You Can Learn a Lot from a Centenarian (+2)

In an effort to reduce frivolous spending, politicians looked to environmental regulations as a critical obstacle to economic development and job growth. Republicans were divided on balancing the importance of income tax as a means of addressing the economic pressures of a country reportedly emerging from a deep recession. Patent fights were breaking out as technology competition – particularly threats coming from international trade – was fierce. The French and Germans were trading diplomacy and barbs as the economic future of Europe seemed to be increasingly tenuous. 3-D entertainment was emerging as a radically new way for audiences to consume media. China was weighing its economic and military options as the United States imposed increasingly protectionist policies to deal with the economic imbalances created by labor out-sourcing. The President was advocating massive ‘shovel ready’ infrastructure projects to jump-start an economy that was not responding to other stimulus. Ford and General Motors were both trying to navigate financing for the revitalization of the automotive industry. These events described the state-of-the-world my Grandmother, Elizabeth Martin – turning 102 on Monday – entered on her birth, October 31, 1909.

I just spent part of my weekend with Elizabeth and sat in rapt amazement as I heard her describe events from the 1920s and 1930s as though they had just transpired last week. Recalling freak October snow storms where the tree limbs snapped up and down the East Coast as I watched the snow pile up 4 inches outside the window; describing the reuse of feedbags to make dresses; recalling the bumper crop of peaches canned in two quart jars with an apricot thrown in for a bit of color and flavor; all memories as present today as they were the day she imprinted them. As I sat with her, my mind took two simultaneous paths. The first impulse was to rush home and open one of my favorite books – The Illustrated World History: A Record of World Events From the Earliest Historical Times to the Present Day published in 1937 – and reread the entries from 1909. I wanted to revisit John Maynard Keynes’ first economic publication, “Recent Economic Events in India”, and see whether from these and other sources, I could find any evidence of an awakening in our times. And, rather than opining on a conclusion, let me share with you the words of Sir John Hammerton and Dr. Harry Elmer Barnes from the conclusion of the Illustrated World History in 1937. After you read it, I wonder what you’d tell my Grandmother on her 102nd birthday to convince her that we’re on the edge of something “NEW”.

“The period since 1929 has been on of the most critical in world history. It is an era comparable to the opening of the sixteenth century. Then the typical and familiar medieval institutions – the feudal political order, the agricultural economy dominated by the manorial system, the guild organization of industry and commerce, and the unity of the Catholic Church – were being challenged, and most of them were on the eve of breakdown. A new epoch – the modern – lay ahead. That slowly developed from the sixteenth century to the twentieth. It produced capitalism, nationalism, representative government, pure and applied science, our mechanical age, the factory system, urban life and the like. Now, in the second third of the twentieth century, there are grave signs that the modern world order is to be superseded by other institutions and ideals. Capitalism has all but broken down. Nationalism threatens the collective suicide of mankind. Representative government, parties and democracy are being forced to retire before the onslaughts of Fascism and the growth of dictatorships. Imperialism is curbed by the shortage of capital for export, the collapse of foreign credit, and the exhaustion of virgin areas for investment and the export of capital. Our technology for production has far outrun the mass purchasing power of man necessary to utilize this increased volume of products. City life produces new strains and stresses and leads to a great increase in mental and nervous instability. World war, using the deadly methods of destruction now available, may drag all civilization down once more to the level of barbarism. Only in the degree to which we understand the critical and transitional character of the contemporary age shall we be able to avert calamity and build a world order which will not only be new and different but better, when measured by standards of general human well-being.”

Hammerton and Barnes, in 1937, saw the dimly lit vision of a world where humanity would wake up. They, like thousands before them in epochs stretching across humanity died with that world unfulfilled. Until we see that it is not the time we’re in that calls us to transformation but the nature of ourselves and our communities, we’ll see inflections come and go unaltered. We’re not on the verge of transformation. We The People are in need of transformation of our responses to the world – the one variable that past inflections and the current – seem to be ignoring. After all, it is the ‘man-in-the-mirror’ that is the constant and those optics lead us to a very tired, very monotonous end. Let’s remove the silver from the glass so that we can see into a world of opportunity rather than seeing a reflection of our own arcane tedium.

Ninety Nine Percent of the Time It Works Every Time

My week began walking out of the BART station at Embarcadero in San Francisco and heading towards the water and my hotel. A few steps out of the station, I encountered several Occupites (my term for the participants in the various ‘Occupy’ protests around the country and across the world) huddling over coffees and under blankets in the chilly evening air in front of the San Francisco Federal Reserve building on Market St. As I am wont to do, I read all of the placards and posters to see if from them I could divine any notion of precisely the focal point of outrage / angst / etc or what was being proposed in lieu of the source of the grievance.

Let’s set the record straight. The present financial system, wired into our laws and modern social concessions since the birth of the industrial revolution is working very well. For those who are the current heirs of its architecture, there is no crisis. In fact for many of them, they made reckless bets for a decade or more and, when the ‘crisis’ metastasized in ’07 and ’08, they went to the government that they had long ago bought, demanded to have their behavior exonerated and rewarded, and, without a glance, the government gladly paid them using the full faith and credit of the very Americans who now call themselves 99%. And to be clear, when the U.S. Department of the Treasury demanded that banks issue 1 share of Common stock for every $2 of TARP funds repaid, only Citibank complied, according to the Inspector General’s report, while all other recipients balked and walked. And after receiving over $250 billion, the reason most frequently given by banks seeking to have favorable repayment terms was concern for the ‘stigma’ associated with having to receive Federal intervention.

Like many others, I have read the OWS statements, blog posts, and commentaries on every side – from Huffington Post’s ‘Dignitarian’ piece to neo-con screeds – and have been fascinated to see that the closest thing that comes to an actual system critique and, as a result, a demand (or at least recommendation) is the repeal of the misnomer repeal of Glass-Steagall Act (the Banking Act of 1933). Ironically, this Act’s relevance, popularized by an incorrect Wikipedia entry describing it, was the same Act that: a) seduced Americans to place their money in bank holding companies with an illusory ‘guarantee’ in the form of the Federal Deposit Insurance Corporation (neither an insurance for depositors in the truest sense, nor a Federal entity); and b) allowed the Federal Reserve far greater flexibility to participate in both government and commercial debt issuance and pricing. One wonders if any OWS Occupite has actually stopped and realized that their anti-Gramm-Leach-Bliley position actually strengthens the incumbency of the Fed and the centrally controlled monetary system? While we can agree that the conflict of interest avoidance of Glass-Steagall may be laudable and necessary, being 99% right in hitting a target means you MISSED.

The other piece of the consensus OWS message – the call for the humanization of humanity and the removal of human treatment for corporations – makes tons of sense and is an issue as old as the corporation. And it was this issue that lead me to wonder who lives at 11400 West Olympic Blvd, Suite 200, the address of the registered url occupywallst.org? I wondered if they / it were / was a person or a corporation? While researching the OWS structure, I was: a) intrigued to find the Alliance for Global Justice – 501(c)(3) corporation – which, while doing a lot of really interesting things is, itself, a corporation; and, b) was fascinated by the fact that AFGJ charges 7% for use of its tax exempt status. In his discussion about meeting with the ‘Finance Committee’ for the OWS movement, Chuck Kaufman seems to admirably describe an impulse to engage but seems to miss the point that, by using the tax exempt corporation, the message of the OWS must avoid lobbying, political action, and several other prohibited acts that are potentially required should OWS actually ever seek to change the system.

This brings me to my bewilderment surrounding the notion that OWS is ‘transformational’ and a sign of some new awakening in the U.S. that, in the minds of some, is a continuation of the Arab Spring. If we use the agency of incumbent systems – a call for the return to a reflex born in the chaos of the Great Depression – and muffle our message to insure tax exemption for our donors – precisely what transformation do we expect to see in ourselves or the systems around us? For change to come, we actually need some contextual learning to actually know what is really behind the impulses we see as unjust, the degree to which we are complicit in supporting the same, and the awareness of what will be required at a systemic level if transition and transformation is possible.

To contribute to this dialogue, a group of friends in San Francisco have proposed building a financial literacy curriculum that addresses these themes by examining, among other things, the Four Pillars that support our current financial system:

1. Fear Arbitrage – the centrality of insurance (a Protestant innovation based on the doctrine of pre-destination and apocalyptic judgment from the Almighty) as the primary utility in our economic system (remember that the first Federal Reserve Bank was principally organized by life insurance companies, not bankers);
2. Unitary Currency – since the formation of the Central Banks in Europe and the U.S., and fully inculcated with the 1944 Bretton Woods agreement, the notion of a singular currency by which we all transact and through which we all denominate value;
3. Commodity of Humanity – throughout the Industrial Revolution, the notion that humans are free units of productivity who must stand in subservient opposition to ‘capitalists’ and, when completed with their ‘useful life’ are to be relegated to some lesser state; and,
4. Dominion over Earth – the presumption that all matter and energy is the domain of those who harness and exploit it.

So long as these Four Pillars are unconsidered – a state currently fully manifesting in the OWS and the systems it protests – transformation will be as fickle as the steam on a latte blowing off a cup in Justin Herman Plaza. And speaking of Justin Herman, the man for whom the SF OWS protest location is named…his use of Federal Funds for the redevelopment of the city of San Francisco involved some rather controversial ‘class warfare’ behaviors that would make most Occupites cringe.

Far from transformational, the historicism-anemic vector of the OWS movement suggests that we’re more of a 1790’s France on our way to the Revolution of 1848 leading to… well, France as it is today. So here’s an idea. Let’s look at structural transformation that actually builds a future that we’d want, not reproduce a failed exercise of ‘enlightenment’ that has found itself at the edge of dissolution once more.

‘Fixed’ Income Gets Neutered and Spayed

I have watched in waking nightmarish horror over the past few months as one of the great pillars of investment doctrine has crumbled like a prophetic Nebuchadnezzar statute failing under an assault to its feet of clay. In my dreams, Bob Barker from The Price Is Right has a stack of banks and countries on a glitzy, gaudy stage and advises bidders that the only sure way to lose is to over-bid. And, as mindless mildly obese contestants line up to guess how low they can go, Bob keeps screaming into that crazy little microphone some nonsense about getting neutered and spayed. Finance ministers from the G-20 all gather for photo ops in the background as the band plays Nearer My God To Thee.

Let’s dispense with the punch-line up front. If you have a 401(k), you know, that ‘big government’ siren song inducing you to pump froth into investment banks today for the ‘benefit’ of paying tax to an insolvent government later (wow, I’m out of control here), you have ALREADY LOST. Sitting in your pension allegedly securing your retirement, backing your insurer and your bank, and hijacking your mortgage are over $25.6 trillion dollars of investments that are NOT WORTH WHAT YOU’RE BEING TOLD (according to the Securities Industry and Financial Markets Association or SIFMA, municipals at $2.9 t, treasuries at $8.9 t, mortgage-backed securities at $8.9 t, federal agency debt at $2.7 t, and asset backed debt at $2.2 t – and the “t” stands for trillion). And, while I’m a big fan of debt issued by corporations that are actually making stuff – a sizable chunk of the $7.5 trillion in corporate debt – some of that’s fluffy too. Here’s the bummer. As we saw with the bankruptcy of Harrisburg Pennsylvania this week and as we’ve watched play out over the past several months and years with sovereigns reneging on their fiduciary obligations, this stuff was supposed to be the reliable means of preserving capital and earning a predictable return.

Here’s the problem. Long ago, in a land far, far away, there was a bad piece of legislation drafted that said that, to meet tax-deferral criteria, certain types of investments HAD to be purchased by pension managers and other statutory buyers. Oh, for those of you who don’t know your own history, this investment stalwart goes all the way back to the tax code of 1913! In collusion with the indictable rating agencies (by the way, when are we going to see some of these cases actually move forward as they were complicit in the theft of billions of dollars?), debt issuers continued to produce ‘inventory’ for a market that had to buy. And, as the quality of investments went down, the buyers were forced to keep buying. Why? Because the debt was good? Because somebody was up to repay obligations? NO! They had to keep buying because the law said they had to. And, worst of all, when governments decide to stick it to the bondholders – a rather populist impulse lately – they are sticking it… are you ready for this … to YOU!

‘Fixed’ income is a neutered, one-eyed, three legged mongrel dog at the SPCA currently awaiting euthanasia. It existed long enough to actually effectuate a season of wealth redistribution where prime brokers and agents got rich off your money. And now, now that we’re seeing pensions seeking liquidity for things like retirement and entitlements, the cupboard is bare. PIMCO’s Bill Gross got lambasted by professional investment advisors when he railed against fixed income dogma. Erroneously, market analysts, pundits and other charlatans lined up and pointed at buying statistics to tell him that his quality critique was wrong. Well, here’s some bad news for all you Harvard Business School and University of Chicago promoters. Just because someone buys something doesn’t mean that: a) they want to and; b) they wouldn’t buy something else if they had the chance. A market that is coerced by statute is…, well, a fraud. Bill’s right. Our economy is NOT producing and, if the ‘no-big-government’ Republicans actually catch the bus that they’re chasing at the moment, you will see that, like the Democrats of the current administration, the only way to prop up the illusion of the U.S. economy is for the government to keep spending. Take government procurement and government contractors out of the mix and we’re 25% more unemployed and 30% deeper in Depression.

“Full faith and credit” is an illusion. When Federal Reserve Chairman Ben Bernanke says that the “recovery from the crisis has been much less robust than we had hoped for,” what he means is that the ability to repay our financial obligations has just gotten more remote. To have ‘Fixed Income’ you need that critical component – INCOME!! Otherwise the game is FIXED (and, for those of you who didn’t grow up in an organized crime family, that’s actually a bad thing). In his speech to Congress a few days ago, he issued the most honest words of his tenure: “In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.” The bummer is that, following that sentence, he provided NO sign of confidence. Instead, he detailed the long-dating of Treasury assets to put their illiquidity safely out of range of the next two Presidential election cycles pushing maturities out to 6 to 30 years instead of the current trove of 3 years and less. And, in an amazing no-confidence vote, after discussing the failing of the housing market to levels not seen since World War II, he announced that the Fed would be investing principal payments in mortgage-backed securities because, clearly, they’re a better bet than the U.S. Treasury?

So why is it that, against all compelling data that evidences that the wheels have come off the bus and it’s careening off the cliff, do ‘fixed income’ promoters still look at investors and tell them that this is where their money is safe? Simple. First, because they’re already taking fees from you – fees that you’ll never recover. And second, because they don’t have the courage or intellect to come up with a more accountable strategy. What investor in fixed income would choose to lose all of their money over the risk that they may have to pay tax on INCOME? Presiding over the extermination of wealth, ‘managers’ are paralyzed by the fear that they may be irrelevant – pawns in a chess game that was rigged in 1913. For the past 13 quarters, household debt has been shrinking. Business and state debts have been relatively flat. This means that the inventory of investment debt has spent 13 quarters being shifted towards sole source production by the worst possible debt originator – countries with flat or negative GDP.

So, if you want to look at why PIMCO’s Bill Gross is correct in his assessment, look at the September 16, 2011 Federal Reserve’s Flow of Funds data on pages 60-64. You’ll see that we’ve got a structural problem in that ‘fixed income’ is missing its income (or asset) confidence. Oh, and by the way, for those of you who are big fans of S&P or other index public equities – tiny piece of bad news – there’s a strong correlation between the financial health of these companies and the credit behavior of the government. Bottom line. If the 80’s was the era of out-sourced heavy industry manufacturing; if the 90’s was the era of out-sourced consumer manufacturing; and, if the 00’s was the era of out-sourced services… then the 10’s will be the era of out-sourced investment income. And, for the record, the correlated returns to the positive will come from countries most of you have never visited. So here’s an idea. Before you lose more money from your 401(k) abysmal fixed income collapse, buy a plane ticket to a place with GDP growth in excess of 5% and get yourself a world-view. You may actually find out that there’s a bigger world out there and, heaven forbid, you may just come to like it.

Anyone Up for a Sweeter Song

Against the cacophony of Occupy Wall Street, Chancellor Merkel’s call to recapitalize German banks, and the growing chorus of those wailing about the coming Depression, I just wanted to remind us that there is a different narrative. When one realizes that the scarcity that has defined 150 years of industrial economies is simply an illusion created by those who seek some vestige of control, the path to an alternative space is readily discerned. For this week’s blog post, I turn to two alternative paths. First, a path that has been shared by my dear friend, collaborator and colleague, Palma Vizzoni. In this attached piece, she takes Integral Accounting and weaves it into a tapestry of West African narratives forming a beautiful view of what’s possible if we change our optics.

And second, as a reminder, I’ve included a piece from antiquity to remind us of the cost of drowning out the Sweeter Song and those who seek to offer it into a universe of frantic fear.



METMORHOSES BOOK 11, Translated by Brookes More
DEATH OF ORPHEUS

While with his songs, Orpheus, the bard of Thrace, allured the trees, the savage animals, and even the insensate rocks, to follow him; Ciconian matrons, with their raving breasts concealed in skins of forest animals, from the summit of a hill observed him there, attuning love songs to a sounding harp. One of those women, as her tangled hair was tossed upon the light breeze shouted, “See! Here is the poet who has scorned our love!”

Then hurled her spear at the melodious mouth of great Apollo's bard: but the spear's point, trailing in flight a garland of fresh leaves, made but a harmless bruise and wounded not. The weapon of another was a stone, which in the very air was overpowered by the true harmony of his voice and lyre, and so disabled lay before his feet, as asking pardon for that vain attempt. The madness of such warfare then increased. All moderation is entirely lost, and a wild Fury overcomes the right.—although their weapons would have lost all force, subjected to the power of Orpheus' harp, the clamorous discord of their boxwood pipes, the blaring of their horns, their tambourines and clapping hands and Bacchanalian yells, with hideous discords drowned his voice and harp.

At last the stones that heard his song no more fell crimson with the Thracian poet's blood. Before his life was taken, the maenads turned their threatening hands upon the many birds, which still were charmed by Orpheus as he sang, the serpents, and the company of beasts—fabulous audience of that worshiped bard. And then they turned on him their blood-stained hands: and flocked together swiftly, as wild birds, which, by some chance, may see the bird of night beneath the sun. And as the savage dogs rush on the doomed stag, loosed some bright fore-noon, on blood-sand of the amphitheatre; they rushed against the bard, with swift hurled theirs which, adorned with emerald leaves had not till then been used for cruelty.

And some threw clods, and others branches torn from trees; and others threw flint stones at him, and, that no lack of weapons might restrain their savage fury then, not far from there by chance they found some oxen which turned up the soil with ploughshares, and in fields nearby were strong-armed peasants, who with eager sweat worked for the harvest as they dug hard fields; and all those peasants, when they saw the troop of frantic women, ran away and left their implements of labor strown upon deserted fields—harrows and heavy rakes and their long spades after the savage mob had seized upon those implements, and torn to pieces oxen armed with threatening horns, they hastened to destroy the harmless bard, devoted Orpheus; and with impious hate, murdered him, while his out-stretched hands implored their mercy—the first and only time his voice had no persuasion. O great Jupiter! Through those same lips which had controlled the rocks and which had overcome ferocious beasts, his life breathed forth, departed in the air.

While his loved harp was floating down the stream, it mourned for him beyond my power to tell.

Conflicting of Interests

Early in this coming week, the United States Senate will be taking up a bill that is innocuous in name: The Currency Exchange Rate Oversight Reform Act of 2011. If you read the posturing running up to the procedural vote, you see the likes of Sherrod Brown (D-OH), Chuck Schumer (D-NY) and others talking about this vote as a ‘Jobs’ bill. Senator Brown would do well to reflect on his experience becoming an Eagle Scout when he and his colleagues choose to tell the public one message while executing an entirely different transaction. For the record, the Scout Oath is:

On my honor I will do my best
To do my duty to God and my country
and to obey the Scout Law;
To help other people at all times;
To keep myself physically strong,
mentally awake, and morally straight.

And, for completeness, the Scout Law (referenced above) is:

A Scout is:
Trustworthy, Loyal, Helpful,
Friendly, Courteous, Kind,
Obedient, Cheerful, Thrifty,
Brave, Clean, Reverent.

A few Senators have forgotten these Oaths and Laws in their most recent public statements. By putting the Secretary of the Treasury and the Federal Reserve in the role of chief arbiter of international trade policy, they are failing the public. The problem with the Currency Exchange Rate Oversight Reform Act of 2011 is that it solves nothing while ignoring the true economic disease. The bigger problem with it is that the sponsoring Senators are using anti-China rhetoric to try to get it passed. And the biggest problem with it is that this Act ignores the hundreds of U.S. corporations who – to satiate the demand of U.S. consumers for ever more, ever cheaper products – turned to foreign markets to enable the production that once happened here.

What does it mean to be ‘physically strong’, ‘mentally awake’, and ‘morally straight’? During the post-World War II period of American enterprise, the industrial machines of war were repurposed into the manufacturing envy of many countries. In an effort to show the world that the American version of Freedom and Democracy was desirable over all other social orders, we instituted policies designed to help us enjoy great, short-term benefits. Consumption, home ownership, credit, employment, tax incentives and countless other market aberrations were demanded to insure that the nation accelerated its ascendancy into the realm of super powers of the past. However, beginning with the Nixon Administration’s policies in 1970-71 through the present, we’ve systematically refused to see that, when we encounter challenges, it’s not appropriate to respond with blame. America is harvesting the fruit of its addiction to cheap goods – where Wal Mart was more of a strategic asset than jobs – and, now when we realize that we’ve gutted our domestic economy’s ability to recover, we seek to label the Chinese as the problem.

We didn’t ‘lose’ jobs to China. The stalwarts of the S&P, Dow Jones, and NASDAQ SENT those jobs to China, Vietnam, Thailand, Korea, Taiwan, and India to inflate profits which flowed AWAY from domestic employment and into the corporate coffers of a few and the financiers to whom they deigned ingratiation. Outsourcing - which sounded so good at the time - has left us with inadequate GDP to grow our economy. And until we solve that problem, outsourcing blame for bad corporate decisions will do nothing but harm us and the fragile relationships upon which we depend.

In a rare turn of events, I actually have profound sympathy for Timothy F. Geithner and the Federal Reserve Bank, who, under the Act, become responsible for policing a geopolitical risk that is well beyond their office. The U.S. Treasury and the Fed are neither structured to, nor capable of, remedying the ill advised industrial and employment policies of the past 40 years. Furthermore, this Act places Secretary Geithner and the Fed in an untenable conflict of interest. On the one hand, they are required to assess the manipulation of currencies done by foreign interests. However, at the same time, they have no choice but to acquiesce to the demands of their largest external shareholder – you guessed it, the very country that Senators Brown and Schumer want to demonize.

Honesty, conspicuously absent from the Oath and Law above, is a prerequisite for moral leadership. If this Act were referred to as the Secretary of the Treasury and Federal Reserve Geopolitical Appropriations Act, or the Treasury and Federal Reserve Appropriating the State and Commerce Department Act, it would face greater resistance and more appropriate public scrutiny. This Act is a bad idea. It’s morally unsavory as it fails to hold any domestic factors accountable for our own challenges. And, in the final analysis, no job will be created from this Act’s passage – including the dude that hands out the smiley face stickers at Wal Mart!

Another…! Boy Who Cried Wolf

Cameron McRae, Rio Tinto’s country manager for Mongolia is the latest in the long line of fear mongers who are willfully misleading the markets. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive,” was his comment on September 24 in Ulaanbaatar when it was suggested that Mongolia may ask for a properly negotiated agreement for the Oyu Tolgoi mine. He joins, in the Hall of Shame, the likes of Graham Hancock of the World Bank, Robert Friedland of Ivanhoe Mines, and Greg Anderson of Papua New Guinea Chamber of Mines and Petroleum for misleading countries regarding their capacity to participate in resource development projects. Under the guise of ‘scaring away investors’, his recent comments are the broken record of firms who have chosen willful fraudulent inducement to enter into sovereign contracts to prop up short term investment windfalls while directly contributing to the instability of countries. Somehow or another, his allegation of scaring investors ignores the risk to a young democracy – like the one being led by President Elbegdorj in Mongolia – which leads to civil war, violent conflict, and nationalization when a public learns that its leaders have been defrauded (or participated in a fraud).

To be abundantly clear, the following message is for the benefit of the intrepid (albeit frightened) investors in Ivanhoe Mines (NYSE: IVN) and Rio Tinto (LON: RIO) – a significant number of whom are readers’ pension and 401(k) institutional managers. Failure to renegotiate a grossly out-of-market agreement, advised in part by Goldman Sachs, presents far greater risk to your investment than listening to the empty cries from insipid, patronizing puppets.

The following information prepared by our team at M-CAM was presented to the Mongolian government in the late winter 2010 and early spring 2011, and to the Canadian Broadcasting Corporation in March 2011 for an interview which they never published. While representing the authors’ opinions, CBC failed to even publish the raw text of the agreements with Ivanhoe Mines or Rio Tinto for any reader to formulate his or her own opinion.

It is important to premise any discussion of the Oyu Tolgoi LLC Shareholder’s Agreement (the “SA”) with a reminder of the fundamental policy and structural failures embedded throughout the document and the project as a whole. On the policy/project side, it is, in this author’s opinion, an utter failure to protect the interests of the State of Mongolia (“Mongolia”) that any transaction involving the deployment of a strategic national asset (much less one the size and global consequence of OT) should leave Mongolia with ANY debt (particularly before any cashflows have been received) when it should have been paid a SIGNIFICANT (into the billions of USD) and UPFRONT fee just simply for granting a suitor the right to have the honor to steward such a unique and strategic asset.

On the structural side, the most significant and damaging items are:
1) The Capital Structure. The existence of, and extremely restrictive terms of, the Debt and/or Preferred Shares issued by OT (defined as Shareholder Debt or Funding Shares) as well as the Debt directly from Ivanhoe to Mongolia (defined as Existing Shareholder Loans) representing at least 40% of its entire GDP(!) which have the effect of transferring the value of OT from Mongolia’s equity stake to Ivanhoe as largely illustrated by:
a. Severe limitations on repayment of the debt
b. Exorbitant interest rates - far beyond any legitimate capital market rate
c. An inability to stop Ivanhoe from continuously authorizing the issuance of further debt under the same restrictive terms

2) The Illiquidity of Mongolia’s Equity. An impairment of Mongolia’s equity stake leaving it with no identifiable pathway to ANY Dividends OR the ability to monetize (e.g., sell or borrow against) its equity stake as partially evidenced by:
a. The irrevocable direction of ALL dividends (including Mongolia’s share) to Ivanhoe so long as any debt is outstanding
b. The inability for Mongolia to repay the “dividend absorbing” Debt or force OT to refinance the debt under more favorable terms
c. Restrictions on transfer of ownership (e.g., right of first refusal) and pledging of shares (as collateral to borrow money) that effectively block any ability to receive cash for its equity stake

3) The Lack of any Mechanism to Protect Mongolia’s Assets or Control Adverse Behavior by Ivanhoe. Mongolia has no contractual/legal pathway in which to block and/or remedy any adverse actions contemplated by Ivanhoe, including a protection of Mongolia’s minority equity stake or, more broadly, an ability to protect one of Mongolia’s most strategic assets as demonstrated in part by:
a. The complete absence of any protective representations & warranties and/or ongoing covenants (e.g., minority shareholder rights, performance obligations on Ivanhoe with associated rights and remedies)
b. The control of EVERY corporate governance and management decision through the control of: 1) all day-to-day operations, 2) the Board of Directors and 3) any Shareholder vote including, but not limited to:
i. The unhindered ability to force OT to enter into transactions to “leak” cashflows out of the Company, including approval of bonuses to Ivanhoe’s management
ii. The ability to unilaterally define the meaning of “available cash” for Dividends
iii. The ability to bury OT under Debt or sell its assets
iv. Ability to monetize Ivanhoe’s equity stake explicitly at the expense of Mongolia’s equity stake
c. The EXTREMELY out-of-market Management Services contract which pays Ivanhoe at least 3-5x what Rio Tinto (the 3rd largest mining company in the world) is conventionally compensated.

In summary, the SA effectively and elegantly cuts Mongolia completely out of the primary capital markets value chain around OT. Further, it straddles Mongolia with enormous liabilities and no legal way to protect itself or its strategic assets. It effectively delivers to Ivanhoe the entirety of OT’s value, including 100% of the economic value of Mongolia’s 34% equity stake, while leaving Mongolia with bankruptcy-inducing indebtedness and a lack of control or oversight mechanisms. The Shareholder Agreement should be renegotiated to remedy these structural failures and should hold, as the audacious standard, an agreement that meets or exceeds the standards of the agreements negotiated by Rio Tinto in G-20 countries.

It’s time for actual shareholders to step up and demand that corporate governance rules be a minimum standard for mineral and energy investment. If Rio Tinto and Ivanhoe can’t make money by operating in a form that doesn’t destabilize governments, than they shouldn’t be the recipient of managed funds and should not blight the public equity markets in New York, London and the rest of the world.

A complete review is available upon request.

Scarcity in Search of Abundance

I just completed a weekend workshop with several intrepid University of Virginia students organized by the Student Entrepreneurs for Economic Development (SEED @ UVA). Over the course of the two day session, my concern for what passes as business education heightened as I watched students struggle with a lack of practical awareness of cross-border business. That this weekend seminar followed on the heels of a much more intensive workshop last week with an expanded group of exceptional globally minded collaborators, made my impulse to broaden commerce and finance literacy grow all the stronger.

While I could select countless topics to unpack in today’s conversation, the theme that struck me most profoundly is our unconsidered assent to the Malthusian principles of glut and scarcity. Its corollary – that economic goods exist when scarcity is present while abundance is ‘free’ – serves as a fundamental animating fallacy of our current economic understanding. To understand Malthus, one must apprehend his critique of his secular predecessor, Adam Smith in which he commends a deeper inquiry into the relative contribution of a consuming and working population in light of access to resources, command of application of labor thereto, and the consumption capacity of systems. The Reverend Thomas Malthus has a particular seat at today’s table as an Anglican clergy and Professor at the East India Company College – two sources of inspiration and patronage that undoubtedly shaped his work and are ignored at our present peril.

What neither of these seminal economists and (a)moral philosophers adequately addressed or understood was the tyranny of colonialism that shaped their understanding of systems. It is then, no accident, that in the application of their principles, colonialism (in its modern incarnation – mercenary military interests serving anonymous corporate patrons) is an absolute necessity. As treated in previous writings, the notion that ‘resources’ are ‘free’ is a principle that can only be promoted in an Occidental world view in which humans are sovereign ‘over’ all things. The notion that it is the role of human enterprise to manufacture economics around the controlled use of scarcity is as Anglican now as it was two and a half centuries ago.

However, there is a particular form of scarcity economics I find instructive and inspiring. It is a component of a very complex economic system which, by most historians’ accounts, led to an economic system lasting over 1,500 years. Credited to be the innovation of the great Chinese diplomat Chzan Tsan in the first century BCE, the Chinese refinement of industrial scale silkworm husbandry led to an impulse to use this manufacturing mastery to launch one of the most audacious efforts in global trade. Sending caravans from Beijing and Xi’an to Venice by way of Kyrgystan, Tajikistan, Kashmir, Pakistan, Afghanistan, Turkmenistan, Uzbekistan, Persia, Iraq, Syria, and Turkey, and then by boat to modern Italy, a great economic mystery unfolded. When one embarked on this journey, an elegant dance between abundance and scarcity played out in a rhythm and syncopation unfamiliar to modern business. Imagine the following.

When I’m leaving Beijing, my pack animals are laden with an ABUNDANCE of silk. For my own PROVISIONING, I pack some porcelain dishes, some paper and calligraphy in SCARCITY , and sufficient food and water to feed my crew and our animals. By the time I reach Turfan, several of my animals have been eaten as they passed through the inhospitable deserts and mountains and, as they die, I need to trade bulky silk for other artifacts. These trades have a particular dynamic. My ABUNDANCE of silk meets a relative SCARCITY of the same in the Gobi desert. In the Gobi desert, gold, weapons and some precious stones exist in ABUNDANCE. I trade my ABUNDANCE for local ABUNDANCE and the value of the trade is the uniqueness and SCARCITY made visible through my enterprise. At no point in this transaction is there any absolute SCARCITY or ABUNDANCE – just a shared IGNORANCE of each others’ context and provisioning. Along the way, my ABUNDANCE of silk is transacted across relative ABUNDANCE to local ABUNDANCE trades informed by the capacity I have to transact. Gold, and precious stones – much smaller and more transportable – start moving in relative ABUNDANCE until I reach Tashkent, Blakh and Merv where I trade more silk now for the local ABUNDANCE of spices. I even amplify the value of my trade by trading my SCARCE porcelain for even more local ABUNDANCE. In Qom, I trade for silver and smith work. In Baghdad, I trade for art and clothing and by the time I reach Tyr, I have relative equivalence of the legacies of my trading. All along the way, my endeavor brought my ABUNDANCE – unknown to my trading partners – into local ABUNDANCE – unknown to me – and in my transaction, I find neither Adam Smith, Thomas Malthus, John Maynard Keynes, nor Milton Friedman.

What makes this model compelling – beyond its obvious millennial success (in contrast to our barely 40 year old failed post-industrial model) – is that I realize that the enterprise value exists in the systematic REMOVAL OF INFORMATION ASYMMETRIES. Unlike the ignorance arbitrage that is central to all of our current economic systems where we rely on cabalistic monopoly collusion between governments and their corporate patrons, true value was discerned through the uniqueness and cultural enrichment of trading partners. And rather than pulling a ‘duty-free’ regression to ‘globalized monotony’, the value of the network is maximized when local uniqueness is celebrated and optimized.

It is regrettable that the commerce and business schools across the globe – including places once central to the Silk Road economy – fail to learn from the brilliance gleaned from principles of this amazing trade innovation. Seeking to pretend that modern economics somehow transcends these core principles insures that our students are incapable of functioning as moral citizens in a global community of transacting parties. It also blinds us to the ABUNDANCE from which we can be empowered and through which we can engage those around us. Here’s to Chzan Tsan – let his wisdom inform us again.