I know what you’re thinking, “Finally, a DreamHost Blog post I can USE!“
HA, you wish! Here we go…
Apart from being a mint, it seems to me there’s really only one way to make money.
And I don’t just mean get money, like from people depositing it with you. Nor do I mean earn money that already exists, like you would from say, working or investing.
No, I actually mean it: MAKE NEW MONEY!
The fact that banks can actually create money is why they’re such a great business.. and also why the recent crash has been so hard.
How It Works, As I Understand It.
(Correct me if I’m wrong.)
For the purpose of this explanation, imagine there was only one bank in the world (which is actually a pretty good approximation, thanks to all those overnight intra-bank loans we’ve been hearing so much about in the news).
Let’s say their first customer ever, Joe the Plumber (yes, THE Joe the Plumber) comes in to Bank of the Universe, and deposits his meager savings of $250,000 (now FDIC insured!).
Great! Bank of the Universe (BofU) now has $250,000! Enough to run things for .004 femto seconds.
But, it hasn’t earned $250,000 .. it still owes that to JTP. And it definitely hasn’t created $250,000.. it just received it as a deposit. In fact, things aren’t too great for BofU at all … it probably has a deal to pay Joe some interest on that deposit. It’s also got to hold that cash / gold / pvc piping for Joe, pay rent on some buildings, employ some customer service people, manage a network of ATMs, and weave dozens of golden parachutes.
Which is why BofU has to make loans! Let’s say average guy John McCain comes in and needs a quick $250,000 for some campaign he’s running. “Sure,” says BofU, “you seem like a stand-up guy and this isn’t Fall 2008, take the $250,000 at only 5% interest!”
Well, now BofU is at least going to earn $12,500 a year! But.. they’re also kind of screwed when Joe Wurzelbacher comes in to get $20 for a back-siphon for the s-trap he’s funnelating.
But They’re Not
Because remember, BofU is not only the Bank of the Universe, they’re the only Bank of the Universe.. and so John just kept that loan in his account with them! And when he does spend that money, whomever he spends it with is just going to deposit it right back in their account with BofU!
In fact, just by making a little “John McCain owes us $250,000 at 5% interest” data base entry, BofU has now not only earned themselves $12,500 a year, they’ve also added $250,000 to the universe’s money supply!
Right now, BofU would be leveraged 2-1 (they owe Joe and John $250,000 each, but they only have the $250,000 Joe deposited in the bank). But, everything is fine. In fact, everything is so fine, they can go ahead and loan out that $250,000 AGAIN (maybe to Barack)!
And one more time!
It took thousands of years for banks to realize this, but when they’re big enough, they not only don’t need to back up their deposits with gold, they can actually pretty safely leverage their deposits at ratios of like 30 to 1, 50 to 1, or even 100 to 1.
And, the banks can earn a ton of moololah from this too. Not 100 to 1 (just because they’ve created this new money, doesn’t make it theirs), but at least 5% on that 100… instead of just 5% on that 1.
It just works out that very little of that actual money needs to be withdrawn by people on an average day.. and when they do there’s always those short-term inter-bank loans to fall back on!
(Except for in Fall 2008.)
But, despite the infrequent aberrations, overall I’d say it’s a pretty good system that works. It results in a much more efficient use of assets, which allows for faster growth and more “economic development”, than if everybody just did like the Russians and just hid their money in their sombreros.
And I should know, because we CREATE disk and bandwidth the same way!
As I may have mentioned before, we offer a lot more disk and bandwidth than we actually have on hand. We’re sort of like a “bank for computing resources.”
Of course, nobody deposits disk with us, but we go out and buy a little, and then sell a lot, and then nobody uses it. And in the end, for all intents and purposes, we’ve really turned that little disk space into a lot!
And, it’s a useful service because if everybody had actually gone out and bought that lot of disk space themselves, they wouldn’t have used 99% of it, and it would have been a waste! A big waste! A universal waste!
And so, we’re “leveraged” in disk. And we’re “leveraged” in bandwidth. And we’re “leveraged” in CPU. And the ratios are a lot more than 100 to 1.
And it works.
But.. when does our Fall 2008 arrive?
Should Be.. Never.
As similar as our businesses are, there are a few key differences between Banking and Hosting.
For one, we don’t owe our computer resources to our customers like banks do their money. We bought them. So there can’t really be a “run on the host” with everybody saying “give us back our disk and bandwidth we bought!”
For two, there can’t even be a “run on the host” .. what, is there going to be some awesome Internet news and suddenly everybody’s website gets 100 times the traffic and uses 100 times the disk?
For three computer resources are not money. Although it may be nice for us if they were… even if we were to somehow (remember, 100% hypothetical!) run out of disk or bandwidth or CPU, we’ll still have our money. And that means our people can still get paid, and we can buy more resources, or we can rejigger something, or whatever… but when a bank runs out of its leveraged resource, bam.
And I don’t just mean that’s it for the bank, I mean that’s it.
For this blog post.
(P.S. I hope all that stuff I said about banks is right.)