Accounting for A Change – Part 1 of 7

Unlike the movies where you don’t know whether there’s going to be a sequel until the final minutes when you groan as you see Sherlock and Watson get a clue for Moriarty’s next shenanigans, I’m telling you, there are going to be seven posts in a series. This gives you the convenience of reading it all in late September or gives you clarity on when this series of ideas will end. You’re welcome.

We’ve come to the end of balance sheet accounting. The high priests of divination (a.k.a. rating agencies) have just been put on notice of their obsolescence in the recent financial reform legislation signed into law by President Obama. Like any other dinosaur, these now dead behemoths will swing their mighty tails around and do a lot of damage but, the good news is that they will soon be fossilized into the mud of the greed and corruption they served. While they won’t serve the criminal penalties for the theft of wealth they aided, we’ll all be better for their extinction.

More importantly, we now have an opportunity to take out a clean sheet and see if we’ve ever gotten accounting right. Sure, some of the most forward thinking businesses and financial interests realized that social values should be “counted” leading to double bottom line reporting (a very good impulse). While there were those companies for whom this was a market charade, many creative people have developed great insights in quantifying dimensions of value.

For many years, we’ve been using a model called Integral Accounting for the enterprises that I’ve started. Each week for the next six weeks, I will be providing some details on the six core value sources that we measure, invest, and steward. These include:
- Commodity – elements present in communities which, through cultivation, production, or value-add, can be used to generate means of social or commercial engagement. These include those things that, like potential energy, can be used or transformed to add utility, value or exchange but in whose natural or unaltered state preserve equal capacity for use and value to anyone (think of them as the ingredients that can be assembled for supporting life, enterprise, and exchange);
- Custom & Culture – practices and expressions of individual or community held values and traditions which create a context for social interactions. This include expressions of social values, priorities and memes that may be shared or expressed in solitude, gatherings, inter-personal interactions, or communities and may take the form of art, music, literature, aesthetics, kinesthetics, or other modes;
- Knowledge – information and experiential awareness which can be transmitted through language, art, or other expressions. This includes the acquisition and transfer of information and awareness in a mode that can stimulate perpetuation or expansion of understanding and creativity;
- Money – a mode of transmitting and recognizing value exchange using physical or virtual surrogates including currency, systems of credit and barter and engaging any artifact constituting a consensus of recognized value exchange which, itself, is devoid of the value it represents;
- Technology – artifacts or schemes by which value-added experiences and production can be effectuated including any thing, action, or utility which allows for the manifestation of spatially and temporally defined tangible or intangible artifacts or events; and
- Well-being – the capacity for any person or ecosystem to function at their optimal level where conditions are suitable for a person to be at liberty to fully engage in any activity or social enterprise entirely of their choosing as and when they so choose.
In every enterprise interaction, we explicitly assess ecosystems for the existence of these value sources, seek to understand community values attendant thereto, and organize our endeavors to optimize all values for balanced value wealth recognition.

This preceding paragraph, even as I write it and re-read it, sounds interesting but seems locked in theory. So, let me try to give you this same information in a story.

My mother is the daughter of a woman who, among other things, was an avid naturalist. Trees, shrubs, and orchids weren’t anonymous plants, but were imbued with Latin names, were known by their seasonal flowering, and were cared for with an eye for optimizing their lives. So, not by accident, my mom loves, and instilled in us, her love of the natural world.

We love to take family trips to the beach (custom & culture). When we are at the beach, the sunrise often sees my mom walking down miles of sand (well-being) looking for the beautiful (knowledge) shells (commodity). As she walks along, her eyes are scanning the remnants of the night’s high tide (technology) for whatever washed ashore. If you watch from the balcony, you see her glancing out into the water and, for particularly valuable specimens (money), she’ll hike up her skirt or pants and wade into the frigid water to harvest a particularly remarkable find. When her walk has ended, she’ll line up her morning’s haul (wealth) and make sure that the grandchildren know about the difference between a right-handed or left-handed whelk (knowledge). [Note to the reader: I still haven’t figured out where whelks have hands but that’s because I’m not as smart as my mom!]

There are mornings, however, when the sea has been stingy. “There weren’t any shells out this morning,” she’ll report when coming back to the house. Ironically, armed with breakfast, I’ll walk out to the beach a few hours later and see millions of shells. I see abundance where my mom reported scarcity. Is it truly the case that she and I saw a different absolute condition? For a woman who could find ways to feed a multitude from what seemed to be quite little, did she not see abundance? Now, who has the correct assessment? Let’s explore this case a bit further to understand the importance of integral accounting.

My mom isn’t looking for shells (the housing artifact of a mollusk). She’s looking for shells that are peculiarly unique and rare. If we saw the beach littered with shells but heard her report of scarcity, we’d think she’s crazy. [Note to the reader: I’m reserving all rights on this point, but stay with me.] But our failure to communicate would be based on inadequate clarity of understanding value. My mom’s custom & culture, knowledge, and sense of value artifact (money) teaches her what has value in her context. Not unlike other human enterprise, something like this simple example illustrates a systemic failure in ecosystem and social stewardship based on a failure to overtly identify, acknowledge and be accountable for a complete situational analysis. As I reflect on the broader ecosystem of this example, it strikes me that a day without beautiful rare shells could actually be the BEST day for people like my mom. After all, if the shells aren’t on the shore, they’re doing what they’re made to do – namely housing the animal who is busily living and creating an artifact that one day will find its way to her mantle (get the biology joke here? – insert groan here).

The same beach on the same morning could represent a windfall for communities in Papua New Guinea who would love to use the abundant, small white shells which, when placed on a strand of reed, serve to represent honor exchanges at social rituals. Can you imagine an accounting of ecosystems where one would include a measurement of those things that could have no value to the observer but would be identified and reported for the benefit of those for whom value could be perceived? I can and we do.

Now I’ve started this series with a simple example but one that holds great complexity if you take it under serious reflection. While we have chosen the convention of six value sources, I would in no way suggest that our model is exhaustive. That said, I would welcome you to pick a life endeavor this week – business, social, or otherwise – and experiment with the process I used in this post. Reflect on what you’re doing (or have done) and start explicitly identifying all of the sources of value in your ecosystem. Beyond the creativity of thinking in a new way, the one thing I can guarantee is that you’ll feel a bit more wealthy when you see how much abundance surrounds you. And then, do it again, and again, and again….


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Inflating Bubbles and the Coming Pin Prick

Recent conversations about inflation, consumer price index and confidence, and “recovery” in much of the G-20 have been fascinating and terrifying at the same time. I remind myself that the economists currently assessing the state of recovery are the same ones who “didn’t see” 2008 coming. I guess that may contribute to the terrifying side of the equation. The fascinating side is the lack of recollection of 1986 – 1994 negotiations around the General Agreement on Tariffs and Trade (GATT) which led to the 1995 creation of the World Trade Organization (WTO) on January 1 that year. One of the anchor tenants of the WTO was the non-discrimination objective on trade for products and services. Plainly, what this means is that no country is allowed (though they all violate the rule with countless caveats to the rule) to purchase based on favorable biases that which can be supplied by another at a better price. As we moved to a service industry, this meant that, to be competitive with qualified international bidders, companies in Occidental markets needed to reduce their cost of labor by reducing the average wage to one that reflects international competitor wages. However, as the recent wage dispute in China has brought into sharp focus, WTO failed to realize that this non-discrimination impulse (a major factor in justifying out-sourcing of labor to artificially deflate competitive pricing) would actually create a hyper-inflationary bubble that is about burst.

Some background will be helpful. If we had a Keynesian system working in a vacuum, labor, wages, productivity, consumption and monetary supply would all work in an utopian harmony. Consumers – both laborers and the public sector – would be constantly choosing to spend or save based on wages or revenue available to spend and the products and services that they would be purchasing would reflect an aggregate value compromised of cost of production plus a variable profit. However, a factor that serves as a spoiler in this utopian ideal is debt-based consumption both on the sovereign and personal level. For the life of the WTO, we have had an anomaly building which is coming to a terminal end. Occidental consumers (both public and private) have been consuming far greater amounts than would be appropriate in a properly functioning system under the myth that inflation has been held in check. And, devoid of any sense of consequence for future economic parity, have been deluded into believing that this hyper-consumption can be done on debt. However, there is a huge problem in this line of thinking purely on economic terms.

The Chinese labor pool, not unlike the Singapore miracle of 20 years ago, is beginning to seek greater wage parity with the consumers who are buying its products. Not surprisingly, this impulse is coming at the exact same time as the Chinese government is realizing that its exposure to U.S. debt is at an unacceptably high level. Further, it knows that its greatest threat to its very existence is the fact that millions of Chinese want to see direct benefit for their willingness to labor for the benefit of their collective debtors. In short, China is left with no option but to further invert their historical export activity to supply a greater number of domestic consumers. The recent increase in wages in China will accelerate a major global economic instability. By increasing wages, local purchasing power will increase. Revenue from taxes will also increase adding to the Chinese government’s economic reserves. Savings – especially those associated with pension programs will increase the amount of money held within the country for investment. This investment is already driving greater Chinese ownership of its own production base as well as the ownership of supply chains around the world. And ironically, this is where the bubble pops.

As early as 2004, reports of labor shortages were coming from China. That’s right. In a country of 1.3 billion people, there were labor shortages. These were not based on a holistic economic ecosystem however. The shortages were in labor willing to work for paltry sums to supply the Wal-Marts of the world. The Chinese workforce, highly motivated, educated and a bit pissed off by the fact that they were supporting a consumption orgy in the West, were seeking better paying jobs. For a few years, the Chinese government did little to respond. However, in the current 5 year plan, that’s changing. The manufacturing base in China is rapidly being transformed to compete on big ticket, high technology items. China just agreed to a $12 billion railroad project in Argentina. China and Siemens recently signed a joint venture on steam and gas turbines. And the list goes on in Pakistan, Africa, South America and Europe.

I recall a conversation that I had with President Bush’s Commerce Secretary Donald Evans’ staff before is farewell visit to China. Secretary Evans was going to do what U.S. Commerce Secretaries are famous for doing. He was going to go over the China and, with typical impudence, deride the Chinese for their lack of global respect for trade policy, intellectual property protection, and currency policy. I strongly recommended that his speech be modulated for fear that one day it would be used against us. That day has come. And inflation is just around the corner. However, that’s not our biggest worry. We’ve got far more at stake and all the inflation talk is a nonsensical diversion masking a much bigger monetary seismic shift.

In the coming few months, we will see that the U.S. economic interest in the People’s Congress is on the wane. One of the tell-tale signs of the coming change is the grossly misreported comments made by State Administration of Foreign Exchange. “Any increase or decrease in our holdings of US treasuries is a normal investment operation,” has been interpreted to mean that the Chinese are not going to pull the plug on our dollar. However, the $2.45 trillion of U.S. exposure sitting in Chinese reserves is going to be dumped at the precise moment when it is in the “fiscal benefit” of Chinese economic policy. And here’s where we come full circle to the GATT / WTO bubble.

Let’s assume that major power or infrastructure projects are going to be put out to tender. And, let’s assume that a Siemens / Shanghai Power joint venture is competing with, let’s say GE. Negotiations bounce back and forth and prices get within +/- 5% of each other. Concessions are being made and all the FCPA rules are being strictly monitored (oh, there I go being utopian). And just at the moment before a key award is announced, China dumps some U.S. Treasuries. This instantaneously adversely impacts GE’s cost of capital totally inverting the viability of the deal. China wins, U.S. loses. I wonder if our Commerce Secretary will be advising GE to suck it up and play by the rules when the best technology and price is on the other foot. Do you suppose that the U.S. Commerce Secretary will tell the U.S. public markets that we’re really happy to see China achieve the great objective of the WTO – poverty alleviation – as we watch the rest of our manufacturing infrastructure crumble into irrelevance? And when we realize that we forgot to protect U.S. intellectual property in Argentina because it was not a “viable market,” do you suppose our government will chasten the U.S. company’s oversight?

And inflation hits….. well, let’s see. I think that I have finally seen why the Mormons recommend storing up for a 10-year famine. I guess I didn’t realize that the dark horse of the apocalypse wears a yellow smiley face button under the “Welcome to Wal-Mart” moniker. We’ve got a fundamental day of reckoning coming. This judgment day is far less dramatic than the world ender’s would like. We’re getting to pay for 15 years of deflationary labor abuse and we’ll get to do so in very short order. We should have realized that our consumption cannot come on the backs of the world’s economically disenfranchised. Maybe we’ll learn to not repeat this mistake again.

Let’s stop worrying about nonsense economic metrics of an illusory past and wake up to what really matters – namely, our role as ethical, non-discriminatory members of a global market.

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What’s In Your Wallet?

I spent the past week in London, Zurich and Amsterdam. From a monetary and market evolutionary perspective, these three cities are synonymous with international capital exchanges, fear and uncertainty based risk management, limitation of liability behind corporations, collectively and respectively. While many monetary historians will lay credit or blame for today’s economic utilities at the doors of Italian bankers and traders, there can be little doubt that this week’s destinations did more refinement of our current capital dependencies and artifacts than all others when viewed over time and consequence.

My motivation was to write extensively on all three themes in this week’s post but I decided to simplify my thoughts around one theme. That theme presented itself in each of four specific moments of my trip – currency. Arriving in London from Washington D.C., I rifled through my foreign exchange stash that I carry with the vestiges of travels past. Thankfully, I found my £20 note which was adequate to buy our day pass on the Tube to get from Paddington Station over to Farringdon. However, the London transit authorities had not posted signage in such a way to alert a buyer of tube fare that none of the Circle Line or Metropolitan Line trains were in operation so, once spent, Colleen and I had the privilege of getting as far as Kings Cross and then walking several kilometers to get to our hotel. Having committed to a transaction that was meant to provide an expected utility my behavior changed and blisters on both of our feet were the consequence.

We stayed next to one of London’s great architectural artifacts of the Templars and I was reminded each day of the development of their demand notes that served to inspire the notion of central reserve backed currency. The building’s presence served as a point of reflection all week. I found myself reflecting on the fact I have come to use one of the most anonymous manifestations of their innovation realizing that, at the end of four days in London, I had used less than £100 in cash resorting to credit cards for nearly every meal, hotel, and cab. So, arriving in Switzerland, I had a wad of pounds and pounds of coins which I dutifully converted to Swiss francs – barely enough to get from the airport to downtown. I had to find an ATM at UBS near the Paradaplatz to get an equal sum for our airport return later in the day. I got Zurich’s currency bet almost right and left with CHF10 in the form of two large coins. In Amsterdam, I left the same way I came with the exact €5 note in my pocket having paid for everything there on plastic.

Spending a week in four currency zones gives you an opportunity to think about, well, currency. And if you’re like me, you can find yourself first amusing over the craziness of it all. For example, what genius came up with the idea of the £1 coin which is smaller than most of its pence brethren? Why do the Swiss have such an obsession with color on their notes? However, my reflections, courtesy of the ghosts of the Priory, went much deeper. In the final analysis, what does currency actually mean and what could I learn from this week’s destinations to think about currency assumptions?

Here goes. First of all, I think that currency, at its core, is a manifestation of the disintegration of community. When value was exchanged between suppliers and finished good producers, there was an implicit need to know the person with whom you were dealing. To succeed, you needed to establish, and be worthy of trust. And to be a surrogate of the transactions of others, you need to have the highest integrity of all. Beyond the mere recording of debits and credits, you needed to have a moral character which placed you above the seduction of holding and transferring the wealth of others. To be engaged in commerce or banking, you need to commit significant time to reputation – a phenomenon that has its highest value in community.

Reserve-based currency has given us the lazy, disintegration impulse to anonymize our transactions. When we hand someone a note or coin, one of the social messages we are communicating is a statement of finality. “By virtue of this payment, we’re done,” we are saying. We don’t have to remember what we may owe or be owed. In a tragic irony, we once exchanged things that had social value – gold, silver, or commodities. For close to two hundred years, we saw these be replaced by something with less permanence and no intrinsic value – paper. In our highly evolved state, we further reduced the exchange to a magnetic impulse using a legacy of the Third Reich – the linear magnetic tape. And now, a sizable number of transactions occur without so much as an artifact at all. Whether you’re ICAP trading $1 trillion of credit default swaps or you’re AIG holding counter-party risk, the exchange of most face value on Earth has been reduced to an entity-less phantasm.

On a recent flight across the United States, I was intrigued by what I believe could be an illegal announcement in light of U.S. inter-state commerce laws. If you wanted to eat or drink anything other than 100mls of Homeland Security approved toiletry liquid, you needed to “buy onboard”. But, we were informed, the airline no long accepts anything but credit or debit cards. We are living in a world which is rapidly moving towards an insidious phase in which the access to a bank card – which obviously necessitates a monopolistic mandate that every person MUST use a bank – is a precondition to engage in commerce.

Some of you may not get the message I’m trying to communicate but I hope those of you who do get it make a point to circulate this blog post or at least explain it to others. Our value exchange system has actually crossed an immoral and unethical tipping point. Currency advocates argued that currency itself liberated international trade and created a mode of access to markets. And, to some extent, while never done with equality of access, this had some evidentiary truth. However, in a time when the public taxpayer has had to pick up the tab for the anonymous greed of the bankers who control the utility of exchange with monopolistic insolence, the simultaneous reliance on plastic and e-commerce together with the ever restrictive fee based behavior of the banks is unacceptable. And don’t think for a moment that the recent financial regulatory oversight transiting the lobbyist oiled halls of Congress has improved the situation in the least. To the contrary, Congress has strengthened the monopoly stranglehold and has insured market hegemony for those who have earned no respect from what once was community.

Today it is time to change. We need to reconnect with the roots of impulses which acknowledged that trust is built on accountability and community. Whenever and wherever we can, we need to regain our willingness to participate in transactions of trust. You think you can wait for someone else to figure out this systemic failure? Think again. While I was in Papua New Guinea three weeks ago, I saw a community exchange cultural tambu (strings of shells) which have been transacted for over 20,000 years and, in the process, I saw tons of produce move between two communities. At the exact same time, a thunderstorm in Charlottesville took out power to most of the city and, for three days, most stores and businesses ceased to operate because the electronic payment and communication system failed. You tell me, which system works? You tell me, which system allows for equal access? The bottom line is simple. We’ve been blindly led into a system that enriches the fewest in history at the expense of all. Enough!

So your challenge this week is to actually do something that creates value for another and accept nothing but a promise of a future return from the beneficiary. See if you can. Most of you who read this will view my recommendation as a nostalgic utopian illusion. However I’m recommending this for a very good reason. Over the past several months, the U.S. and European governments have been vastly expanding the deployment of electromagnetic pulse (EMP) shielding in defense and communications installations. If our governments – once allegedly of, for, and by the people – are now protecting themselves from electromagnetic radiation (which could come from a detonation of a high altitude nuclear device or a burst of electromagnetism) – it means that our e-commerce system is on a collision course with a nefarious outcome. So we MUST learn how to operate now in a manner that shows that we the people will not be victims of the insanity of those who perceive they control power. Get practice now and, in so doing, you may be part of the humanity that actually creates a more honorable, humane system. At worst, you’ll start building trust and community.

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After the Fireworks – then what?

Some combination of gunpowder and metal was concocted about 1,000 years ago in China to ward off undesirable spirits. One thousand years later, it’s a bit ironic that the same country that gave the world this invention is once again on the verge of reclaiming its role as global economic super-power. Three short days after the last spark vanishes in the night sky over the Potomac River fizzling as it hits the water, the Agriculture Bank of China will finally price its Hong Kong and Shanghai IPO setting the world’s record for the largest IPO in history. It’s notable to realize that the record being broken is also Chinese – the 2006 IPO of the Industrial Commercial Bank of China (ICBC) – where approximately $21 billion was raised.

There are several factors about this IPO that are particularly notable. And I’m not referring to the fact that this record is being set by the bank that has been the iconic legacy of the Communist Party’s half century of countering the notion that capitalism is the only mode for economic prosperity. After all, this bank, established under the auspices of Mao Zedong in 1951, has not made its money through fiscal shenanigans and investment banking fees. A significant amount of its strength comes from the simple fact that there are more customers in AgBank than there ARE Americans. That’s right, this bank’s customer list actually eclipses the entire population of the United States.

More intriguing, however, is the list of investors in this IPO. A significant participation in this watershed event is coming from the Middle East – including reported interest from Qatar as a primary buyer. To be sure, the global interest is diverse including Temasek from Singapore as well as Singapore’s Government Investment Corporation, Standard Chartered PLC, Kuwait and Abu Dhabi Investment Authorities, along with Rabobank, Daiwa Securities and several Chinese household name stalwarts who are coming together to celebrate a clear global message about the bets being placed on the future. This IPO comes on the heels of the unveiling of more evidence that the much-hyped “recovery” in the U.S. and Europe was, as I’ve reported for several months, a façade supported exclusively by excessive government spending. With banking, manufacturing, and building life rafts inflated by careless monetary policy and reckless spending in Washington, the patches on the tires that were supposed to be our “road to recovery” vehicle have come off and we’re now on the side of the road.

For the record, we’re not going to come back. And, for the record, I’m thrilled about that. As Mao’s legacy is toasted in Shanghai and Hong Kong, we now have a moment to sit on the sidelines and take an honest stock of where we are. Ironically, in a desperate effort to evidence matriculation into the market control club, this IPO may be an indicator of hope for an even larger transformation – one that won’t be claimed by any “ism”. You see, the AgBank IPO means that China is following the too-big-to-fail path that led the U.S. and Europe into 2008 calamity. And it’s doing so at the same time that China is going to establish policies to encourage spending rather than savings. The legacy of individual savings – a policy and social phenomenon that helped grow Chinese banks – is going to shift to spending as global export demand weakens. Internal demand is going to expand and internal consumption – supported by recently upwardly adjusted wages – is going to increase. In short, what made the AgBank so successful to date, is a dynamic that was unsustainable.

To be clear – a lot of people are going to make a lot of money on this IPO. And, AgBank is likely to continue to persist as one of the world’s most powerful banks. However, the Chinese economy generally is repeating a systemic risk that contributed to the failure of the U.S. and European banking infrastructure. The Chinese banking environment is well-suited for agriculture and manufacturing businesses where hard assets are the core of productivity. However, as China has shown from its decade-long failure to effectively deploy its compulsory technology transfer assets (required from multi-national corporations seeking to sell technology to the Chinese government), it is ill-equipped to transition to an innovation-based economy. China holds more of the world’s cutting edge technology rights than any other country. However, the National Development and Reform Commission still has no clear visibility on what it has and how to put it to use. In fact, in the 11th Five Year Strategic Plan of the Communist Party of China, they officially promote “independent innovation” as a core objective in a world where collaboration has been proven to out-perform proprietary impulses at every turn.

So, on this July 4, 2010, we can watch our tribute to China flash against the darkening skies. We can puzzle over the irony that we picked a Chinese invention to mark our self-proclaimed but never fully actualized “independence”. And then we can wake up tomorrow and realize that an era has ended. And as with every end, this merely means that there’s a new beginning. Not only will the AgBank IPO possibly set the largest record – it may also be one of the last of its kind. Like world-records when the world went from yards to meters, some records aren’t broken because the measurement changes rendering the old metrics irrelevant. And that’s the time we’re in right now. The measurement which allows a Mao legacy bank to eclipse all capitalist-generated IPOs is comic, ironic, and evidence that change is upon us. The real challenge for us is to have the courage to walk away from the pointless metrics of value that led to vast wealth disparity and begin constituting reciprocal knowledge networks that perpetually benefit whole communities. And when we begin that journey, we’ll be less interested in independence and more tuned into interdependence. We’ll be less motivated to burn gunpowder and metals and we’ll be more motivated to see an unpolluted sky. Maybe when it’s done setting capitalist records, China will become a land that fosters a new experiment – one that collaborates on a more integrated future where people and their ecosystem can thrive.

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