Fortress FAANG

The year is 1799 and you’re about to make the most important decision of your life.

You’re a prosperous business owner. You’ve worked hard and saved a lot. You’ve accumulated a lot of capital. Now you have a choice as to which currency you park that capital in.

For the purposes of this (slightly fictionalised) historical thought experiment, gold is off the table. You have a binary choice.

You can allocate to the pound. This is backed by the full force of the British government, but nothing else. It’s a fiat paper currency.

Or you can allocate to a private currency, issued by The Company. The Honourable East India Company.

Which do you choose?

Some more information to help you decide.

Britain is at war with Revolutionary France. Its national debt is about to explode. It’ll soon be forced to introduce new temporary taxes on the population, in order to continue the fight. (Temporary taxes like income tax. Temporary has a different meaning to the authorities than it does to you and I.)

The British East India company is at the height of its powers. It has a private army that’s twice the size of the British Army. It generates millions of pounds in revenue and administers large parts of India. And it presides over a private trading network with nodes in every port that counts on at least three different continents.

Given that, which currency do you choose? The publicly issued, state-managed pound? Or The Company’s private currency?

Now, let’s remove all the historical context (and inaccuracies) and make this relevant today. Swap the East India Company for Facebook. Swap the British government of 1799 for that of today (or any government you choose). Same question.

I’ll leave you to ponder that one. (Answers to nick@southbankresearch.com.) In the meantime I’ll point out that this kind of decision was once a lot more commonplace – and a lot less strange seeming – than it feels today. Governments haven’t always had a monopoly on the issuance of currency or the management of a monetary system.

And perhaps they won’t again in the near future.

If you read yesterday’s piece (We need to talk about Libra) then you’ll have guessed where I’m going with this.

Whether you’re a fan of Facebook or not, its attempt to create its own privately issued digital currency matters. It might well turn out to be a turning point. If bitcoin opened Pandora’s box then perhaps the first thing to slither forth will turn out to be Libra.

What I’m trying to figure out today is whether Libra is the start of a brave new era or the logical conclusion of the last era.
In my book, The Exponentialist (get your copy here), I looked at the idea of “epochal innovations”. These are technologies that reorder the economy, the markets and society around themselves, and generally emerge every 50 years.

The last was the microprocessor. Before that, the mass-produced internal combustion engine. Think of them like new suns at the centre of a solar system. They emerge, disrupt and then ultimately form the core around which more or less everything else orbits.

The book was more of a search for the next epochal innovation than an analysis of the existing one. But if I were adding a bonus chapter on that subject today I’d pick this idea up. The microprocessor created an industry – the modern-day tech sector – that has disrupted more or less every other industry it has interacted with.

For proof of that, you only need to look at the size of the top tech companies – take the FAANG stocks of Facebook, Apple, Amazon, Netflix and Google, and throw in Microsoft for good measure.

These companies aren’t just big in the sense of market capitalisation, revenues or profits. The sheer number of people who use their products and services, the number of people they employ, the magnitude of their supply chains and ecosystems. It is not unreasonable to compare these companies to mini sovereign states.

And perhaps it’s expected at this point in the pattern. More than 50 years after the microprocessor was first commercialised, we’ve had an entire “epochal” cycle for the technology to mature. If history is a guide we’re at the peak of that cycle. The point when the maximum amount of power and influence has accrued to firms built around the current innovation.

In a sense, digital currencies are just an extension of that. Tech has disrupted everything else. This is just “tech disrupts money”. Given money has been the exclusive purview of government for centuries, how long before we get “tech disrupts government”?

I’ll have to leave that question for another day. Back to currencies. How long before we see FAANG not as a list of companies or stocks to invest in, but a series of competing monetary systems?

It’s not as far-fetched as it might sound. As I just pointed out, tech stocks already have the scale and revenues of small sovereign states. At least one of them has already laid out plans to issue a currency. My bet is we’ll see another before long. Amazon would be my guess.

This is real power. And it’s not power gained through coercion or a monopoly on violence, which is true of “regular” nation states. These companies are powerful because – whether you like it or not – they created something valued by billions, that people voluntarily use and that generates vast sums of money.

By the way, one thing the last cryptocurrency boom told us is there are a lot of people out there – many of them young – who will invest their capital in new ideas and speculative ventures. FAANG stocks issuing tokens as well as shares may open up an entirely new digital capital market.

That’s an idea that sits at the intersection of demographics and technology. It may be too big to explore today. But it could be significant as a source of wealth and as a way of “solving” capitalism – in the sense that it’d help give a new generation of people a stake in the system of risk taking and the creation of value.

We’ll see. Maybe that’s too speculative. But I think I’ll come back to it again later in the week. In the meantime, write to me at nick@southbankresearch.com.

By the way, Sam Volkering, author of Crypto Revolution, reminded me last week that he predicted that technology companies would rise to become as powerful as sovereign states all the way back in 2013.

I’ve included a few pertinent sections of Sam’s piece below. This was written six years ago. I haven’t updated the numbers. But it’s worth reading nonetheless…

Maybe there’s a better way to run the world? Imagine a world where leadership is egalitarian. A world with decentralised boundaries and borders. Probably the best way to describe it would be The Great Global Liberation. Essentially a world where there’s no “government” per se. 

I may be the ultimate optimist, but imagine… a world free from central control and economic mismanagement. Throw the concept of a nation state away; it won’t be the way the world works in the future. Multinationals are poised to wrestle control away from government.

… Imagine if you combined Apple, Microsoft, Amazon, Google and Oracle together and made one big company. Let’s call it “Appcrozonglecle”.

Their combined revenues of $372.6 billion put them as the 31st largest country in the world. Bigger than Columbia, Denmark, Singapore and the United Arab Emirates.

Then what if we look at their cash positions combined – that is, how much cash to these tech giants have in their coffers? For a start, if they wanted to, Apple could have bought Cyprus. And had change to wipe the total external debt of Singapore for the fun of it.

That’s right. Apple on its own has enough cash to eliminate the total external debt of Cyprus and Singapore; over $130 billion. 

These multi-nationals have greater economic power than hundreds of countries in the world. They are financially managed more effectively too. And they all turn a profit regularly (except for Amazon). 

Add to this the combined direct workforce of the five tech companies mentioned. The total population is over 400,000. Factor in the indirect jobs they create and the numbers head into the millions.

There’s so much money flowing through the doors and so much cash hoarded. It’s not unrealistic to think one, or a couple, of these tech giants could buy their own country. 

It would be the reversal of what happened during the GFC. Instead of countries bailing out companies, we’d have companies bailing out countries.

The up side could be assuming power and control over the governing body. Apple might create its own sovereign nation. 

Of course I’ll expand on this over the next few weeks but for now, understand that economically the power has already shifted from the nation state to the multinational. So what comes next?


A reminder: you can get Sam’s bestselling book, Crypto Revolution, for just £5… right here.

Until tomorrow,

Nick O’Connor
Publisher, Exponential Investor

Category: Cryptocurrency

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