Regulating Social Media – Yeah or Nay

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How safe do you feel on social media? On the one side, we have huge proponents of social media saying that it should remain unregulated so people can practice their freedom of speech, engage in meaningful conversations, and share opinions. On the other side, there are people who support its regulation claiming that it has become a public menace.

And from a user’s standpoint, it does seem important to be able to share and express yourself freely. However, the recent social media scandals, such as the Cambridge Analytica, banning Alex Jones from social media, spreading fake news, hate speech, and the fact that terrorists use it for recruitment shows us the other side of the coin.

Is social media coarsening public discourse and lowering the quality of journalism? It definitely does.

Social Media Censorship

Is social media censoring us and how? For example, this analysis shows how Google systematically stifled the content by the author Doug Wead from being available in Google search results and on YouTube. Last year, Media Matters issued a memo explaining how social media platforms can collude to eradicate what they feel to be “fake news” or “right-wing propaganda.”

Social media platforms are increasingly accused that the Silicon Valley elite is excluding other people’s views, and these recent scandals show how vulnerable our democratic society can be to the power of social media. Many of us treat them as a part of our daily lives, where we connect, communicate, and share our values and opinions.

Do Tech Companies Consort to Evil for Profit?

In March 2018, Washington Post published an article to remind the public about the relationship between the IBM and Nazi regime. Namely, Thomas J. Watson (IBM president) returned the medal he received from Adolf Hitler himself because the Fuhrer started a war, which was “contrary to the cause which he has been working and for which he received the decoration.” However, he didn’t say that he will terminate the relationship, and actually continued to do business with the Nazi regime.

Mark Zuckerberg resorted to the same type of “ignorance.” Leaving Facebook and Twitter to self-regulate their platforms is dangerous, but should we cede power over private companies to the government? In the digital space, we may sacrifice our liberty by doing that.

Two Dark Sides of Social Media

With no regulatory supervision, companies such as Google and Facebook use techniques common in casino gambling and propaganda (such as rewards and constant notification) to foster psychological addiction. The other side is geopolitical, where social platforms are used to inflict harm on the powerless in commerce, foreign policy, and politics. They can be exploited to undermine democracy.

Saying that the government should regulate social media as alcohol or tobacco may be too harsh, but the fact that private individuals and companies control the flow of information and saturate their platforms with the information they want can be considered as another form of media manipulation and manipulation of an enormous part of the human population. Yes, it is a valuable tool for spreading the right information and the truth, but the truth can easily be lost in a sea of irrelevant news.

We need more than just self-regulation, but content disclaimers and verification systems. We need social media to give liberty to the people and not be used as a weapon that is not held accountable to legal standards. However, we are left to see what will be the rules, and the proponents and opponents need to find common ground.

The Financial Policy Council is there to inform the public about all current fiscal and economic matters. Whatever social media regulations might be introduced in the future, we are here to inform, educate, empower with our accurate research on key policy issues.

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What Does It Take to Be a BIG Disruptor?

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Today, almost every new technology is being called “disruptive,” and it’s mostly because that specific word has been overused for so long. It became a cliché, but there are situations where it fits perfectly. Some revolutionary companies, like Aereo (the television streaming company) and Uber (the ride-sharing app,) have entered the market and used their potential to disrupt the way their industry operates.

These innovations are known as the “big bang disruptors” and were evident in hypercompetitive markets, such as computing, gaming, and electronics. However, they have moved into other industries as well, and now there isn’t an industry that hasn’t experienced an enormous transformation due to these big bang disruptors.

Have you asked yourself what does it take to be a significant disruptor? Here is what you should know about it.

  1. Listen to Visionaries

Who should we consider a visionary? Anyone from your employees who have decided to move from one to another successful startup because they see a more promising future, to industry thought leaders like Elon Musk or Steve Jobs, who are persistent in chasing the dream of the future. They are the truth-tellers because their lives depend on it, and they can show us things that are not so obvious. And besides the truth-telling people, future market demand can be indicated by crowdfunding campaigns and today’s enormous data sets.

  1. Experiment

The most innovative products used to be developed by the companies with the most robust R&D (Research and Development) departments. Today, small tests can be conducted without enormous budgets. Experiments with the potential to grow into disruptive ideas. The risk and cost of experimenting are getting low.

  1. It’s Also about Timing

No, it’s not a matter of luck because luck plays such a small role. Take Amazon’s Kindle for example. Jeff Bezos has decided to avoid all the problems that other e-readers were encountering with the technology, waiting for it to mature. When it hit the market, it wasn’t the first e-reader out there, but it was the best. That’s how the timing was crucial to the success of a big bang disruptor.

  1. Handling the Quick Scaling

Once a disruptive product enters the market, it creates an enormous demand. However, such quick success comes as a challenge because you need to be prepared (logistically) for fast business growth. Consider finding partners or outsource ahead of time to get help when needed.

  1. Stay Competitive

Once you make a disruption, new iancumbents will start flowing into the market, trying to get their piece of the cake. Every product has a saturation point – when the user base peaks and then continue to fall. Give your best to anticipate your product’s saturation point.

  1. Think What You Can Do Next

At one point, things will start slowing down, but you will be prepared. Plan your next move before the fire starts dying down and sell your assets before they turn into liabilities. Use your money to develop the next product or start reducing your expenses early on. Don’t use all your resources to that one breakthrough product.

In the beginning, you were a disruptor. Later, you will also become susceptible to disruption. Anticipate threats to stay alive, and realize that you’re being slowed down by your product that was once a disruptive innovation. Quit while you’re ahead and avoid ending up spending vast chunks of your profits trying to save an industry in decline.

For a peek into the future and getting a clue about emerging industries and markets where you may enter as a disruptive entrepreneur, there is the Financial Policy Council. To us, America is the land of opportunity, and we want to inform, educate, and empower entrepreneurs by helping them understand, support, and recognize the issues and opportunities of their concern.

Come join us and be part of decisions that will shape the country’s future and the world.

August 4, 2018

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Bitcoin: Drawing the Line Between Investors and Gamblers

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People who bought and held their .01 bitcoins from 2010 could have enjoyed an increase in value of 119,999,900 percent. If you spent $100 on the most popular digital currency then and didn’t sell or lose your fortune to hackers, your electronic coins might be worth about $120 million today. Those are pretty incredible returns, and few people regret buying a few bitcoins back in the day, holding onto them, and reaping the benefits. Of course, none of that offers any guarantees that the value of this or any other digital currency will continue to rise like this or even continue to increase at all.

Is Buying Bitcoin Investing or Gambling?

In fact, it’s possible to argue that the very thing that maintains today’s value is past performance. As you should know from reading any prospectus, past performance doesn’t ever guarantee future returns. If you can afford it and want to spend some money on digital currency, that’s your choice. However, you really should first spend some time considering what it really means to buy bitcoin.

When you buy some bitcoin, are you investing or speculating? In order to figure this out, you first have to decide if bitcoin qualifies as an investment. This question usually sparks a lot of contentious debates among people who are considered financial experts. Aswath Damodaran teaches at NYU’s Stern School of Business. He’s often referred to as the “Dean of Valuation” for his work valuing various assets.

Professor Damodaran divides all investments into four main categories:

  • Assets
  • Commodities
  • Currencies
  • Collectibles

He says it’s easy to dismiss digital currency like bitcoin as an asset, commodity, or collectible. This digital currency doesn’t generate income on its own like a rental property, an asset that you can touch. You can’t consider bitcoin a raw material like a commodity. It certainly isn’t a collectible.

If nothing else, Damodarian is willing to say that bitcoin might be a type of currency, but he also has gone on to comment that bitcoin isn’t a very good currency. These are some reasons that bitcoin hasn’t yet become a good currency even if it might be loosely classified as one:

  • It’s not that easy to trade nor commonly accept by most vendors.
  • If you do find vendors who accept it as payment, they probably won’t give you an actual price until the moment you want to make a trade just because the value is very volatile.

If bitcoin is an investment, it’s hard to classify. You might call it a currency just because it really isn’t anything else.

Professor Damodaran is not at all a fierce critic of electronic currency and doesn’t believe it’s any sort of fraud or Ponzi scheme. He just says it’s impossible to value right now. You can only trade it or price it. You can find many tougher critics than Damodaran, so it’s worthwhile to consider the words of a fairly unbiased scholar and recognized expert in the field.

He does say that if future technology makes it easier to spend bitcoin or other electronic currencies, he might offer a revised opinion. Still, it might be that blockchain technology and not the electronic currency that really has the value. If that’s true, another electronic currency or even a different kind of technology could replace bitcoin.

Should You Regard Bitcoin as an Investment or Speculation?

Just as you know, you should never sell in a panic, it’s also prudent to be wary of buying in a panic. Right now, you might regard bitcoin as something that’s interesting to study or even risk whatever you can afford to lose. If you want to invest in order to secure your retirement, earn profits, or meet other financial goals, you should probably look for something that’s easier to classify as an investment. More important, you will probably be prudent to find an investment that’s easier to value.

If experts are having a hard time telling if or when this will all come crashing down, it can be easy to see this as a gamble. Some people are fine with putting their savings on the line in hopes that things will go the way they guess, but more savvy investors will typically take the “boring” route and put in the hard work required to ensure their financial growth.

Now you know

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Why Keep the Mortgage Interest Deduction Intact for Now

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Arguments over the mortgage interest deduction are not new and arise from both sides of the political spectrum. It’s important to remember that when Congress first imposed a federal income tax, they made all interest payments deductible. At the same time, the Tax Foundation contended that Congress wasn’t thinking about middle-class homeowners in the early part of the 19th Century. They excluded the first $3,000 for individuals and $4,000 for married couples, so only about one percent of the population of the country paid federal income taxes back then.

In those days, Congress may have considered business or farm interest but probably not typical home mortgages. As time passed, notions about interest deductions and exactly who would be impacted have obviously evolved. Today, the home interest deduction and the related property tax deduction remain as the two sacred cows in the tax code. It’s fair to say that they remained intact after other interest-related deductions had been gutted because lawmakers believe that they provided incentives for homeownership, and because homeownership was something that Congress hoped to encourage.

Why Keep the Home Mortgage Deduction Intact?

First, the latest tax code proposal doesn’t ask to completely do away with these two deductions, so it’s important to look at the latest bill to learn exactly what it does do.

This is a brief summary of the changes for home mortgage deductions:

  • You cannot deduct interest on a second home but only a primary residence.
  • You can still deduct home interest on any loan or part of a loan up to $500,000.
  • It’s worth noting that the related deduction for home property taxes would be capped at $10,000.

Arguments in favor of these changes usually underscore the additional revenues that the government can collect by eliminating these home deductions. Since the proposed changes aren’t eliminating all home deductions, it’s also easy to argue that they won’t impact the majority of Americans who only have one home, don’t have a mortgage over half a million dollars, or who pay more than $10,000 for property taxes each year.

How Could Changes to Housing Deductions Impact the American Economy?

A lot of Americans may not think that this sort of change to the tax code will impact them that much. Such expensive homes are rare in most counties and probably don’t represent more than four percent of all American homes. It would be possible to apply a similar argument to the property tax deduction. Lots of homeowners don’t pay $10,000 in property taxes every year, and many of those don’t even pay enough to allow them to itemize deductions.

However, the CBS report pointed out a couple of impacts that the news of the tax code has already had on the U.S. economy:

  • Home builder stocks: For example, the SPDR fund dropped by over five percent on the news reports. Even home-improvement retail chains like Home Depot and Lowes lost value.
  • Vacation homes: An analyst for Cowen named Jaret Spielberg said that his firm found the news negative for the market of vacation and second homes. Obviously, the tax code will also impact more homeowners in pricier markets. For instance, home prices average around $276,000 in Austin, Texas but over $1 million in San Francisco. This change may impose an additional burden on people who already struggle to afford housing in more expensive cities. Even if the old deductions get grandfathered in, the change is still likely to impact future home sales, and thereby the availability of different financing options. This, in turn, may affect the ability of these expensive housing markets to attract new people.

Also, the tax proposal included an increased standard deduction. It’s not accurate to only view the way these changes will impact future home buying decisions at the top end. More people with modest homes in areas that don’t have such high property taxes may also find that homeownership doesn’t give them the tax benefit that it used to.

In any case, the National Association of Realtors felt strongly enough about the impact of these changes on the real estate market to speak out. Because it can eliminate the tax incentive of purchasing a home for many taxpayers, they believe it will weaken the real estate market and result in higher taxes for many Americans. According to NAR’s president, William E. Brown, the changes would result in a “one-two punch” that would end up reducing America’s homeownership rate, which has certainly never been a goal stated by the political platform of either party.

A key resolution to consider…. If the intent is to make America greater than ever.

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Understanding and dealing with bubbles – a review of the state of the art

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Take a close look around you. There seems to be today bubbles boiling up everywhere.

There are bubbly stock markets like India, Brazil, and the U.S. Lots of bond bubbles: U.S. Treasuries, U.S. corporate bonds, global bonds in general, subprime auto bonds.

There’s talk of a bubble in the international art market, solar energy, venture capital, lithium and U.S student loans. Another looming one is the bitcoin bubble too.

There’s also evidence of real estate bubbles around the world: Vancouver, Auckland, Sydney, Toronto, San Francisco and London, for starters. There’s a reported bubble in “nine-figure real estate listings.”

Chinese bubbles are a class of their own: Real estate, iron ore, cotton, garlic, eggs and soybean meal are some recent ones. Of course, China’s stock market bubble burst last summer.

Then there is discussion of “the mother of all bubbles” also known as “the everything bubble,” which infers that a global debt bubble feeds all the other bubbles. With so many bubbles, it’s hard to keep track.

Possibly a Bubble ETF is needed, composed of the many bubble markets, so that there’s an efficient way to track and trade the world of bubbles.

Yet, despite the fact that speculative bubbles are popping up everywhere, it can often be hard to tell you’re in a bubble until it pops. It would help to know how to tell a bubble is forming.

Luckily there are about four centuries’ worth of speculative bubbles to study for answers.

The first widely known and the most famous market bubble of all time was Tulip Mania, which occurred in Holland in the early 17th century. The Dutch became enamored with tulips that had flaming colors on their petals. They coveted the bulbs that grew into these unique tulips.

As demand for the bulbs increased, along with their value, a market in tulip bulbs developed. As word of profitable speculation spread, more people piled in. Prices moved continuously higher.

Then from December 1636 to February 1637, the price of premium tulips surged by 200 percent. At the height of the mania in 1637, the market price of a single prized bulb was sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam – when that city’s homes were among the most expensive in the world.

Needless to say, these prices were not an accurate reflection of the true value of a tulip bulb. In February 1637, buying tipped over into selling, and a domino effect of cascading lower and lower prices took hold. Speculators saw that they had spent vast sums to buy plants that were little more than glorified onions, and liquidated their tulip bulb holdings without regard for price. As wealth evaporated, pandemonium engulfed Holland. A deep economic depression followed.

Tulip mania established a pattern that has since been repeated over and over in speculative bubbles ever since. Despite advances in economic theory and the increasing sophistication of markets, market bubbles, and human psychology, haven’t changed much since the 1630s.

In 2008, Jean-Paul Rodrigue, a Canadian transportation scholar, conducted a study of the history of bubbles, and published a model of bubble stages:

  1. Stealth Phase. The initial bubble stage is where a new market opportunity, or paradigm, is cautiously recognized by early smart money investors.
  2. Awareness Phase. As market prices rise, more investors are attracted to the new investment story. The media begins to cover the story, adding to the momentum, and investors become increasingly interested – and increasingly less sophisticated.
  3. Mania Phase. Now everyone notices the rising prices. The media is touting “the investment of a lifetime.” Price becomes detached from underlying economic reality. Euphoric, irrational investors project recent price gains into the future. Enthusiasm spreads like a contagion between investors. A feedback loop ensues – rising prices amplify stories that seem to justify high valuations, which attract an ever increasing number of buyers.Even cynical traders join the buying, expecting to sell to “greater fools.” Price gains become nearly parabolic. Paper fortunes are made. Greed rules. Meanwhile the smart money is selling to the dumb money.
  4. Blow-off Phase. At some point buying abates and a paradigm shift slowly – or sometimes quickly – unfolds, as market participants realize something has changed. Sellers now find few buyers and prices fall quickly. Leveraged speculators face margin calls and are forced to sell. The decline becomes a crash.

Everyone now views the market as “a house of cards,” and prices plummet at a rate much faster than when the bubble was inflated. Often, prices fall below pre-bubble levels. The market becomes universally hated. But eventually the smart money starts buying again, recognizing the  panic has created an opportunity to buy assets at bargain prices.

This classic bubble pattern is apparent in the most notorious bubbles of the modern era, including some very recent ones.   Another example is the Shanghai Composite index just last year. Starting in August 2014, the index gained 125 percent in 10 months. This was fueled in part by easier margin lending rules, which allowed Chinese investors to borrow more to invest.

This amplified the speculation and buying, so prices kept going higher. Thinking that buying stocks was an easy way to make money, less sophisticated investors entered the market and mania ensued.

But eventually the bubble popped. Investors realized stocks were way overvalued and the market collapsed and fell 32 percent in less than a month.

Over 400 years of market bubbles have shown a recurring pattern: A smart investment idea gains a following, and prices rise. The media discovers the story, ever more investors join in, becoming increasingly excited, and prices rise even more. Valuations lose connection with economic reality. Sooner or later the bubble bursts, prices crash, and many investors are ruined.

With potential bubbles in so many different markets across the globe, it’s a good time to study this historical pattern. Knowing what stage a market bubble is in can help you avoid taking a bath when the bubble pops. And bubbles always pop.

Learning to control the emotions that can cause us to get caught up in market bubbles is also important.

Next bubble?

I am afraid the next bubble will be due to cheap money…

Ever since the Fed (and other money printing entities throughout the world) started to print money at record pace after the 2008 crisis, there has been a lot more money in the economy.

What the central banks were trying to do (and it has worked a little) was stimulate economies by injecting money into industries that were hanging on by a thread.

Unfortunately, this has caused many assets to be inflated in price because of the larger volume of dollars (or whatever currency you use) in the market.

This large volume of money allowed people to pay higher prices for things like homes, businesses, cars, education, or really anything that can be bought with borrowed money.

As we continue down this road of more money printing, we are just like a drunk at the bar, who is drinking more and more. We think we are getting better and better at dancing all over the tables, and hey, maybe we are! But… the next morning we are going to have a mean hangover.

So, anything that is financed through borrowed money is at risk of being in a bubble. Real assets that cannot be financed are the few things that wealthy people will start transitioning into as this bubble gets larger. Things like metals, art, collectibles or foreign real estate.

Given the current state of our economy, the only thing worse than a new bubble would be its absence.

Now you know….

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