Defining digital trade should occur within an independent digital market.

Defining Digital Trade

There is no set definition of “digital trade“. Depending on the organization, digital trade is used interchangeably with “e-commerce.” To give you an idea of the variance in definitions, consider the following:

“The production, distribution, marketing, sale, or delivery of goods or services by electronic means.” — World Trade Organization

“Purchases and sales conducted over computer networks. E-commerce can involve physical goods as well as intangible (digital) products and services that can be delivered digitally. ” — United Nations Conference on Trade and Development

“The delivery of products and services over either fixed-line or wireless digital networks. It excludes commerce in most physical products, such as goods ordered online and physical goods that have a digital counterpart, such as books and software, and music and films sold on CDs or DVDs.” — United States International Trade Commission

“The direct exchange of digital goods, and digitally enabled exchanges of services or labour. The exchange of personal communications is included in the definition.” — McKinsey Global Institute

What strikes me about most of the definitions is that “digital” refers to an alternative method of delivery of goods and services versus the actual construction of the market itself. The value from digitization is likely lower costs to producers and distributors and to consumers likely benefits are lower costs of product acquisition, assuming the costs of shipping and handling resulting from online shopping don’t exceed the costs of shopping in person.

Where’s the Surprise?

But beyond this, where is the “surprise” from using a communications medium like the internet to engage in e-commerce? In my opinion, the real value, the surprise, should be beyond the actual goods and services exchanged.

The pursuit of time saving, one of the benefits of online trade, is nothing new. Today I saw two women walk into Starbucks and grab coffee ordered via an app. The value for them was getting in and out of the coffee shop with the coffee versus sitting down in a Starbucks at 7:45 am with a group of people admittedly looking a bit too scruffy.

But is this enough, the time saving to the consumer and the costs savings to the producer to treat digital trade separately from traditional trade?

The Value in Digital Trade is in the Independence of a Digital Market

As currently constructed, digital trade is more an infrastructure adjunct to traditional, physical trade. True digital trade will happen when there are pure digital players exchanging data that can only be created in cyberspace through cyberspace. A true digital market and the digital trade that occurs within should be separate from human intervention where machines are responsible for analyzing, organizing, and distributing information and knowledge over digital networks.

One example of this digital market independence is occurring in the financial markets. In an article for Forbes.com, Bernard Marr shares how artificial intelligence is being used by hedge funds to trade stocks. According to Mr. Marr, what is extraordinary is an artificially intelligent machine making trades without the assistance of a data scientist. Mr. Marr goes on further to say that:

“Artificially intelligent machines analyze inordinate amounts of data at extraordinary speeds that is impossible for humans. They learn from the information they analyze to improve their trading acumen. This information includes market prices to corporate financial reports and accounting documents to social media, news trends, and macroeconomic data. Once the information is analyzed by thousands of machines, the machines then “vote” on what action to take and the best trades to make. “

While Mr. Marr doesn’t go on to discuss AI machines on the other side of the trade, I can envision the next step where an AI machine for Trader x exchanges shares with an AI machine for Trader y making a market entirely without human assistance. This exchange of shares or information and the making of a market for information independent of human intervention is the true digital trade.

Conclusion

While the commercial internet is three decades old, I don’t think we are at a stage yet where we can say we have complete digital trade. At best, digital trade is a subset of cross border trade and robust markets for autonomous trade between pure digital players in cyberspace is around the corner with the innovation and inclusion of artificial intelligence. The definitions we have now for digital trade should be changed to reflect the creation of true digital markets.

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In this theater, the media is also a combatant

The Board of Governors of the Federal Reserve is meeting over the next two days to discuss whether or not to raise the federal funds rate.  The federal funds rate is an interest rate that banks assess each other when borrowing money overnight from each other.  The Federal Reserve, America’s central bank, drove the rate to near zero in attempt to boost the economy after the financial markets crashed. 

Lenders became wary of the collateral other financial firms were carrying in their portfolios, typically asset and mortgage-backed securities that were declining in value due to the inability of commercial and residential borrowers to keep up with interest and principal payments. By buying these securities from financial firms on poor footing and giving them cash, the Federal Reserve hoped to prime the lending pump and provide financial institutions with the confidence to go out and lend again.

 Mr. Trump has been taking issue with rate hikes, making the argument that the timing is horrible for the financial markets and the economy overall.  To some extent, he has a point; increasing rates could eventually lead to a devaluation of assets sensitive to rate increases, and where these assets are used as collateral for loans, being awarded a loan becomes a lot tougher if a bank does not think collateral is strong enough.

From a political warfare perspective, the media has time to time pointed out Mr. Trump’s apparent lack of respect for the independence of the Federal Reserve, specifically taking issue with Mr. Trump questioning Federal Reserve Board chairman Jerome Powell’s rationale for rate hikes.

But by commenting on the direction of rate hikes, is Mr. Trump really attacking the independence of the Federal Reserve? My answer is no.  

Under the Full Employment Act, the Congress, the Federal Reserve, and the President are to coordinate their activities in order to bring about the effective control of inflation, genuine full employment, production, balanced growth, and a balanced federal budget. The chairman of the Federal Reserve is to connect his monetary policy to the numerical goals established by the president in his economic report. That the President was transparent and vocal in pointing out what he considers the Federal Reserve’s pursuit of a policy that seems out of sync with his may be brash, but is not out of step with the coordination the law requires and even the transparency that many citizens in the United States allegedly prefer.

How well has the Trump administration, the Board of Governors, and the Congress coordinated on the economy is subject to another discussion, but the point here is that the media and other critics have failed to give the public a full picture of what is entailed in economic management and this lack of full disclosure on the part of media only adds to Mr. trump’s assertion of fake news and unfair targeting of him by the press.

The other takeaway, of course, is going and investigating other sources of information on the management of the American political economy.  In political warfare, you need to know where all the bullets are being fired from.  In this theater, the media is a combatant.   

The “economy” is doing better but I am seeing more homeless in Atlanta

I am seeing more homeless people in my West End Atlanta neighborhood. I have seen at least one sleeping in his vehicle. Others make use of the parks to sleep at night.  What I see on the ground does not coincide with the claims made in Washington of a booming economy.

WABE, citing data collected from the city of Atlanta, reported that the homeless population numbers around 3,000 people and is allegedly on a decline.  And last year, the Atlanta Journal Constitution reported that Atlanta ranks among America’s neediest cities based on 21 metrics including child poverty and the number of uninsured. Homelessness is the result of a number of factors including the lack of affordable housing, poverty, discrimination, and shifts in the economy. Can city policies adequately impact these factors?

Take the factor of affordable housing. Atlanta mayor Keisha Lance Bottoms has made affordable housing one of her top public policies, but it appears to me that such an approach falls out of line with one important goal of a city: to generate tax revenue necessary for providing the amenities that keep citizens interested in living in Atlanta.  Land owners want to see property values rise and see an increase in the revenues that their properties generate.

Also, as city leaders continue their efforts to make Atlanta a job center, they have to keep in mind that as part of the efficiencies offered by a city is the location of housing close to job centers.  Housing located close to job centers may also end up being some of the most costliest housing.

I ride into Buckhead every day from southwest Atlanta. I have blogged before about how the MARTA train feels more like those conveyor belts loaded with coal that go into a furnace to fuel a production facility.  In this case the human coal are the lower and middle income individuals heading into Buckhead to work a job that, ironically, may be on the chopping block in a few years due to artificial intelligence.  If these people can’t afford to live close to an employment center where they can walk to work, the pressures of living will really increase when they have to find alternative employment.

But even with current employment, there may not be enough affordable housing available because landlords will be under pressure to meet rising property taxes resulting from the increased values of their properties, at least in the short run. This rise in value and ensuing property taxes will result from increased demand for housing that Atlanta expects to face over the next ten years.

Let’s not forget the upward pressure expected on interest rates over the next two years.  Property owners will have to increase rents in order to cover higher mortgage rates.  For the city of Atlanta it means higher bond servicing costs as the city continues to raise money through bond issues for its development and operational needs.

Affordable housing, because of the above pressures, won’t increase in supply.  Only an economic downturn may bring about cheaper rentals but even that will be short lived because a downturn in the economy means a slowdown in hiring and the specter of non-affordability due to increased lost income.

Politics wise, it is time for elected officials, particularly Democrats, to eliminate the affordable housing mantra from their campaign slogans.  They won’t be able to achieve it at any meaningful scale.

 

On Powell, Trump, and low rates

Donald Trump has shown no shyness when it comes to lamenting his regrets. When those regrets take the form of personnel, he fires them.  Over the past 48 hours, Mr. Trump has been expressing his frustration with current Federal Reserve chairman Jerome Powell.  Mr. Powell has been on a rate raising course since his appointment earlier this year and Mr. Trump believes that, setting aside what he perceives as Mr. Powell’s enjoyment, that this is not the time, given the advances in the economy and the stock market, for rate increases that may dampen or slow down the Trump Effect.

The textbook logic behind the Federal Reserve’s rate increases is to control the growth in asset values. Assets serve as collateral for borrowing and lending money.  If a potential lender sees an opportunity to lend $1,000,000 at 5% and has a portfolio of assets valued at $1.5 million, it will use its $1.5 million in assets to borrow the $1 million at say 2% and lend those funds out at 5%, and with all things equal, bring home a net return of 3%.

If the Federal Reserve believes that discipline is in order, it will raise the rates at which  banks borrow from each other overnight. It may also raise the rates on the funds that banks leave on deposit with the Federal Reserve. Both moves are designed to keep potential loanable funds out of the system, making money scarce and more expensive to find.  Also, higher rates, because of their inverse relationship with asset prices, result in asset values falling. This means that banks, businesses, and individuals will receive less funding because the collateral they have has lessened in value.

Increases in rates threaten wealth growth and consumption.  With the advent of modern central banking, nation-states have transformed into payment systems where taxes are collected, interest payments made to bond holders, and budgets used by politicians to bribe voters are financed.

It is the role of government to ensure the political-financial payment system operates at maximum.  Rates should stay low to encourage borrowing and investing.  Deficits should be eliminated resulting in less pressure to increase interest rates in order to attract purchasers of Treasury notes and lower rates for borrowers in the private sector.

Mr. Trump, unlike most of his critics and I dare say most central bankers, has a better understanding of this reality.