I'm on my way back to Boston after a great Thanksgiving with the family, and doing some reading catch-up on the plane.

One of the articles that I was really looking forward to reading was a new essay by Paul Graham (founder of the VC firm Y! Combinator), which is about (in a nutshell) the hidden cost of checks and balances--presumably the ones found in big companies--and I don’t agree with him at all.  This is the first essay of his that I haven’t been able to point at and say “yeah, he’s dead on with that.”  I thought he was going to discuss the finer points of skilled labor losing efficiency to time-consuming process (writing to startups like he usually does) but this post is directed to the companies who buy the startups' products. 

Instead of his normal sage advice to startups, this piece makes him sound like an apologist for poorly run startups.  I think his vision may be clouded by the current state of the economy.  I hope not by the economic state of the Y! Combinator startups, but I don’t think that can be ruled out given a glance at TechMeme on any given day.

 IWantSandy, one of my favorite Web services, is shutting down on December 8th.  This was a really cool service that would act like a virtual assistant for you, reminding you of things you need to do, people you need to call, etc... everything a good REAL assistant does.  I have had it hooked up to Jott (so Jott could act as the speech front end to IWantSandy) for a long time so that all I need to do is call a number and say "remind me at 2pm on Saturday that I parked in lot D near D-3", and Sandy would remind me, like clockwork.

It was one of the truly useful Web 2.0 services that added value to my life, and it's shuttering its doors.

This news is sad for me, because I really enjoyed this service.  In fact I would pay (a small amount) to use it.  Alas, it seems to be too late.  At least Jott is surviving, I certainly hope they make it.

A post by Erick Schonfeld at TechCrunch today really got me riled up:  The SEC has shut down Prosper, a peer-to-peer lending site.  This was up in the air until yesterday:

Yesterday, the SEC issued its formal cease-and-desist letter (embedded below or download PDF), outlining its reasoning for characterizing Prosper as a seller of investment, something prosper had vigorously resisted in the past by arguing that it was merely a marketplace matching lenders and borrowers. But the SEC is having none of that.

If this sounds familiar, it's because this is an exact rerun of what happened with the original Napster and the music industry, only worse in my opinion.

The key here is that Prosper itself was not lending or borrowing, it was simply matching up willing borrowers and willing borrowers.  It also provided additional services such as collection and tracking.  The HORROR.

The real fact is, if private citizens were allowed to freely lend to one another, the private banking cartel that is our central banking system would lose the little control they have over the economy.  The free  market would freely set interest rates and people and businesses would be free to do an end-run around our corrupt and bloated financial system.  The financial engineering that has allowed Wall Street to siphon off trillions of dollars in profit at our expense would be crippled.  The SEC is simply acting as the enforcement arm of our private national banking cartel.

Don't fall under the protection of the cartel?  Goodnight, chump.

Ever since I wrote a few posts about deflation, I've had a lot of traffic coming in via Google from people looking for ways to protect their money during deflationary credit collapses.

Since there's a lot of what I consider to be garbage advice out there right now (such as throwing your money away into the stock market because it's a great time to buy!), I thought I'd put something out there to counteract the tsunami of stupidity. Just doing my part.  So I'll go over my short-term investment strategy, for what it's worth.

This week was kind of an important one for the markets.  It hit levels not seen since March of 2003.  I expect a bounce into Christmas and then a horrible New Year's hangover once the retail numbers hit. 

People are realizing that more than likely even with a screaming 2009, the entire 2000-2010 decade will be a loser.  I would bet big money that this is a certainty (and I am, actually).  Fred Wilson wrote an interesting post about the "lost decade" of the American stock markets--that is, if you invested $10,000 in an index (an incredibly stupid way to invest IMO) in 1998 you'd have less than $10,000 in your account today.

Yep, this looks bad.  But there's another situation you should be familiar with to give you a little perspective.

There's no denying it any more--we live in a completely different world than we did six months ago.

The rules of the game have changed.  Now you have to decide if you're going to change with them or get run over.

I just had CNBC on.

Watching this silliness will do nothing but funnel misinformation into your brains.  It is financial soap opera, like professional wrestling for yuppies.  I only watched for a few minutes.  My son was in the room, I don't want him absorbing this nonsense.  Kids are impressionable.

The biggest lie I see told is that the Fed, or the Government, or Warren Buffet, or Santa Clause, is somehow in control of the markets and can help you somehow.

This is a lie.

• The Fed does nothing to control anything.  It does not set interest rates, it follows them.  It is primarily concerened with propping up invsolvent banks and getting you to pay for fraudulent loans and so on.

• The Government is just a proxy for you.  It simply takes your money and gives some of it back to you.

• Warren Buffet--the W.C. Durant of our era--is losing money hand over fist.  He is also very old and going to die soon barring the discovery of the fountain of youth.  He has apparently decided to spend his retirement giving out terrible investing advice, and I don't think he cares much.

• Santa Clause funds his operation by selling bonds to the elves.  Unfortunately there was a real-estate boom in the warm sections of the North Pole over the past several years and the market is now littered with foreclosured Elf Huts.  So the elves don't have much money to invest this year.  Unfortunately this means that Santa is a bit tight on funds this year and has had to reject Ben Bernanke's repeated requests for help in recapitilizing the banks.

While I'm at it, let me add that hyperinflation is a fairy tale told to grown adults to keep them from having nightmares.  We just had the worst hyperinflation in history, and I'll bet you barely noticed.  The part that is sucking is the deflation.  Hyperinflation makes you want to get rid of your dollars faster, which keeps our debt-based money system from imploding on itself.  If people understood the reality of deflation, everybody would hoard their dollars (also called--gasp--saving money).  This would result in instantaneous hyperdeflation.

Now, I've resolved to never write another post again unless I have something positive to say.  (I can't count how many posts I've written and deleted recently as a result of this new policy.)  In an otherwise negative post like this, I figure if I at least add something positive, the post nets out to a zero in the universe and at least lets me feed the blog a little.

I have been hearing rumors of personal responsibility and market transparency surfacing recently.  There was a reported sighting outside of a shopping mall in Minneapolis.  There is talk of setting up a regulated marketplace for credit default swaps.  Michael Bloomberg is suing the Fed to disclose the stinking mess of oozing collateral under the Tarp (bailout program).  Also, it is a beautiful Sunday afternoon here in New England.  Nice breeze coming in.

Now LinkedIn and Microsoft are getting into the cloud computing game (by cloud computing I mean providing a platform for you to run your own application without a data center of some type).  LinkedIn, Microsoft (Azure), SalesForce.com, Amazon, Google, you name it.  Cloud computing is the new black.

I have been thinking a lot about deflation lately.  In fact, I've been thinking so much about it and its effects on the software industry that I've decided to write a book about it, if only to serve as my own private investment thesis.  I've been studying various ways to take advantage of the current economic environment for business advantage if possible.  The notes I was jotting down quickly grew far bigger than even several blog posts would accommodate.

Deflation is a runaway train right now.  It is in the process of putting EVERYTHING on sale.  This is going to decrease the price of your products whether you like it or not.  Much like deflation itself, this is going to be a recursive process.  End customers can't afford to pay as much, so they renegotiate or otherwise force the price of your product lower, which forces you in turn to renegotiate the prices with your suppliers, and so on.

You can take advantage of this if you're willing to be a little aggressive.

When a deflationary mindset comes into play--this is forced by the destruction of credit--everybody involved expects the price cuts subconsciously.  Fear of losing everything makes people much more amenable to compromise.

The companies who renegotiate their costs first--instead of when their hand is forced by their customers--are going to come out ahead.  Their suppliers know this demand is coming and will accommodate it.  The company which renegotiates first makes extra money by increasing their margin until they're forced to cut.  By being aggressive with suppliers and cutting costs first they can make up some of the revenue they will eventually lose anyway.  It's a game of musical chairs, slowest company loses.

There's a feedback loop built into this deflation process, and you're just deciding whether you insert yourself in a strategically helpful location or forced into it by your customers.

Especially in the software industry, where fixed costs are very low, I can't see ANY prices staying the same.  I expect to see big cuts in SaaS subscription prices as well as every other software channel.    Commodities are already getting killed due to demand destruction, but we haven't seen this in the software industry yet.  I'm sure we will.

Instead of trying to cut costs internally, I recommend you start renegotiating supplier contracts on Monday.