid out at anytime. If such an account existed, they would have zero risk of loss (except for the inevitable effects of currency depreciation) by having 0% invested in loans. While I would never use this, I argue that people should be allowed to keep their cash (or a proportion thereof) in the equivalent of an electronic money safe. This does not exist at the moment. Of course you could keep all your money in your transaction account and earn close to zero percent, but your money is just as much at risk as anyone else’s money if the bank fails.

In the modern world, there is no choice in how or whether your money is invested when you put it into the bank. But more importantly, you do not know how it is invested and therefore you cannot make rational investment decisions about whether the larger interest rate is worth the extra risk.

This scenario leaves the banks prone to bank runs, based on either false rumour or runs with legitimate reasons. Uncertainty about the nature of the banks holdings may exacerbate the problem, for example if one of the many large investments a bank makes fails, this may trigger a run despite the investment making a very small dent to the balance sheet.

Scenario 2: Business as usual, but with greater consumer information

Banks provide a valuable service to their depositors, by taking their relatively small deposits and spreading them over a large number of loans, thereby spreading risk. Without banks person A would loan their money to person B, and if person B goes bankrupt, person A could lose everything, which is a bad scenario. Banks allow person A to take their deposit and break it up into millions of tiny loans to person B, C, D, …. such that if 0.1% of loans fail the depositor only loses 0.1%.

Given that banks provide us with a useful service by spreading out our investment, we should at least know how they do it. If I am trying to work out which bank to choose, I should consider the interest rate of the accounts and whether my funds are going to be mostly invested in houses, business loans or the share market. These are important considerations when dealing with risks. While retail depositors would be quite far from theoretical rational market agents due to massive information asymmetry, they should be more rational when they are given more information.

Unfortunately while this information allows me as a depositor to make decisions about how my money is invested, it still doesn’t prevent bank runs. If house prices collapse, Commonwealth might see a bank run. If share prices fall, ComSec would likely see a bank run. And if whatever business UBank invests in happens to drop in price, then UBank will experience a drop.

If you were to let the market correct for such problems, you would find that interest rates would move around a bit quicker than they currently do now. While not necessarily a problem for economics theoretically, rapid interest rate movements can make decisions about long-term projects more difficult for companies. Most economists would agree that keeping the interest rates generally steady (if the economic conditions support it) is prefered.

Scenario 3: Redefine what a bank is

Point of this article so far is to give weight to what I think a bank should be redefined as. People, when investing their money, should take responsibility for the various choices they make. However, to make those decisions, they also must be informed.

My proposal is to destroy the concept of a bank acting as a black box, always giving the same interest rate to depositors while playing the market to borrowers.  Instead banks will be companies that package loans and deliver them to depositors to buy. These loans will be made up of particular sectors such as real estate, small business, medium business, large business (asx 200), government bonds etc.

To ensure stability in the market place and to ensure people don’t have to daily check on their finances, I would suggest that the majority of these savings investments should be fixed-term deposits. These deposits could earn a good deal more than

The reason I argue for fixed terms is that having variable interest rates that change daily would be frustrating both to depositors and people who take out loans. In most cases, people have small amounts invested (in the order of a few thousand dollars) and shouldn’t have to deal with information overload from such a small amount of savings.

In such a scenario, banks would essentially become packagers for financial products, where they charge fees for stitching a very large number of loans together.

To ensure that banks do not create financial devices that they do not believe in, it would be necessary for the bank itself to have skin in the game. One of the problems of the global financial crisis was that financial institutions were packaging up poor quality home loans and giving them high ratings while secretly betting against such loans to the detriment of their own customers. To avoid this, banks will need to have a certain percentage of their own money on each of these loans. The proportion of each of these loans (say 10%) must be financed directly by the bank itself. This way, underperforming loans will affect the profits of the bank in the same that a customer’s account would be affected.

Concluding remarks

Most of this is just theory, and there are additional requirements (beyond scenario 3) of adjusting the financial system to avoid direct government support. That said, removal of government support for the financial industry is an important aim to have. We don’t want governments supporting big banks and the already wealthy while cutting health spending and education budgets.

“Wow that was an excellent track, by ___, let’s listen to the next one, it’s really great too, it’s called ___”

I’m thinking, “Okay this guy must really love his drum and bass.” So the first song fades into the second very smoothly. Turns out the second song exactly the same song, with one note changed in the trumpet tune. Seriously ONE NOTE. I’m down with this though, I liked the first one. About 5 mins pass (you can’t really tell time properly with drum and bass), and the guys English accent interjects

“Hey that was another track by ____. Such a great track. Let’s check out another …”

3rd track is exactly the same as the first, but this time with violin instead of trumpet. EXACTLY THE SAME. I like drum and bass, but those barely count as songs, let alone separate songs.

Think about your use of computers. You use computers at home and at work, you use computers in the form of a smart phone and even when you drive, computers are managing systems that control your car. In so many ways this useful technology has had positive benefits to our lives to help us share information, make us safer, make our lives more interesting and make tasks easier. In the future we will use them even more.

But can you describe how they work? If I put you into the middle of the wild, could you build a computer? No you could not. 200 years ago, it would be conceivable for you to produce many of the things that you would use in your daily life. You want to build a house, so you knock down a few trees and bang them together to make one. You want to grow some food, knock down some more trees to clear land, plough it using your favourite oxen, then plant some seed. Even if you want to make something out of metal, find a deposit of red earth, fire up your kiln, chuck in some coking coal and away you go. Surely many of those things required specialized knowledge, but it would not be inconceivable for someone to become a carpenter, a farmer or a blacksmith and produce at least one working item made primarily from their own skill. All of these professions dealt with items that you could touch. They were all tangible.

Computers live in the world of the intangible. They live in the world of the microscopic, where to even inspect the smallest parts require electron microscopes only accessible to the lucky few. They live in the world of information, where the use of the devices requires very little understanding of the code and the protocols that occur in the background. Even if you do know some of the code that goes on in the background, you probably only know a very small part of it. And even for that small part of the code you do know, you have no understanding of what the machine code looks like, let alone what it means.

Now your average physics or electrical engineering graduate might be able to describe in general terms the workings of various types of transistors and methods to print integrated circuits. They might be able to tell you the necessary components that make a functioning computer, such as a central processing unit, a graphics processing unit, power supply, etc. But they would not be able to tell you how to create a whole computer. The reality is we rely on a very small number of companies to produce some of the most important parts of our computers. The field has cultivated extremely highly specialised individuals in very high specialized companies who are responsible for very small parts of the entire system.

Just think about what it took for you to read this blog. Someone had to design and make the CPU of your computer, and the CPUs of all the machines between you and the server. The hard drives, monitors, other peripherals. WiFi systems, optical fibre networks, network switches (not to mention material science that is needed to create the substances and structures that go into making these devices). Protocols for communication over these networks, as well as the Hyper Text Transfer Protocol, the web browser and operating system you are using, as well as the people who put together the WordPress code which makes the backbone of the website you see right now. All these parts have scientists, software designers and engineers working on them which have little to do with each other.

What we do today requires several layers of highly developed technology. This layering of technology is not just layering across different fields such as CPU development and software design, but also across time. Modern computer chips aren’t human designed any more. They are designed by computers. Of course humans tell the computers what to put into the design. An old version of the Intel Core i7 chip contains 731 million transistors. That’s too many for humans to even consider.  If you managed to draw 1 transistor on a circuit diagram every second, you would take about 556 years to draw all the transistors in the i7 chip. So much of the work is done by computer calculation, not human design.

Let’s say we were to lose the computerized copies of designs for most modern computer chips. Say some solar flare erupted comprised mainly of long wave magnetic field oscillations such that we didn’t get vaporized, but all of the world’s electronics are essentially rendered useless. It would take decades to return ourselves to a point where we could successfully create microchips of similar quality to the ones that we use today. But a world in which we lose the knowledge of the foundations of our computer systems is not as far-fetched as the loss of all computers everywhere due to the mother of all solar flares.

In the future it is quite possible that we will live in a digital dark age, or more correctly, that the past becomes a dark age because we haven’t kept proper records of what we have done or because formats of data are no longer supported. Although not as important as the foundations of modern computing, I currently have several 3.5 inch floppy disks with my school assignments on it that I will never be able to access, partly because I don’t have the correct 3.5 inch drive, but also because the software it was written in (ClarisWorks) is essentially incompatible with any modern machine. Imagine specifically that we lose or misplace the designs of earlier computers that were a precursor to current machines due to format depreciation.

Importantly, the layering of computer technology is also fundamental the culture and transmission of ideas that allow technological development to occur. The fact that computers are cheap and readily available means that we have plenty of experienced and eager young computer programmers and engineers who are capable of adding to the already amazing compilation of human knowledge in the computer field.

We live in a world where the early pioneers of computer technology are still alive and quite often still working in the field. Once they die, they will take with them the stories and knowledge of the past much like the last soldier dying from a long ago war takes with them the stories of the horrors and the triumphs. We are soon coming upon the age in which the founders of the modern computer society will pass away, taking with them a part of the knowledge of what it was like to create the first microchips and the early systems.

Humans have only been farming for the last 20 000 years or so. They have only had steel production for the last 4000 years or so. They have only had electricity for the last couple of hundred years. And they have only had computers readily available for the last 30 years or so, and yet so much has been achieved. The human species has been around for around 200 000 years, give or take depending on your definition of what counts as human. If humans development were to continue for the next 1000 in this manner, we probably would not even recognise the technology of 3011.

Much like we don’t know who exactly created the first quill to write with, the first molten iron or the first crop, one day humans might not know where the technology for the computerised machines that they will use came from. We live in a nexus in time where the basic objects we created in the past can be explained and the complicated machines of the future (or even today) cannot be explained. If we live in a time where objects we use daily are too difficult to explain, in the future this will become even more so.

Google has had so many cracks at social and so far most have been failures. Orkut. Buzz. Wave. Here’s why Google keeps failing: they don’t understand how humans network. Humans want to be allowed to network, but they don’t want to be forced. If you look at Google Wave, you had to get invites. And it was hard to get them! People spent weeks trying to get these silly invites, meanwhile the early adopters got bored and walked away from it. On the flip side, Buzz forced people to network much more than they wanted. This caused people to try as hard as they could to turn off all those features as quickly as possible.

Now Google+ is released and they are at their silly invite games again. Social networking is cool because it allows you to find the people you are interested in and communicate with them. If you can’t find people you are interested in (because they don’t have an invite yet), you walk away. It’s that simple. Google will lose users as quickly as they will gain them using this system. What do you think? Is Google killing Google+ already?