Related Rates-
In differential calculus, related rates problems involve finding a rate that a quantity changes by relating that quantity to other quantities whose rates of change are known. The rate of change is usually with respect to time. Time can even be related to another quantity (even time!) as long as a formulaic relationship can be shown. So what? We are living in a related rate problem, right now. The recent economic mess is a great example, since may economists knew this kind of implosion was coming - someday, off in the future sometime. And would occur in phased steps, over about a ten to 15 year period. WRONG! This problem started in the Fifties with the RAND Corporation recommending the shift from a saving/investment economy, to a consumerist (they called “Rational Choice”) economic model. Now days, rate of change has not only increased, but the rate of the rate of change has increased!
The models underlying society at every level, which are largely based on a linear model of change, are going to have to be redefined. Because of the explosive power of exponential growth, the 21st century will be equivalent to 20,000 years of progress at today's rate of progress; organizations have to be able to redefine themselves at a faster and faster pace.
Over time,the pressure I outline below reached a super-critical mass, and when the cards fell, they fell in a matter of days. Take a look:
Critical $$$ Bubbles (see graphic link at end of post)
off-book asset liabilities
GAAP allows toxic assets (under performers) are simply taken off the books and dumped into offshore accts. Can't be audited at that point, but they are still REAL!
Action taken - adopt IFRS over GAAP for acct'ng.
Additional action required
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credit card debt
Use of credit cards & home equity to make up for wage rise differential - past 20 ears.
Action taken - savings rate going up, but will go back down when mkt stabilizes.
Additional action required
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Emerging Markets
china/india/latin america - financial expansion/contraction of these nations is accelerated.
Action taken - current deflationary cycle will continue thru 2010
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Sub-Prime Mort
see visual guide http://s3d.netfirms.com/Downloads/visualguidecrisis.jpg
Action taken - see blog
Additional action required
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private derivative contracts
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
Action taken
Additional action required
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Default Credit Swaps
A credit default swap is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default or on the occurrence of a specified credit event (for example bankruptcy or restructuring). Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
Action taken
Additional action required - it has to crash
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bond market inflation/deflation
Radical swings in bond yields, usually in a negative parallel track with the stock market - That's how the bond market could be gutted, and trillions in wealth destroyed. Theoretically, financial disruption may (???) occur which causes some of the trillions in derivatives to go sour, causing massive selling of the underlying assets to raise cash to reduce margin and other debt. Such a sudden "crisis" could erase trillions from global liquidity. How? Because the money was lost. The derivatives turned out to be worthless, and the stocks and bonds were sold into a plummeting, panicky market. All derivatives valuation depends on it's "underlying assets", not the instrument itself.
Action taken
Additional action required - it has to crash.
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Banking reserve exposure
banks over leveraged - The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates. 10:1 is a good ratio of borrowed assets (leverage) to "cash on hand". The US bank average is now 30 to 50:1. European banks go to 135:1. THIS IS VERY BAD!!
Action taken
Additional action required
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Current Transformational Issues (see graphic link at end of post)
- my random thoughts in trying to pull all the political/social/economic issue threads together, or as Stephen Stills once sang, "there's something happening here...what it is ain't exactly clear".
The change in our society and how it is structured are both causing and necessitating change in the economy and its industries. The crisis is bigger than it appears in the rear-view mirror. It’s more than jobs lost and companies folding. It’s a new economy built on a new society that we are only just beginning to recognize if not understand. What is happening now, is just such a transformation, and it has everyone concerned, upset, worried, whatever. the important thing to remember is that this is NORMAL! This has happened many times in human history, but with no recent memory of so many threads converging at once, we are all apprehensive. Starting with the RAND Corporations recommendation of shifting from a saving/investing economy to a “consumerist” one (RAND theorists' notion that rational self-interest, rather than collective interests like religion, governs human behavior was the theory) to the present day vultures coming home to roost is what we are witnessing - in real time!
Creative Destruction
Entire sectors of the economy will disappear or will change so much they might as well disappear:
America may well not be in the auto industry soon. “American car sales have dropped to an annual pace of nine million, from some 17 million in 2007. Even if sales increase considerably, that is likely to leave a lot of unneeded auto factories,” said The Times.
• Financial services will have to be completely remade (by government). Check "Eight Bubbles"
• Newspapers will start to vanish. Magazines are in worse shape. Books‘ channels of manufacturing, distribution, and sales are going though through upheaval. Check "Kindle"
• Broadcastmedia will become meaningless, replaced by digital delivery. Even the way we distribute, buy and play music and movies is radically different from just ten years ago!
• Advertising will be next to feel the earthquake, after media.
• Large-scaleretail will shrink and consolidate and then be transformed by a search-and-buy economy.
• Business travel- including the convention and conference business - will take a huge hit in the financial crisis and much of it won’t come back, replaced by more efficient communications.
• Carbon polluting energyindustries will shrivel.
• Residential and commercial real estate will have to restructure around a new capital structure. Homes will get cheaper but so much of homeowners’ equity has been wiped out in real estate and stock investments that apartments will be what’s built when building returns. Commercial real estate had its own bubble and it will be hit with a double whammy as tenants shrink and disappear. Construction will, of course, decline.
• Health carewas the one sector in this month’s employment report that showed growth. But we know that medicine, pharma, and insurance will undergo a forced restructuring.
• Computers are getting so small and cheap and open that that industry is under growing pressure. As every other device we have becomes smart and connected, the "computer" itself will begin to disappear.
• Universities are facing competition from each other and commercial newcomers online and have suffered huge blows to their endowments; they will have to change. We should be so lucky that elementary and secondary education will also face such pressure.
• Education is a growth opportunity but not in its current institutions. As industries are killed and turned upside-down, present and former employees will need to be retrained in technology, in the skills of starting and running a business, in entirely new skills.
• Finally, consumer productsof all sorts will have to change in the face of empowered customers and, in some cases, with competition from small competitors given the benefits of scale on platforms (see: eBay, Etsy, Amazon, et al). They will also face price pressure thanks to online comparison shopping and new retail structures.
• Government will grow but thanks to the empowered populace, it, too, will face fundamental change.
The process of transformation that accompanies radical innovation
• The opening up of new markets and the organizational development from the craft shop and factory to such concerns as (fill in the blank) illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ...
• Current methods, processes, "things", must be destroyed to create the new. This always causes upheaval on ALL fronts.
• Microsoft, MTV, CNN, FedEx, Intel, Hewlett-Packard, Burger King all started up in this kind of "crisis"
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Socio-political
Because of all this, it’s hard to build a business model anymore out of screwing people - since when you do, we the screwed can rise upand be heard and fight back and make evil too expensive. Our interconnectedness is also what made the complex derivatives & MBS,etc. - the toxic assets - that triggered the financial crisis possible - but that is all the more reason why we will demand transparency, our best antidote to evil. That will change how business is run in fundamental ways.
• transformation phases (pre-development, take-off, acceleration, stabilization) can provide essential insights
• Essential change in international relations & constructs - NATO-like organizations in every corner of the world.
• Realtionships will become more "bottom-up" oriented as inter-connectedness becomes pervasive.
• applies from the "bottom-up" socially
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Global Restructuring
• a new economy built on a new society that we are only just beginning to recognize if not understand
• a great “compression,” as an economy built on perceived value reconciles with actual value.
• Emerging Markets - china/india/latin america - financial expansion/contraction of these nations is accelerated.
globalization is not simply a trend or fad but is, rather, an international system. It is the system that has replaced the old Cold War system, and, like that Cold War System, globalization has its own rules and logic that today directly or indirectly influence the politics, environment, geopolitics and economics of virtually every country.
But remember... not very long ago, economic globalization— the free worldwide flow of capital,goods,and labor—looked both inevitable and inexorable. Most governments seemed to embrace the very real benefits being offered by rapid technological change and international markets and sought to liberalize their economies in order to maximize these gains. Policymakers worked to prepare their societies for a world of ever-increasing interconnectedness and relentless competition,and the debate—at least within the United States—started to revolve around how to cope with the effects of this new “flat”earth. Globalization WILL continue, but in a slower more "muddled" fashion - I know this contradicts the related rate scenario, but this is a temporary contraction of the process.
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"Great Power" dissolution
• the vast middle of transformative political-socio-economic change being wrought right now by globalization's spread/speed.
• Re-tooling military role - "war among the people" - get out of a big-war mentality and focus on the reasonable scenarios ahead
• Ditch the UN - NATO-like organizations in every corner of the world.
General Sir Rupert Smith and General David Petraeus have both theorized and implemented just such an approach - Six Rules, based on the British experience in Malaysia, seem most the most effective:
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Keep an achievable, realistic goal uppermost in mind. “Eliminating Global Terror” is not realistic. Containing it is.
Coordinate your efforts with all concerned governments. Terror organizations are extra-statist, so this is critical.
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Intel ---> Know thy enemy!
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Separate terror organizations from their base of support. This is primarily a social function, like a police or firefighting department.
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Neutralize them physically when you can.
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Have a Post Action Plan at the ready.
All the anxiety out there requires someone to offer comfort...or at least some sort of rational explanation. The irony is, if you insist on a rational explanation, there probably isn't one. Humans look for patters, even if there aren't any, and that turns our ex[pectations into pre-meditated dissapointments, So, I found this list o' thoughts that my friend Pete Cochrane has on his web site ( http://www.cochrane.org.uk/ )... he is an inveterate list-maker, but this oneis pretty good, so:
1. The new economy does not obey the laws of physics
2. Online markets are not the same as the old ones
3. The more bits that flow, the more the atoms will want to move
4. The Internet enables new and novel interactions
5. It also enables new forms of organization
6. Organisational charts should be hyper-linked, not hierarchical
7. Hyperlinks subvert hierarchy
8. Networked markets can change suppliers overnight
9. Knowledge workers can change employers over lunch
10. Networks promote new forms of knowledge exchange
11. Networked markets know more about products than companies do
12. Markets are getting smarter, more informed, and faster
13. People get better information and support from one another than from vendors
14. What happens to markets happens among employees
15. Brand loyalty is the corporate version of marriage - look out for divorce!
16. Companies that do not network and belong to a community will die
17. Exponential change is like a tidal wave - by the time you see the danger it is too late to run
18. We now have two classes in our society: those who will spend any amount of time to save a little money; and those who will spend any amount of money to save a little time
19. Work is no longer a place - it is an activity - and I got to my office to be interrupted - for "pheromonal" excitement
20. Technologies and economies are like a ratchet - we cannot go back, an agrarian economy could not support the 6 Billion people now on this planet.
According to Michael Panzner, the U.S. is not in a typical recession. Instead, he believes the crisis more closely resembles a depression, in which we can expect an extended period of economic contraction accompanied by deflation.
Panzner said the largest players in our banking system are insolvent. He suggested their current situation was brought on by a combination of factors, including exposure to trillions of dollars of mortgage backed securities, derivatives, and default swaps, and suggested that bailouts and stimulus packages will only postpone the inevitable, not resolve the nation's financial troubles. "What got us here, decades of excesses, decades of imbalances, you can't just stop them by saying, 'OK, we're determined and we're going to think positive,'" Panzner remarked. (Editor's note : that's me - since real value of wages has been static for the last 20 or so years, we have, as a society, replaced normal wage gains with CREDIT CARDS and HOME EQUITY credit. Now this is part of a greater whole, as Panzer points out, but very underestimated and unrecognized...)
What does Michael Panzner see on the horizon then? Our currency will continue to be devalued by the ongoing 'printing press' policies of our government, he said, and we can expect an inflationary environment. Real estate prices will fall even further, perhaps not reaching final lows until 2012 at the earliest. There will be multiple "lurches down" in the stock market, Panzner continued, noting the DOW might fall by as much as 75% from its current level. The retail sector could be wiped out as the "religion of consumerism seems to be dying," he said. At the extreme, Panzner foresees the U.S. breaking apart, conflict with Mexico, and perhaps another world war. You see, we had a "globalization" framework before - it was called colonialism, and ended with World War One.
Parts of the country will become "suburban wastelands" due to water and energy issues, Panzner further speculated. He exhorted listeners to adjust their attitudes and lifestyles accordingly, and to accept the reality that the current economic downturn is not short term -- it's the new norm. He recommended people pay down debt and live within their means, and advised investors to look at precious metals like gold, silver, and platinum.
Please see the "Eight Bubbles" graphic on the links below-you may have to download it and pull it into your Windows / Mac / Linux graphic viewer and zoom in, bit the graphic pretty much tells the story...
Graphic One: CRITICAL BUBBLES - http://s3d.netfirms.com/Downloads/Criticalbubbles.jpg
Graphic Two: Current Transformational Issues - http://s3d.netfirms.com/Downloads/Currenttans.jpg
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