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What Does Quantitative Easing Really Mean?

The financial crisis of 2008 plunged the world economy into an era of unprecedented economic turmoil, bringing to a halt one of the most prolonged periods of growth in recent memory. The collapse of Lehman Brothers – resulting largely from exposure to increasingly worthless mortgage-backed securities – caused a complete loss of confidence in banks, freezing interbank lending and bringing the flow of money around the world to a halt. Bank after bank had to be bailed out, with the collapse of Lehman paling into insignificance compared to the impending carnage of major bank failures across the globe.

Quantitative Easing Depression EraWhile the immediate response of governments, including in the United States, was to bail out financial institutions that were “too big to fail,” the effect of this was merely to prevent a total economic meltdown – it did not address the catastrophic impact that the banking crisis had on the broader global economy. Central banks quickly moved to lower interest rates, in order to stimulate borrowing and economic activity, but that strategy quickly ran out of steam as interest rates approached 0%. There was no scope for further reduction, since this would make it more attractive to hold onto cash.

Quantitative easing was in fact a last-ditch attempt by central banks to stem the downward spiral of the global economy. While many equate this to “printing money,” it is in fact a way of injecting money into the economy which in theory avoids the disastrous consequences that printing money has had in the past. For example, the hyperinflation seen in the German Weimar Republic in the 1920s was largely a result of the government literally printing money and using this to finance its own debt. This in turn made government debt worthless, since a theoretically infinite amount could be financed using this mechanism.

Quantitative easing involves a government – for example the Federal Reserve in the US – purchasing large amounts of assets such as bonds from non-governmental institutions, including major banks. It does this by creating new money – hence the comparison to printing money – but it avoids the trap of making purchases from government institutions such as the U.S. Treasury. The money then goes on to the balance sheets of the banks, which in effect recapitalizes them. In the case of the financial crisis of 2008, this was critical since banks had suffered major losses and also were in the middle of a liquidity crisis because other banks would not lend to them.

Aside from improving the stability of the banks, the primary goal of quantitative easing during and after the financial crisis was to get the banks to start lending again, using the additional capital on their balance sheets. This in turn was supposed to stimulate the economy by making more money available to both consumers and businesses.

However, there has been a lot of criticism of quantitative easing since that time. A number of influential investors and economists have stated that it is both ineffective and dangerous – for an example of this, see Ken Fisher’s Forbes article, “Betting Against Bernanke”.

One of the major criticisms is that the banks did not actually start to lend more, but instead used the money in other ways, such as making new acquisitions – which actually led to further job losses as organizations merged and eliminated redundant positions. The reason put forward for the banks not lending is that quantitative easing involves purchasing long-term bonds, which reduces long-term interest rates since bond issuers do not have to offer high rates to attract buyers. Since banks take short-term deposits and issue long-term loans, they make profits based on the difference between the two rates. Lower long-term rates therefore make lending less attractive compared to using capital inflows from quantitative easing to make strategic acquisitions.

Alan GreenspanThe question, of course, is whether or not quantitative easing has actually done its job. There are those who say it hasn’t, including Alan Greenspan, the former Chairman of the Federal Reserve. On the other hand, others such as Joe Gagnon, Senior Fellow at the Peterson Institute for International Economics, argue that it has, but that the central banks have not been aggressive enough. There are also conflicting messages coming from global financial institutions such as the International Monetary Fund. For instance, the IMF has warned that the Bank of England could see losses amounting to nearly 5.5% of the UK GDP when it finally unwinds quantitative easing in that country – an illustration of the damaging long-term effects. On the other hand, the IMF has warned against the US withdrawing quantitative easing – citing a concern that it could disrupt delicate financial markets.

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Posted in the category: Insight

BlackBerry 10 signals new round in smartphone war

This is the debut edition of Signposts, Arthur Goldstuck’s new weekly column for the Sunday Times Business Times. It is archived in The Big Change a week after appearing in print.

On 30 January 2013, BlackBerry served notice that it had rejoined the smartphone wars.

The spotlight was on the first phone sporting its new BlackBerry 10 operating system, the Z10. But, between the scripted lines of the launch event, the company formerly known as Research in Motion (RIM) sent out many signals of a newly fortified brand.

On the surface, the Z10 is merely a high-end device playing catch-up with all the high-end devices from rivals like Apple and its iPhone 5, Samsung with the Galaxy S III, and Nokia armed with its Lumia 920. These three phones also happen to run on the three major rival operating systems, respectively Apple’s iOS, Google’s Android and Microsoft’s Windows 8 Mobile.

The older BlackBerry 7 operating system, which underpins the current ranges of Curve, Bold and Torch phones, could never be mentioned seriously in this company. The founders and former joint CEOs of RIM, Michale Lazaridis and Jim Balsillie, would not bring themselves to admit it – one of many reasons they needed to step aside and make way for the current CEO, Thorsten Heins

While his predecessors had paved the way for BlackBerry 10, Heins instantly set about changing the way the organization thinks about its customers and its technology. One of the many outcomes of his new-broom approach was the announcement, on Wednesday night, that the RIM brand would be killed off, and the company would henceforth be known by the same name as its core brand, BlackBerry.

Symbolically, the new branding buried RIM’s recent past and its one-time culture of attempting to dictate to customers what it thought best for the market.

Keep reading →

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Posted in the category: News

Lies, damned lies … and percentage growth

One of the many banes of a technology journalist’s life is a tech company gushing about its percentage growth – while refusing to divulge actual numbers.

This is almost always cause for alarm. Invariably, it means the base figure is so low, it would be an embarrassment to the company to reveal its true performance. But anyone can claim 678 percent customer or user growth if they only had 2 customers to start, and anyone can truthfully declare 200 percent revenue growth if revenue started at a few hundred or even thousand dollars.

Let’s be straight about this: it is an insult to present journalists with these kinds of numbers. That many of these claims make it into the media is not a reflection of credibility, but of poor journalism and inability of journalists to think through the claims they report.

This is only marginally more offensive than the use of old data to back up current arguments. Especially in the mobile arena, and especially in Africa, growth is so fast, that old data is all but irrelevant – and yet many companies still base both business decisions and claims on a long gone status quo.

A rule of mobile Internet resrarch has even been coined in South Africa to warn against this form of sloppy data use: Gray’s Rule, named for veteran Internet marketer Scott Gray:

“Research around mobile typically has a relevant life of around three months. Decrease the relevance by about a third for every six months on top of that.”

The rule has been bandied about among South African tech journalists frustrated with the relevance given to old data by large corporations. It’s been modified somewhat by refinements and corrolaries, to allow for the difficulty in accessing fruit-tree-fresh data.

For example, there has been consensus that, if such data is accompanied by solid forecasts based on proven methodologies, it may be used to extrapolate data by a further 12–18 months. However, this does not apply to data more than 18 months old.

The underlying assumption is that the research is based on sampling that is broad enough to be generally representative of a population in question.

In April, during a Virtual Indaba to thrash out further rules around acceptance of statistical claims, Brainstorm editor Samantha Perry pointed to a third broad category of data abuse: the use of undated statistics in press releases or marketing material, in an attempt to avoid having to vouch for their veracity. The refusal to accept such data was accepted as Perry’s Corrolary to Gray’s Rule.

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Posted in the category: News

Online Retail growth in SA: The Tweenote presentation

Tweenote presentation (10 Tweets on a topic in 10 minutes) of MasterCard Online Shopping Survey with South African industry context (using hashtag #MCSurvey):

1. #MCSurvey MasterCard Online Shopping Survey part of global study. Local industry context from World Wide Worx research.

2. #MCSurvey sampled 500 SA consumers, 18-64, banked, online at least once a week. Representative of highly active users.

3. #MCSurvey found 58% of active Internet users shopping online in 2011. World Wide Worx puts that at 1,65-million people.

4. #MCSurvey found high growth in % of online shoppers: up from 44% in 2009, 53% in 2010; and % of growing base each year.

5. #MCSurvey showed concern over security falling rapidly: 2009: 59% worried; 2010: 47%; 2011: 38%. Function of experience.

6. #MCSurvey finds key factors in growth are price/value, convenience and secure sites. Backed by World Wide Worx research.

7. #MCSurvey shows product and site reviews increase confidence. Social media (Facebook, Twitter) will be vital in process.

8. #MCSurvey finds virtual products, eg coupons, air tickets, gaming and apps, most likely to be bought online vs offline.

9. #MCSurvey finds grocery shopping in decline, down from 27% to 9%. Mirrors World Wide Worx finding segment stagnating.

10. #MCSurvey finds Kalahari, Amazon and Bidorbuy the biggest online retail drawcards for SA. Groupon biggest contendor.

Thank you for following the #MCSurvey tweenote. Full details of the findings are up on @GadgetZA at



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Posted in the category: News

Why Facebook bought Instagram

Why did Facebook pay a  billion dollars for Instagram? The answer is simple: Facebook wants to own photo-sharing.

Here you have an early-stage photo-sharing player that is on a rapidly climbing trajectory, but can still be had cheaply. The question is not why Facebook bought it, but rather, why WOULDN’T Facebook buy it? Fear and greed often go hand in hand, but in this case the simpler answer is that it consolidates Facebook’s position in this arena.

Facebook is already acknowledged as the biggest repository of photos on the Internet, and probably in all of history. The coming of Instagram has represented a seismic shift not only in the way people regard their photos, but also in what makes an application cool. At the heart of early enthusiasm was the fact that it was another way iPhone users could pretend their device was cooler than any other, but that was never going to last. What it did do was build a critical mass of early adopters who would create a buzz about the product.
The cross-over to Android was inevitable, and the objections of the iPhone community were more comical than a real issue for its adoption. But the cross-over did indicate that Instagram would maintain an upward trajectory that would eventually challenge the dominance of Facebook in this space, in a way that Flickr and Picasa never could.
Facebook will probably allow Instagram to continue as both a stand-alone app and as an integrated tool within Facebook. The ability to apply Instagram effects to your entire repository of photos on Facebook will be very compelling to some, as terrifying as it may seem to the purist.
The backlash is symbolic of a deep-seated psychology of superiority among certain categories of technology users. In particular, the iPhone users who mourned its cross-over to Android don’t realise that, given it’s massive user base, there was nothing exclusive about Instagram to start with. Wanting to hold onto it as a single platform application is not only absurd, it is also childish and arrogant. If it worked for you as an iPhone user, it will still work for you once Facebook owns it. If you refuse to use it because it’s on Android and Facebook, it means you weren’t using it for its utility, but for the status it gave you. It is an idiotic approach to technology use, and there can be little sympathy.

Is it indicative of a bubble?

The Instagram purchase is more a factor of its stratospheric growth at a time when Facebook is prpeparing for a listing, than of a bubble as such. It is a case of Facebook defending its position as the world’s leading photo-sharing environment, and of making an obvious acquisition of the fastest growing player in this arena, rather than of Instagram in its own right suddenly having this high value. Time is tight for Facebook, prior to its IPO, and they obviously made an offer that couldn’t be refused, taking advantage of the current high value of Facebook shares.

Well then, is Groupon a bubble?

Groupon’s biggest mistake may well have been not accepting a similar offer-that-couldn’t-be-refused from Google and believing its own hype about how much it was worth. Although it has a market cap of above $8bn, versus that $6bn offer, it is unlikely they will be able to extract that value from the business. The market has already punished Groupon, and its share price is down to a low of near $13  from a high of $31 (Nasdaq data, 11 April 2012). That looks like fairly sane market response to a business that had previously been over-hyped. If we were in the midst of a bubble for group buying sites, that share price would be closer to its highs.

Of course, both the acquisition of Instagram by Facebook and Posterous by Twitter, not to mention Zynga buying the creators of Draw Something, will spark renewed fervour to come up with the next big app or platform that can be sold to one of the big guys. Every developer is looking for a big payday, and this just fuels the dreams, although in most cases not the reality.


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Posted in the category: News

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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