The document discusses the evolution of markets from Market 1.0 which was decentralized and disconnected, to Market 2.0 which was centralized and connected through intermediaries, to the current Market 3.0 which aims to be decentralized and connected through networks. It describes how the banking system created unsustainable credit pyramids by outsourcing and securitizing risk, leading to the housing bubble and financial crisis. It argues that 21st century problems require solutions beyond the 20th century financial system, and that answers may lie in pre-18th century approaches and a flight to simplicity.

1. Barter 3.0
21st Century Credit Clearing & Beyond
Chris Cook
IRTA Convention Ocho Rios
14 September 2012

2. “21st Century problems cannot be solved with
20th Century solutions”.

3. Market 1.0 – decentralised & disconnected

4. Market 1.0 – physical market presence

5. Market 2.0 - centralised & connected

6. Market 2.0 - presence via intermediaries

7. Market 3.0 - decentralised & connected

8. Market 3.0 - network presence

9. Market 2.0 reached Twin Peaks

10. Peak Credit - financial demand on people

11. Peak Resources - demand on finite resources

12. Peak Credit – intermediary Banks create
credit pyramids on their bases of Capital
Credit
Capital

13. Banks outsourced credit risk

14. Freeing Capital to support more credit creation

15. Totally – securitisation and sale of debt to
'shadow bank' investors

16. Temporarily – Credit Derivatives
(CDS - a time-limited guarantee)

17. Partially – using credit insurance from
insurers such as AIG

18. Radioactive cocktails of all three, like
CDOs, structured finance and so on

19. The Result was a bigger Credit Pyramid
than Banks alone could sustain…
Credit
Investor
Capital
Bank
Capital

20. …and an opaque 'shadow banking system' of
Investors holding sliced and diced risk
Credit
Investor
Capital
Bank
Capital

21. This pyramid of Credit funded the Mother of
all Bubbles in US property prices….

22. …and servicing this credit finally exceeded
the financial capacity of the US population

23. Maybe the end of cheap oil spiked the bubble?

24. Peak Credit – was the point when the
Property Bubble began to deflate

25. But by now no-one knew where the Risk was
Credit
Investor
Capital
Bank
Capital

26. Banks started to think, “if this is what
our balance sheet looks like…..”

27. “…what does everyone else’s look like?”

28. The problem is not shortage of money -
liquidity

29. It is shortage of Capital - solvency

30. Solvency of Banks is one aspect
Credit
Capital

31. The other aspect is the solvency of populations

32. And a secular decline of purchasing power

33. Loans which cannot be paid, will not be paid

34. Non-performing loans drain money out of the
system...

35. ...threatening a deflationary spiral...

36. ....which requires periodic transfusions

37. ...to avoid Depression

38. Quantitative Easing – increases quantity of
money and prevents deflation

39. This dilutes the value of money, and causes
inflation of financial asset prices

40. Money will only inflate retail prices if lent or
spent into circulation

41. But at the Zero Bound of 0% dollar interest
rates strange things happen

42. Investors buy anything but dollars whether it
carries a return or not

43. Investors buy Structured Products from Banks
and Units in Exchange Traded Funds

44. The motive is Fear: investors aim to avoid loss,
not to make speculative transaction profit

45. Financial demand – not consumption – has
caused correlated commodity bubbles

46. Markets have suffered a cardiac arrest

47. So Investors have actually created the very
inflation they seek to avoid

48. Financing - short term investment in creation
of new assets......

49. ....and trade credit necessary for the
circulation of goods and services

50. Funding – long term investment in
productive assets

51. “21st Century problems cannot be solved with
20th Century solutions”.

52. In fact, the answers lie prior to the 18 th
Century.........

53. …..and in a Flight to Simplicity