Understanding and navigating the economic crisis by Ernesto Spruyt - February 2009 (ernestospruyt@freeler.nl) Goal : provide insight in the workings of the system that we call ‘the economy’ to be able to better navigate the current economic crisis as a manager and/or entrepreneur The economy in a nutshell What happened? What will be next? How to heal the economic system? A methodology for managers, entrepreneurs and ‘community wizards’

Goal : provide insight in the workings of the system that we call ‘the economy’ to be able to better navigate the current economic crisis as a manager and/or entrepreneur

The economy in a nutshell

What happened?

What will be next?

How to heal the economic system?

A methodology for managers, entrepreneurs and ‘community wizards’

The economy in a nutshell Unlike what is stated by many politicians and ‘economists’ in the media, consumption does not lead to wealth creation Production creating value Consumption using/wasting value Saving storing value Spending exchanging value Borrowing/Debt promising value The money domain: 1) a means of exchange; 2) a store of value; 3) a unit of account Good credit Bad credit Wealth Poverty A bank’s primary function is to intermediate between those who save and those who borrow

Flaws in our economic system Our “free market” economy has in fact always been very heavily managed, market principles applied only selectively Production creating value Consumption using/wasting value Saving storing value Spending exchanging value Borrowing/Debt promising value Limited saying over allocation of savings Bad credit and leverage heavily promoted by central banking monopoly Productivity is not appropriately measured; GDP is meaningless Governments distorting market and risk/reward mechanisms; creating moral hazards Governments have an incentive to create inflation, and to conceal it Banking: many but inappropriate rules, too little enforcement Incentive systems for companies not in line with ‘stewardship’ principles Money=Debt=Perpetual growth necessary to service it

How this is draining you and your community Removing the drains on our communities is a tremendous opportunity for creating wealth Production creating value Consumption using/wasting value Saving storing value Spending exchanging value Borrowing/Debt promising value Pension funds and money managers funneling savings to corporations, not sme’s Irresponsible and predatory lending Oligopolies and unfair market barriers, killing market dynamics Savings being destroyed by inflation Banks financing (unethical) corporations abroad, but not your local entrepreneurs Taxes spent on corruption, war, other inefficient, undesirable policies Talent, creativity, time spent on counter productive activities Companies behaving unethically, towards people and/or environment

So, what happened? Ever since Ronald Reagan the US (bipartisan) government has been hollowing out its economy to the point of collapse Production creating value Consumption using/wasting value Saving storing value Spending exchanging value Borrowing/Debt promising value Lowest savings rate ever Massive consumptive borrowing by state and consumers Borrowing did not go into productive investments China/Japan/EU footing large part of the bill of credit defaults All savings have been spent Production moved overseas Confusing consuming with wealth creation Heavy money creation (=inflation) through mortgage bubble

So, what happened? in figures...-1 The US has been living structurally beyond its means...

So, what happened? in figures...-2 ...as our growth-based financial and economic model is running into the physical reality of resource depletion...

So, what happened? in figures...-3 ...leading to an explosion in (unsustainable) debt...

So, what happened? in figures...-4 ...at a time the US has been in a slow motion economic crash (since around Y2K)...

So, what happened? in figures...-5 ...leading to systemic failure, and government turning on the printing press (=massive inflation = lower living standards)

The bailout: why it aggravates the problem Goverments try to solve this problem by creating more of what caused it: debt Creating more debt instead of less Rewarding bad behaviour while obstructing market forces Debasing currencies by creating massive amounts of money out of thin air

Creating more debt instead of less

Rewarding bad behaviour while obstructing market forces

Debasing currencies by creating massive amounts of money out of thin air

Global economy imploding The effects of the credit crisis are starting to ripple through the global economy

What’s next? -1: short term outlook The worst is yet to come: financial crisis is now transforming into an economic crisis [depression] Consumers: mass firings, no access to credit, problems repaying debt Investments: no access to credit, on hold due to imploding demand Governments: spend, spend, spend; with borrowed and then printed money Government bonds: the next bubble? Inflation: will kick in heavily sooner or later (rising prices, but no rising incomes) Value: anything the government can’t replicate (precious metals, commodities) Difficult/impossible to predict timing and severeness of the bottom, but considering peak-everything it will likely take years to recover (Japan: no serious recovery in the last 19 years)

Consumers: mass firings, no access to credit, problems repaying debt

Investments: no access to credit, on hold due to imploding demand

Governments: spend, spend, spend; with borrowed and then printed money

Government bonds: the next bubble?

Inflation: will kick in heavily sooner or later (rising prices, but no rising incomes)

Value: anything the government can’t replicate (precious metals, commodities)

Difficult/impossible to predict timing and severeness of the bottom, but considering peak-everything it will likely take years to recover

(Japan: no serious recovery in the last 19 years)

What’s next? -2: long term scenarios While many think that we’re in ‘Balancing the budget’ (and act accordingly), we’ve actually entered ‘The long emergency’ Green Brother Watching You The Long Emergency Balancing The Budget Business As Usual

‘ The long emergency’: bye bye market-economy In ‘The long emergency’ the shift from a market-economy towards a managed-economy (=more drains) will be intensified Trends in governance : -Centralization (EU, WTO, Kyoto, UN, etc): as countermeasure to protectionism -Diffusion of gov’t and private sector (Gov’t becoming banker) -Trade-off between privacy and security -Countertrend: social unrest, civil disobedience, liberty activism Trends in the economy : -From consumerism to government spending as key driver -Middle class shrinking, widening gap poor & rich -Oligopolization: government determines who has acces to finance -Countertrend: localized business & entrepreneurship Sustainability becomes a sine qua none Trends in business : -Comply with gov’t policies (encouraged via regulations, subsidies, access to credit lines) Focus on efficiency & reducing costs Technological innovation: energy, recycling, efficiency New business models: co-sharing, co-creation, open source, peer2peer, etc -Sustainability becomes integrated part of policy Trends in consumption : -From spending to saving -Seeking security in the broadest sense (physical security, but also mental: in human relationships/ community) -Consumers becoming producers -Focus on functionality as opposed to emotional benefits -Seeking value for money / quality regains importance

Trends in the economy :

-From consumerism to government spending as key driver

-Middle class shrinking, widening gap poor & rich

-Oligopolization: government determines who has acces to finance

-Countertrend: localized business & entrepreneurship

Sustainability becomes a sine qua none

Trends in business :

-Comply with gov’t policies (encouraged via regulations, subsidies, access to credit lines)

Focus on efficiency & reducing costs

Technological innovation: energy, recycling, efficiency

New business models: co-sharing, co-creation, open

source, peer2peer, etc

-Sustainability becomes integrated part of policy

How to heal the economic system: massive decentralization The solution is decentralization: restoring democratic principles and integrity, removing monopolies and applying subsidiarity Production creating value Consumption using/wasting value Saving storing value Spending exchanging value Borrowing/Debt promising value Use savings to stimulate productivity within the community Lend to those you know and trust and can hold accountable Buy products from (local) companies you know, trust and can hold accountable Undoing currency monopolies Decentralizing the banking system; democratize intermediation of savers-borrowers Undo policy monopolies. Decentralize policy making where possible (subsidiarity) Mobilize talent, creativity, time for the benefit of the community Produce and consume in a way that does not harm people and planet

Key principles for entrepreneurs and managers These 3 basic principles form the simple paradigm for businessmen with responsibility and leadership Shift all your attention, energy, spirituality, money, leadership away from the centralizing ‘tapeworm’ economic system towards building wealth for you and your community; in other words: make money removing the economic drains in the community Create value taking into account the longevity and quality of vital human support systems, such as the environment and the society: build sustainable decentralized businesses Build abundant wealth locally and globally with one proviso: do no harm

Shift all your attention, energy, spirituality, money, leadership away from the centralizing ‘tapeworm’ economic system towards building wealth for you and your community; in other words: make money removing the economic drains in the community

Create value taking into account the longevity and quality of vital human support systems, such as the environment and the society: build sustainable decentralized businesses

Build abundant wealth locally and globally with one proviso: do no harm

Where to start? How you define your community, what you consider a drain and where you see business opportunities is a subjective matter The Solari network ( www.solari.com ) has developed a simple methodology for detecting and removing wealth drains in your community: Avoid co-dependent strategies: 1) fighting the system, 2) dropping out Organize: form a taskforce/investor circle with people you know and trust (goals & level of formality up to you) Study & education: how you are being drained, how you can remove the drains Withdrawing: “Coming Clean”, feeding local living economies, avoiding dirty tricks, earning ‘clean’ money & prestige Profiting: from a shrinking tapeworm, from growth in planetary wealth, seizing business opportunities

The Solari network ( www.solari.com ) has developed a simple methodology for detecting and removing wealth drains in your community:

Avoid co-dependent strategies: 1) fighting the system, 2) dropping out

Organize: form a taskforce/investor circle with people you know and trust (goals & level of formality up to you)

Study & education: how you are being drained, how you can remove the drains

Withdrawing: “Coming Clean”, feeding local living economies, avoiding dirty tricks, earning ‘clean’ money & prestige

Profiting: from a shrinking tapeworm, from growth in planetary wealth, seizing business opportunities

Coming clean Coming clean means: aligning your principles and your actions Become inspired Explore / define your principles [create meaning/purpose in life] Switch media Optimize your time Be healthy Create a home / create community Optimize your finances [get rid of debt] Educate yourself Vote with your money and job [adapted from: http://solari.com/archive/coming_clean/ ]

Become inspired

Explore / define your principles [create meaning/purpose in life]

Switch media

Optimize your time

Be healthy

Create a home / create community

Optimize your finances [get rid of debt]

Educate yourself

Vote with your money and job

[adapted from: http://solari.com/archive/coming_clean/ ]

Who is my community? Define your own community and design it to minimize external drains There are many real life examples of (sub-)systems designed to keep the value within: local currency systems (e.g. LETS) customer loyalty systems (e.g. airmiles, frequent flyer programs) consumer labels (e.g. fair trade, eko / organic, rainforest alliance) the local first movement:

There are many real life examples of (sub-)systems designed to keep the value within:

local currency systems (e.g. LETS)

customer loyalty systems (e.g. airmiles, frequent flyer programs)

consumer labels (e.g. fair trade, eko / organic, rainforest alliance)

the local first movement:

Profiting from decentralizing the economic system Creating real wealth by empowering individuals/local communities instead of centralized institutions Examples of tactics: Cut out the middle man Increase self-sufficiency Cutting out time&distance Cost reducing products&services Recycling/smart use of materials Demonetize and / or de-commercialize transactions Mobilizing latent resources (e.g. elderly people, unused space, waste) Example areas of opportunity: Peer2peer financing. E.g. www.zopa.com , www.boober.nl Open source / co-creation systems. E.g. www.mozilla.com Decentralized/P2P food systems. E.g. www.odin.nl ; www.locallygrown.net Community Supported Agriculture ( CSA ). E.g. www.vvhp.nl or www.localharvest.org Decentralised, renewable energy. E.g. www.pedalpower.org Energy-efficiency. E.g. www.happyshrimp.nl Recycling. E.g. Cradle to cradle design or www.freecycle.org The point is: it can be mainstream or niche, local or global, large scale or small scale, profit or non-profit; as long as it 1) doesn’t do harm, 2) empowers individuals & communities, and 3) reduces the drain from the ‘tapeworm’ economy.

Examples of tactics:

Cut out the middle man

Increase self-sufficiency

Cutting out time&distance

Cost reducing products&services

Recycling/smart use of materials

Demonetize and / or de-commercialize transactions

Mobilizing latent resources (e.g. elderly people, unused space, waste)

Example areas of opportunity:

Peer2peer financing. E.g. www.zopa.com , www.boober.nl

Open source / co-creation systems. E.g. www.mozilla.com

Decentralized/P2P food systems. E.g. www.odin.nl ; www.locallygrown.net

Community Supported Agriculture ( CSA ). E.g. www.vvhp.nl or www.localharvest.org

Decentralised, renewable energy. E.g. www.pedalpower.org

Energy-efficiency. E.g. www.happyshrimp.nl

Recycling. E.g. Cradle to cradle design or www.freecycle.org

The point is: it can be mainstream or niche, local or global, large scale or small scale, profit or non-profit; as long as it 1) doesn’t do harm, 2) empowers individuals & communities, and 3) reduces the drain from the ‘tapeworm’ economy.