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Economic History III: Seigniorage, Paying the Bills

Click here to be taken to Part I if you haven’t read the introduction.

There are several ways a government can finance its spending. One such method is to enact taxes upon the benefactors of the government’s services through both personal and business taxes, another is to sell government bonds to the public, and a third is to create money. Another term for printing money is seigniorage.

When the government prints a lot of money, they’re basically imposing an inflation tax upon all holders of currency. Due to the increased money supply, prices rise as money loses its value. A concise way of stating it is that this resulting inflation is like a tax on holding money (Mankiw, P.93).

Seigniorage accounts, on average, for less than 3% of America’s government revenue as opposed to other countries, especially those experiencing hyperinflation:

Source: Reid

But America didn’t always have private investors climbing over each other to loan the country money or purchase its bonds.  The 1775 Continental Congress found itself in dire straits as it explored different options for financing the Revolution. The French government, who was not particularly fond of Great Britain at the time, had lent some money to Congress, and some states had responded to the Congress’ requisitions upon the states, but even combined, this amount was not nearly sufficient (Woods).

John Witherspoon, a New Jersey clergyman and an official signee of the Declaration of the Independence, said this of the effects of the paper money in America, “For two or three years, we constantly saw and were informed of creditors running away from their debtors, and the debtors pursuing them in triumph, and paying them without mercy” (Woods). This is funny in retrospect, but one can only imagine the chaos of the time as people experienced their money losing value overnight. If only those creditors had held variable interest rates.

Wrap your mind around the actual amounts of newly issued continental currency over the years:

1775 $6 million
1776 $19 million
1777 $13 million
1778 $63 million
1779 $125 million

The continental dollar became nearly worthless as a result of this increased supply. It was thanks to Alexander Hamilton that Congress passed the Mint Act of 1792, which established gold and silver as the basis for the new system of commodity money (Mankiw, P.93). To read more about Alexander Hamilton, click here.

Sources:

  1. Mankiw, Gregory. Macroeconomics.
  2. Reid http://www.jstor.org/stable/pdfplus/2601207.pdf
  3. Woods, Thomas. http://mises.org/daily/2340
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Posted by on April 5, 2011 in Economic History

 

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Small Business 101: Introduction

Today begins part 1 of a series of posts dedicated towards helping you start your own business: Small Business 101. Just the thought of starting your own business can be overwhelming. Well I’m glad you’re reading this because I can tell you right now that it doesn’t have to be like that. I will break up the steps for your reading convenience; go at your own pace.

I predict that this will span beyond 8 posts, with each entry covering a new step or topic. While I recommend you go through them in the sequence I have myself ordered, feel free to browse through the titles and content and decide where you might need some help and throw out whatever doesn’t apply to you.

As an example, I will approach the series as though I am considering starting a consulting firm in entertainment and technology.

And I almost forgot to mention: even if you have no intention of starting your own business any time soon, I highly recommend you keep up with the series. Who knows, you might change your mind—and a little bit of learning never hurt anyone (disclaimer!).

I’ll be updating the below list with every new post, just click on the link to be taken to that page:

Table of Contents

  1. Part I, Business Structures
  2. Part II, Writing an Effective Business Plan
 
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Posted by on January 12, 2011 in Small Business 101

 

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Demystifying Facebook’s Revenue Stream

Just last week my roommates started referring to me as Mr. Facebook due to how I’m always popping up on their newsfeeds and uploading and tagging them in random pictures and posts. At first I became really defensive and retorted with:

“It’s not my fault I come up so often. Maybe if you had more than a hundred friends, we wouldn’t have this problem.”

That sounded really good at the time, but in retrospect, I think it really only strengthens their argument.

Now, I was trying to come up with specific times of when, thanks to Facebook, some of my past conversations took an awkward turn, but decided these awkward Facebook moments were funnier (last one’s pretty sad though):

But anyways, Facebook’s been coming up a lot and recently someone asked me how Facebook makes money, seeing as they don’t charge users for their accounts.

The answer’s pretty straightforward: ad space. Facebook, like most other websites in the green, makes its money through advertisements—especially ads tailored to each of our individual interests. If I went to my Facebook right now, on the right hand panel I would probably find an ad about upcoming 30 Seconds to Mars and Jay Sean concerts, Seinfeld apparel, online education, massage therapy degrees, and best of all, sites promising to link me with young, hot and single Persians. I just hit the refresh button and got some new crap about Kinect for XBOX 360, becoming a paid survey-taker, and racquetball shirts.

The craziest part of this isn’t how much money they make off of this (just fyi: a ridiculous $250-300 million in 2009 alone), but how there’s a button on the bottom of these ads, More Ads which then takes you to an Ad Board customized, once again, to your interests. At this point, I can’t really think of anything to say aside from “Brilliant bastards…”

But in all seriousness, how brilliant is this method of marketing? I know they’re not the first to implement it (Google AdSense), but I would argue that they’re the most effective. So many people (myself included) click the “like” option and suggest these ads to friends, making it an interactive experience. It’s scary how some of these ads actually seem to call out to me.

Not too long ago, a lot of angry people stirred up a ruckus over how pissed off/scared/whatever they were about Facebook collecting the information on their profiles to target them with such advertising. I see their point, but I kind of just want to ask these people why they would even create a page if they were concerned about this. Better yet, keep your page, but don’t add specifics to your profile, it’s not that hard. They might also want to think about how this keeps Facebook free and in top shape.

But I digress.

I went through some of the initial steps of creating my own ad. They’re very robust in how you can specify not only by gender, but pretty much by any information you may or may not include in your profile, such as relationship status, what you’re interested in, languages you might speak, education and workplaces, your past likes and interests, and your region.  The most appealing part of it all are the marketing metrics approximations they provide you with that change with each adjustment you make. For example, I chose to target the entirety of the United States to people who are age 18 or older, like soccer or indoor soccer, and work at Microsoft; the estimated reach for all of these specifications is 920. You can imagine how useful such feedback might be in helping you decide whether or not to change your choices or even invest in such a campaign at all.

One of the case studies Facebook provides you with covers how a company called CM Photographics generated approximately “$40,000 in revenue directly from a $600 advertising investment on Facebook. Of the Facebook users who were directed to CM Photographics’ website from the ads, 60% became qualified leads and actively expressed interest in more information.”

Naturally, there’s more to the process than just throwing money at Facebook and expecting immediate results. Yes, it’s a way to generate some buzz around your website/company but you’ve got to make sure your product or service is appealing enough to your target audience that they follow up. Impressive nonetheless.

Another interesting aspect of their revenue stream are the Facebook gifts you can purchase for others. Some of the money goes towards whichever outside companies might have created the gift (if not Facebook itself) but otherwise it stays in house. In 2009, they generated between $30-50 million based off of such gifts and other virtual goods.

In one report, Facebook is estimated to achieve over $1 billion in revenue for the 2010 year. According to another report, this would be doubling their 2009 revenue of $500 million which had grown from $300 million in 2008.

Now that we’ve established how powerful and smart the Facebook team and its associates are, why don’t we look into some ways that YOU can benefit from their success? The following was gathered from a slide show by Richard Krueger, the author of Facebook Marketing for Dummies:

1.       Sell products via Facebook. There’s a huge market out there.

2.       Develop an application. There are a lot of opportunities here, just refer to my first blog on mobile business apps. You don’t necessarily even have to develop it yourself, just come up with a creative idea and team up with someone who can make it a reality.

3.       Ad arbitraging. This is basically when you buy ad space and then sell the targeted traffic.

4.       Promote yourself, or according to Kreuger, “Become a Celebrity.” Create groups and pages for yourself, create newsletters, etc.

5.       Market research. `Nuff said.

6.       Become a Facebook Party Planner. Personally, I thought this one was kind of lame, but hey, who am I to judge?

7.       Position yourself as a Facebook Marketing Expert.

8.        Comment with your own ideas of how to make it big!

Regardless of whether you take advantage of all that Facebook has to offer or not, it’s definitely around to stay for at least a little while. In fact, Myspace recently just conceded defeat.

Anyways,

Happy Facebooking!

 
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Posted by on December 12, 2010 in Business/Technology

 

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Let’s Laugh Through Our Misery

You know your audience consists primarily of college kids when your view count drops to single digits during finals week.

But check out these cartoons on your study break for a few laughs 🙂

If you’re a computer programmer, check out these jokes.

If you still haven’t heard about Ireland’s newest declaration of war, click here!

 
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Posted by on December 5, 2010 in Recreational

 

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Signs of a Failing Economy

Got this forwarded to me a long time ago. Just saw it again a couple minutes ago and thought I’d share 🙂

The Economy is so bad that:

-I got a pre-declined credit card in the mail.

-I ordered a burger at McDonald’s and the kid behind the counter asked, “Can you afford fries with that?”

-CEO’s are now playing miniature golf.

-If the bank returns your check marked Insufficient Funds,” you call them and ask if they meant you or them.

-Hot Wheels and Matchbox stocks are trading higher than GM.

-McDonald’s is selling the 1/4 ouncer.

-Parents in Beverly Hills fired their nannies and learned their children’s names.

-A truckload of Americans was caught sneaking into Mexico .

-Motel Six won’t leave the light on anymore.

The Mafia is laying off judges.

-Exxon-Mobil laid off 25 Congressmen.

-Congress says they are looking into this Bernard Madoff scandal. Oh Great!! The guy who made $50 Billion disappear is being investigated by the people who made $1.5 Trillion disappear!

 
-And, finally

I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc., I called the Suicide Lifeline. I got a call center in Pakistan , and when I told them I was suicidal, they got all excited, and asked if I could drive a truck!

 

 
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Posted by on December 1, 2010 in Recreational

 

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“Only Rapper to Rewrite History Without A Pen”

Written jointly by Edris Bemanian and Adi Gulati.

Unless you’ve been living under a rock, most of you are familiar with the artist Jay-Z. You know – BET’s 2009 and 2010 Best Live Performer of the Year, the Grammy’s 2010 Best Rap Solo Performance winner, etc. There is no denying that this man has revolutionized the music industry and if you disagree with me you can take it up with the decision-makers of Billboard Magazine who, in 2009, ranked him as the 10th most successful artist of the decade and the 4th best rapper. To date, he has sold approximately 50 million albums worldwide! Imagine the kind of dough he rakes in each year.

But it’s important to remember that “Jay-Z” is so much more so a brand than it is a name. In fact, the illustrious Shawn Carter goes by many nicknames, including: Jazzy, Icerberg Slim, Joe Camel, Jigga and on and on, though it’s no secret which one stuck. More impressive than even his accomplishments as a rapper are those he has made as a businessman.

Jay-Z wears many different hats depending on what he’s doing that day, from his hip hop mogul self (who’s currently on tour and will be performing in Melbourne, Australia tomorrow), to being a loving husband (check out the lucky bastard’s wife), to his current position as CEO of Roc-A-Fella Records.

After numerous successes as a direct player in the industry, Jay-Z shifted his focus to the business aspect and became president of Def Jam Recordings. During his time there, he signed Rihanna, Ne-Yo, and Young Jeezy.  After resigning from this post, he signed a deal with Live Nation—a concert promotion company—which provided funding for Roc Nation, Carter’s music development and endorsement company, allowing him to fund for his music and investment projects.

Furthermore, Jay-Z co-founded Rocawear, an urban-style clothing apparel line, and then bought out his co-founder’s shares for 30 million dollars in 2005. Jay-Z then utilized his reputation to bring as much attention to the line as he could to reach extremely high sales levels. He grew the company to the point where achieved more than $700 million in retail sales annually before it was acquired by Iconix for approximately $204 million.

Jay-Z decided to also try his hand in the club and entertainment industry which resulted in his starting the 40/40 Club in Las Vegas, Atlantic City, and New York City. But few, even the most successful of entrepreneurs, aren’t without their failures. A measly eight months after the Vegas club’s 2008 opening, Jay-Z had to make the decision to cut his losses and exit. The official 40/40 website, however, has tentative dates for their Chicago, Dallas, Tokyo, and Macau club sites.

“I love sports and wanted to create an environment that is conducive to my lifestyle, while being able to watch the games at the same time,” says Jay-Z on his website. Incidentally, Jay-Z paid $4.5 million to gain a minor stake in the New Jersey Nets, though their recent 2009-1010 performance dropped their value by 9% according to Forbes. But I guess we can’t exactly blame Jay-Z for that.

In an interview, Jay-Z disclosed how one of the most meaningful investments to Carter will always be his TriBeCa penthouse, where he married Beyonce. He invested $6.85 million in 2004 for his 8,000 square foot home. I wonder whether he has trouble deciding which is easier on the eyes, his house or his wife?

Jay-Z’s firm, Gain Global Investments Network, LLC invested in an events promotion company Aqueduct Entertainment Group (AEG) which tried to settle a deal with New York State officials to open up the only gambling site in New York – a race track and casino. Due to the ethical difficulties involved in this deal, Jay-Z lost a decent chunk of money when the deal failed to pull through. He owns a 28.6 percent stake in AEG.

Jay-Z was not immune from the effects of the recession. He was forced to walk away from a project to develop a luxury J Hotel in New York City. His company borrowed $52 million for the project, but Carter dropped it all and ended up suing Highland Capital—the lender—for delaying the closing of the loan in order to continue receiving interest payments on the principal. Jay-Z sued for over $3.7 million but ultimately suffered a net loss.

Despite these setbacks, Jay-Z remains on top of the world with his approximated net worth of $1 billion, his numerous endorsements, his records of which over fifteen have gone platinum, his ownership stakes in the New Jersey Nets, the Arsenal Football Club, his nightclubs, and Def Jam Records, and his numerous other endeavors. Oh, and I almost forgot! Throw Beyonce into the mix and we get to watch his worth shoot up another $400 million. Why you muggin, Jazzy?

To learn more about Jay-Z, you should check out his recently released book titled, Decoded, though you should know the book is more so an insight into his songs and the contexts behind them rather than his business moves.

And this article should drive my point home.

For more on Adi Gulati, visit the Contributors page of the blog.

 
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Posted by on November 30, 2010 in Business/Technology

 

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