Integral Accounting: Knowledge – Part 4 of 7

…information and experiential awareness which can be transmitted through language, art, or other expressions

When the late Lory Roston introduced me to the work of Gregory Bateson on a cold afternoon in an office in the Trinity Building on Broadway and Wall St in New York, I had no concept of the gravity of the moment. As he sat at the end of the conference room table and adjusted his hearing aid, he looked at me and said, “Young man, the last time I was this fascinated with listening to someone was when I listened to Gregory Bateson.” I knew neither Lory nor Gregory. And, for that matter, as he was transfixed with his hearing aid for a good five minutes, I didn’t know how much of what I had said he had actually heard. However, I decided to glance at the book he rifled from his tattered briefcase and, in a few minutes with Steps to an Ecology of the Mind I was hooked. What followed was my voracious pursuit and contemplation of every book, article and lecture of Bateson’s I could find. Adding to the irony of Mr. Roston’s linkage was the fact that, like Bateson, much of my deepened consideration on values and epistemology was triggered by the exact same tribe in East New Britain, Papua New Guinea – interactions separated by almost 80 years!

Bateson presents one of the most articulate arguments for an integral view of knowledge – one that has the courage to challenge Occidental dogma emerging from Plato’s notion that knowledge represents a justification-based evidentiary belief. Challenging the Aristotelian notion that knowledge requires witnessed evidence of cause and effect leading to certitude, Bateson promotes the integration of somatic observation and experience with qualitative comparisons of ecosystem level symmetries and asymmetries. His concept of what he characterized as adductive scientific methodology to understand “a difference which makes a difference” encourages an expanding, rather than reductionist, view of knowledge. In Bateson’s view, knowledge was an expanding, abundant, boundless journey, not a consensus dogma.

I’m entertained by those who suggest that we live in a “Knowledge Economy”. I find this self-aggrandizing hubris oxymoronic and delusional. As the recent equity, debt and government financial implosions have shown, “experts” had no clue what the heck was going wrong before something went terribly wrong. And those who were hopelessly clueless on the way into the storm are now equally clueless on determining whether we’re getting better (though we’re pretty sure that we are not unless we’re an over-caffeinated promoter on CNBC in which case all we do is yell louder). What we do know with absolute confidence is that GREED uses KNOWLEDGE ASSYMETRY to take money from gullible would-be lottery winners and appropriates it to those who can avoid accountability. The very notion that propaganda has been labeled “Knowledge” and that “financial experts” are merely those who serve the thieves most efficiently shows that there is no responsible “management of the household” – the literal meaning of “economy”. This week’s Federal Reserve assessment is the punctuation in the obituary on the Knowledge Economy. We will now use our economy’s future to purchase toxic waste so that we can share the ownership of the lack of judgment of the few!

Knowledge is a vital component to Integral Accounting. What has been passed off as “knowledge” for the past thirty years has too often been willful deceit. Let me review a few examples. Since the Reagan Administration’s trade war with Japan, we were told that we were the most innovative country on Earth. We had to be told that because, regrettably, Japan was clobbering us at a game we thought we dominated. With cars, semiconductors, electronics, and certain energy technologies, our self reported superiority was being so thoroughly trumped that the U.S. had to waive it’s own anti-trust and collusion laws to regain a “competitive” position in fields that we knew we owned. While American institutions of higher learning boasted many of the world’s pre-eminent scientists and scholars, the students in the most sophisticated classrooms and labs were not American. And, for those of you who haven’t been around higher education lately, it’s graduate students who are frequently the source of creativity, not their tenured advisors. So, when countries like Korea, China, Taiwan, Vietnam, and India bring their students home – accelerated in our anti-immigrant post 9/11 world – guess what! They take their knowledge and creativity home with them. And when U.S. and European corporations told their investors that out-sourcing would drive profitability, they assiduously avoided pointing out that, together with frequent compulsory technology transfer, what they were really doing was selling their future for short term gains.

Doubt that knowledge has explicit and implicit, quantifiable value? Look at where economies are growing and look at where education expenditure growth outpaced military and health care expenditures. These truths are self-evident.

So far, if you’re reading this in the U.S., you may be feeling pretty bummed and if you’re reading this in historically marginalized countries, you may be pretty excited. Not so fast. One of the biggest mistakes in the pursuit of knowledge is the blurring of the line between EDUCATION and TRAINING. As we state in our Integral Accounting definition of Knowledge (“information and experiential awareness which can be transmitted”) the concept requires the capacity to transform individual awareness into a transmittable form. The transmission may be evidenced in behavior, communication, art, kinesthetics, collaboration, or technology. Overlooking the sense of network synergies and collaborative values arising from inter-relational cooperation, many countries have focused on training to compete rather than educating to collaborate. Not surprisingly, industrial property artifacts like patents and trade-secrets are being foolishly embraced by countries precisely at the same time that these systems have proven to be obstacles for development in their countries of origin. China and India are carelessly adopting innovation Cold War practices of encouraging isolation rather than collaboration. This behavior is antithetical to knowledge. Awareness that is hidden and enclosed for short-term, proprietary gain is not knowledge. Furthermore, in a world where trusted relationships form a critical support mechanism in uncertain times, protectionism and isolation is shortsighted.

So, with reckless abandon, I am going to dive into a multi-millennial debate over Knowledge by proposing that, the reason why we’ve been locked in our confusion over knowledge and its essence is because we’ve seen it as an end – not a utility. We view it as an object or ideal to attain rather than a vehicle through which we manifest our capacity to integrate, critique, and synthesize. Allow me to explain with a deeply personal experience.

In the Spring of 1988, I was a competitive track athlete at Goshen College. At the first outdoor meet of the season, I jumped into the long-jump pit at Huntington College and gained knowledge. I learned that the grounds keepers had not dug into the sand to find that there was ice beneath the surface. Upon landing, both of my legs ripped at the knees placing my feet remarkably close to my buttocks in a most hideous and contorted way. Shortly thereafter, I was informed that I would probably never walk again. I went from athlete to invalid in an instant. While 22 years of pain have been my constant companion, I did regain the ability to walk, run, bike, and engage in activities that knowledgeable experts thought impossible. However, this is not my example.

While I was in the wheelchair, my greatest emotional trauma was the realization that I may possibly never have the opportunity to engage in a face-to-face conversation with anyone again. Those who stand and socialize have no concept of the distance felt by those who involuntarily sit out of eyesight. For months I pleaded with the universe for someone to actually kneel down and talk to me eye-to-eye. Save my lovely bride and my mother, no one did.

In October 2009, I was in Brazil and met my soon-to-be-friend Marcelo Colonno. Marcelo lost use of his legs in a car accident and, at our first meeting, I was visited by the spirit of my pleading 21 years earlier. Despite excruciating pain, I walked up to him before either of us knew one another, knelt down and introduced myself. He and I shared a wonderful conversation and in an instant forged a bond which has already had a ripple effect altering the economic course of Brazil.

The reason why I share this story with you is to demonstrate what I mean when I talk about Knowledge as the evidence of integration, information, synthesis of information and experiential awareness. I didn’t “have” knowledge. I evidenced knowledge and, in so doing, shared an evident knowledge with Marcelo. In short, Knowledge, like potential energy, is an option which only exists when evidenced. While the Greeks struggled to apologize for their circular arguments which attempted to separate knowledge from self-confirmatory belief (unsuccessfully) and while others have struggled mightily since to do the same, we are lost if we seek to attain something that can only be manifest in its sharing. In Integral Accounting, Knowledge is the mutually recognized capacity to communicate “differences which make a difference” in an ecosystem. Bateson got it as close as anyone and, thanks to my late friend, Lory Roston, I have better tools to share knowledge. I trust that in the coming week, you take a moment to transform your information and experiential awareness into an episode of communication with another. In so doing you will, for a moment expand the universe of knowledge and make the world a better place.


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Integral Accounting: Custom & Culture – Part 3 of 7

…practices and expressions of individual or community held values and traditions which create a context for social interaction

This Wednesday, August 11, 2010 as many as one sixth of the world’s population will engage in or contemplate the fast of Ramadan. For the next thirty days – from the crescent moon to the next crescent moon – many will neither eat nor drink during the hours of light. While many of us would think of a thirty day fast as unimaginable, it is interesting to note that the admonition to fast was not principally to reduce consumption (although it has that laudable effect). Rather, the teaching from Prophet Mohammed PBUH was to have a yearly reminder of distinguishing right from wrong – a very tangible reinforcement of the value of discernment.
… and eat and drink until the white thread becomes distinct to you from the black thread of the dawn. Then completely observe the fast until night. Qur'an 2:187

I took my first journey through this fast at the invitation of my dear friend, Moustapha Sarhank. My experience entering into Ramadan in 2006 was far from pious. I was quite fascinated by the concept of a month-long fast and I wanted to experience it. I viewed fasting for a month the way I view training for a sporting event – it is an interesting challenge and it certainly won’t hurt me. Thirty days later, I had been significantly impacted – experiencing the unconsidered centrality of food in our culture, confronting emotional and psychological personality traits I did not know I had, and deepening my appreciation for the wisdom of practices quite foreign to me. Little did I know that sharing this experience would forge one of my most cherished friendships, open up countless relationships throughout the world, and provide deep inspiration for much of our financial innovations ever since.

Custom and Culture, the second pillars of Integral Accounting are filled with explicit and implicit value. In dismissive contempt, many mainstream economists view these factors as “soft” or “subjective” and therefore unmeasurable or unreliable. When Thomas Aquinas made his statement, Veritas est adaequatio rei et intellectus, (Truth is the [correspondence or agreement] between things and the intellect), he was buttressing the bridge between things and perception that had been spanned by Pythagoras almost 1800 years earlier. In fact, our modern resistance to include custom and culture in economic metrics is based on our consensus dogma (which would make Pythagoras circumspect) that numbers are a superior reflection of truth than any other expression.

We encounter custom and culture implicitly every day. Whether it is the U.S. trade embargo on Cuba or the Islamic Republic of Iran (which directly penalize would be producers, consumers and collaborators over divergent belief systems); the consensus illusion that human efforts need to be organized in a “corporation” before ideas and services can flow between parties with accountability (a threat to the rising popularity of “crowd-sourcing” in which idea ownership becomes blurry); or, Delta Airlines’ unwillingness to sell M&Ms to me for cash because everyone uses credit and debit cards and they don’t accept cash (where’s the class action Interstate Commerce legal challenge to forcing airline customers into the arms of the credit card monopoly here?), at every turn, we alter open, free, and fair value exchange with custom and culture all the time and it really matters.

Now, I know, about this time, those of you familiar with my work are wondering, “What’s going on here? I thought that I was going to read about fire dances in the Pacific, a Kenyan choir belting out South Africa's national anthem, Nkosi Sikelel’i Afrika, and the monetary reallocation via philanthropy appealing to a moral need to eliminate poverty.” While all of these, and thousands of other values are all important, I wanted to make sure that we realize that custom and culture extracts enormous frictional costs in the most unevolved practices of our current economic system.

Custom and Culture play an inextricable role in the economy. Let me review a couple explicit examples.

Language – for time immemorial those who had the ability to communicate between cultures, regardless of the social state, obtained explicit places of social value. Ask any U.S. CEO the value of Mandarin or Portuguese and you’ll be met with an effusive tale of how important the Chinese and Brazilian markets are to business. Ask them the same question in Mandarin or Portuguese and most will look like they’re hopelessly lost. When, in contemporary business plans, did you see a line item for Rosetta Stone® as a critical success factor? Why not?

Religion – Plan a meeting to discuss financing at 1pm with Sunni Muslims and see how far your relationship goes from there. While you’re ready to talk about financing a desalination project, they’re praying. You’re both offended and the relationship suffers.

Recreation – Since the LA Olympic Games in 1984 and evidenced in the 2004 Greek Games, the 2008 Beijing Olympics, and the recent World Cup in South Africa, linking recreation with economics is assumed to be as commonplace as breathing. Mind you, drinking Coke® isn’t going to get you on the track or in the pool but billions of dollars (and lower centers of gravity in millions of consumers later), we are becoming candidates for the day when sumo becomes an Olympic sport.

Political Ideology – We go to war, we say, to promote democracy and freedom. However, if you ever took a look at the direct and indirect spending of the U.S. government on the war – both on the value of defense contracting to the total GDP and the reliance that companies like IBM, Oracle, L3, SAIC, KBR, Booz Allen Hamilton (in its new, renamed incarnations), CSC, Dell, HP, Accenture, SRA as ancillary defense support contractors have on their government contracts arising from “homeland security” – you would realize that the U.S. has no economic plan that is not heavily reliant on conflict. We actually go to war to control resources and maintain employment and we justify it with “freedom” and “democracy” – custom and culture.

Tourism – In many countries on Earth, the largest source of foreign exchange is tourism. As humans, we don’t merely desire an experience – we desire experiences in venues. I was at a beach resort in Cancun Mexico two weeks ago. On every day of the week I was there, I did something only I would do. I went to the beach and counted how many empty chairs were there and then went to the pool and did the same. The conclusion that I came to was that humans are ridiculous. Eighty-five percent of the beach chairs were empty; while less than five percent of the pool chairs had vacancy. And, mind you, there were over 20 times more pool chairs than beach chairs. So, we fly an average of 2,000 miles to a destination by a beautiful beach to sit… AT THE POOL! What? No, we’re actually gaining something that the local community pool doesn’t offer – culture. And so, madness and all, we still do it.

So, how do you go about adding custom and culture into Integral Accounting? Actually, this one’s pretty easy. Think about the concept of frictional cost. Identify those elements in an interaction which are essential to get the transaction done. Do you need a legal framework (contract)? Do you need to communicate (language)? Do you need a corporate license (government-sanctioned judiciary)? Do you need financing or performance guarantees (trust)? Once you identify all the elements required for the interaction, then consider what resources could be added to lower your execution risk and increase the fluidity with which value can be exchanged. The more you can align your activities with the context in which individuals and communities are organized in your field of operations, the greater your Integral Return.

So, on this eve of Ramadan, let’s all consider our ability to distinguish between right and wrong – the white and black thread. By integrating custom and culture into our understanding of value and its exchange, we will open ourselves to the possibility that we’ve depersonalized our view of things and, in so doing, lost our understanding of Aquinas’ notion of Truth. The more we consider this, the more we’ll realize that we simply don’t have all the information we need to engage in this type of consideration. This means we need better access to knowledge… the next leg of Integral Accounting and next week’s post. Until then, Ramadan Mubarak!

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Integral Accounting: Commodity – Part 2 of 7

…those elements present in ecosystems which, through cultivation, production or value-add, can be used to generate means of social or commercial engagement

Under the sun of the Mayan Riviera I completed reading Spencer Wells’ Pandora’s Seed: The Unforeseen Cost of Civilization. I suppose that it was as fitting a place as any to read this accessible account of our species’ progression towards an accelerating evolutionary cul-de-sac where our grossly oversized appetites to consume will either engulf or transform us. Should you wish to probe more deeply into the linguistic and behavioral intellectual paralysis that has led us so completely into our consumer hypnosis, I recommend both the book and the venue. Wells provides an ideal point of departure for this week’s Integral Accounting post on Commodity because his central ethno-anthropological thesis – quite compellingly argued – includes the assumption that homo sapiens have “civilized” over the passage of time. However, as I will point out, I don’t find the evidence compelling. Far from self-congratulatory terms like innovation, civilization, and development, I would argue that we’ve become far less creative than our forbearers, less willing to share for the common good, and far more susceptible to single point failures leading to a renewed urgency to rethink how we account for life and the systems on which it hinges.

Commodity is a term that, in ordinary use, refers to substances which have non-discriminatory intrinsic value (meaning that their value exists by virtue of their very existence without any qualitative differential across markets) and can be used or distributed equally by, and between suppliers and consumers. A simpler understanding of the common use of the term may be the concept of ingredients for baking. Flour and sugar (both derived from “commodities” and both “commodities”) can, in the right hands become a cake or chocolate cookies. However, in the magical hands of my wife, Colleen, they can become the essential elements in the most transcendent bread this world’s ever smelled or tasted.

Not surprisingly, the term commodity shares its linguistic roots with the concept of commons. However, our understanding of commodity has undergone persistent enclosure in what James Quilligan frequently critiques as antithetical to ideal social organizing principles. After all, in the Magna Carta’s companion declaration, the Charter of the Forests, felled wood, nuts for foraging and other sources of livelihood were essential non-discriminatory resources.

We need look no further than our electricity addiction (or petroleum, as the same argument will hold) to see how perverted our understanding of commodity has become. As heirs to Edison and Westinghouse’s legacies, humans have ripped mountains apart, ravaged forests, and fouled rivers, lakes and oceans in pursuit of copper. Now, we’ve done this so that we can extract the metal, stretch it into long, fine strings and twist it or coil it to feed society’s most ubiquitous drug into our shared addiction. And despite over 100 years of mining ore from the earth (and calling it a commodity), we have failed, in this recyclable metal, to realize that we’ve taken out enough. You may be interested in knowing that, according to the USGS 2007 Minerals Yearbook, consumers recycle less that 25% of metals with the exception of lead. We throw away the vast majority of our aluminum, copper, iron, steel, magnesium, nickel, tin, titanium and zinc. Our current economic system is built on the immoral and genocidal belief that it’s more desirable to take ore out of the ground (at great environmental degradation cost and human displacement cost), transport it over great distances (polluting all the way), smelt and refine it (once again at great polluting cost), fabricate it into wire (at great polluting cost) and then integrate it into disposable products which we will bury on average after 7-10 years (the terminal life of most electrical appliances) than it would be to actually design products whose motors, compressors and conductors could be entirely reused for the life of a person (or many generations).

We tolerate this delusion because our religions, governments and economic propagandists (a.k.a. – most of the world’s business schools) cannot fathom that the Earth is NOT ours and is NOT free. Somewhere between days two and six of Biblical creation, humans enshrined themselves as the pinnacle of “lordship” over the Earth. And since our sacred texts all say that “God said so”, we blindly go along with the madness.

In Integral Accounting, our worldview around the elements all change. Let’s start with the basics. First, it’s all here. All the air, water, calories, energy, shelter – all are here and all exist in sufficient abundance to care for life on Earth. Second, it’s all going to stay here. If we decide to burn carbon-based life residue, for example, we’re not getting rid of it. We’re just changing its form into something that is choking our atmosphere rather than percolating under our land and seas. If we over-produce and over-consume starches, our bodies will do what they do and make fat. I guess the silver (or more appropriately, greasy golden) lining here is that we’re closer to biodiesel with every passing sedentary day. Third, the better we figure out suitable distribution of access and use, the better our chances at becoming a persistent species.

And the elements do not merely have value in the industrious hands of humans. Remember that soil, water, and air all rely on these shared resources. Plants, animals, and living systems we don’t yet characterize and understand all rely on these same elements. When we take a metal from the ground, have we considered what bacterium was being held in check based on, for example the bactericidal properties of silver? Is it possible that by preferring an ever narrower list of foods, metals, and chemicals upon which we rely, we endanger our species to susceptibility to disease and extinction unthinkable in our hunting and gathering past? As we see throughout history that dense urbanization and its associated industrial food and water infrastructure preceded “mysterious” mass extinction events common in the Americas and Eurasia, is it possible that keeping maximum diversity in our appreciation of commodity is actually the only path to avoid a similar outcome?

Commodity reductionism – a pseudo-efficiency required only to maintain wealth and power asymmetries created by the industrial mercantile system that we currently find prevailing – is the proximate cause of most of our armed conflicts on Earth and reinforces unspeakable atrocities. Commodity diversity is a requisite for human persistence. “Too Big To Fail” – a phrase lately applied to the financial industry is a greater threat when it applies to elements perceived to be essential for preservation of a way of life. Go online and look how boring we’ve become. Look at the commodities markets and puzzle over why We The People of Planet Earth seem to care about silver, gold, titanium, copper, nickel, aluminum, orange juice, cocoa, coffee, sugar, soybeans, beef, pork, corn, wheat, and rice? While I’m only slightly over-simplifying to make my point, I do know that we’ve predisposed ourselves to single-point failures in a world of abundance and we need to have our heads examined.

Let me end with how we put Commodity Integral Accounting to use. When I teach people about Integral Accounting principles, one of the first exercises I have them do is walk outside and count everything they see in instances of greater than six. These are the local abundant commodities resident in an ecosystem. Rather than seeing a place for what it’s missing, see the place for what it is. Immediately, think about what you could do if you had a lot of that thing. What kind of systems would you build or create to expand access to and use of this abundance if you chose to do so? What community would you need to engage? What would be the full ecosystem consequence of such use? What information would you still need to answer these questions?

So, here goes. When you fly into Dalanzadgad, South Gobi Province, Mongolia, at the right time of day, you notice that the municipal landfill is highly reflective. Like many other landfills in Mongolia, there is an abundance of one item – vodka bottles. A legacy of the grain alcohol industrial production accompanying the Soviet era, the abundance of glass is staggering. In this desert, water and food are appreciated for their intrinsic value. However, when a Korean development agency decided to set up greenhouses in this land prone to violent wind and sandstorms, they used metal tubing and plastic coverings. Sheets of flimsy plastic to protect vegetables from harsh cold, to preserve moisture during arid months without rain, and to, well, litter the landscape in the next big wind. Integral Accounting would see another path. Why not use the vodka bottles as building materials for greenhouses? By using the bottles as glass bricks, one could easily create a vapor and thermal barrier that would: a) withstand the wind and sandstorms; b) insulate the interior for optimal growing seasons; and c) solve a municipal solid waste problem. Oh, and by the way, local communities could grow their own organic produce without relying on expensive overland shipping from China. Given that the Oyu Tolgoi gold and copper mine – the potentially largest mineral reserves of both on Earth – is estimated to bring up to 30,000 new hungry mouths to this parched region, wouldn’t such an approach make economic sense?

Of course it would. When it comes to our view of commodity, it seems that we’d be well served if we could begin to migrate from our linear view of extractor – processor – consumer – disposer to a practice of optimized repurposing. This transition opens up countless opportunities for perpetual creativity which can be done in harmony with community in the context of next week’s post on custom and culture.

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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