Author: Chris Castle
Subduing without fighting: Avoiding Hyperinflation
“The supreme art of war is to subdue the enemy without fighting.”
― Sun Tzu, The Art of War
You’ve probably seen press reports about China making significant commercial deals that promote its renminbi (yuan) currency in large scale sovereign resource and development contracts. This is particularly seen with China leveraging its position and the largest crude oil importer and recently surged commerce with France, America’s oldest ally. While there’s a long way to go before the renminbi unseats King Dollar as the world’s prime reserve currency, the point is that China is really trying hard to make that happen which is a first. The downside of losing prime reserve currency status would be as devastating as a war and would result in hyperinflation the likes of which America has never seen.
Of course, we won’t go straight to being Argentina, but there could easily be pressures along the way that would cause our inflation to spike, particularly for those who live off of wages fixed by the government from Social Security to the statutory mechanical royalty rate. This makes fighting for Cost of Living Adjustments all the more important.
Sleeping Through the Wars
Let’s go back to February 23, 1998. Like most days, there were some odd coincidences. The U.S. Air Force announced that the iconic RQ-4 Global Hawk drone was cleared to file its own flight plans and fly in civilian air space in the United States. Pam and Tommy got divorced. President William Jefferson Clinton was bogged down in a personal crisis of his own making. Celine Dion was number one with a song from a movie about an unsinkable ship that sunk.
The U.S. was a debtor country, meaning our balance of payments was negative. Howard Stern’s radio show premiered on WAVF in Charleston, South Carolina.
And a fellow most of the world had never heard of declared war on the United States. And nobody noticed. We were, after all, Fortress America, etc., etc., and did not pay attention to such things. Well, it wasn’t quite a declaration of war as we know it. Al-Quds al-Arabi, an Arabic newspaper published in London, printed the full text of a document in Arabic titled “Declaration of the World Islamic Front for Jihad against the Jews and the Crusaders” (now studied at West Point). That document was ostensibly signed by a relatively unknown Saudi financier who masterminded the August bombings of the US embassies in East Africa, and even more obscure leaders of militant Islamist groups in Egypt, Pakistan, and Bangladesh. That Saudi financier was named Usama bin Ladin, and nobody paid much attention, not even when he repeated the fatwa on CNN the next year.
China Declares a People’s War on the US
Another event happened in 1999, Two colonels in the Peoples’ Liberation Army of the Peoples Republic of China published a book in Mandarin entitled Unrestricted Warfare. The titles is variously translated as Unrestricted Warfare: Two Air Force Senior Colonels on Scenarios for War and the Operational Art in an Era of Globalization, or the more bellicose Unrestricted Warfare: China’s Master Plan to Destroy America. The thesis of the book is that it is a mistake for a contemporary great power to think of war solely in military terms; war includes an economic, cyber, space, information war (especially social media like TikTok), and other dimensions–including kinetic–depending on the national interest at the time. I think of Unrestricted Warfare as an origin story for China’s civil and military fusion policy, later expressed in various statutes of the Chinese Communist Party that were on full display in the recent TikTok hearing before Congress. Although the book was translated and certain of the cognoscenti read it in Mandarin (see Michal Pillsbury and Gen. Rob Spencer), it was largely unnoticed. Except in China–the CCP rewarded the authors handsomely: Qiao Liang retired as a major general in the PLA and Wang Xiangsui is a professor at Beihang University in Beijing following his retirement as a senior Colonel in the PLA (OF-5).
The point of both the 1998 fatwa and Unrestricted Warfare is that no one paid attention. We know where that got us with bin Ladin, there are movies about it.
Fast forward to May 14, 2019, the CCP government declared a “people’s war” against the United States as reported in the Pravda of China, the Global Times operated by Xinhua News Agency (the cabinet-level “news” agency run by the CCP):
“The most important thing is that in the China-US trade war, the US side fights for greed and arrogance … and morale will break at any point…The Chinese side is fighting back to protect its legitimate interests. The trade war in the US is the creation of one person and one administration, but it affects that country’s entire population…In China, the entire country and all its people are being threatened. For us, this is a real ‘people’s war.'”
What is the “people’s war”? It is an old Maoist phrase (remembering that Xi Jinping’s father fought with Mao during the revolution). It has a very specific meaning in the history of the Chinese Communist Party according to Wikipedia:
People’s war, also called protracted people’s war, is a Maoist military strategy. First developed by the Chinese communist revolutionary leader Mao Zedong (1893–1976), the basic concept behind people’s war is to maintain the support of the population and draw the enemy deep into the countryside (stretching their supply lines) where the population will bleed them dry through a mix of mobile warfare and guerrilla warfare.
So in the dimension of unrestricted warfare, what end state would the CCP like to see? Bearing in mind that they will avoid a shooting war in favor of the various other dimensions of civil-military fusion and following Sun Tzu’s admonishment o subdue the enemy without fighting. One way would be to impose economic damage on the United States (and really the West) but to do so in a way that does not damage China’s economy or not as much.
One way to do that would be by fully or partially displacing the U.S. dollar as the world’s prime reserve currency. And it helps if you think of the U.S. or France the way China does, as a market for Chinese goods. Forget the iconography of the White House or the Élysée Palace; try thinking of the presidents of the U.S. and France as the regional VPs of sales for China, Inc. with Xi Jinping as the Chairman of the Board. That may well be how Xi thinks.
What is all this talk of breaking morale, people’s war, economic warfare? You mean aside from a few key chapters in Unrestricted Warfare, the manual for the CCP’s hegemony?
First, let’s take an example of the world as it existed on February 8, 2022. And let’s say you are the President of Steppestan, a Central Asian country and CCP buffer state with two natural resources in abundance located a stone’s throw from China’s border: large oil fields and cobalt deposits.
Prior to February 8, 2022 if you wanted to sell your oil, you would almost certainly need to fulfill those trades in U.S. dollars, also called the petrodollar. (President Nixon took us off the gold standard and effectively pegged the dollar to the price of oil when Nurse Ratched wasn’t looking in return for protecting the security of Saudi (see United States-Saudi Arabian Joint Commission on Economic Cooperation.)
So that means that you as President of Steppestan need to find another country, let’s say China, that has dollars to close these oil trades. You’re in luck–China has a bottomless pit of dollars. Well…not bottomless as we will see, but it looks bottomless in February 2022. So Steppestan and China enter into a private “output” deal, a long term contract for Steppestan to provide China with oil for about 30 or 40 years. This contract will require the trades to be closed in dollars unless both sides agree on a different currency. Because Steppestan and China are not going to be pushed around by the American neo-imperialists forever, right? See “people’s war” above.
And since this is an output deal and Steppestan is essentially providing all the oil China can buy, the price of oil will be discounted so that China is protected from price fluctuations imposed by OPEC+ (OPEC plus Russia…ahem…and some of the other stans). That means that if OPEC+ decided something, oh say, for example, to cut production and increase the price of gasoline at the pump before a U.S. Presidential election, it won’t affect China at all to the extent of its output deals like they have with Iran.
For the moment, then Steppestan and China agree to denominate their deal in U.S. dollars, which provides you the dollars to do all kinds of other business that also are denominated in dollars. And of course, it’s not just these deals; the Bank for International Settlements shows 90% of these transactions were dollar denominated. This is what it means to be the prime reserve currency. It means that your money is good everywhere and everyone wants to hold dollars. It also means that there may be an audience of people who are tired of holding dollars given the trainwreck at the Federal Reserve, bank failures, and other alarming events.
Why is the Dollar the King?
There are a few reasons why the dollar is the currency of choice for all countries in the world. The U.S. financial industry is pretty well regulated (aside from the 2008 financial crisis, several recent bank failures, massive deficits and high inflation), we have rule of law so don’t have riots in the streets (ahem…), and we our currency is stable (aside from devaluing the dollar due to high inflation, high interest rates, and giving up on our manufacturing base despite Mike Rowe’s best efforts).
Now as President of Steppestan, you need to spend those U.S. dollars you got from China. You can buy stuff made in America or American assets like real estate or stocks of U.S. companies. You can spend the dollars as fast as you make them, but if you just want to put a little aside, now what? You’ve got a pile of dollars in your central bank that needs to get invested, so where do you put these “reserves” (as in “prime reserve currency” as opposed to “transaction currency”).
Where will you invest your country’s dollar reserves? Well, you want a well-regulated financial system, rule of law, low inflation, all the same things your grandparents wanted with your college fund. But unlike grands, you will want that investment to be liquid, so you can move your money around from instrument to instrument, or raise cash as needed. Plus there’s never been a question that the U.S. would pay its bills and would not refuse to pay if you held those treasury bonds to maturity or pay interest on the debt obligations for any reason. Like if the U.S. government decided Steppestan was a bunch of bad people–it doesn’t only have to do with being able to pay, it could be purposely refusing to pay in a form of sanction.
For decades, really in the post-WWII era, many countries have chosen U.S. treasury debt, not solely because Hitler was dumb enough to get into a bombing campaign with a country his bombers couldn’t reach, but really because the U.S. ticked all the boxes as a good investment. One could also say that a significant reason was because nobody tried to challenge King Dollar as the world’s prime reserve currency. That was because nobody wanted to make unrestricted warfare against the U.S. in the economic dimension or declare a people’s war in that dimension.
When Sanctions Backfire
And until February 8, 2022, the U.S. hadn’t really gone after another country the way it went after Russia–which may have a direct effect on the ability of the US to finance deficits. Now remember–due to fiscal dominance by the appropriators, there has never been an effective limit on what Congress could spend because if Congress could pass it, the Federal Reserve would find the money somehow, even if they had to buy toxic assets and print money to buy bonds they couldn’t sell to people like Steppestan or China.
So you could say that the leverage that these other countries have is not just that they hold U.S. debt, it’s that they are willing to buy U.S. debt, even during the Federal Reserve’s Zero Interest Rate Policy (or “ZIRP” which sounds like something General Zog might say). In other words, there were people willing to buy U.S. treasury obligations that paid no interest, and that helped Congress drive up the price of all assets.
You’ll often hear that U.S. treasury debt is backed by the “full faith and credit of the United States”. That’s true. But what does it mean? It sounds like a latter day Nicene Creed or something but there’s actually a very simple secular explanation for this “full faith and credit” thing. Look in the mirror and there it is. The full faith and credit of the United States is you and me and generations yet unborn,
What this does is allow the U.S. to borrow unbelievable amounts of money. When you hear “Congress spent” take a closer look and you’ll see that a good chunk of the dollar figure that follows “spent” was borrowed. Imagine if journalists got fact checked into saying “Congress borrowed”? Do you think that would be a different reaction?
The End State of Economic Warfare
At the moment, emphasis on “moment”, that is all working out, but you can see what would happen if a country wanted to engage in economic warfare against the U.S., or more broadly, the West. All they’d have to do is offer better terms on the transactional currency, like say allowing transactions to close in renminbi (another name for China’s “yuan” which is a unit of renminbi, like sterling and pound).
Those terms could be actual cash terms, or it could be investing in a country like China has done with its Belt and Road Initiative involving debt forgiveness in return for access to a port, train line, or strategic mineral rights like say Steppestan’s other natural resource, cobalt. Never mind that Steppestan mines cobalt using children who get very sick in terrible work conditions like in the Congo. China’s not worried about that as you can see from the vast amount of pollution and slave labor owned by the CCP. In that way, the sleaze factor in CCP business is right at home in Steppestan, just like they were in Afghanistan after the U.S. abandoned the post.
As if by magic, the Steppestan deals with China are denominated in renminbi, which is part of thousands of transactions, including oil deals with Saudi that are now denominated in the China currency. Every time this happens, it gets closer and closer to shifting the world reserve currency to renminbi and away from dollars.
Let’s say that Steppestan does something that angers the current American presidential administration, and all of Steppestan’s dollar denominated reserve accounts are frozen by order of the President. Steppestan is denied access to their own money because they are blocked from the SWIFT system. Steppestan says wait, we bought all that U.S. debt because rule of law, etc., etc., and now you’re just going to take it away from us because you can?
The price you pay for being the world’s prime reserve currency is that you don’t do things like freeze sovereign reserve accounts. You can be offended, and there are many, many ways that a country like the U.S. can express that offense and even anger. One of them is called SEAL Teams, another is Delta. And there’s a lot of diplomatic steps that don’t cost the blood of our treasure. But is it worth getting knocked off as the prime reserve currency and becoming Argentina? If you think 5% inflation is bad, you ain’t seen nothing yet.
And here’s why. Steppestan is saying, I don’t want to play this game anymore and I don’t need to because I can get almost anything I need from China in renminbi and what I can’t get from them, I can get from somebody else who America has cheesed using renminbi or some other currency or even good old fashioned barter. This is called “sanction proofing”.
Subduing without Fighting
So when you see stories about countries doing deals with China in renminbi, this is what it means. Will the collapse happen tomorrow? Probably not, but it’s the kind of thing that happens gradually and then suddenly. Along the way one possible outcome is that when the U.S. goes to borrow the hundreds of billions of dollars it needs to keep paying these deficits and say, finance the transfer from fossil fuels to electric along with all the grid upgrades, charging stations and the like that must be acquired, the price won’t be the same because we may have to pay sweeteners to get people to take our debt. (We may have to start doing this now because of inflation, set aside the Federal Reserve quantitative tightening and interest rate rises.)
If it happens, it will happen gradually and then suddenly in the words of Mike Campbell in The Sun Also Rises. It will be hyper inflationary. And it’s a very good reason to keep fighting for cost of living adjustments in any government payment like the statutory mechanical royalty. Will the depression that inevitably will come with hyper inflation be sufficient to break the morale of the American people or subdue them into a surrender?
Unrealized Losses and the Black Box Investment Policy
The “risk free rate” is often thought of as the rate of interest paid on US government bonds. That interest rate is thought of as risk free because it is backed by the full faith and credit of the United States. Want to know where you can find that full faith and credit? Look in the mirror.
When you ask around about what collective management organizations do with their “black box” monies while they are waiting to match money with songwriters or at least copyright owners, you often hear that the money is invested in very safe instruments, like U.S. treasury bonds. This might be particularly true of CMOs that are required to pay interest on black box because that interest has to come from somewhere.
But–and here it is–but, as we have learned from the Silicon Valley Bank collapse and the number of federal government officials in the mumble tank about why these banks are failing and why they are getting bailed out by, you know, the full faith and credit of the United States, “risk free” seems to be a relative concept. When you buy US government bonds, there are a number of different maturity dates available to you, kind of like buying a certificate of deposit. A common maturity date is the 10-year bond and the two-year bond, both of which were recently down sharply.
But–there is a connection between the interest rate that the bond pays, the price of the bond, and the maturity date of that bond. When bond interest rates increase, the face price tends to decrease. So if you paid $100 for a bond with a interest rate of say .08% and that rate then increased to say 4.5%, the face price of that bond will no longer be $100, it will be less. If that increase happens fairly quickly, you can have difficulty finding a buyer. The good news is that when the Federal Reserve raises the interest rate, there is about as much news coverage of the event as it is theoretically possible to have, both before during and after the rate increase, not to mention the Federal Reserve chair testifying to Congress. It’s very public. Closely watched doesn’t really capture that level of attention.
When bond prices decline, holders only “realize” the loss or gain if they sell the bond unless the bond is marked to market so the firm has to disclose the amount of what the loss would be if they sold the bond. Hence the concept of “unrealized losses,” “maturity risk,” or “interest rate risk.” Some think that US banks currently have $620 billion in unrealized losses due to interest rate risk. And don’t forget, these are your betters. These are the smart people. These are the city fellers.
This interest rate risk issue is not limited to banks, however. It is also present anytime that an entity tasked with caring for other people’s money invests that money in treasury bonds, crypto, or whatever. You don’t have to be Wall Street Bets to end up losing your shirt or something in this environment.
So the point is that the same problem of interest rate risk and unrealized losses could apply to CMOs, such as The MLC, Inc. because of their undisclosed “investment policy” of investing the $424 million of black box they were paid by the services. They don’t disclose what the investment policy is and they don’t disclose their holdings so we don’t really know what has happened, if anything. The money could be perfectly safe.
Silicon Valley Bank Shuts Down–Crash or Comeuppance?
“It’s the economy as a whole,” Ashley Tyrner said. “It’s not just that they made investments that went the wrong way. It’s also that VCs are not writing checks to startups and deposits are not coming into the bank. So that’s the bigger piece here than just that they made a bad investment. They’re not getting deposits because venture capital is not funding startups like they were two years ago.”
The first time I ran across Silicon Valley Bank I thought it was a little too good to be true. When I met executives from SVB it was very much like the Harvard MBAs in the mail room at one of the big Hollywood talent agencies. A little too well groomed, a little too nice a car, a little too networked. And making deals that really made no sense other than keeping Sandhill Road happy.
Startups would end up with a perk-filled banking relationship and a multimillion dollar credit line with no top line revenue. And the so-called CFOs would promptly draw down that credit line (a secured credit line by the way) with no idea how it would ever be repaid. Even if the startup IPOd it probably would just rolled over into an even bigger credit line.
I don’t know if she realized what she was saying, but Ashley Tyrner described it perfectly. The VCs are cutting back on startup investing and “deposits are not coming into the bank”–to pay for those multimillion credit lines and the bridges to nowhere. No new money coming in to pay off the old commitments…sound familiar Mr. Madoff?
The reality is when the “risk free” interest rate on government bonds is approaching 5% with all signs pointing to a significant recession in our future, investors are not clamoring for a return as they were even a year ago, certainly two years ago.
So that’s just about right–the smart money starting pulling back right about two years ago. Remember, the venture funds are limited partnerships. When you hear that a venture fund has “raised” X billion, that means that they have funding commitments for X billion. They actually get that money through “capital calls” when their limiteds have to actually pony up. And sometimes–like in the Dot Bomb meltdown–limiteds tell them to F right the F off because their kids are going to college thank you very much. They won’t burn any more money on the Silicon Valley feeding frenzy.
The next Elizabeth Holmes is not going to get billions thrown at her. And that means that for some institutions in Silicon Valley, the music just stopped.
Will Songwriters Wish they had Gotten Inflation Protection on Streaming Mechanicals?
When the dust settled after the last mechanical royalty rate setting we saw the Copyright Royalty Board approving two different settlements for mechanical royalties. The royalty rate for physical mechanicals and permanent downloads get a significant rate increase and the royalty rate for streaming mechanicals got a theoretical rate increase. However, only physical mechanicals and downloads got both a rate increase and a cost of living adjustment (or “inflation protection”). Streaming mechanicals did not get inflation protection–could have but did not.
This means that the same writers on the same song in the same recording will get inflation protection when that song is sold in physical formats (such as the surging vinyl configuration) or downloads, but will not when that song is sold in streaming formats. What is the logic to this? One difference is that record companies are paying on the physical and download side and the lived experience of record companies necessarily puts them closer to songwriters than the services. And the lived experience of streaming companies is…well, breakfast at Buck’s, Hefner level private jets, warmed bidets and beach volleyball courts at home with imported sand. (Although Sergey Brin has a real beach in his Malibu home. Surf’s up in geekville. Maybe he’ll send DiMA to represent him at the Malibu city council meetings if Malibew-du-bumbum is ready for Silicon Valley style lobbying to decide who can surf Sergey’s beach and the color scheme of their boards. Kind of like the Palo Alto Architectural Review Board with a tan.)
We heard that inflation was transitory, which may prove true–or not. Transitory or not, that’s not an argument against treating songwriters equally on two versions of the same mechanical license; rather, it’s a reason why it should be easy to afford if you cared about sustaining songwriters at least as much as investing in ChatGPT to replace them.
However, in one of the great oopsies of the 21st Century, it doesn’t look much like inflation is all that transitory. Based on some of the posts I wrote starting in 2020, I think we can see that inflation is way worse on the items that count for songwriters like “food at home,” rent, utilities and gasoline. Very often the number of Americans working a job is used to counter the lived experience of the high number of people who believe the economy is tanking. But what about that jobs report? More jobs equals good times, yes? There’s something weird about the math of the jobs report which should make you wonder about whether that’s such a great argument.
If I still have your attention after the “math” word, there are two standard surveys of the economy used to measure jobs that measure different components of the jobs created in a given measurement period. These data are the “Establishment Payroll Survey” which measures the total number of jobs in the U.S. economy. That’s the number most people refer to with the “jobs report” you hear so much about. (More formally titled the “Current Establishment Statistics (Establishment Survey).”)
There’s another number called the “Household Survey” that measures the total number of jobs per household (more formally titled the Current Population Survey).
Note that the Establishment survey measures all jobs; the Household survey measures jobs per household. If you had two or three jobs, the Household survey would count you as “employed”; the Establishment survey would count the number of jobs you had. Now note that there is currently 2.7 million job difference between the two. Why?
I’m not really sure, but it would appear that there are more jobs than households. That difference may occur from time to time, but it’s quite a big difference at the moment and seems to be a trend that’s confirmed by another statistic: the surge in part-time jobs as shown in this chart:
So what’s missing is how many jobs that are counted in the Establishment survey are held by any one or two household members in the Household survey. If you were to draw the conclusion that every job in the Establishment survey is a full time job held by the primary source of support in a household and that when the Establishment number is rising things are looking up, that may be a leap unsupported by evidence. That may be one of the things you’d want to know if you were trying to predict how well the government’s songwriter royalties would hold their value over the five year rate period.
The sharp increase since June in the number of part time workers may suggest that more people are working multiple jobs and not that more people are working. In fact, the total number of full time workers seems to have declined by a bit over the same period.
That’s not to say that inflation protection is not a serious requirement of everyone who relies on the government for their livelihood. While the inflation rate has declined a bit recently, possibly due to the Federal Reserve abandoning its zero interest rate policy, it is still significant. In my view, nothing in the employment report suggests otherwise and continues to highlight the importance of songwriters being accorded the same inflation protection on streaming as they are on physical and downloads.
Just because the physical rate is paid by the record companies and the streaming rate is paid by the richest corporations in history does not excuse the distinction. Each should be protected equally.
The Enemy Gets a Vote: How will Big Tech respond to “CRB Reform”?
You may recently have heard the term “CRB reform” tossed around by various music industry entities. The term usually means changes to the law or regulations governing the Copyright Royalty Board in the interests of the lobbyists or the big music publishers. And yes, so far it has just been the publishers raising “CRB reform” aside from the odd comment of A2IM filed with the CRB that would, if adopted, create a massive change to the Copyright Act and make controlled composition clauses even more pernicious. (As I explained in my reply comment, I don’t think the CRB has the authority to make the change A2IM asked nor do I think they have the inclination for self-surgery judging by their opinion concluding the “Subpart B” proceeding in Phonorecords IV.)
What you don’t hear, what you never hear, is how the music users will respond, particularly the Big Tech companies that participate in the Phonorecords proceedings for streaming mechanicals. You don’t even hear speculation about that little issue, which ignores the very important fact that the enemy gets a vote. (If you don’t think Amazon, Apple, Google, Pandora and Spotify are the enemy, then ask yourself why they brought 26 lawyers to the Phonorecords IV streaming mechanical proceeding and conducted a scorched earth discovery campaign in that proceeding. Not to mention dragging out Phonorecords III as long as they possibly could without remorse. And then there’s UGC 2.0 called AI and ChatGPT designed to take the human out of transhumanism. That’s not how friends treat each other.)
The fact that you don’t hear anything about how Big Tech views “CRB Reform” suggests one of two things is happening. Either there is no deal in place with the services or worse yet there is a deal but it just hasn’t been surfaced yet. That would be in keeping with the disastrous 2006 S1RA legislation (“Section 115 Reform Act“) the first version of the Harry Fox Preservation Act that failed, but eventually became Title I of the Music Modernization Act.
The way that one worked was Big Tech woke up and said, oh, you want to amend the Copyright Act? We have some things we want, too. (Big Tech in those days mostly Google led by their many proxy NGO front groups including the person of Gigi Sohn who is now unbelievably an FCC commissioner). So not only could Big Tech bring their considerable lobbying muscle to bear on any statutory “reform” (which usually means a further consolidation of power in the ruling class by closing loopholes favorable to the people), but they might make it actually worse.
For example, it would not be difficult for Big Tech to leverage their superior numbers and legal geographical advantage by expanding the discovery and appeal rights in CRB proceedings. That will essentially be the death knell of songwriters ever being able to defend themselves. Both the publishers and Big Tech would probably like to make certain that there is never again a George Johnson figure appearing in the proceedings much less 50 George Johnson’s (apologies for the casual objectification, but you get the idea). The lobbyists and lawyers on both sides share that special Washington moral hazard of wanting everything involving the government to be as complicated and lengthy as possible. Boy have they done that with the impenetrable streaming mechanicals calculations and expensive negotiations to keep it complicated so only the big guys can afford the accounting systems to use the government’s license.
How would anyone keep Big Tech from slurping at that trough if you opened up the CRB statutes and regulations? You can’t stop them–except one way.
If our side in the proceedings found voluntary changes everyone could agree to that would not require amending the statutes, then for better or worse we would be able to operate on the status quo. For example, the publishers could agree that there would be an independent songwriter advocate who would be included in the negotiations. They could agree any one of a number of things that would result in better treatment of songwriters. As long as we are stuck with the compulsory license, we could at least make it more representative.
But what no one wants is to have Big Tech leverage disagreements inside our house over the length of our table to come up with even more limitations and exceptions to copyright. To my knowledge, there is no agreement from the other side to stay out of this issue. If there is such a deal, I’d really like to know what was given up to get it. If there isn’t, I’d love to hear the plan from the smart people.
I’m all ears.
Are Songwriters and Artists Financing Inflation With Their Credit Cards?
Recent data suggests that songwriters and artists are financing the necessities in the face of persistent inflation the same way as everyone else–with their credit cards. This can lead to a very deep hole, particularly if it turns out that this inflation is actually the leading edge of stagflation (that I predicted in October of 2021).
According to the first data release for the US Census Bureau’s recent Household Plus survey, over 1/3 of Americans are using credit cards to finance necessities at an average interest rate of 19%. Credit card balances show an increase that maps the spike in inflation CPI over the same time period. This spike results in a current debt balance of $16.51 trillion (including credit cards). There’s nothing “transitory” about credit card debt no matter the helping of word salad from the Treasury Department. Going into the Christmas season (a bit after this chart) U.S. credit card debt increased to the highest rate in 20 years
According to the Federal Reserve Bank of New York:
These balance increases, being practically across the board, are not surprising given the strong levels of nominal consumption we have seen. With prices more than 8 percent higher than they were a year ago, it is perhaps unsurprising that balances are increasing. Notably, credit card balances have grown at nearly double that rate since last year. The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards. Below, we show the flow into delinquency (30+ days late) grouped by zip code-income. Here, it’s clear—delinquency rates have begun increasing, albeit from the unusually low levels that we saw through the pandemic recession. But they remain low in comparison to the levels we saw through the Great Recession and even through the period of economic growth in the ten years preceding the pandemic. For borrowers in the highest-income areas, delinquency rates remain well below historical trends. It will be important to monitor the path of these delinquency rates going forward: Is this simply a reversion to earlier levels, with forbearances ending and stimulus savings drying up, or is this a sign of trouble ahead?
What does it mean for artists and songwriters? It is more important than ever that creators work is valued and compensated. When it comes to government-mandated royalty rates like webcasting for artists and streaming for songwriters, due to the long-term nature of these government rates, it is crucial that creators be protected by a cost of living adjustment. (Remember, a cost of living adjustment or “COLA” is simply an increase in a government rate based on the rise of the Consumer Price Index, also set by the government.)
Thankfully, the webcasting rates (set in “Web V”) are protected by the benchmark cost of living adjustment, as are the mechanical royalty rates paid to songwriters for physical and download.
The odd man out, though, is the streaming mechanical rate which has no cost of living adjustment protection. This is troubling and exposes songwriters to the ravages and rot of inflation in what we continue to be told is the most important income stream for songwriters. If it’s the most important royalty, why shouldn’t it also have the most protection from inflation?
Applying a Cost of Living Adjustment to Streaming Mechanicals
You are no doubt aware that the Copyright Royalty Judges handed down a final rule adopting the settlement covering streaming mechanicals reached by the major publishers and the richest and most dominant corporations in the history of Planet Earth: Apple, Amazon, Google, Pandora and Spotify. There are many who are dissatisfied with the negotiated rate, no doubt. There are many who are disappointed that the Judges perpetuated the mind-numbing complexity of the royalty calculation methodology (which probably costs more to account on a per-stream basis than the payable royalty).
That’s all true, but is a byproduct of the discriminatory practices frozen in time at the CRB, a libertarian hell-scape preserved in amber. As if taking a trip to Jurassic World (or at least 2009) wasn’t bad enough, the Judges refused even to place a toe onto the arc of the moral universe as they just did in the Subpart B rate setting in the same proceeding (i.e., the Phonorecords IV rates that abandoned the frozen mechanical and adopted an annual cost of living adjustment for physical and permanent download configurations).
I discuss this in more detail in a post on MusicTechPolicy in which I question whether a hidebound adoption of rates that fail to apply a COLA equally and treat likes alike in the same proceeding is lawful, much less good policy. While the Judges focus on giving the negotiating parties, aka the rich people, what they want and ignore the notorious unfairness of the Copyright Royalty Board whose rulings apply to all songwriters in the world who ever lived or may ever live regardless of representation, I argue that applying the same COLA calculation to streaming as to Subpart B configurations solves the problem. This post will lay out a simple method of implementing a COLA for streaming.
The policy goal would be to apply the COLA formula to streaming. Because the streaming formula is so unduly complex, it’s easy to understand the resistance to adding still another step. Remember that the greater than/lesser of monthly calculation is a series of steps that gets to a per-play rate of sorts. All of the greater of/lesser than calculations have been fought and salivated over by dozens of lawyers (literally) so changing any one of them is probably not productive and in my mind is not necessary to give effect to the COLA. Remember that in the history of the government’s mechanical rate, the COLA was applied to a rate as an uplift, not as a way to calculate a rate. The point of a COLA is always to preserve the value of the government’s rate and recognizes that the songwriter will not have a chance to revisit the rate for five year tranches and a lot can happen in five years.
The easiest way to apply a COLA to streaming is to derive the per-play rate given the current formula and then uplift it with a COLA. The Judges already have a COLA based on CPI-U . The Judges need only apply the COLA as a legal modification to the streaming mechanical and accept the base line rates in the negotiated settlement. Otherwise, the exact same songs with the exact same songwriters for the exact same recording in the exact same proceeding will have a COLA when exploited by record companies and none when exploited by the rich people. This result just seems arbitrary. The labels having shown the way to a fair result should be followed by the DSPs.
We raised this approach in a Phonorecords IV comment I filed for David Lowery, Helienne Lindvall and Blake Morgan:
Applying the COLA to Section 115 may actually have a simple solution. The Judges already have a COLA formula. That formula can simply be applied as a step (5) in 37 CFR §385.21(b). This way the negotiated settlement terms are not re- opened.
Adding a COLA uplift to the applicable royalty calculation is simple. First, determine the applicable payable royalty for the accounting period concerned under the negotiated rates. Then apply the COLA formula derived by the Judges as an uplift to the payable royalties as a last step in the royalty calculation. The COLA could be calculated either annually or monthly although monthly seems more appropriate and accurate.
The uplifted amount (after any uplifted overtime adjustment to plays) would then be reflected on the applicable Copyright Owner’s royalty statement as the payable royalty for that accounting period.
This seems like a simple solution that brings the streaming mechanical out of Jurassic World and into the Era of the Songwriter.
Just a Story: Netflix Corporate Biopic of Daniel Ek
FRANKIE FOUR FINGERS
It’s a nice story, but it’s just that. Just a story.
from Snatch, written by Guy Richie
You may have noticed that there is a multi-part Netflix miniseries called “The Playlist” that is based on this book:
“The Spotify Play: How CEO and Founder Daniel Ek Beat Apple, Google and Amazon in the race for audio dominance” is an English translation of Spotify Inifrån, the Swedish book that all of this is based on, which I understand is loosely translated as “Spotify Untold” or as the inside story of Spotify. How it got from “Spotify Untold” to a title straight out of a corporate comms department of failed English majors is anyone’s guess. But notice that the book has now been refocused on the really important story–ahem–of how Daniel Ek crushed the competition and secured his monopoly on global music, or as he calls it “audio”.
For these authors to refer to music as “audio” is very much in line with the story of Spotify’s business model that Daniel Ek tells to Wall Street (which is, in all likelihood, the important audience for all this from Spotify’s perspective). Listen to any Spotify earnings call and you’ll hear what I mean.
The somewhat maniacal focus on global dominance is also interesting when you think about the fact that Daniel Ek uses the 10:1 voting stock he retains to be in global control of music streaming which may explain why Spotify’s algorithms always seem to say “Bieber.” He might want to be a bit careful about the “dominance” word.
Just in time for the Netflix debut, Spotify’s stock has tanked. Which begs the question of why Spotify was ever a public company to begin with. But that’s a story for another day. Here’s what “beating” Apple, Google and Amazon looks like (the straight red line across the bottom of the chart is where Spotify closed on its first day of trading):
You’ll notice that this chart is the relative growth on a percentage basis of all these stocks measured over the same time period. Spotify briefly outperformed the others during COVID, but now is easy to find because it is the one with the minus sign in front of its growth rate.
The Publisher’s Weekly review of the book kind of sums it up:
The authors display more enthusiasm toward Ek than readers are likely to have (they call frequent lies in his personal life “entrepreneurial hustle,” and spend pages writing about the “headaches” behind his multimillion-dollar homes), and let some of his surprising claims slide as quirks, as with an account of Ek insisting Steve Jobs was calling him to breathe over the phone and intimidate him.
I think if you do the timeline of this Steve Jobs anecdote, you will find it particularly odd because Steve was kind of busy at that time. He was busy dying. Which makes the anecdote both troubling and kind of sick.
I happened to have a chat with a Hollywood film executive–let’s call him/her “Bubba”–about the Netflix miniseries and the odd way that a book in Swedish was set up for production at Netflix at lightning speed without ever being on a best seller list or gaining an audience.
“Smell that?” said Bubba, doing an impression of Robert Duvall in Apocalypse Now. “Nothing else in the world smalls like that. Smells like…astroturf.”
Really? I said. Which part?
“All of it,” Bubba said. “But look, it’s just a story. A bunch of workers got paid to tell a story that some rich guy wanted told a certain way. Those workers may go on to do something important like send their kid to college or write the next Citizen Kane or Chinatown. Or Dirty Harry for that matter. But this month they could pay for gas and their mortgage. Just another day in Hollywood. Let’s get the steak tartare.”
So lots of questions about how this book came to be written and miniseries came to be made. The solution is likely the same as it is for radio payola–disclosure.
Streaming Remuneration: An answer to global cultural dominance by European/US Streaming Services
Streamers Lack of Local Cultural Contribution
Look at Spotify’s “Global Top 50” playlist on any day and the world’s biggest music service will show all or nearly all English language songs. With few exceptions these songs are performed by Anglo-American artists released by major record companies.
These “enterprise” playlists largely take the place of broadcast radio for many users where Spotify operates and Spotify competes with local radio for advertising revenue on the free version of Spotify.
Spotify’s now former general counsel told the recent inquiry into the music streaming economy conducted by the UK Parliament’s Digital, Culture, Media and Sport Committee, “Our job is sucking users away from radio” and Spotify uses its market power to do just that.
However, Spotify has not been subject to any local content protections that would be in place for local radio broadcasters. Enterprise playlists that exclude local music contributes to the destruction of music economies, including performers. Local performers struggle even more to compete with Anglo-American repertoire, even in their own countries.
Due to this phenomenon, local artists are forced to compete for “shelf space” with everyone in their local language and then the Anglo-American artists and their record companies. This also means that local artists compete for a diminishing share of the payable royalties. The “big pool” revenue share method of royalty compensation is designed to overcompensate the English-language big names and reduce payments to artists performing in other languages in their own country.
Local Content Rules
Many countries implement local content broadcast rules that require broadcasters to play a certain number of recordings performed by local artists or indigenous people, songs written by local songwriters in local languages, or recordings that are released by locally-owned record companies.
Because streaming playlists, especially Spotify enterprise playlists or algorithmically selected recordings, are an equivalent to broadcast radio, there is a question as to whether national governments should regulate streaming services operating in their countries to require local content rules. Implementing such rules could benefit local performers and songwriters in an otherwise unsustainable enviornment.
The Fallacy of Infinite Shelf Space
Because Spotify adds recordings at a rate of 60,000 tracks daily (now reports of 100,000 tracks daily) and never deletes recordings, there is a marked competitive difference between a record store and Spotify. In the record store model, artists had to compete with recordings that were in current release; in the Spotify model, artists have to compete will all recordings ever released.
Adding the dominant influence of Anglo-American recordings on Spotify, the “infinite shelf space” simply compounds the competitive problems for non-English recordings.
Streaming Remuneration Helps Solve the Sustainability Crisis
The streaming remuneration model requires streaming services—not record companies—to pay additional compensation to nonfeatured and featured performers. Streaming remuneration would be created under national law and is compensatory in nature, not monies in exchange for a license. Existing licenses (statutory or contractual) would not be affected and remuneration payments could not be offset by streamers against label payments or by labels against artist payments.
Each country would determine the amount to be paid to performers by streaming services and the payment periods. Payments would be made to local CMOs or the equivalent depending on the infrastructure in the particular country.
European Corporate Dominance
It must also be said that the two founders of Spotify hold a 10:1 voting control over the company through special stock issued only to them. This means that these two Caucasian Europeans control 100% of the dominant music streaming company in the world. For comparison, Google and Facebook have a similar model, while Apple has a 1 share 1 vote structure as does Amazon (although Jeff Bezos owns a controlling interest in Amazon).
The net effect is that the entire global streaming music industry is controlled by six Caucasian males of European descent. This demography also argues for local content rules to protect local performers from these influences that have produced an English-only Global Top 50 playlist.
Local governments could consider whether companies with the 10:1 voting stock (so-called “dual class” or “supervoting” shares) should be allowed to operate locally.
Countries Can Respond to Streaming’s Homogenized Algorithmic Playlist Culture
Many national cultural protection laws have a history of sustaining local culture and musicians in the face of the Anglo-American Top 40 juggernaut. There is no reason to think that these agencies are not up for the task of protecting their citizens in the face of algorithms and neuromarketing.