Give Chance a Hope

I just spent the last several days in Rio de Janeiro. Selecting the days of Carnival for a business trip to Rio has its positives and its drawbacks but I can assure you that the positives far outweigh the distractions (not to mention that many of the distractions are quite positive). I was a guest of APEX, a critical component of Brazil’s economic development and engagement strategy and, as a result, was treated to a first class trade promotion experience. True to form, observing events wasn’t enough for me – I had the amazing experience of being invited to dance with one of the best samba schools in the Carnival parade!

As I interacted with public and private sector influencers in Brazil, I was overwhelmed by a single observation which is the subject of my post this week. The observation is complex and I’m sure it will leave more than a few puzzling but, here goes.

The stated purpose of our visit was to carry forward conversations about the use of Trade Credit Offsets as an accelerator for enterprise creation and financing in Brazil. While experts from around the world come to Brazil loudly promoting investment in Brazil, this cacophony has masked a huge reality – I think intentionally. Let me explain.

Business is built on the interaction, and value exchange, between a steward of resources or goods and those who have use for those resources or goods. The nature of the value exchange may take the form of commerce with money or it may take the form of defined mutual benefit. However, in Brazil, the desire to create equity-based capital markets – encouraged by experts from abroad and reinforced by influencers within – provides the context for a deep systemic failure. Clamoring for “access to capital” to create the next “Silicon Valley” illusion is en vogue. When a person like me asks about cash-flow, revenue, or value exchange, I’m viewed as an anachronism. You see, in our promotion of economic development around the world, we’ve not promoted business – we’ve promoted usurious capital markets where it’s about investment returns, not enterprise. Stop and think. How many of you actually KNOW the business of the companies in which your pensions are invested. Get it?

A Trade Credit Offset is a function of market asymmetries. When a country buys a fighter plane or a hydroelectric power plant, the economic imbalance created by a net outflow of money from a country to a company is excessive – many times representing significant fractions of GDP. To address this imbalance, most countries impose Trade Credit Offsets which act a bit like a rebate. If, as a company, I sell a billion dollar power plant to a country, I am required to create $300 million dollars of market with the country in return. Historically this took the path of purchasing commodities, raw materials or components. Offsets can range from 25% to 100% of the nominal value of the contract and must be satisfied before the company can recognize the revenue on its balance sheets.

Over time, companies began setting up local subsidiaries for component manufacturing, assembly or service creating employment value which, in many instances helped deal with offsets. More recently – and most substantially used by China – technology transfer and know-how have become increasingly desirable by countries increasing their industrial efforts. Multiples are put in place to incentivize things like technology transfer which, in many instances receives a 10 fold multiple on its value as the offset satisfaction.

In fiscal year 2009, we identified over $5.2 billion in unsatisfied Trade Credit Offsets in Brazil. This number is staggering on a number of levels. First, what it means is that while Brazilian economic development professionals are running around looking for equity capital, they’re ignoring the LARGEST capital source in Brazil, created by Brazilian procurement and waiting to be deployed. Second, it means the supplier companies providing goods and services to Brazil are likely holding large amount of contingent revenue on their books (up to $20 billion) which cannot be recognized until satisfied. Third, it means that while creating offsets, Brazil is not effectively using this program for the fulcrum it affords. Brazil is paying premium price for less than they should be getting and they’re leaving untapped billions on the table.

So, I explained this in my meetings in Rio. Not surprisingly, people connected with Brazil’s largest corporations got it immediately. In many cases, their response was informed by the fact that they have suffered cost overruns and huge expenses from being overbilled by foreign companies who are passing along offset risk in proprietary pricing and financing. But regrettably, and to the round-about point of this post, the people in the public sector were frozen in disbelief. Their first response was, “I can’t believe what you are saying.” Frequently that response was followed by, “Why hasn’t anyone ever told me about this?” And then, my favorite, “Do you have a white-paper on this?”

I guess this is the point where I had my mini-epiphany of the week. A white-paper! Really?

If you had gone for three days in the desert without water and I handed you a bottle of water, would you first ask me to explain the chemical structure of water? Would you debate the importance of water and your lack of clarity around whether water is really as important as others say it is? And as you’re dying of dehydration, would you convene a committee to explore the merits of taking water given the possibility that it might be from the tap versus from a mountain spring in France? No. You’d drink the water.

I guess what struck me was the irony that people looking for investment – when confronted with capital far in excess of their wildest imaginations of capital for business development – chose to continue to pursue the proven failed model and walk past the largest capital asset the country has at its disposal. Which leads me to the title of my post “Give Chance a Hope”. It’s time that we give ourselves the permission to trust our observation of facts rather than rationalize consensus thinking in the face of wholesale evidentiary dissension.

Our current economic and social paradigms are heavily biased on propaganda. The controllers of the message become the arbiters of truth – even when all evidence stands in direct contravention. They are the hypnotists of those charged with leadership. In Papua New Guinea, I presented the Provincial Government of East New Britain with data from a mining company’s PUBLIC FILINGS on the stock exchange. This data explicitly said that the company was taking gold out of the country and not paying their required royalty. The mining company successfully prevailed upon the local press to publish a retraction of a report of the company’s own public filings. The Provincial Government cowered in the face of pressure from the mine. At no point did the government ever independently verify the news published by the mine on the company’s own website which confirmed their abuse. And the Toronto Stock Exchange, when informed of the same information, has taken no action against incontrovertible evidence of legal and financial violations.

Over 100 countries have been exposed to the Global Innovation Commons – a repository of open source innovations available for immediate deployment in the fields of carbon-alternative energy, agriculture and soil management, clean water, and tropical diseases. The vast majority of those who encounter the repository of OPEN SOURCE data remain convinced that they cannot use the information because it was once patented. Think about it. The very system which Thomas Jefferson established to SHARE information with the general public has been so thoroughly abused that the very basis of the social contract has been rendered unimaginable by the same general public. Over $2 trillion dollars of innovation, available for free, untouched!

Where’s the problem? Is the Government of East New Britain corrupt? Are economic developers in 100 countries corrupt? No, I think not. As a matter of fact, I think that the true failure is summarized most honestly by a gentleman representing my generous host in Brazil who had the decency of acknowledging, “We didn’t even know we could know.”

In the face of the self-proclaimed “knowledge economy” it is a moral failure to accept “not knowing” as a justification for the perpetuation of mineral rights abuses, inefficient energy technology legacies, contaminated water, food shortage and land degradation, and rampant disease. My friends in Brazil, Papua New Guinea, and over 100 other countries are not the problem – we all are. We must act to educate. We must inform ourselves and commit to sharing information with others. Start by getting the messages in this blog out to your friends and colleagues – look at the referenced data – draw your own conclusions and ACT.

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Mythical Paradox – Epic Confusion

Nature revealed and mind made clear, they visited the Buddha;
Actions complete and all achieved, they flew aloft.

Journey to the West, Wu Cheng En’s epic account of China’s manifest destiny may intimidate would-be readers due to its size. However, within its 99 transformations in over 1,700 pages, one can begin to see the archetypal logic which seems to inform today’s global market dynamics. For those who are seriously intent on understanding the movements being made by the Chinese government, Journey to the West should be the top of the reading list.

Prior to the formation of the current National Development and Reform Commission or NDRC (formerly known as ICC-SCORES), its director arranged for me to receive an authorized translation of Journey to the West. “Understand this,” he said, “and you will begin to understand China.”

To the Western reader, the simple moral of the epic is that things are not as they seem. What meets the eye is not only not the case but is diametrically opposed to the truth. Consummating in the final interaction with Buddha in which the heroes find a paradox in the scrolls, wisdom and enlightenment are only discerned from altering perspectives and freeing observation from preconception.

This week, I was puzzling over the prevailing ignorance evidenced by monetary policy and government experts on how to deal with China. In our reductionist myopia, we seem to believe that China is constrained by the same legacy and logic that characterized our ascent to global market economic hegemony. Our leaders seem incapable of looking at things free from preconceptions. This incapacity is inextricably linked to our undoing.

Take stock of the following certainties over which U.S. or European arrogance have little to no effect:

1. Gold – While the Responsibility Jewellery Council and other NGOs seek to advocate for more ethical and responsible gold production, and Western investors seek to hedge currency risk with vacuous metals bets, China has announced its commitment to increase their reserves eight to ten fold. In the West, market conversations circle around the price of gold and irrationality of the Chinese buying such quantities at market prices. What is ignored is the close to 8 years of sophisticated development of Chinese gold extraction efforts – including those coordinated by Robert Friedland, one of the world’s most notorious metals men. Friedland’s Ivanhoe Mines (TSX: IVN and NYSE: IVN) have been actively working with the Chinese to vastly expand domestic production of gold, copper, molybdenum, and coal and have focused considerable attention of the tough to access and tougher to audit claims of vast gold reserves in Southern Mongolia. Friedland and Apple’s Steve Jobs spent early life together in the land of and with the people of Journey to the West. With no love lost between Friedland and the U.S. Justice Department, one has to wonder whether China’s alliance with Friedland is, in part, fueled by the “He who laughs last” truism. China is not going to buy their 10,000 tonnes, they’re going to extract them. And an American (supported by the Toronto and New York stock markets) is going to aid the process.

2. Consumerism – We continue to hold a naïve belief that the only way for China to advance economically is through American-style consumerism supported by debt. We do not have the capacity to consider market conditions which not only challenge our notions but may, in fact, preclude China from following the American path. As I indicated before, the 60 – 100 million males (a consequence of China’s one-child policy leading to gender inequality) are going to create a market dynamic without modern precedent. All of the earning potential and inherited wealth of these men are going to be expended in a single generation. The degree to which this dynamic is managed with consumption vs. alternative market actions is unknown. Clearly, placating a male population which may be at times quite displeased with their lot in life will be a primary concern for the Chinese government. Doing whatever is necessary to keep this population docile is of paramount concern. There are reports from many nations that financial incentives are being offered by the Chinese government to induce African, Pacific, and South American countries to provide residence to men relocating to other countries. China can invert its export economy rapidly by producing for domestic consumption and still have yet-unseen models to fundamentally alter its economy.

3. Energy – President Obama’s nostalgia for a Kennedy-style shoot-for-the-moon science and technology stimulus with clean, green energy technologies would be admirable were it not delusional. Whether it’s electric cars, biofuels, solar, wind, or nuclear, China’s millions of technology trained engineers have already out-maneuvered their U.S. counterparts at most turns. Uranium linkages with Australia and Central Asia, coal deposits in Mongolia, and oil and natural gas contracts with Iran, African states and partnerships with South America mean that legacy energy feedstock control will allow China to time its conversion when it’s ready – not when the U.S. dictates new energy mandates. And, by the way, the new saber rattling with Iran doesn’t help. An “oops” tactical nuclear strike would make Iranian oil and natural gas fields difficult to access due to the possible cloud of uranium hexafluoride. However, as that radioactive, toxic cloud drifts with the prevailing winds into Pakistan and India, the last hope for resolution of our Middle East position will wither in an atomic instant.

As you read this posting, it’s not good enough to just puzzle over the enigmas wrapped in this seventh century poem. It is time to take action. If you fear currency volatility, do not run to gold. The game is over and, unless you have a mine in your backyard, you’re the pawn, not a player. If commodities are interesting, follow those which have deployable use. We’ll have more batteries, semiconductors, and, yes, sweet food in the future than we’ll have use for gold. If your business is counting on U.S. consumerism fueled by easy credit to rebound, wake up. The experiment ended and your government simply accelerated its demise. It is time to put direct efforts into building trading networks across the globe where interdependence will build mutuality of interests. And if you think that we’re going to solve unemployment with green jobs, prepare to be the out-sourcing country. That’s right. If you can install power systems whose instructions are shipped in Chinese and Hindi, you’re going to be more employable. And, by the way, when your children learn Mandarin in school so that they can respectfully engage with our colleagues to the West, recommend Wu Cheng En’s Journey to the West. It will help them become better neighbors.

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Archimedean Theorem IV – One More Question

My dear friend Larry Stay forwarded me the text of Clayton Christensen’s February 12, 2009 Harvard Law School address, “The Importance of the Right Question.” Christensen’s central thesis is best summarized in his early observation, “unfortunately, too many of us are so eager to debate and get on with the right answer and the solution, that we often forget even to think about whether the right question has been asked.”

In the last two weeks, we have watched countless assaults on our collective sense of morality and, remarkably we’ve stood by with no voices raised, no “town hall” “tea parties” – in short, those with a moral center have been complicit in their silence. A few observations…

In response to the outpouring of latter day compassion for those impacted by the Haiti quake, past presidents Bill Clinton and George Bush led the calls for people to reach out generously – with money. “Don’t send tents and blankets, don’t send food and water, send money.” Did anyone stand back for a moment and consider the fact that it was the animation (the act of imparting life or spirit to that which is without the same) of money which created the indifference that created the tragic loss of life in Haiti? Did society consider that maybe, compassion of hands and heart, sweat and blood – while more “inefficient” – would more likely render permanent a connection between the people who have so little living so close to those with so much?

Americans blankly looked at the headlines on Friday, January 29, 2010 and puzzled over the news that the American economy grew by much more than economists predicted. And, if they would have actually read the U.S. Commerce Department data, their puzzle would have deepened. Though the GDP grew by 5.7%, much of this “growth” was not actually impacting the average American. And, missing from the truth in the report was that the only sectors of alleged growth were those where the Federal Government was offering economic stimulus injections which artificially inflate the actual GDP. The consumer spending, decoupled from tax and incentives offered by the U.S. government, not only fell but probably was more accurately measured by the compression of inventory and decrease in imports. Since GDP has been a crude measure in the best of times and an utter failure in indicating economic future performance, why do we continue to measure that which does not explain or prognosticate? As politicians stand in faux incredulity lauding economic progress that none of the electorate can perceive, where is the call for metrics that convey meaning? Given that the most ubiquitous purchase made by American families is food and energy, why does the U.S. Commerce department continue to perpetuate the measurement of consumer price growth excluding food and energy? Oh, and by the way, if you read the fine print, the real news – ignored by ALL the media hype about the 5.7% growth in the final quarter was that Real GDP for the year of 2009 was -2.4%. The reason why we don’t feel better off is because we are not.

We listened as the Tax-Collector-Evader-in-Chief testified in Congress that saving AIG was a decision made for the best interest of the American people. As our elected leaders grilled the Secretary, he stood his ground and, ironically, probably told most of the truth. However he was shielded from the whole truth by a Congress which is incapable of, or unwilling to, ask the right questions. How did the Treasury and Fed actions actually ameliorate the toxic behavior of AIG when all they did was cover the recklessness by moving it to other balance sheets? No pension is more secure, no bank more stable, and the U.S. taxpayer is worse off by their actions. In fact, one year later, the SAME toxins are still in the system – they just have cute names and the Fed and Treasury are shareholders and guarantors of what AIG once originated. In all the hype about the “main street” rage about bank bonuses, did anyone look at the fact that the bank profits in 2009 are Ponzi profits? If you look carefully, you find that the banking profits are being reported only where U.S. government equity interests (including a need for Treasury and Federal Reserve Balance Sheet profit reporting) are present.

And where are people of conscience, patriotism, or any other broader sense of responsibility when, just last week, the Federal Reserve Board’s Federal Open Market Committee reinforced the likely criminal incompetence that aided the financial raiding of the U.S. economy by enshrining Moody’s Investor Service, Fitch, and S&P as the arbiters of economic risk? These Nationally Recognized Statistical Rating Organizations (NRSRO) are incapable of acting with independence due to the imposition of FOMC credit and collateral rating rules. In short, the very organizations which give them their anti-trust-flaunting capability of legal market collusion dictate the minimum capital and collateral conditions to prop up the illusion of financial stability. Given that NONE of these organizations provided any independence prior to the market collapse by offering true ratings of risk, why are we not demanding that the public interest be served by establishing a meaningful criminal investigation into these organizations and their incentives? Further, why are we not agreeing, as a public, to no longer accept these organizations’ inputs into our pension, banking, and investment products?

The answer is quite simple. Since our puritanically inspired inception as a nation, we have been taught to advance into the future with faith. Faith that a beneficent, vindictive omnipresence is watching out for us. Faith that the institutions that are established for our guardianship actually have our interest at heart. Faith that when we see overt evidence that a thing is not as promoted, it is our perspective that is wrong – that a wiser, higher being must understand a greater complexity than we can apprehend.

Friedrich Nietzsche observed that all things are subject to interpretation and that the prevailing interpretation is based not on truth but on power. While observing a truism in humanity, Nietzsche seemed to avoid the extension of this observation into what I propose is Archimedean Theorem IV – humanity achieves no transformation or advancement so long as assumptions are unquestioned. The awakening of new possibilities and realities is only possible when we learn to courageously assert our intuition by freeing ourselves from the laziness of answers and dive deeply into the perpetual discipline of the unasked, unconsidered question.

Haiti will then have pilgrims of conscience who will work to create social and economic systems which link people with purpose. Metrics of consumption will be replaced by metrics of replenishment and future productivity. Monetary authority will stand impotent against network exchanges where community benefits flow without capriciously imposed interest rates on Ponzi debt. Risk rating will be far less interesting than productivity and obsolescence accountability and transparency. Accountable stewardship will find quarter where faith has enjoyed unconsidered sanctuary.

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Earthquake in Consciousness

One week ago I was sitting on the sixth floor balcony in Providenciales , Turks and Caicos when waves mysteriously slowed in the bay to my north. Moments later, I felt the building shake and looked into the room to see my wife looking out at me. “Did you feel that?” Before I could respond, the earth moved again – this time with greater intention and for a bit longer duration. My mind raced across two oceans to last year when I was similarly confronted with a major quake – that time in the Kingdom of Tonga. Several seconds later, the earth calmed, the building stood silent and gradually, the waves regained their percussion. Armed with a fast internet connection, I went onto the United States Geological Survey website to see where the quake was. No information. So, I quickly filled out a “Did You Feel It” form and hit submit. When my browser confirmed the delivery of my report, I went back to the world map and there, in a bright red square, was the ominous news – 7.2.

We all know that the movement of the earth in Haiti has moved the world. People are pouring out much needed compassion on those who have lost what little they had. My dear friend and colleague, Chip Duncan – author of “Enough to go Around” and board member of Relief International – has been keeping many of us apprised of the devastation and human challenges confronting a part of humanity that has, for so long, been marginalized and forgotten. His encouragement, joining many others, is to do whatever you can to insure that much needed medical, food and shelter supplies are provided to attenuate the suffering that is so acute.

I am moved, however, to write about the earthquake from an entirely different point of view. While a 7.2 magnitude earthquake is quite powerful – a 7.2 magnitude quake does not kill 100,000 people. At least it didn’t have to. The earthquake showed the weakness of our callous indifference towards resource distribution and poverty. What killed so many and injured countless more was the inadequate or inappropriate building materials and methods which put tons of unreinforced concrete and bricks above the heads of those who sought shelter. What killed so many was a global market where excessive supplies lead to over-built mansions built to unimaginable codes while a deforested island is left with meager supplies to make do. The earthquake illuminated, in tragic clarity, the cost humanity pays for immoral imbalances in resource distribution – an imbalance that no emergency charity can absolve. As some of my dear friends who do considerable work in Haiti pointed out a few nights ago, this year the same number of people would have or been disabled due to grinding poverty, violence, and inhumane living conditions. In a country where the life expectancy for most people is less than 5 decades and where only a few hundred miles away, we complain of economic crisis that means many of our population must return to work in their 6th and 7th decade of life, can we not see we need to WAKE UP.

Last year, over 18 million children were displaced by war – many of them forced to engage in violence against their own people. Over 700,000 people were sold as slaves across international borders in 2009. Years after the earthquakes in the Indian Ocean, Pakistan, Iran, and India, thousands remain without adequate shelter. And consider this, 11 million earthquake and tropical storm survivable homes can be built for the same budget that the U.S. government spent on the C-130 aircraft that we use to shuttle relief onto landstrips after disasters. Sure, these arguments are often cited in terms of resource prioritization but, I’d like us to take a deeper look.

Our real challenge in Haiti requires a deeper examination of a fundamental system failure. As a result, if we have any genuine intention of honoring those who lost their lives due to imposed inadequacy, we need to consider as much civil and economic engineering as we consider emergency relief. Haiti is a beautiful country which shares a beautiful island with its neighbor, the Dominican Republic. Separated by an arbitrary, colonial and slavery imposed boundary, these countries are worlds apart. We need to consider, in this moment of memory, that genuine honor of the human loss one week ago involves a commitment to building not only a different condition for the future of Haiti but making our actions generalizable in places like Colombia, Uganda, Cambodia, and Sudan.

What is a new narrative and how will we recognize it? To answer that, we must begin by inquiring, in this moment , “What do we have in abundance in Haiti?”

Well, start with the images from Port-au-Prince. You cannot help but see the piles of broken buildings and the rubble left in the aftermath of the quakes. But can you see the over 800 open source technology options that exist for immediate deployment in recycling this building material into aggregate for paving and tiling? Do you see the ability to do land and water reclamation and filtration using aggregate from this recycled material.

Port-au-Prince is blessed with copious access to water. In a country where potable and irrigation water resources are scarce, which of the 12,447 low or no-combustion desalination technologies will be deployed for locally owned and empowered enterprises to create sustainable water and service utilities. Who will match these open source innovations – many of which are proprietary and restricted in the U.S. and Europe but were never patented or protected in Haiti – to local communities and entrepreneurs seeking to build enterprise, employment and engagement where the earthquake and poverty scarred the land and its people?

There is coastal and for the development of bio-diesel and nutritional algae farms. There is degraded land for the deployment and testing of soil reclamation technologies. Rather than exporting aid, a new narrative would recognize that enabling local engagement will not only rebuild a city but will, for the first time in two centuries, ignite the innovation of a culturally rich people. Can we not only ship aid but commit to the support and creation of businesses that build renewable and resilient habitations with locally manufactured products; create medical outposts equipped with locally produced medicines and devices? Is that too much to ask? Is it easier to watch thousands die and then rush to aid those left in devastation? And speaking of people, for those who remain to deal with the aftermath, how do we as a global community immediately collaborate to use this moment to align our creativity with that which is local to imagine a Haiti not surviving but thriving?

Long before the earth shook, our organization, in partnership with a few courageous civil servants at the World Bank’s infoDev program, deployed the Global Innovation Commons – a public resource for stimulating the use of open source technology to build ethical, commons-based market opportunities in the most marginalized countries on Earth. In our rush to show compassion, let us insure that we redouble our resolve to recognize that poverty and indifference created this catastrophe. And then let’s insure that every effort to “import” solutions is at least matched with an equal commitment to create local enterprise to engage Haiti (and countries in similar situations) in capacity enablement which can one day lead to safer houses, more engaged employment and industry, and a sense of collaborative participation in the global community. Let’s work to enable Haiti to join other Environmental Challenge Zones (like the volcanic region in East New Britain, Papua New Guinea) in being the experts in seismic technology and crisis response – building a new story out of the rubble of a scarcity laden past.

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As We Forgive Our Debtors, Lead Us Not Into Temptation

Growing up with a mother who dearly loved classic linguistics – particularly as it related to translating the Bible from Greek into English – I was taught that written, classic Greek did not use punctuation the way we do in English. I also learned that, as a result, dogma could easily be construed (or misconstrued) simply by how one chose to place punctuation in translation. As I read a number of readers’ responses to my last posting in 2009, I was struck by the irony of the phrase I had used from the Christian traditional Lord’s Prayer “Forgive us our debts.” Obviously, the choice of that title was to have us consider our careless assumption that there is a mystical something or someone “out there” that will take care of our recklessness when we abandon responsibility and accountability. Several of you wrote e-mails suggesting that I should write another blog post focusing on the other half of the classic line from the prayer, “As we also forgive our debtors.” There was the irony. I puzzled over that phrase when it struck me. What if you change the phrasing of the classic prayer and put the following sequence together, “As we forgive our debtors, lead us not into temptation?”

So, entering 2010, allow me to challenge 2000 years of doctrinal construction and our modern economic conundrum…and then have dinner.

By now, the numbers are in and we know that the U.S. government will default on both external (Treasury debt) and internal (fiscal recklessness) debt. Whether it is the U.S. debt ceiling paralysis in late February, a further weakening of buying criteria for unsecured credit purchases of Treasuries (now the primary buyer at auctions), or an external shock from China or the Gulf, we are blindly entering a maelstrom of a debt-financed economic stimulus without which we’d be on the edge of a technical Depression. We don’t have a plan for entitlements and we’re about to add to our illiquid safety net promise with a “bail-out” for the pharmaceutical and insurance companies (promoted under the moniker “health care reform”).

And we’re ignoring the looming consequence of China’s one child policy. This year – 2010 is the year that the one child policy’s unintended consequence begins to emerge as the disproportionately large number of Chinese males enters adulthood. Over the next decade, between 50-100 million men will face the practical reality that the gender preference growing out of the 1979 population and poverty reduction policy means that they will never marry or procreate. The world has no modern analog for what’s about to unfold as 100 million people spend 100% of their earning potential AND their heritable wealth in a single generation. This consumption anomaly will not only require drastic economic policy shifts in China but will also invert the global supply chain for at least 20 years. In short, precisely at the time we need to have China be robust in its extension of debt capacity to the U.S., it’s own domestic priorities will dictate a massive internal focus where nationalism and consumption will be the most readily accessed means to placate a very unsatisfied male Chinese consumer.

Lead us not into temptation…

First, we must realize that our track record on forgiving debt has been abysmal. Oh, sure, we have addressed foreign debt crises in the past. However, our method for “forgiving debt” in the U.S. has been to destabilize governments, impose draconian measures on currencies, and extort gross imbalanced trade concessions from our “debtors”. How will these measures feel when the shoe is on our foot? And remember, unlike the Latin American debt crises in the period between 1975 and 1982 during which countries used excessive debt to finance industrial output capacity and infrastructure, the U.S. debt has financed a war on terror and government subsidies – neither one of which can be repurposed to build GDP.

Second, we should remember that our central problem has been, and remains the fact that our present understanding of our own economy is built on myth. I was recently in Brazil speaking to a group of private and governmental interests regarding the creation of a capital market system in Brazil. Consultants from the North had advocated the adoption of Venture Capital and Investment Banking models from the U.S. as way to build Brazil’s future. However, none of them had pointed out that these systems had failed the U.S. Consider the following:
- From it’s birth in the 1950’s until the Reagan administration, venture capital (not called that at the time) relied exclusively on capital flowing into markets that were principally selling technology at premium prices to government buyers. Investor exits were in the form of merger and acquisition into defense, energy, electronics, telecommunications and specialty materials incumbent corporations – not public markets. It was government subsidies, not entrepreneurial risk, which created the venture miracle. And, it wasn’t until the late 1980 and early 90s that venture capital flowed into a majority of consumer-oriented enterprises.
- The Small Business Administration wasn’t started as an economic development engine for the American economy – it was started as the Small War Plants program during the second world war to respond to the lethargy of the large military manufacturers’ inability to respond to German engineering and Japanese encryption.
- Our two most productive decades of academic innovation in the U.S. were fueled in large part by foreign graduate students who came to the U.S. pre-9-11 and whose minds and bodies have returned to Korea, Taiwan, China, and India and are now continuing innovation that we took credit for while they were here.
In short, we have a strong temptation to believe our own mythology and this does us no favors. Advocating a Green Innovation Venture Capital future to save us is foolish not just because it reinforces consumptive greed and restrictive, monopolistic excess. It fails its basic assumption of utility as it never worked in the first place. The VC funding efficiency for “green” technology underperformed conventional VC with enterprise failure rates exceeding 90% and technology adoption failure rates in excess of 95%. Solar photovoltaic global market dominance held by Sharp came not from the best innovation. Rather it came from Sharp’s capacity to benefit from Japanese credit subsidies that allowed technology infrastructure to be adopted with nominal cost. And China is taking its cues from Japan’s playbook and will do the same with LEDs, Organic Solar, and Hybrid Vehicles. Our temptation to rely on myth for our salvation is both empirically and morally bankrupt.

Post Copenhagen, the only area that held a modicum of consensus was some vestigial notion of providing “funding” for green technology from economic powers to the economically marginalized countries. Missing from this discussion was the naming of the true beneficiaries of these proposals. UN-sponsored “Green Investment” programs as proposed, would benefit a new class of managing partners who would extract fees. It would benefit purveyors of false proprietary claims to extract licensing fees for fraudulently promoted research and development and intellectual property. And unfortunately, under most proposed frameworks, the use of the ecologically appropriate innovation Commons – those property rights that were granted but never deployed – are not even mentioned.

In short, our temptation is to believe that we can enter the future promoting an enlightened agenda using the extractive, usurious, utilities of the past. This is neither possible nor appropriate.

Central to a new narrative for humanity is the reclamation of understanding that it is in linking enterprise and incentive to integrated productivity that we can find our way. What I mean by this is quite simple. Enterprise begins by linking defined needs to a global, open review of all solutions advanced in any related field. After all, most innovation addressed only one of the multitude of contexts in which it could operate. Deployment friction inefficiency and public awareness failures – not true lack of solutions – keeps most entities unaware that their perceived “need” has been solved by someone else in another context. Enterprise may involve a conventional cash flow in which solutions are provided for financial consideration however they are not restricted to this monotonous view of values. If “need” exists where cash is not present or a viable means of compensation, alternative exchanges are part of the innovative proposition. Second, the preferred mode of enterprise involves the highest collaborative efficiency for the least extractive proposition. Process and mode innovation becomes as important as the innovation artifact. Third, metrics of performance and success are linked to the most ubiquitous delivery of goods or services to the most impacted populations at the lowest extractive or highest replenishable means. Monopoly-based scarcity models are explicitly rejected while Commons-enabled network value activation is rewarded. Finally, profit from industry is measured not in artificial time horizons (like quarterly reporting) but from all-in life-cycle reporting where the total social and financial gain from obsolescing, repurposed or recontextualized innovation is measured in the full consequence of system impact. For example, our proposal for St. Louis in which every new building adopts water recycling technologies is assessed not only for the reduced cost of water supply to buildings; the reduced cost of municipal water treatment and waste processing; the reduced cost of maintaining hub-and-spoke central processing capacity; but, it also measures the total financial inefficiencies required for financing conventional, centralized models in the form of bond origination, trading, and administration. Further, we measure the social transformation effect of having individuals – once disembodied consumers of taps and drains – see themselves as the mediators of value creation. We look at the field effect of this transformation on other innovation, entrepreneurial or consumer behavior. When we see that health, social well-being, and civil engagement all improve based on a simple innovation integration, we begin to see the consequence of the Commons dictum that everyone, at all times, must be conscious of their role as simultaneous producer/consumer/steward.

“Too complicated”, you say? Absolutely not. When you consider the global cost of our thoughtless, anonymized-abuser ignorance-based system, you realize that we’ve simply followed the temptation of deferred morality. We won’t address our debt until it’s a crisis. We won’t address poverty until its shadow is on our doorstep. We won’t address wellness until we realize that our public health is at risk. We won’t seek accountability in our financial markets until we’ve allowed exclusive classes of bankers, insurers and politicians to steal the public treasury in a fashion that would make despots around the world envious. And, it is this world – the world of progressive abusers – that we are transforming. An alternative is ripe for deployment – now. Welcome.


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Forgive Us Our Debts

So I was doing some post-holiday reading (my son’s gift to me Invictus; my wife’s gift to me The Magna Carta Manifesto, and the FDIC’s 2009 Failed Bank List) and, while I know I’m biased, my family was far more in tune with “interesting” than our dear friend Ms. Bair. That said, I don’t want, for a moment, to have you think that there wasn’t a good dose of intrigue in the FDIC’s bestseller and I figured that the year wouldn’t be complete without one more FDIC moment of incredulity. I guess, in a strange way, as Congress’ actions on Christmas Eve showed us, we really should take our debt situation seriously. So, I thought, it may be worth one more visit with the Keeper of the Scythe into the Crypt of Failed Banks 2009 to see what tales the dead could tell.

In my desperate plea for someone to recognize that this involved some effort, I should point out that this journey involved reviewing, as best I could, the capital positions of over 120 banks, the FDIC’s stated exposure on each, and the identities of the financial institutions which stepped in to acquire the assets of failed institutions. Let me summarize some observations that will certainly lead to deeper inquiry on my own part and, with all luck, on the part of others.

First of all, I found it quite fascinating to see that the distribution of bank failures was anything but a normal distribution. Outside of Illinois, with 14% of this year’s failures, the FDIC found its primary prey in the southlands with Georgia (17%), California (12%) and Florida (10%) leading the nation in collapses. That’s right, four states accounted for over 50% of the nation’s bank failures. Arizona (4%), Texas (4%), and Washington (3%) were in the distant second tier. Banks failed in 31 states 43% of which would be considered Northern.

The assets of the banks reviewed were approximately $143 billion with 20 institutions listing assets in excess of $1 billion. But this is where it gets a bit murky. According to the data listing the FDIC’s exposure to these institutional failures, it appears that they hold approximately $32.4 billion in insured exposure but were “aided” or “absolved” of a total of $110.4 billion. Now, I realize that this appears to have a perfectly rational explanation – namely, that many of the assets were acquired by other institutions and therefore are not at an insured loss exposure at present. Eight institutions had no buyer of record whatsoever. However, in each of these instances, the nominal assets and the FDIC exposure were incongruous and the delta is worth considering. Almost $6.7 billion appears to have vanished. No one bought the assets and the FDIC doesn’t claim that it has an obligation to cover them. And there’s more. There seems to be discrepancy between what the FDIC thinks acquiring banks took on and what the FDIC outstanding liability may be.

The obvious conclusion that should explain this is that there are a number of deposits that exceeded the maximum insured benefit and therefore have no insured benefit. Maybe, depositors were just foolish and put way to much cash in bad banks. While all these questions may appear the product of blurry vision after reading too many spreadsheets, there’s a material reason why this really matters.

You see, to stave off it’s own insolvency the FDIC has decided to accelerate an advance-paid premium scheme assessed against insured deposits. And the scheme, per the FDIC’s most recent posting, is based on actual insured deposits at a variety of capriciously set times calculated against rather arcane actuarial assumptions. So, the $110.4 billion (against which premiums have been already paid by the now defunct banks) sits in a fascinating limbo from the standpoint of those who wish know the true actuarial position of the FDIC. To further confound the matter, the FDIC, through it’s actuarial and investment negligence, required the aid of other financial institutions to step in mightily and bail the insurer out of its own insolvent position. Therefore, the approximately $32.4 billion that is currently the responsibility of the FDIC does NOT conform to historical actuarial data with respect to secondary market recovery. It is “junkier” junk than was the case in the past meaning that the FDIC will be more on-the-hook than usual.

So, as we look through the soiled diaper on the little baby called 2010, we find ourselves realizing that the FDIC accounting creativity and actuarial acrobatics is merely the warm-up for what Congress will face between mid-January and the end of February at which time the mystery moves into the realm of trillions, not these pesky billions.

For all those who suggested that we weathered the storm and we’re coming out with a healthier financial sector, be cautious. Remember that the fee income that led to bank profitability in an era where NO meaningful commercial lending origination was going on was based on moving government money – commissions on TARP on the way in and commissions on TARP on the way out. Oh, sure, technically this couldn’t have actually happened but, remember, the same entities that jumped to aid the Treasury in managing bailout funds actually wound up being consumers of the very funds they were moving and, yes, they collected fees for moving taxpayer money. The automotive industry got its bite at the apple with clunkers. The real estate market got its bite twice with homebuyer tax credits and Freddie and Fannie illusory capacity. And the banks got the windfall by moving it all and collecting fees each time anything moved.

The Bretton Woods and Nixon debt currency experiment is ready for examination. The vaunted institutions that were promoted to “protect” the American citizen from the recklessness of the past and to insure that some perversion of Keynesian monetary theory persisted have lost their moorings. No new acronyms are going to rescue us from ourselves. Our reflexive response to Irrational Fear which has led us into countless, unconsidered yawning chasms, deferred accountability, and reckless excesses must be brought into refinement.

In the throes of the Cold War in 1956 (the year after Rosa Parks’ bold stand for equality which was met with oppression), we intertwined our national identity to our money enshrining as our national motto “In God We Trust” – a motto that was not derived from piety but from the presence of that statement on coinage minted to unify the nation during the Civil War. I think what we really meant was that in the debt dependent American Consumer Capitalism (and in the government institutions that are there to shield us from our own wanton excesses) we trust. Well both the unconsidered consumption and the prophylaxis for irresponsibility have failed us. What took the chosen ones in the desert 40 years of wandering to learn took us 50 years. Following an idol animated by fear and greed gets you nowhere. Our “promised land” – then defined as “not communism” – has been leveraged and the note has come due. So there’s some gallows humor in realizing that it is China – the last bastion of our greatest animating fear for which we had to proclaim our “Trust” in “God” – that now holds the Sword of Damocles over the great experiment.

As we peer into that which is coming, I am convinced that prudence dictates a careful consideration of precisely how we want to manifest a new future. And here, I’m inspired by my other two readings to which I made reference at the beginning of this piece – Invictus and The Magna Carta Manifesto. You see, these two books merge a most insightful narrative evoking the possibility of a more conscious, considered future. Whether it is the Springboks “One Team One Country” that helped carry South Africa past the certain ravages of bloodshed that was thought inevitable at apartheid’s end, or whether it was the truce embodied in the 1215 accords at Runnymede – the Magna Carta and the Charter of the Forest – in which economic, religious, and government tyranny were addressed by people dictating the terms under which THEY would be governed, the essential message of both is that we, the people, must first accept and then expect responsible actions from each other and then our governments. One way or another, we’re going to need to re-examine “In God We Trust” through the lens of E Pluribus Unum.

Happy New Year!

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A Lump of Coal, Carbon Credits or Christmas Cheer?

‘Twas the night before Christmas in the Washington’s halls;
Blankets of snow kept shoppers from malls;
The year that was closing was almost wrapped neatly;
But Congress had one toy that wasn’t boxed completely.

While Ma in her kerchief, and I in my hat;
Had just settled in for our last Yuletide chat;
A tiny default that would collapse the dollar;
Needed containment so markets wouldn’t holler.

You see, there was a matter that kept up Beijing;
The gold in our debt was loosing it’s ching;
Our debt limit pressed through a blizzard of spending;
Concerned Hu and Wen at the government’s year ending.

When through Senate halls there came a solution;
While no one was watching came economic evolution;
To fix the default and keep holidays jolly;
The Congress embarked on a February folly.

You see, in this year, when a problem arises;
The prudent solution that wins all the prizes;
Is to extend much more credit, abolish debt ceilings;
The future be damned, it’s all about feelings.

So down the chimney on Pennsylvania Avenue’s cold night;
Over self-righteous, duplicitous, Grinchy protests from the Right;
To $12.4 trillion the debt limit was raised;
A move that was sure to earn Treasury’s praise.

On Freddie, On Fannie, On Pensions and Banks;
On Goldman, and Citi and legacies of Hank’s;
We need not be burdened with debt default sorrow;
As long as we have our solution – Tomorrow.

In case you had too much eggnog and figgy pudding, you may want to recall that also in this year’s December stockings were:
- another 16 banks “protected” by the insolvent FDIC;
- a record of your neighbors officially no longer unemployed (we’re making so much progress) because now they’ve been without work long enough to no longer be unemployed – they’re the uncounted;
- fiscal conservatism immaculately conceived in the Republican party – the same folks that spent us $11 trillion into the hole – making the Virgin birth downright plausible; and,
- record non-compliance with Basel II for another year insuring that U.S. banks and financial institutions will simply compound the problems created by 2010’s arrival of Solvency II – the capital adequacy standards for the insurance industry that, you guessed, enjoy non-compliance at present.

Accountability does not find itself a frequent bedfellow of expediency. In 2010, I hope that fewer of you look for change to “believe in” but rather change that has the maturity to confront reality and deal with tough problems head on. When the February note comes due on the Christmas Eve debt ceiling limit charade, we will be confronting the consequences of deferral. And, if we don’t learn from the past year’s folly, we’ll have to choose between noses… will we follow a red nose through the darkening night sky or will we continue to look to a wooden puppet wishing he was real?




_P.S. More like the SAIC posting coming... stay tuned