The start of an idea relating supply chain understanding to money supply in the current financial crisis. Comments appreciated.

1. Offset economics
The paradigm of digital time-value
asynchronisity in financial markets.
Andrew Wilson MBA
Finidhyn Ltd.
8 August 2012
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2. It occurred to me that the modern money markets are in fact a modern-
day supply chain. Rather than physical product moving from A to B
over time, annuities, risk, profit and capital move over time through a
virtual supply chain. If we accept that "value" can replace physical
"product" and that time can best be represented by "maturity" in
relation to investments, then it is possible that some of the physical
phenomena that exists within traditional supply chains can also exist
within our financial services.
It is important that we accept this initial premise if we are to seek to
explain what might be happening within the global financial markets as
asynchronisity. Asynchronisity in supply chains is when the physical
manifestation of supply somehow does not represent the digital
manifestation described before us by our measurement systems. It is at
its most basic level a bullwhip effect, but rather than manifesting itself
as "physical stock" it manifests itself as "current value". The behaviours
within the supply chain are just as valid in this scenario as they are
within a physical supply chain, people panic and over-stock, this causes
shortages and also leads to damaged confidence and resultant
dysfunctional behaviour throughout the supply chain. Unfortunately for
us, the world of finance is infinitely more complex as a totality, than
most supply chains that we study in the real world. We refer to them as
networks, but in reality there is a linearisation within this network and
it is based on maturity values, unfortunately many of the agents within
the network can play multiple parts within this supply chain in effect
confusing the apparent linear nature of the chain. It is a bit like trying
to map the total end-to-end life cycle of consumer product even after it
has been broken up for scrap and re-integrated into new products.
What we are proposing here is that taking a linear approach to value
over time and applying supply chain logic, it is possible to see that
overstocking of capital is in fact a standard supply chain reaction to
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3. uncertainty of demand. Uncertainty within financial markets is
equivalent to order volatility within the traditional supply chain.
Demand attenuation is the goal of most global supply chains, and as
such it must me the same for the financial world.
Uncertainty attenuation is at the heart of restoring confidence so that
inventory in the form of capital can be reduced. At the heart of this
problem is that financial institutions are unable to match past decisions
with current consequences. On top of this they are unable to match
current decisions with future scenarios. Part of the problem with this is
the belief that a problem can be sold on, or insured against. In the real
world, companies cannot produce a bad batch of product and not suffer
the consequences of that bad product, they are directly impacted in
time and space for those mistakes, and as a result of the proximity to
the decisions that led to that mistake, they are able to put better
process in to avoid it happening again. The time frames within financial
markets are confused and range from the long term to the short term;
this makes consequential understanding fundamentally asynchronous.
Words such as complex and chaotic are applied, but these are
misnomers for our lack of understanding of the basic mechanism at
play with the data. Things become complex and infinitely difficult to
understand if you allow action without the need for consequential
understanding of the reaction.
If we take a real and physically present supply chain, the consequences
of decisions are normally manifest within hours, days or weeks. Where
elongated time frames abide, there is a need for securitisation in the
form of long-term investment plans and liquidity support. Building
aircraft carriers and Airbus aeroplanes is an example of where the
government needs to act as guarantor in order to allow for the 10-20
year supply chain, and as a result cost amplification of 100% plus is not
unusual.
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4. We have in effect, when deregulating the financial markets allowed our
product portfolio to become too complex and our timeframes to become
too long. Both expansions along these dimensions have caused us to
lose sight of the consequences of our actions. This is not deliberate; we
just believe that if things are going well now, it must mean that the
decisions we have made in the past must have been good ones.
Unfortunately the data you see now, bares little resemblance to the
consequences of the actions taken in the past due to this
asynchronisity.
One of the benefits of a short supply chain is that when demand falls off,
all of the supply issues resolve themselves slowly as a matter of ongoing
business. The problem with long supply chains with long lead times is
that we continue to fiddle with the day to day in an attempt to make
todays situation better, and as a result add more and more complexity
into future scenarios, as a result complexity and misunderstanding
becomes a self fulfilling prophecy. If there were stability within our
financial product portfolio, there would be no need to buy government
backed securities, but due to the malleable approach to value and the
forward positioning or "betting" that we do on otherwise secure
contracts, we introduce a level of uncertainty which in the end is
responsible for the current crisis. On the other hand had we "secured"
all of our transactions and not leveraged them, the money supply would
be much smaller than it currently is. Paradoxically, we would then have
gone to the governments for quantitative easing in prescribed and
required amounts, allowing the correct amount of liquidity to exist for
the current money supply.
In the real world of physical supply chain, when demand amplification
leads to an inability to supply the only solution is to stop supply until
which time raw materials are in sufficient quantity to resume. What we
are seeing at the moment is exactly this phenomenon. Unfortunately
due to the length of the supply chain we may have many years before
we are confident that enough of the product out there in the market has
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5. reached adequate maturity to allow us the confidence to supply once
more. By that time customers will have found an entirely new way to
exist without us, and the road to growth will then take longer still as the
need to re-educate customers in the ways of consumption.
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