Don Dodge on The Next Big Thing

Three reasons Microsoft will not buy Nokia at any price

Nokia (NOK) stock price is dropping to historic lows with a current market cap of just $9.3 Billion. Nokia has revenues of over $38B, $6B in cash, 30,000 patents, and a great brand. Investors and sharks are circling. Microsoft (MSFT) isn't one of them. Why not? Three reasons; they don't want to, they don't need to, the FTC & EU regulators wouldn't let them...even if they wanted to. Techmeme thinks Microsoft might be getting into the hardware business, but not phones. Lets explore these three points.

They don't want to - Microsoft has strong DNA as a partner driven company. The success of Windows was driven by thousands of hardware manufacturers and tens of thousands of software companies supporting Windows in their products. For more than 30 years this has been the business model. They view Windows Phone 7 just like Windows on the PC...an operating system platform for any hardware device. They just work with manufacturers and the money pours in. They don't want to mess with the model.

It has been a great model, but it doesn't always work. Microsoft has always been the opposite of Apple (APPL). Microsoft makes software available to all manufacturers, while Apple is a closed system. For most of the past 30 years Microsoft had the better model. Not anymore. Apple has proven that a beautifully integrated (closed) system can be very attractive. Apple has DNA too. Apple products have always been integrated hardware and software. It has worked well for the Mac, iPod, iPhone, and iPad. Hmmm...maybe Apple will buy Nokia. Makes more sense than Microsoft, but I digress.

Microsoft made one exception to the model I can think of, the Xbox. And that was only because they couldn't convince the game box makers to play nice with them, and because they didn't have any partners in this space. Microsoft spent billions developing the Xbox hardware platform just so they could sell their game software. Eventually, the bet paid off. And, in the future it could be a huge home computing platform if they could shake their legacy DNA. Not likely. Microsoft might enter the Tablet space. This would mark a change in strategy, and create huge channel conflict with partners.

Smartphones are a huge market, and the future of personal computing. Microsoft is trying to use their Windows PC distribution model for Smartphones. It isn't working. Manufacturers who once used Windows Mobile have grown tired of the slow pace of innovation at Microsoft and high OEM prices. Many are now using Android. Microsoft responded by making a deal with Nokia, paying them billions of dollars for "marketing" and engineering transition costs. To date that isn't working very well either.

Microsoft doesn't need to buy Nokia - Microsoft already gets everything they want from Nokia without buying them. Microsoft wanted distribution from a big brand Smartphone manufacturer. The idea was that other manufacturers would follow after Nokia blazed the trail with Windows Phone 7 and grabbed market share. Nokia was one of the few big manufacturers that hadn't committed to another OS. It was a reasonable strategy for both companies. It hasn't worked out yet, but it still might. The Xbox strategy didn't work in the first year either. These things take years and billions of dollars to execute. Microsoft has plenty of time and money. Nokia doesn't.

The FTC and EU wouldn't let them - Almost any big acquisition by Microsoft, or any of the big players, will attract an FTC, EU, and even China review. We live in a world where government regulators decide, not the two willing companies. That is a subject for another day, but suffice it to say that government regulators would probably not allow Microsoft to acquire Nokia based on some theory of "competition" being lessened and consumers being harmed.

Nokia could still turn things around. Microsoft could pump in more money to help them out. Nokia can sell off assets and patents for billions of dollars. Nokia already announced they will lay off 10,000 employees as part of a restructuring. It will get worse before it gets better. But, the Nokia brand and asset is too strong to just totally disappear. Nokia can emerge from the restructuring as a smaller stronger company, or end up being acquired by a bigger stronger company...but not likely Microsoft.

Disclosure - I worked for Microsoft for 5 years. I don't speak for them. I now work for another large tech company. I don't speak for them either. These are my own personal uninformed thoughts...and probably wrong.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

About Last Night... the social network for nightlife

About Last Night, the social network for nightlife, launched today at Techcrunch Disrupt, and is available for download on the AppStore. Its about the party last night, the concert last night, your date last night, or any event last night. It is an iPhone app that is photo centric and location based. It is similar in design to Path, but the sharing model is more like Twitter, and the posts are totally focused on nightlife.

About Last Night posts are headlined with the location where the photo was taken. The person who created the post is listed below the photo. All posts from all users are visible in the main stream, but you can get different views (Following, Locations, Nearby) to tailor the stream to just what you are interested in.

Whats happening anywhere?  Lets say I'm from Boston but visiting New York for the weekend. I want to find the best night spots in New York, or know what is happening at Columbia University. About Last Night has a "Nearby" view that uses your GPS location to show all the posts from night spots near you. You could also be "Following" Columbia University to see all the posts from Columbia. You can follow people or locations. I'm sure college students and the nightlife crowd are going to love these features.

Whats hot?  About Last Night also has a voting system where users give a "thumbs up" to parties and places they like. As a post gets more thumbs up votes it earns a bronze medal, a silver medal, up to a gold medal. This is an easy way to find the best parties and night spots near you.

Deals - Bars and night spots can also post special offers and discounts, or post bands playing or new menu items. Users can vote up posts they like, and share the deals with their friends via Facebook, Twitter, or email.

Private Feed - Your little black book on your phone. About Last Night posts are public just like Twitter posts. But, you can flip a switch and make a post private, just for you. Lets say you see a very attractive person at a party and want to remember them. Just snap a picture, add a note, and set it to private. The app automatically puts a time stamp on it, and adds the location where the photo was taken. This could be useful when you can't quite remember the details the next morning...or next week.  This could also be useful at a conference or large party. Lots of people give you their business cards but you can't remember them the next day. Just snap a picture and post it to your Private Feed.

Disclosure - My sons, Derek Dodge (25) and Darren Dodge (21) are the founders of About Last Night. I am a proud father, so my bias may show through in this post. Check out the app for yourself. You candownload it from the iPhone Appstore. They assure me an Android version is coming soon :-)

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

 

I could build Instagram in a week

I could build Instagram in a week. How many times have you heard someone say "I could build [insert hot startup name here] in a week"? I hear it all the time. But, I have yet to see one of these delusional wizards actually do it. They are obviously too busy inventing the next big thing. They fail to realize that building a successful consumer web or mobile product takes more than great technology. A lot more.

Success looks easy from a distance. Technology seems simple if the design is great. Attracting great founders and early employees just means rounding up some of your friends. Raising money is always easy, right? Getting great press stories just takes a few emails. Attracting influential users just sort of happens. Viral growth is a simple formula. Solving a problem that millions of people care about is just luck. Going public or getting acquired is automatic. There are hundreds of critical decisions along the way. None of them are easy.

From a technical point of view there isn't much difference between Instagram, Path, Oink, Hipster, or a bunch of other companies that all do essentially the same things. Mobile, social, photo apps that include comments and some type of friend/follow model. Why is one worth $1B and another shut down with no value? It isn't about the technology or how long it took to build.

First Mover Advantage is real. The first product on the market has a big advantage...if the product actually works. People get used to the product, get to like the user experience, and develop a user community culture. Users invite their friends and the viral growth cycle starts. Once the user community starts to grow virally they are not likely to switch to another product...even if it is better. A competing product with a few new features, or something that is faster or cheaper, isn't likely to steal away many users.

Design and user experience matters, especially with consumer products. Timing and luck play a big part in success. Technology can be replicated, timing and luck can't.

Facebook definitely has the engineering talents to build a mobile product with features similar to Instagram. But it wouldn't be Instagram. It would be an obscure feature buried somewhere inside the Facebook app that would only work within Facebook. Instagram is magical because it does one thing really well. It stands alone, and is quick and easy to use. It isn't bogged down with the overhead of a much larger app or service. Instagram photos can be shared across lots of different social services. If Facebook engineers designed a mobile photo sharing app would it work like this? No.

Mobile is the future, and photos are core to Facebook. Instagram does both better than Facebook. Being the leader in two growing trends is critical to Facebook. That is why Instagram is worth more than $1B to Facebook.

Google Video is another example. Google already had a video hosting/sharing service called Google Video...but it wasn't YouTube. Even though the features were similar, the user experience, and more importantly, the user community, were very different. The technical features could be replicated, the brand and user community could not.

Web video, and search for that video, is a huge trend. YouTube was the clear leader. Whoever owned YouTube would instantly become the leader. That was worth $1.6B to Google...even though they already had comparable features in Google Video.

Next time some wizard tells you they could build XYZ hot startup in a week, just smile and say "You probably could build the features...but you couldn't build the user community or the company. That is where the value is."

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

Why Instagram is worth $1B to Facebook, Web 2.0 just went mobile

Facebook announced that it acquired Instagram for $1 Billion. The company is less than two years old, has no revenue, and about a dozen employees. Remember, acquisitions are about what the acquirer can do with the company in the future, not some multiple of revenues or profits today. Why is Instagram worth $1B?

Facebook acquired Instagram for about $30 per user, or $1B. ($30/user X 33M users = $1B) Facebook is valued at about $100 per user or $80B ($100/user X 800M users = $80B). Other popular social apps are valued around $20 to $50 per user. The monetization models need to work out about the same to justify the valuations.

If Facebook was worth $80B last week, is it worth $81B now with the addition of Instagram? Yes. Here is why. The number one thing people do on Facebook is share photos. Photos are going mobile in a big way. Instagram is the clear leader in mobile photos. Instagram added 1M users in the first day of availability on Android. Facebook needs a growth engine to show investors after they go public. Instagram is that growth engine, and it is worth much more than $1B to Facebook and its investors.

Web2.0 to Mobile - Everything is going mobile. Path, Instagram, FourSquare, are totally mobile, and don't care about the web. This could mark the turning point for another sea change; Web 2.0 to Mobile. Facebook has a horrible mobile app and needs to upgrade its mobile services. Path is the most elegantly designed mobile app, with an awesome user experience. Instagram is the best mobile photo app. FourSquare is the leader in mobile location data. All of them are critical to any company that wants to dominate the mobile paradigm shift.

Is Instagram worth $1B to Microsoft or Twitter? Probably not. Microsoft couldn't monetize the users and growth in the same way that Facebook can. Microsoft isn't focused on social or mobile photos. Twitter could realize a ton of value from Instagram, but $1B? Probably not. Twitter will still get lots of users and traffic from Instagram. They don't need to own it.

The value of a company is different for different potential acquirers. If Facebook can monetize its users in a way that justifies $100/user, than paying $30 per user for an acquisition is a great deal. For other potential acquirers maybe not. It depends on their monetization model, and what they plan to do with the acquisition in the future. This is why Instagram is worth $1B to Facebook, and why AOL patents are worth $1B to Microsoft. They both acquired good value for what they want to accomplish.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

How to name your company and product

Company names and product names can be a very expensive and time consuming process. It shouldn't be because company names and URLs don't matter. One of the first things you do when starting a company is come up with a name. Most times the name you come up with is already taken for the .com URL. Much angst and frustration follows. Don't sweat it. Be more creative in your name selection process. Lets look at some very successful companies and their names.

Cisco is the most successful networking company in the world. Is Cisco a word? Does it have anything to do with network gear? No. Cisco is the last few letters in San FranCISCO. The founders are from the San Francisco bay area and thought Cisco was a short and memorable name that was easy to spell. They use the Golden Gate Bridge as their logo because that goes along nicely with the name. Neither the name or logo has anything to do with network communication gear. But, their branding and marketing made the name Cisco synonomous with networks.

Zappos is the most successful online retailer of shoes. Is Zappos a word? Does it convey any meaning about online shoes? No. Zappos is a mis-spelled derivation of the Spanish word zapatos, which means shoes. Zappos was a great name because it had no pre-existing meaning in consumers minds. No one had the trademark or domain name for Zappos, so it was easy and cheap to obtain. Tony Hsieh made Zappos stand for quality products and outstanding customer service.

Shoes.com vs Zappos.com - Should the Zappos founders have named their company Shoes.com? Would that have made a big difference in their success? I doubt it. Amazon acquired Zappos for over $1.2 billion. Shoes.com is part of a 130 year old shoe company. Which one do you think sells more shoes? Which company created more enterprise value? Regardless of the answers...the name had absolutely nothing to do with it. The branding, marketing, and customer service had everything to do with it.

Amazon.com and Apple are counter examples. Amazon had a pre-existing meaning that had absolutely nothing to do with online retailing of books. There is nothing about the word Apple that says computers, phones, or music players. In fact, the words Amazon and Apple meant something completely different before those two companies took the words as their names decades ago. Today such common words would not be available as names anyway.

Jeff Bezos chose the name Amazon because it represented something big. When Amazon started online web stores were virtually unknown. There were very few web sites, so they probably got the domain name pretty cheap. When Bezos started Amazon it was only focused on selling books online. Should he have chosen Books.com instead? No. The name probably wasn't available, and it would have limited his reach to just books. It would be tough to branch out into movies, music, clothes, and a million other things if the company name was Books.com. BTW, I just checked and Books.com resolves to BarnesandNoble.com. They probably acquired the name for big bucks at some point, but don't even use it as their company name...because it isn't really a brand name.

Google, Yahoo, Napster, AltaVista, Zynga, and hundreds more company names meant absolutely nothing to anyone before they started using them. Of course there is a story behind how they came up with the name. But, the name itself meant nothing to the public or potential users of the service.

Google is easy to remember, easy to spell, and just 6 letters short. All good things for a name. Google is actually a mis-spelling of the mathematical term googol which is a 1 followed by 100 zeros. Does the meaning of the word googol have anything to do with search? Does the general public know what the term means? No. Google is a great name because it is short, easy to remember, and easy to spell. The Google logo with its primary colors (blue, red, yellow, green) is memorable and playful. Everything about Google incorporates the playful primary colors. That is how branding works.

Napster was Shawn Fanning's nickname. He got the name because his hair was very curly and nappy. He played basketball a lot and the other players would make fun of his nappy hair and call him nappy, or The Napster. That is where the name for Napster came from. Again, the name is short, easy to remember, and easy to spell. The name is not a word that meant anything. The Napster logo of the kitty with headphones became one of the most well known names and logos in the world. That is good branding and marketing.

Zynga was the name of Mark Pincus's dog. Zynga of course is the largest social gaming company worth several billion dollars. Another friend, Shervin Pishevar, named his company Social Gaming Network or SGN. The name accurately describes what the company does, but which company was more successful? Did the name matter? Nope.

There are many other examples. The key is to be open and creative when coming up with a company or product name. Don't worry about the name meaning something. In fact, in most cases you want the company name to NOT mean something. You make it mean something later with good branding and marketing.

Great logos are important, and part of the branding program. The company name and logo are how the general public remembers your company. The Napster kitty is a great example. Today with the explosion of mobile apps, a tiny little icon represents your company on the mobile screen. The tiny blue box with a stylized T is instantly recognizable as the Twitter logo. A different shade of blue with a stylized F is obviously Facebook. The red box with the stylized P is the logo for Path. Choosing a color and an icon is just as important as the company name and logo. They all must work together in the branding.

Company names should follow a few basic rules;

1. Memorable - the name should be easy to remember, and not confused with anything else.
2. Easy to spell - removing vowels or doubling letters is not usually a good idea
3. Short - Try to keep it to 10 letters or less.
4. Non generic - calendar management is way too generic

OK, so think outside the box when coming up with your company name. Choose a logo and icon that is distinctive. Don't pay crazy amounts of money for a domain name. Make your name mean something with good branding and marketing. Always dispaly the company name and colors together with the logo or icon. Once the connection is made in the consumers mind they will work together or alone.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

Why company names & URLs don't matter

Some founders agonize over the name of their company and pay big bucks to purchase the domain name. Save yourself lots of time and money because it doesn't matter. At least not the way you might think it matters.

The best names start without any meaning at all. Brand names become recognizable because we make them mean something. Two startups I worked with provide good examples; AltaVista and Napster. These words had no real meaning before we started using them, but became some of the most memorable and recognizable names and logos of that time.

Google, Yahoo, Zappos, and Cisco are further examples of words that didn't mean anything until they made them mean something. That is a good thing because you don't want to confuse the marketplace with a common, well known name that already has a meaning. It is really hard to overcome preconceived meanings.

You also don't want to confuse the search engines, or rank poorly for your own name. Lets say you have a cool new startup focusing on fixing the problems of multiple calendar management. You are convinced Calendar Management is the best name for your company, but you discover that someone already owns the domain name www.CalendarManagement.com  Undeterred, you offer $100,000 for the domain name. But, the owner wants more...they want 2% equity in your company too. Don't laugh...I have seen this happen many times. Don't fall for this.

Here is the problem. Do a search for Calendar Management. I got about 1.2M results. Every company that is doing anything remotely close to calendars or management has loaded their web pages with key words and applied SEO magic to rank highly for those words. The advertisers have also bid up those keywords to very high prices in order to get their ads in front of anyone searching for those terms. So, how do you think your new little startup is going rank against this kind of competition?

Company names should follow a few basic rules;

1. Memorable - the name should be easy to remember, and not confused with anything else.
2. Easy to spell - removing vowels or doubling letters is not a good idea
3. Short - Try to keep it to 10 letters or less.
4. Non generic - calendar management is way too generic

A great logo is really important. In this age of cell phone apps, a tiny logo is the face of your app and company. The association of the logo to your name and to the product is what great marketing is all about. Spend quality time on designing your logo.

Pick a unique name that doesn't mean anything, is memorable, easy to spell, and short as possible. Then design a great logo to go with your name. Don't overpay for domain names. Once a user visits your site one time the browser cache remembers the name and will auto-complete it after the first few letters...or teh user will bookmark it. So, in the end...the URL doesn't really matter.

And, BTW, CalendarManagement.com is held by a domain name squatter just waiting for some sucker to come along and offer big bucks for it. Domain name squatters are down there with patent trolls in my book. They add no value and take money from suckers. Don't be one.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

EchoEcho finds your friends at SXSW even indoors!

The mobile social location space is heating up. EchoEcho will unveil a new version at SXSW that will find your friends indoors, where GPS doesn't work. Imagine being at the Austin Convention Center with 10,000 people. You know your friends are in the building somewhere but you can't find them. EchoEcho plots your friends on an indoor floor plan map, in real time, so you can find them with pinpoint accuracy, within 2 meters. None of the other location apps can do this. A Stanford startup, WifiSlam provides the indoor location maps to EchoEcho. Both companies have been building this functionality in stealth mode. This weekend at SXSW in Austin people will be able to use it for the first time.

EchoEcho uses GPS signals outdoors to locate your friends anywhere in the world. Lots of apps can do that. But, EchoEcho goes further by plotting your friends on a street map, then showing what building they are in. If that building has been mapped by WifiSlam then EchoEcho takes you inside the building and plots your friend on a floor plan so you know exactly where they are. Think of being in a shopping mall, or on a college campus, or at an airport or theme park. You could find your friends or family members anywhere, any time.

Privacy is an issue with some of the mobile social location apps. Do you really want random friends of friends, people you don't really know, to be notified that you are in the area? Do you really want to be notified that a person who "Liked" The Simpsons on Facebook is near you? Seriously? EchoEcho users individually opt-in to being visible to specific friends. And, you can easily decide when you want to be visible, and when you don't. Privacy matters.

The problem is not finding more random people who might have clicked on a Facebook Like button that you also clicked on. You already get inundated by too many notifications, messages, spam, and random people. The real problem is how do I find my real friends among the sea of humanity. That is what EchoEcho does, with privacy in mind.

Dead batteries in Austin. Don't be surprised to hear users of the other popular mobile location apps complain of dead phone batteries. The way they use GPS and ping their servers will drain your battery within hours. EchoEcho thought of that too. They have engineered some clever ways to get the location data without draining your battery.

Don't have an iPhone? No problem. EchoEcho works on iPhone, Android, Blackberry, Windows Phone7, and even Symbian. Check them out on the iPhone AppStore and Android Market.

Disclosure: I am an investor in both EchoEcho and WifiSlam.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

 

How Twitter and Facebook create social ads

Today I saw an advertisement in my Twitter stream. Not something that was ReTweeted by a friend, but an ad that looked like a Tweet, inserted in my stream. Not off to the side in a sponsored area, but right in my main stream. Facebook does this too, but usually off to the side in a "sponsored" area. This is a new type of advertising, and it could change everything.

I have heard rumblings about Twitter experimenting with new ad formats and "promoted tweets" but this is the first time I have actually seen it in my stream. The screen shot above shows both a "promoted tweet" in the left side bar, and a regular looking Tweet in my main stream with a little "promoted" label where I expected to see a "retweeted by xyz". There is nothing wrong with this, I was just surprised by it. Have any of you seen this in your Twitter streams?

Twitter works with companies interested in advertising on Twitter by creating an ad that looks like a normal Tweet. Its not clear how Twitter decides which advertisement to insert in your stream, now they target, how often they insert it, or how they measure success and get paid for success. Twitter knows a lot about you, your location, who you follow, etc, so they can do some pretty effective targeting. The real social multiplier comes when users ReTweet these ads to their followers. Then is switches from a social targeted ad to a word of mouth social ad from your friends. This could be big!

I checked Facebook to see how they do ads which they call "sponsored stories". These have been around for a long time. They usually show up off on the right side bar and are easily ignored. They attract attention by posting little photos of your friends next to them with text that says "Steve Schlafman likes Naked Apartments". I'm not making this up...really...look at the screen shot below. Be careful what you "Like" on Facebook...you never know where it might show up.

Word of mouth advertising has always been most effective. Social networks like Facebook and Twitter enable taking "word of mouth" to a whole new level. This is just the very early stages of what promises to be a revolution in advertising.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

How early product failures led to huge successes

Failure is not an option...it is a requirement...to future success. Failure gets a bad rap. It is actually an important element of success. When I speak at conferences around the world I say "In America we don't use the word failure...we call it experience". You learn far more from failure than you do from success. And those lessons from failure are what prepares you for future success.

Angry Birds became an overnight success...after 51 failures. Thats right, Rovio produced 51 other games before hitting it big with Angry Birds. Can you name any of the 51 games Rovio produced before Angry Birds? I doubt it. No one remembers failures. And that is a good thing. It means your reputation is not irreparably harmed by failures.

Guitar Hero, the music game, was another overnight success that took 10 years to materialize. Harmonix produced nine other games before hitting it big with Guitar Hero. All the previous failures were required to get to the huge success.

WD40 is a popular lubricant with hundreds of uses. Do you know why it is called WD40? Because the first 39 formulations didn't work. The 40th one did and they called it WD40. The WD stands for Water Displacement.

Now I bet you can guess how Formula 409 got its name. Thats right, the first 408 formulations didn't work. In fact, lots of very successful products were the result of previous failures.

Post-It Notes are the result of a failed experiment by engineers at 3M to develop a new adhesive. It would stick to some surfaces but could be easily peeled off, or fall off with too much force. It was considered a failure until the 3M engineers thought of different possible uses. Super Glue was another product success born from a failed experiment.

Odeo was a startup focused on building a new podcasting product. They weren't having much success. One of the engineers was playing around with a side project to publish short messages to a small audience. That project became Twitter.

Can you think of other product success that came after initial failure? Or startup companies that succeeded after their first ideas failed? If so, leave a comment on the far right side of this blog.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+

Fear & Greed - how housing market drives the economy

The economy is all about confidence. Fear = lack of confidence. Greed = supreme confidence. Individuals feel confident when the stock market and housing prices are up. When individuals feel confident they spend money, and even borrow money, to buy more stuff. Consumer confidence drives the economy. When consumers spend, business do well, stock prices go up, consumers feel more confidence and spend more. Virtuous cycle.

When confidence is down consumers "de-leverage" reduce borrowing, reduce spending, which hurts business, and starts the death spiral. The Fed can lower interest rates to ZERO, but businesses will not borrow or expand because they aren't confident. Conversely, when confidence is high, businesses will borrow no matter what the interest rates (or tax rates) are.

Government can't control the economy anymore. In the old days the Fed could raise interest rates to slow down inflation, or lower interest rates to speed up the economy. It doesn't work anymore because our economy is now global, and interconnected with other global economies. Money and wealth can move globally in seconds with the click of a mouse.

Congress could raise tax rates or lower them to incentivize the economy. They could give special tax incentives (R&D tax credit, solar tax credit, jobs credit) to make certain things happen. It doesn't work anymore. Business got wise to the constantly changing rules and has decided not to play anymore.

Today it is the housing market and the stock market that drives the economy. When housing prices and stock prices are up, people and businesses feel confident...and they spend money...which drives the economy and jobs growth.

When housing and stocks are down people and businesses get nervous, consumers don't spend, businesses don't hire, and everyone gets very conservative. Economic death spiral (Fear) ensues. When this happens lowering interest rates won't help. Raising or lowering tax rates won't help. Political speeches won't help. There are no quick fixes. Economic cycles take time to adjust.

Remember one thing; fear is temporary, greed is permanent. Greed always wins out over fear. Fear = lack of confidence, and is temporary. Greed = supreme confidence. People don't want to miss out on new opportunities or fantastic buys. The economy will come back strong in spite of government policies...not because of them.

Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+