January 09, 2004

The Tentacles of the World Market

British science-fiction author Charlie Stross quails as the tentacles of the world market snatch away pieces of his livelihood:

I was deeply unamused to notice the US dollar continuing its slide... you can now buy 1.8025 dollars with a single pound sterling.... [T]he dollar was at 1.50 to the pound for almost the whole of the 1990's.... [T]he majority of my sales... are to publishers in the United States.... If the dollar loses 15% of its value against the pound between a contract being negotiated and the books written, delivered and paid for, then the author loses 15% of his or her pay packet....

[I]f you're a British SF/fantasy writer, then almost by default (if you want to earn a living) you're a one-person export industry aimed at the North American market. Which is why headlines like this one (No end in sight to dollar's descent) do not fill me with joy and goodwill towards all Federal Reserve bankers.

But what the world market taketh away, the world market also giveth. Big businesses that want to lock-in overseas earnings against exchange-rate fluctuations use derivatives contracts to do so. Within the decade, I predict, Charlie will find it possible to (with only small transactions costs) to take huge honking short derivative positions against the dollar, positions backed and collateralized by claims on his future royalty earnings. Then he will view declines in the dollar with equanimity rather than terror, as the losses on his expected royalty earnings are offset and neutralized by the gains on his derivative portfolio. (Of course, he will then view gains in the dollar with equanimity rather than joy, as the gains on his expected royalty earnings are offset and neutralized by the losses on his derivative portfolio.) He will, however, have gained an additional second-order worry: did his financial derivative technicians calculate the hedge portfolio correctly?

But in the meanwhile, the creations of humanity's brains become oppressive alien powers and... "BACK, you beast, BACK! That's my money you're taking!!"

For my part, I highly recommend Singularity Sky and Toast, and I am told by reliable sources that the Atrocity Archive (a story I understand to be vaguely along the lines of Thomas Powers's Declare and David Brin's "Thor vs. Captain America") is better.

Posted by DeLong at January 9, 2004 06:52 AM | TrackBack

Comments

Oh, great. Everyone a sophisticated capitalist. That's worked so well for 401k's. (Yes, in general it has, but the general case really isn't so important for risk-bounded things like retirement.)

More theoretically, this is the kind of thing that an author's publishing company should be dealing with. Every year there is less and less excuse for a publisher to take 90% of sales revenue when they hive off liability, publicity costs, rights aquisition, exchange-rate risk and who knows what else onto the author (while retaining, of course, all the profit potential they can think of). Whatever happened to the heory of the firm?

Posted by: paul on January 9, 2004 08:08 AM

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Both Mongoose Games (UK) and Guardians of Order (Canada) are having the same problem. Their markets are almost exclusively American, so as the dollar slides, their profit margins on products has decreased. I'm expecting GoO to have to increase the price on their game books this year to compensate. Gaming is such a niche market to begin with, and it's not uncommon for a RPG to be sold with insufficient margins to begin with.

Posted by: Unseelie on January 9, 2004 08:10 AM

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A solution for the author might be to spend some time and money in the US? Why even do the exchange from $ to lbs?
There could be strong personal reasons for not doing this but it does offer a partial solution.

Posted by: dilbert dogbert on January 9, 2004 08:42 AM

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I'm a novelist, not a financial management specialist. Time I spend figuring out how to hedge against bizarre risks is time spent not doing what I'm paid to do. Plus, I wouldn't know how to evaluate the risks in taking a short derivative position against the dollar -- I'm barely be able to tell you what one is -- which would put me doubly at a disadvantage.

Plus, doesn't this presuppose ownership of a chunk of capital large enough to be worth investing for income? That's not a common situation for a writer to be in -- as of 1999, the Society of Authors in the UK pegged the average annual income of a British novelist at GBP 4500 a year. While I'm not quite at the eating catfood stage, I'm hardly in a position to risk as much as, say, a couple of thousand pounds. That's serious money!

Posted by: Charlie Stross on January 9, 2004 08:51 AM

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"Charlie will find it possible to (with only small transactions costs) to take huge honking short derivative positions against the dollar..."

You are kinda joking there right?..This just points up part of the larger problem for me with our brave new world--the fact that most people in it are never going to do anything remotely like that...most of us are never going to dabble in the market in any sense...we're using all our remaining brain cells to keep up with the knowledge we need to do our jobs effectively or at a rate of productivity that will allow us to keep them. And as for moving to America, Dilbert Dogbert...I know people who are talking half serious about moving to India.

Posted by: scylla on January 9, 2004 08:57 AM

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... As for "spend more time in the USA", I'd rather not. It'd take a lot more than a 15% devaluation to make it cost-effective for me to do that, and by the time the dollar was down, say, 50% I suspect my own troubles would be vastly overshadowed by everything else going on in the background.

Posted by: Charlie Stross on January 9, 2004 09:02 AM

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... As for "spend more time in the USA", I'd rather not. It'd take a lot more than a 15% devaluation to make it cost-effective for me to do that, and by the time the dollar was down, say, 50% I suspect my own troubles would be vastly overshadowed by everything else going on in the background.

Posted by: Charlie Stross on January 9, 2004 09:07 AM

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So in the future, exchange rate risk will be a rounding error? I'm having a hard time with this one.....

Posted by: Jason McCullough on January 9, 2004 09:14 AM

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It was fascinating to read Charlie Stross report of his current plight, particularly since it was juxtaposed with reading Michael Kinsley (in today's WP) and William Pfaff in today's IHT. Pfaff mentions Ricardo's "Iron Law of Wages" of which I had never heard that apparrently states that as the supply of labor increases wages tend toward subsistence levels.
It has always made sense to me (a non economist) that free trade does increase global wealth. Upon momentary reflection, as the non-local labor pool expands at an almost exponential rate, Ricardo seems likely to be right about wages as well.

Add to this the plight of Stross and one wonders the extent to which our global society is rapidly approaching a point where the individual human has less and less control over his economic destiny. Obviously, to an extent this has always been so and we are talking about matters of degree.

Are there any institutions that are attempting to define the extent of this global social problem? (Maybe Kinsley, Pfaff and I don't really understand it.) If the problem is real, is anyone making suggestions as to how governments might organize their affairs so as to alleviate human suffering of various types and extents that seems sure to follow in its wake?

Oh well, its a rare snowy day on the Outer Banks and the heron sitting beside the lake behind my house makes a great picture when framed by the still red geraniums. Time to finish re-reading "Mission of Gravity" by the late Hal Clement (Harry Stubbs) which I recommended to my grandson and realized that I had almost forgotten.

Later this afternoon I will check the bookstore for a new author.

Thanks Brad and Charlie for bring a new author to my attention.

Sam

Posted by: Sam Taylor on January 9, 2004 09:35 AM

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Is it feasible to write an exchange rate into the contract -- at least for the advance, where a simple choice would be something like a published forward rate timed to the advance payment -- and thus lock in a payment in sterling (for better or worse)?

Of course, that presumes that a US SF publisher has the inclination and (more significantly?) the wherewithal to roll the dice on the actual dollar payment as opposed to have the certainty of paying $X.

Anyway, sounds like Mr. Stross should see a buck or two (whatever they're worth) from readers here.

Posted by: Tom Bozzo on January 9, 2004 09:45 AM

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seems there is the opportunity for a dotcom company to do the hedging for small players with this problem.

Posted by: big al on January 9, 2004 10:04 AM

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seems there is the opportunity for a dotcom company to do the hedging for small players with this problem.

Posted by big al at January 9, 2004 10:04 AM

Or an iApp, perhaps. iFinance? iInvest?

Posted by: Tom Bozzo on January 9, 2004 10:28 AM

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Perhaps, as another commenter has suggested, you are joking about the derivatives hedge. If not, then it is a not a good suggestion.

The author's future revenues in USD are not certain. To buy a forward contract for the amount of expected revenus would therefore expose him to the risk of an adverse movement in the exchange rate should his revenus fall short. On the other hand, buying an option would mean incurring an additional expense - just like insurance, you only get it if you pay it - and I doubt if the author should really take it unless he has thought long and hard about the need for it.

Collateralization is only available to well-known artists with significant expected future cash flows.

Sadly, too many people think they understand derivatives when in reality they don't have a clue.

Posted by: abo on January 9, 2004 11:02 AM

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Can't he just take up a fixed-rate loan in dollars with the size that makes it paymets mach what the bank thinks the royalties will give him (possibly using them as collateral)? He use the loan to pay off his mortgage: now his personal economy is much safer and more independet of exch.rates and interest rates.

Posted by: Mats on January 9, 2004 11:14 AM

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Let's not forget about counter-party risk.

Posted by: BW on January 9, 2004 11:48 AM

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Tim Powers not Thomas Powers. In my opinion the single best sci-fi-ish writer living today. I guess he's might be more historical alternate fiction. But incredible non-the-less.

Posted by: Gideon S on January 9, 2004 11:57 AM

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Well, it all balances out, ya know. Money flows both uphill and down, across oceans both East and West.

My US-based company receives a fair amount of its funding from European governments. We're actually starting to edge toward a lack of worry about paying for our projects. Feels strange.

Posted by: Martial on January 9, 2004 12:56 PM

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Note the weasel wording in "Charlie will find it possible..."

If you can change "can" to "must" in a piece of text and it remains accurate, that shows that the situation is not actually liberating but oppressive. This is a case in point; Charlie Stross is being constrained, not enabled.

Posted by: P.M.Lawrence on January 9, 2004 03:47 PM

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Thanks for the heads up on Stross, an author I'm not familiar with. But your link for Atrocity Archive points to Toast.

Posted by: Dave Trowbridge on January 9, 2004 04:26 PM

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