A Negative (Interest Rate) World: When The World Plunged Into Its Mirror Image…

(Un)customary Warning: This is a parody of a rather boring real-life event. Negative interest rates; a topic high on Repulsive Quotient. Mumbo-jumbo is kept down to a minimum, however, and one hopes the brief waddle through an arcane world turns out to be an enjoyable ride.

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Johnny Simple was flummoxed and a trifle grumpy. The reason behind his grumpiness was his government. Simple didn’t really harbour views on the quality, or the sanity, of his government (‘I couldn’t care less’), but in the sleepy surroundings of his home, his mind was astir. An investment that he had made – out of his own free will – was giving him ample cause for bemoaning.

He had chosen the safety of his trustworthy government’s Bonds, had made an investment for a return, waited…but on maturity, something seemed amiss. Simple had naively thought his government would return his principal and then something extra, on his investment. But his government seemed to have charged him for the privilege of investing with it. He learnt the true meaning of ‘return’. To air his misgivings, he sought out a friend, Complexius, and learnt a bit about himself and human behaviour. Complexius quickly got down to dealing with complexities.

For centuries, people thought a country’s government was the safest of safe places to park one’s capital. It was simple. You invested in a country’s government bond, the government provided interim happiness (interest on the bond), and one got one’s investment back at the end of it all. This was when countries around the world were paragons of strength.

Like a body that wilts under the tentacles of cancer, countries were now consumed by Debt. A pale shadow of their strong former selves, countries were scampering to resuscitate one another. The world had changed.

Bank deposit rates had gone Negative.

Ailing countries proclaimed that considering their financial ill-health, their citizens would now have to pay them for the privilege of safe-guarding their savings. A few paused and thought, deteriorating financial health ought to lead to ever higher interest rates as compensation. What in the heavens was happening here? This minority, however, was superseded by a vast majority that deemed it rational to turn over their savings to near-default governments, that were now mavens of shakiness and scrambling in the race for life-support.

Risk-free return was now replaced by returns-free risk.

But humans, bless their rational souls, continued ‘investing’ blissfully in their rationality.

Some thought of taking this a step further.

Earlier, everyone desired more money and growing paper wealth. The rules had changed. Holding Paper Currency was now anathema. There would now be a mad desire to lose money. People would be paid to whisk money off their hands, instead of whisking it off others’ hands, as used to happen earlier.

Soon perpetrators realised that heading to an Ivy League was a great way of launching their lose-money careers. The degrees cost a bomb, and it was seen that Ivy League experience in blowing money served as a tremendous adornment in one’s CV.

This led to a happy situation, where smart fellows (with Ivy League backings) now spent their waking hours conjuring up ways to lose money. Investors brandished their capacity for generating the highest rates of return earlier, in order to garner investors. Now, everyone proudly brandished their capacity to lose other people’s money. It was observed that the ones with a long and established track record of losing money, often in scintillatingly novel ways, seemed to enjoy great demand.

Banks, which earlier were vilified by the larger public, suddenly assumed a God-like persona. Many thought no one would know how to lose money better than those with a centuries-old history of practising the fine art. Banks did not disappoint. Complex derivative transactions, which earlier were onstensibly aimed at reducing risk of loss, were now in vogue; with the sole purpose of finding complex ways of increasing risk of loss.

Governments across the world, well, were already in the game before most others.

This culture spilled over to the social sphere, threatening the very fabric of society by questioning age-old customs. The historical roles of the pilferer and the ‘pilfered’ swapped. Thieves, existing and aspirants, took umbrage to this unwanted development. They remonstrated that their identities were being snatched away forcibly and blamed lose-money Capitalism for this conspiracy.

The culture of education underwent a change too. Oodles of moolah was now spent in providing young humans with an that had little value. The institutions soon had a problem, they were generating massive amounts of money without enough outlets for losing it. So they turned to paying parents to send their kids to school. This circle of bliss, paradoxically, left everyone unhappy. Employment went through the roof, as everyone scrambled to lose money. Governments found that they had little to do, leaving them grumpy. There was no money in being a politician.

Eating also witnessed some queer developments. Farmers now fell over one another to pay consumers to buy food. Gradually, most resorted to not producing any food at all. Food was a source of headache for these producers, so they weeded out the cause. Humankind did not take to this kindly.

Riots began, queerly due to the negative prices for essential food commodities, and then thanks to food scarcity. Food scarcity, however, led to a death spiral of ever lower prices now. Things were not turning out well.

Riots soon morphed into skirmishes, which then morphed into regional squibbles, which then morphed into nationwide agitation, which then morphed into international conflict. Ending in obliteration.

Complexius’ exposition left Simple with a heavy head.

He had never thought losing money would lead to such unhappiness and collective disaster.

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‘A Plea To Every Earthling’ – Facebook, On Its IPO

True to its dour and slow-changing character, Cement, belatedly opened a Facebook account to sample the world of virtual intimacy. Facebook – in typical non-intrusive fashion – kept a watchful eye on Cement’s ‘Likes’. As humour ranked highly, it helpfully pointed Cement to avenues which catered to its personal tastes.

One fine day, Cement was surprised to see Facebook presenting itself.

The ramrod of relevance, paragon of privacy, social networking priest was in the market. Seeking $100 billion in market valuation from folks that ‘Liked’ it compulsively, every single day.

Would Cement be interested in investing?

Facebook humbly presented its alpha-CV. 850 million users, $4 billion in revenue, $1 billion in profit, in less than a decade. Stupendous growth in the number of users that liked Liking and paying real cash for virtual games. On this last mention, Zynga jumped in with gusto, indulged in some chest-thumping and encouraged Cement to play Cityville. Cement gently reminded Zynga that it indulged in playing real Cityville everyday. Zynga appeared displeased.

Facebook continued. It believed in a more open world where everyone was connected with everyone else, however meaningless the interactions might be. Ever the helpful Samaritan, it would sell highly relevant advertising. A great bulk of its revenue stream was tied intimately to the growth in online advertising, which was the future. It pegged the potential global advertising industry size at $600 billion.

Being a well-wisher, Cement felt compelled to consider the merits of Facebook’s plea.

It considered the possibility of every earthling using Facebook. How much would Facebook earn, if this materialised? Currently, earnings/user stood at ~$1. Allowing for Facebook’s remarkable appeal, Cement assumed earnings/user to grow to $5, in 5 years. 7 billion earthlings would help Facebook generate earnings of $35 billion, 5 years down the line. Today’s value of these juicy profits was about $15 billion. This valued Facebook at under 7 times earnings. Cheap, no? Never mind if only 2 billion earthlings currently used the internet.

Facebook made a mental note to make an earnest plea to every earthling alive…and considering what was needed to sustain the stock price, it contemplated soliciting support from dead earthlings and non-earthlings as well.

Cement then allowed for the possibility of Facebook capturing half of the global advertising market, a long long shot. This would put Facebook’s revenues at $300 billion, nearly 3 times Apple’s and 8 times Google’s current revenues. If past profit margins persisted over the next 5 years – another long shot – earnings would be $75 billion. Today’s value of this Alice-in-Wonderlandish situation was $30 billion. This valued Facebook at a paltry 3 times earnings. Cheap, indeed.

Stiff requirements but this was Facebook. Nothing seemed beyond the realm of possibility.

Potential investors would be betting on (praying for) Facebook to be the next Apple/Google, several times over.

As a well-wisher however, Cement reminded Facebook of the Greater Fool Theory and to never underestimate the power of irrationality and herd-behaviour. It also lauded Facebook on timing the public offer to perfection. It was sure to warm existing sellers’ hearts.

At this juncture, the ghost of Orkut manifested and quivered resignedly. It served as a shining example of how social networking could go wrong, when competition exposed its many hidden weaknesses. MySpace, on life support, too made a guest appearance and shared how it lost 95% of market value since 2006.

Facebook, undaunted, focused on subtly appealing to the greater fool. It tried to forget that it might need every earthling to sign up and swim in Facebook for the next 5 years, or be immensely profitable in the very least; to justify the price it was requesting from investors.

On returning to its dusty milieu, Cement wondered how real users shelled out real cash for playing virtually, often for little real rewards. Zynga’s coup was praiseworthy indeed. Credit was due to Facebook for its tremendous growth in the past and its achievements but partaking in the business at its offered price was a completely different proposition.

Cement grinned at the oddity of life. A brick and mortar entity – Cement – was sometimes valued at less than the cost of tangible assets; while GenX intangible offerings carrying the promise of stupendous growth were welcomed warmly. The world and investor Likes had changed. Hard asset plays often landed on hard asses.

As a nearly extinct Facebook user, Cement wished Facebook and, more importantly, its eager prospective investors the very best and promised to hit at least 5 Likes everyday, which was higher than the current average Like hit-rate (3 Likes/user/day).

As for its participation in the public offer, Cement’s Like was unLike-ly.