Introduction flight to simplicity

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Introduction flight to simplicity

  1. 1. A Flight to Simplicity Chris Cook Kansas City 23 July 2012
  2. 2. About me - Trading Places
  3. 3. “21st Century problems cannot be solved with 20th Century solutions”.
  4. 4. Market 1.0 – decentralised & disconnected
  5. 5. Market 1.0 – physical market presence
  6. 6. Here: Market 2.0 - centralised & connected
  7. 7. Market 2.0 - presence via intermediaries
  8. 8. There: Market 3.0 - decentralised & connected
  9. 9. Market 3.0 - network presence
  10. 10. Here - at Twin Peaks
  11. 11. Peak Credit - financial demand on people
  12. 12. Peak Oil - demand on a finite resource
  13. 13. Peak Credit – intermediary Banks createcredit pyramids on their bases of Capital Credit Capital
  14. 14. Banks outsourced credit risk
  15. 15. Freeing Capital to support more credit creation
  16. 16. Totally – securitisation and sale of debt to shadow bank investors
  17. 17. Temporarily – Credit Derivatives(CDS - a time-limited guarantee)
  18. 18. Partially – using credit insurance from insurers such as AIG
  19. 19. Radioactive cocktails of all three, like CDOs, structured finance and so on
  20. 20. The Result was a bigger Credit Pyramid than Banks alone could sustain… Credit Investor Capital Bank Capital
  21. 21. …and an opaque shadow banking system of Investors holding sliced and diced risk Credit Investor Capital Bank Capital
  22. 22. This pyramid of Credit funded the Mother of all Bubbles in US property prices….
  23. 23. …and servicing this credit finally exceededthe financial capacity of the US population
  24. 24. Maybe the end of cheap oil spiked the bubble?
  25. 25. Peak Credit – was the point when the Property Bubble began to deflate
  26. 26. But by now no-one knew where the Risk was Credit Investor Capital Bank Capital
  27. 27. Banks started to think, “if this is what our balance sheet looks like…..”
  28. 28. “…what does everyone else’s look like?”
  29. 29. The problem is not shortage of money - liquidity
  30. 30. It is shortage of Capital - solvency
  31. 31. Solvency of Banks is one aspect Credit Capital
  32. 32. The other aspect is the solvency of populations
  33. 33. And a secular decline of purchasing power
  34. 34. Loans which cannot be paid, will not be paid
  35. 35. Non-performing loans drain money out of the system...
  36. 36. ...threatening a deflationary spiral...
  37. 37. ....which requires periodic transfusions
  38. 38. ...to avoid Depression
  39. 39. Quantitative Easing – increases quantity of money and prevents deflation
  40. 40. This dilutes the value of money, and causes inflation of financial asset prices
  41. 41. Money will only inflate retail prices if lent or spent into circulation
  42. 42. But at the Zero Bound of 0% dollar interest rates strange things happen
  43. 43. Investors buy anything but dollars whether it carries a return or not
  44. 44. Investors buy Structured Products from Banks and Units in Exchange Traded Funds
  45. 45. The motive is Fear: investors aim to avoid loss, not to make speculative transaction profit
  46. 46. Financial demand – not consumption – has caused correlated commodity bubbles
  47. 47. Markets have suffered a cardiac arrest
  48. 48. So Investors have actually created the very inflation they seek to avoid
  49. 49. Funding – long term investment in productive assets
  50. 50. Financing - short term investment in creation of new assets......
  51. 51. ....and trade credit necessary for the circulation of goods and services
  52. 52. Resolution & Transition - Getting from Here to There
  53. 53. “21st Century problems cannot be solved with 20th Century solutions”.
  54. 54. In fact, the answers lie prior to the 18 th Century“
  55. 55. Community Partnership Enterprise ModelStructure - Stakeholders - Custodian - User - Manager - InvestorLegal framework – NondominiumInvestment instrument - Stock
  56. 56. User Payment Custodian % %Investor Manager
  57. 57. Legal Framework – NondominiumTwo complementary agreementsCollective agreement between stakeholders jointlyAssociative agreement between stakeholders individually or severally
  58. 58. Collective AgreementGoverns creation, issue and exchange of Stock, holds bank accounts and title/transaction registriesStakeholders have negative veto rightsInterfaces with people and organisations (legal persons)
  59. 59. Associative AgreementUser – pays for the use of productive asset (land, energy, IP)Manager – receives a proportional share in the flow of use valueInvestor – acquires Stock consisting of unitised use value sold forward at a discountComplementary to the collective agreement – akin to a for profit limited companys shareholder agreement
  60. 60. Nondominium - OutcomesA consensual non-statutory development corporationNeutral – removes ego and politicsCollaborative - stakeholder interests aligned – no principal/agent problemSocial Business – shared surplus/ not for loss - relationship-based not transaction-basedSustainable - everyone has an interest in minimising cost of use over time
  61. 61. Investment Instrument - Stock 1.0
  62. 62. Stock 2.0 – Back to the FutureStock - an undated credit returnable in payment for use value of productive assetSold at a discount – eg £1.00 of Rental Stock sold for 80p gives an absolute return of 25%Rate of Return is literally the rate at which Stock may be returned to the issuerRate is not fixed, but depends on whether there is a flow and what it is
  63. 63. Stock - OutcomesCompetitive - no compound interestSecure – no default risk, and the more affordable the rental, the more secure the returnLiquid – single asset class, not fragmented by date or interest rateLiquid – Manager will always buy Stock on behalf of Users for redemption at best offer < or = to £1.00
  64. 64. A Flight to Simplicity

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