24 August 2015

Krugman Finally Says It

Some time back, I invented (so far as I know) the phrase "Tyranny of Average Cost"™ to describe the problem faced by capital/fixed cost biased production: in order to make moolah from the investment, one has to shift a lot of widgets at a moderate price or shift just a few at unaffordable price. Apple has, sort of, taken the latter course. Without sufficient demand, the investment never pays off. Without sufficient payoff, investment in physical assets slows, even stops. Economies such as Bermuda exist based on almost wholly fiduciary investment. Some here in the USofA are sore jealous.

Yesterday's missive told the tale of Intel and physical investment. The author of the piece sees superior use of fiduciary capital in finance. The comments, on the whole, argue that Intel (at least) should stay the course of making physical widgets. On the other hand, there is that siren tune of WhatsApp: a handful of guys with PCs getting $19 billion (not really, but it does sound good, doesn't it?). The ROI is outta sight. The problem, of course, is what your Good Mother told you when you were in short pants:
What would the world be like if everybody behaved like you?

Barriers to entry for such Service Economy companies is nil. Which is why WhatsApp got the $19 billion: it was simple extortion. Legal, but extortion nevertheless.

Well Krugman finally says it, almost.
More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a "global saving glut": a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns. He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. (Some of us did.) But his suggestion that the U.S. housing boom was in part caused by weakness in foreign economies still looks valid.

This financialization of the USofA economy has been going on for a while. Longer, in fact, than even Krugman admits in today's column.

What both Bernanke and Krugman miss, or are too tired to deal with, is that the glut began no later than the DotBomb. All that moolah to fund .coms like Pets.com (loved the sock puppet; just your average CEO in drag) came from somewhere. The "Giant Pool of Money" should be reviewed at least once a year; it explains most of what's going on. Still.

Which brings us to a new neologism (from your local Department of Redundant Redundancy): The Cudgel of Good Enough™. All producers of tech widgets find themselves facing the same problem: what functionality can be invented that is new, useful, and high margin? The smartphone business is ground zero, of course. The Big Deal with the next iPhone, if all these reports are to be believed, is Force Touch. Doesn't have quite the allure of an iPhone, when none existed, does it?

What's a company to do? On the one hand, income/wealth concentration continues apace, such that any growth in the global economy happens to the 1% (or .1%). For, say, Burberry that's not so much a problem, since selling a man Just The Right Coat For The Occasion™ is what they do. (You should have stayed with coats, Angela, I guess your Plan B makes it low risk?) For an iPhone shifter, not so much. Not even The Donald needs more than one. No, I've no idea whether he really does or not. Thus the Watch, which isn't likely to be a smash hit. Tim would have leaked that by now if it were.

Back to the SA story. The author does have a point: the marginal benefit of semiconductor progress has plummeted since the heady days of the Pentium, while the cost of implementing those benefits continues to increase. The Tyranny and The Cudgel beat Intel like a drum. Remember when the 450mm wafer was just around the corner? Never happened, of course. One might argue that node shrinks have been a substitute, but, if so, at much greater cost. Soon enough, control of power at 10nm (certainly below that) becomes an issue.

Is there a happy ending? As Krugman puts it,
But there's also, I believe, a sort of emotional prejudice against the very notion of global glut. Politicians and technocrats alike want to view themselves as serious people making hard choices -- choices like cutting popular programs and raising interest rates. They don't like being told that we're in a world where seemingly tough-minded policies will actually make things worse. But we are, and they will.

To quote the subtitle of one version of these endeavors, "It's the Distribution, Stupid".

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