Not surprisingly then, Fedwire is central to the nation’s money supply and health of the economy. But not only does it move massive amounts of money around, it is also the mechanism through which the Federal Reserve’s interest rate policy is implemented. When Fed Chair Janet Yellen announces that interest rates will increase/decrease, Fed traders get on their computers and sell/buy financial instruments to reach the desired interest rate target. These are known as Open Market Operations(OMO). [2]

The Federal Reserve was created in the aftermath of a devastating financial crisis in 1907. Although the crisis was alleviated, primarily by the actions of the infamous New York banker JP Morgan, it drew public anger and calls for reform. The next year, Teddy Roosevelt pushed for the Aldrich–Vreeland Act that formed the National Monetary Commission to study banking systems around the world. Banking elites drew up a new system of money control over the next few years. A few months after JP Morgan died, President Woodrow Wilson signed the “Currency Bill” or Federal Reserve Act of 1913 on Dec 23 of that year. It opened the next year on November 16 with assets from the sale of shares in the Federal Reserve Banks to stockholders of subscribing national banks.

Federal Reserve Banks began moving funds and information electronically in 1915 but it was not until 1918 that they created the proprietary telecommunications system known as Fedwire. The telegraph system connected the Federal Reserve Board in Washington DC to the US Treasury and all 12 Reserve Banks with lines leased from telegraph companies. Initially it was used for settling gold accounts without physical transfer and within a couple of years for transferring Treasury securities electronically. Over the next 40 years Fedwire migrated from Morse code telegraph systems to teletype and telex switched networks and eventually to proprietary telecommunications networks.

During the 1960s, the entire global financial system began to face a “paper crisis” and pushed the move to computerized information solutions. As transactions increased across the sector due to a thriving economy, paper-based record keeping and transfer just could not keep up. Banks, insurance, and securities companies began to automate their activities with computers. Also clearinghouses and exchanges saw the necessity of moving to computers and data networks. The Fed also began to implement automated computer operations starting with Xerox Sigma computers that allowed banks to enter their sales directly into the Fed’s books without additional human intervention. The pressure continued when the US went off the gold standard under President Nixon and the two oil crises dramatically increased the amount of US dollars in global circulation leading to extraordinary double-digit inflation.

President Jimmy Carter appointed Paul Volcker as the new Chair of the Fed in October of 1979. Volcker immediately enacted some tough measures that increased interest rates by “targeting” the amount of money in the economy and in bank reserves. Overnight interest rates for banks borrowing of Fed Funds increased to 11.2% in 1979 and later to a peak of 20% in June 1981.[3] Carter had also signed the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA or MCA) that brought all banks in the country under Fed control. The Act required the Fed to price and charge for most financial services including funds transfers, check clearing, currency and coin services. It was required to provide access to these services to nonmember depository institutions, and other financial services. This encouraged private-sector competition while also standardizing computer systems and connecting the network throughout the entire financial system. Internet protocol (IP) and distributed processing technologies were integrated in the 1990s and the Fed’s open market operations even replaced their famous chalkboards with computers.

How does the Fed try to control interest rates? Banks borrow money from each other through the Fed Funds Market over the Fedwire so they can increase their loan portfolios. If they determine they can make a profit by borrowing the money from other banks and lending it out at an advantageous rate, they will likely do that. Alternatively, they may decide that it is advantageous to hold interest-bearing bonds with their deposits rather than lend out the money. These transactional equations form the operational rationale for the FOMC policy prescriptions and the trading operations they direct.

The FOMC does not set the rate of interest but rather it sets a target that actual trading operations are instructed to meet in order to influence the money and credit conditions in the economy. It does this through the trading desks at the Open Market Operations located at the New York Fed. Workday mornings, around 9:30 AM, with the exact time of intervention determined by chance, the traders at the OMO intervene to influence the Fed Funds Market and guide the Fed Funds Rate towards the FOMC’s target rate.

The traders buy or sell government securities through the OMO to influence the banking system’s lending behavior, but it would be a mistake to think that the OMO trade directly in the federal funds market. Instead, the Fed participates in the Treasuries market and more recently agency debt, especially debt from Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Home Loan Banks. What they do is influence the amount of excess reserves banks have to lend overnight. The basic economic logic looks like the below.

– Fed Purchases
• Inc Bank Reserves
• Dec Fed Funds Rate
– Fed Sells
• Dec Bank Reserves
• Inc Fed Funds Rate

The OMO conducts both permanent operations, holding debt for long periods; and temporary operations, using repurchase agreements with maturities of less than a week. It does this through trades with the 19 primary dealers that act as intermediaries with the larger banking system. They trade with some 21 primary dealers including Barclays Capital, Citigroup, Credit Suisse Securities, Goldman Sachs, J.P. Morgan Securities, Morgan Stanley, UBS Securities, and Daiwa Securities America. Two primary dealers were lost with the collapse of Bear Sterns and Lehman Brothers in 2008. If the Fed’s OMO purchase bonds from the primary dealers, it will inject money into the banking system and decrease the incentive to borrow from the Fed Funds Market, consequently reducing interest rates. If they sell bonds through the primary dealers it will absorb money from the banks and increase the incentive to borrow through the Fed Fund Market and thus increase interest rates. So the result is that trading operations directly increase or decrease the level of Fed balances, not the flow of federal funds transactions among banks.

The buying and selling of U.S. government securities from these primary dealers influence the price of money bankers are lending to each other overnight. If the Fed purchases bonds it will increase bank reserves and decrease the Fed Funds interest rate. If they sell bonds to the primary dealers it will draw money out of bank reserves and increase the Fed Funds interest rate. By making it attractive for banks to buy government securities from them, the Fed can “tighten” the money supply; conversely, the purchase of bonds will inject money into the economy. It is this inverse relationship between OMO trades and the Fed Funds Rate that guides the nation’s money supply. If bank reserves increase because the banks have sold their government bonds to the Fed, the prices of interest rates, the amount lenders will charge for borrowing that money, will decrease. Likewise, if bank reserves fall because banks prefer to use that money to buy interest-bearing government bonds from the Fed, that action will increase the Fed Funds rate.

Whatever you think about the Federal Reserve, it is central to our current financial infrastructure. Very few people understand the processes of the central bank or the impact it can have on the economy. Others fear the Fed and the power it has over the economy. In any case, it is important for people to come to grips with this dominating institution and the way it structures our current political economy. Currently the Fed Funds Rate is near zero until unemployment decreases and the Fed purchases an additional $75 billion dollars a month in mortgage-backed securities and treasury bills to provide additional stimulus.[4]

Notes
[1] Fedwire transfer figures from http://www.federalreserve.gov/paymentsystems/fedfunds_ann.htm and include daily numbers which averaged U$S2.4 trillion dollars a day.
[2] This video takes you inside the New York Fed’s OMO.
[3] More information on the Fed’s handling of inflation in the late 1970s and early 1980s.
[4] For additional economic stimulus, The Fed has been buying a combination of treasury securities and mortgage-backed assets at a rate of $85 billion a month. In December of 2013 they announced the first “tapering” of $10 billion, reducing the monthly rate to $75 billion.

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Anthony J. Pennings, PhD recently joined the Digital Media Management program at St. Edwards University in Austin TX, after ten years on the faculty of New York University.

Category: electric money, financial technology, geopolitical risk, telegraphic political economy

Why Digital Media Firms Need to be Fed Watchers

Posted on | December 12, 2013 | No Comments

Over the course of about 10 years of teaching economics and digital media at New York University (NYU), I developed a simulation of the Federal Reserve Bank that has proved useful in engaging participants in the study of economics, monetary policy, and how the US economy works.

I developed it initially to make my macroeconomics course more interesting, but recently applied the Fed simulation to an MBA course in digital economics. Consequently, I felt an additional burden to relate the Fed’s actions to a variety of media companies. In this post, I identify key components of the larger economy that digital media companies should be following and how decisions by the Federal Reserve can influence these aspects of the economy – and ultimately their organizations.

The entirety of this article is published in The Fed Watcher’s Handbook.

Producers of digital goods and services need to develop educated expectations about economic conditions influencing their businesses. They need to tie observations about the economy and where it is heading to their own decisions about hiring, production schedules, and investments in permanent facilities like studios or office space. While the Fed’s actions, policies, and research are not the only points of concern that can impact a digital firm; they are significantly consequential to warrant sustained observation.

This material is now available at Amazon as part of The Fed Watcher’s Handbook: Simulating the Federal Reserve in Classrooms and Organizations

How do digital media managers conceptualize larger business trends and track this information while necessarily micromanaging the daily activities of their organizations? One of our media economics textbooks proved helpful, The Economics and Financing of Media Companies by Robert G. Picard points out four important areas where media companies should direct their attention:

• the business cycle
• inflation
• interest rates
• and exchange rates

Although Picard barely mentions the Federal Reserve, we can address the above concerns, starting with the recurring and irregular expansions and contractions of economic activity known as the business cycle.

The Federal Reserve influences the business cycle by controlling the supply of money in the economy. By injecting more money through the financial system, it can lower interest rates and consequently increase business investments and consumer spending. Economic growth means more jobs, increased incomes and more disposable income for consumers to spend. Sales of media products and services are subject to consumer incomes and expectations about the state of the economy. Monitoring the contraction and expansion of the economy supplies vital information about consumer spending patterns and confidence.

Media goods like game consoles and HDTVs are particularly sensitive to economic fluctuations. Advertising, a key driver of media sales, reacts strongly to business conditions. But admittedly, more research needs to be done on digital media products as substitute goods for other entertainment pastimes, particularly in times of economic downturn. For example, films and radio were popular pastimes during the Great Depression as a means of escaping the harsh conditions of the time. More recently, Netflix began its historic rise during the Great Recession and video gaming also did well as consumers purchased relatively cheaper forms of entertainment that allowed them to stay home or take advantage of mobile leisure time.

Inflation can come either from too much money/demand in the economy or too few goods and services. If the economy is growing too fast, prices for goods and wages increase accordingly. When prices inflate it can be good for the economy as purchases are made more quickly to avoid the higher prices. Another incentive to spend is that the value of monetary savings depreciates faster. Inflation is good for borrowers as they wind up spending less to pay off their debt. On the other hand, prolonged inflation makes it hard for producers to plan and inventories can dry up as consumers hoard goods, contributing to shortages. Excessive inflation can be quite stressful for an economy as the US discovered during an economic period during the 1970s known as “stagflation“.

Deflation comes from too little money or effective demand (demand with cash) or from an abundance of goods and services. Deflation has been a more persistent problem in our contemporary economy. This has occurred despite the massive infusions of money into the economy and rising prices of energy. While deflation mainly results from a slow economy and lack of demand, one of the reasons for our current deflationary trend has been the increasing efficiencies of digital products following Moore’s Law that predicts the speed of digital microprocessing doubles every 18 months. Digital technologies are allowing us “to do more with less” – including humans. Competitive pressures due to low barriers to entry into Internet commerce also push prices down. Price stability is a major concern for the Federal Reserve and they watch changes in prices closely.

Interest rates are the prime vehicle for the Federal Reserve to influence the price of money and consequently the supply of it in the economy. The cost of borrowing capital is critical for many digital media firms that need funds for new initiatives, expanding operations, or just the cash flow for meeting payroll and other expenses. The Federal Reserve conducts complex financial trading operations to meet their target for interest rates which they announce about 8 times a year following a two-day meeting.

With the globalization of the net-centric activities, exchange rates are also a concern for digital media firms. The Fed rarely intervenes directly in the spot markets that determine the dollar’s exchange rates. Exchange rate policy is the responsibility of the U.S. Treasury. However, because the global currency markets are so huge, trading trillions of dollar each day, they sometimes coordinate with the New York Fed. Even then, it is more to signal a policy that can influence exchange rates rather than to implement one.

The Fed can have an influence on exchange rates with their interest rate policy. Lower interest rates depress the value of the US dollar by discouraging purchases of U.S dollar denominated financial instruments. It also makes it attractive to borrow cheap money and spend it internationally. Sending money offshore requires purchasing other currencies and that depresses the value of the U.S. dollar. It makes exports more attractive but can drive up the prices of imports, including raw materials and other components needed for your own production processes.

It would be a mistake to think that the Fed somehow controls the economy – far from it. Despite powerful governmental influences, the US and most of the global economy operates under market (or market-failure) conditions. Also, large banks and companies can exert significant influence on markets as we saw with the events leading to the crash of 2007. Still, the Fed can have a major impact and its stabilizing effects are often underestimated. The research on the economy it produces is also extremely valuable. It would be wise for digital media firms to keep an eye on the Federal Reserve.

For a small fee, you purchase my Fed Watcher’s Handbook.

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Anthony J. Pennings, PhD is the Professor of Global Media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Hawaii in the 1990s.

Category: digital coordination, digital media economics, digital media management, media strategies, political economy of media, strategic communications
Tags: business cycle > deflation > digital media managers > exchange rates > Federal Reserve > FOMC > inflation

Licensing Creative Properties – Merchandise and Characters

Posted on | December 4, 2013 | No Comments

One strategy for digital media growth is the licensing of creative intellectual property, a $150.8 billion industry that is increasingly global.

Intellectual property law provides protection for creative content and licensing is required when a desired property such as an animated character is controlled with a copyright, trademark or even a patent. Licensing is giving permission to another company to use a specific form of its intellectual property. Or, a company might want to license a creative property from another company. In either case, a Licensing Agreement defines clear conditions for the relationship and a royalty is paid for using the protected signage or characterization on a product such as a sleeping bag, lunch box, doll, jacket, etc. In this post I examine licensing merchandise and character properties that are protected with a copyright or trademark.

It may be useful to understand the scope of the business and some of its biggest license holders and licensors. One would have to start with the Walt Disney Company, especially in light of their acquisitions of Lucasfilms, Marvel, and Pixar. While 2012 figures still rate the Disney Princesses at $1.5 billion as the highest source of revenues from licensing, Star Wars merchandise at $1.48 billion is a close second. Add other properties licensed such as Mickey Mouse, Winnie the Pooh, Cars and High School Musical and you can understand why Disney controls just over half of this market. The figures are even more extraordinary when you realize that they do not include merchandise manufactured and sold by the property owner.

According to the Licensing Letter, some 34 entertainment/character properties in Canada and the U.S. had retail sales of licensed merchandise of over $100 million. The recent growth has been significant with sales of licensed merchandise in the U.S./Canada alone increasing 136% between 2011 and 2012. Along with Disney, Hello Kitty is a significant property with royalties of just over US 1$billion and Rovio’s Angry Birds totaling over $500 million.

Peter Vesterbacka, the Chief Marketing Officer of the Finnish company Rovio publicly stated that they wanted to turn Angry Birds into a “permanent part of pop culture”. From a $.99 game to a universe of signage, it’s difficult to walk through the store without seeing Angry Birds toys, candies, stickers, shirts, physical games, etc. I took my daughter to NASA’s Johnson Space Center near Houston and she enjoyed playing in a huge “Kids Space Place” with Angry Birds 3-D sculptures, imaginative games and all, of course, adorned with their trademarks (See above image).

Licensing covers a wide range of other property types besides Entertainment/Characters such as Fashion, Sports, Collegiate, Art, Music, and other types of Toys and Games. For those categories as well as Media and Entertainment, a good source of information is the Licensing Letter.

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Anthony J. Pennings, PhD recently joined the Digital Media Management program at St. Edwards University in Austin TX, after ten years on the faculty of New York University.

Category: books and films, global e-commerce, media strategies
Tags: Angry Birds > copyright > Intellectual property law > Marvel > Pixar > trademark

JFK’s Contribution to Global Communications

Posted on | November 21, 2013 | No Comments

We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too. – President John F. Kennedy, September, 1962

It was Arthur C. Clarke, the author of many science fiction classics including 2001: A Space Odyssey (1968), who published a seminal article on the possibilities of satellites in the 1945 edition of a British journal, Wireless World. The former radar engineer conceived the idea of putting satellites into an orbit high enough above the earth so that they could maintain pace with the revolving ground below. He reasoned that a satellite circling the Earth at about 6,870 miles per hour, 22,300 miles above the equator, would need 24 hours to complete its orbit.

Three satellites, or as he called them, “rocket stations,” positioned in “geostationary orbit” approximately 120 degrees apart, could act as a worldwide telecommunications system. Each satellite could act like a fixed radio repeater tower. Together, they could provide interconnections between various points over the entire Earth and between each other. Geosynchronous meant that the antennas that received satellite signals did not have to move to track the satellites. Called “earth stations,” these satellite dishes sometimes were initially 50 meters in diameter to pick up the faint signals from the pre-photovoltaic satellites. Clarke’s idea helped propel the “Space Race” and the vision of a new global communications system connecting countries and peoples around the world.

We are coming up on the 50th anniversary of the tragic death of our 35th president. On November 22, 1963, shortly after noon, President John F. Kennedy was assassinated as he rode in a motorcade through downtown Dallas. Although he was only president for three years, he had an extraordinary influence on the development of our modern technological age, especially the rise (literally) of global communications and the fulfillment of Clarke’s vision.

President Eisenhower created NASA in 1958 in response to the Soviet Sputnik satellite launches. Still, Kennedy directed the space agency to send humans to the Earth’s Moon by the end of the 1960s. Concerns mounted after the 1961 successful launch and landing of Soviet cosmonaut Yuri Gagarin, the first human in space. JFK laid out an initial vision on May 25, 1961, in a State of the Union address before Congress. It was less than half a year into his first term, but just weeks after the failed Bay of Pigs invasion of Cuba.

Although initially committed to unmanned space exploration, Kennedy saw how putting humans into space captured the public’s imagination. The space agency needed billions of dollars to design and build the rockets and systems to put larger civilian and military payloads into space. He pushed astronaut flights to gather political and popular support for funding NASA.

In his “Urgent National Needs” speech, Kennedy emphasized the need to recover from the ongoing recession and also reinforced a commitment to freedom in the southern hemispheres, particularly in Vietnam. He stressed the dangers of the Cold War and what was perceived as a USSR advantage in military superiority, especially in space and their “powerful intercontinental striking force.”

Finally, he laid out the vision for space, specifying the importance of new and more powerful rockets and requesting $125 million for “accelerating the use of space satellites for world-wide communications.” A related concern was weather satellites that were becoming more useful in forecasting weather conditions and helping to avoid disasters.

In all, Kennedy asked for over $7 billion for “a great new American enterprise” in space. It was within this context of national urgency that he set out the initial vision of going to the Moon by the end of the decade.

A year and a half later, Kennedy reinforced the vision of a Moon landing in his speech at Rice University. In September 1962, while dedicating the new Manned Spacecraft Center (now called the Johnson Space Center) just outside of Houston, he emphasized the importance of science and technology and reinforced the importance of communications and weather satellites. He pointed out that the Mariner spacecraft was on its way to Venus and compared it to “firing a missile from Cape Canaveral and dropping it in this stadium between the 40-yard lines.” The imagery was intentional; missiles with nuclear warheads that could pinpoint targets in the US were becoming a practical reality.

By conflating space with national and civil defense, he was able to mobilize the resources for a combined national effort to travel to the Moon and “do the other things”: close the missile gap with the USSR, circle the Earth with satellites helping ships at sea, connecting military operations, and predicting weather conditions, as well as become the leaders of international communications. The same rockets that would propel the astronauts to the Moon would first set up a global network of communications satellites.

Work had begun that year on the creation of a consortium that would create a fleet of orbiting satellites to provide global communications. The capital expenditures of space communication systems were so expensive that it took the Communications Act of 1962 to mobilize the resources of NASA, the Department of Defense and AT&T, the largest corporation the world at the time to create the new domestic monopoly Comsat. Though initially designated as a private enterprise on February 1st, 1963, Comsat required initial funding by the US government. Soon after, former Under Secretary of the Air Force, Dr. Joseph Charyk, was named its first CEO. Comsat was chartered as a common carrier subject to the Communications Act of 1934 and its creation, the Federal Communications Commission. Given the extensive foreign relations nature of the company, the President was given the power to oversee its activities.

Comsat moved quickly to initiate the formation of Intelsat, an international telecommunications satellite consortium. In August of 1964, the organization was formed with 19 other countries with Comsat as the U.S. Representative and main owner. The percentage of U.S. ownership was 61 percent compared to the next two largest owners: the United Kingdom with 8.4 percent and France with 6.1 percent. Other countries were skeptical because of the satellite’s ability to bypass national boundaries. Intelsat was careful to work with established national Post, Telephone and Telegraph (PTT) entities and the ITU (International Telecommunications Union) and eventually satellites were gradually accepted around the world.

With the backing of the United States, the Intelsat program proved to be very successful for the development of international telecommunications. Although undersea telegraph cables have been operating since 1866 and since 1956 for voice communications, they could not keep up with global demand by the 1960s. Hughes Aircraft launched the first three experimental geostationary orbit satellites in 1963 and 1964. While Syncom-1 never functioned adequately, Syncom-2 transmitted telephone, telex, and data communications across the Atlantic to Africa and Europe. Syncom-3 was launched over the Pacific and repeated a similar performance. Intelsat- 1, or “Early Bird,” as it was named, became the world’s first commercial satellite when it was launched from Cape Kennedy on April 6, 1965.

Clarke’s vision of three geostationary “rocket stations” was realized in July of 1969 when Intelsat III was placed over the Indian Ocean Region. Launched just weeks before the Moon landing, Intelsat III offered 1,500 voice circuits or 4 TV channels and carried President Nixon’s congratulatory telephone conversation with the astronauts.

As more satellites were launched, Intelsat was criticized for its natural monopoly model. Satellite proposals like the Orion and Finansat had challenged the status quo but their business models were based on “skimming the cream” off of prime routes such as that between the US and Great Britain. Nevertheless, President Clinton finally privatized Intelsat in 2000 to further competition in global communications.

Advances in fiber optic cables also challenged the satellite model. An undersea communications cable can move terabits of data each second while satellites lag with hundreds of megabits. Undersea cables such as the 18,000 kilometer-long SEA-ME-WE-4 linking countries from France, Egypt, Singapore, and Indonesia have become international workhorses for the Internet. But by using spot beams, satellites can provide a tremendous amount of bandwidth for niche government, media, and corporate needs as well as provide necessary redundancy in case a cable is cut or otherwise damaged.

Although the dynamics have changed, JFK’s contribution to global communications lives on in a vibrant network of interconnected components that transmit our Facebook likes, blogs like this one, and other information and news that we value in our disparate, but global civilization.

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Citation APA (7th Edition)

Pennings, A.J. (2013, Nov 21) JFK’s Contribution to Global Communications. apennings.com https://apennings.com/how-it-came-to-rule-the-world/the-cold-war/jfks-contribution-to-global-communications/

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Anthony J. Pennings, PhD is a professor at the State University of New York in South Korea (SUNY Korea). Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center in Honolulu, Hawaii during the 1990s. He lives in Austin, Texas when not working in Korea.

Category: global communications, space systems, the cold war
Tags: Arthur C. Clarke > Communications Act of 1962 > Comsat > geosynchronous orbit > Intelsat > JFK > John F. Kennedy > Moon landing > rocket stations > satellites > Sputnik > Syncom > Telstar

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