As we have stated repeatedly in prior posts, this Depression will be a life-changing event for everyone who lives through it. It is not an interruption to the economic routine. The economy is not going to 'recover' to where it used to be.
The world is going to look very different on the other side of the Depression. Most of the old rules of economics and finance - both high and personal - will be tossed out the window. There may be vast political and social changes as well. We don't know what they will look like, only that they will happen. However, we shall speculate on some changes that may take place, and the opportunities that will lie therein.
First and foremost, the economy at all levels will be focused on efficiency. This will be necessary due to less available investment capital and depleting natural resources. We do not doubt that efficiency can theoretically make up for many lacks. But it will not necessarily do so. There is a great deal of cultural inertia, especially in (but not limited to) the USA, that looks at conspicuous consumption as the non plus ultra of human existence.
Compounding this problem there is a lot of turf that is going to get vigorously defended. Bank bailouts (for example) are not for preserving the integrity of the economic system, but for preserving an opulent lifestyle for well-connected bankers even after their banks stop creating value for society.
But moving along, what sort of efficiencies are waiting in the wings? The Internet will enable a wide range of peer-to-peer markets. You can buy and sell stuff on an auction market or classifieds, you can make loans or borrow on a lending network, you can put up a website and sell your services. All of these markets capitalise on the process of disintermediation, or cutting out the middle man.
Another, less glamorous level of efficiency is simply making do with less: smaller living spaces, perhaps shared with (more) others; a smaller car - or no car. Beyond efficiency, there is becoming more of a producer: growing a garden; cooking home meals, mending and fixing instead of replacing.
All of the above mentioned activities involve learning new skills and attitudes. Multiply these and more across all of society and you have transformation. If this change is resisted by individuals and institutions, change will be slower, and the Depression will be prolonged. Nevertheless, if you embrace the trend, your personal circumstances should prove manageable and you may find the quality of your life even improves.
Showing posts with label disintermediation. Show all posts
Showing posts with label disintermediation. Show all posts
Friday, April 17, 2009
Sunday, November 30, 2008
The Risk Bubble
As one may have noticed, many of the strange financial instruments blowing up world-wide deal with risk. The sheer complexity of these instruments makes understanding them completely almost impossible, but a few generalisations can be made. Typically, these exotics disassociate the risk usually connected with a certain investment, packaging them into a 'security' and selling them off as an investment in their own right.
The how and why these instruments are blowing up is not particularly important, merely that the nuclear mushroom clouds are appearing across the world. It is our opinion that these exploding instruments are indicative of a major shift in the world's economy. Namely, a shift in how investment risk is managed.
For (a somewhat oversimplified) example, to ship cheap plastic crap from China, a manufacturing company will hire a freighter from a shipping company, since the manufacturing company does not own any shipping. The shipping company, at the same time, doesn't own the ships it rents out! It leases the ships from yet another company, which only owns commercial freighters and doesn't actually operate them.
This circuitous system is, at its simplest, merely a way the manufacturing company can avoid the risks associated with owning freighters. The risk of ship ownership is held by one company, the operating risk another. This particular intermediation is already breaking down: shipping companies are losing access to credit to finance their cargoes, and having difficulty making their lease payments to the actual owners of the ships proper. At the same time, the ship owners are having trouble making their financing payments...
It is our observation that one of the effects of the 2008 Depression is the collapsing of risk. This can be seen in the shipping example, as well as exotic investment vehicles. We posit a bubble of risk intermediation is popping. The symptoms of this bubble should become more apparent in the coming months, as the companies which depend on sloughing off their risk feel the squeeze; and in the coming years, as organisations who took on the risk of others cannot meet their obligations.
On the positive side, we feel there will be opportunity in the disintermediation of risk. Having intermediated risk is similar to credit leverage, and if one can avoid it at all costs, one likely has a higher chance of economic survival in the 2008 Depression.
In an extreme example, this is why holding one's money in one's mattress may be far better than leaving it on deposit in a bank. If a true bank run develops (i.e. every bank has its own run), cash and deposits will be rationed-by-queue. One only needs to look at Zimbabwe today to see how bad that sort of thing can get. People in Zimbabwe right now are queuing up at banks every day to withdraw the equivalent of 25 cents U.S., the maximum withdraw allowed by law. One shouldn't think it will never happen in the United States, or in other developed countries.
The how and why these instruments are blowing up is not particularly important, merely that the nuclear mushroom clouds are appearing across the world. It is our opinion that these exploding instruments are indicative of a major shift in the world's economy. Namely, a shift in how investment risk is managed.
For (a somewhat oversimplified) example, to ship cheap plastic crap from China, a manufacturing company will hire a freighter from a shipping company, since the manufacturing company does not own any shipping. The shipping company, at the same time, doesn't own the ships it rents out! It leases the ships from yet another company, which only owns commercial freighters and doesn't actually operate them.
This circuitous system is, at its simplest, merely a way the manufacturing company can avoid the risks associated with owning freighters. The risk of ship ownership is held by one company, the operating risk another. This particular intermediation is already breaking down: shipping companies are losing access to credit to finance their cargoes, and having difficulty making their lease payments to the actual owners of the ships proper. At the same time, the ship owners are having trouble making their financing payments...
It is our observation that one of the effects of the 2008 Depression is the collapsing of risk. This can be seen in the shipping example, as well as exotic investment vehicles. We posit a bubble of risk intermediation is popping. The symptoms of this bubble should become more apparent in the coming months, as the companies which depend on sloughing off their risk feel the squeeze; and in the coming years, as organisations who took on the risk of others cannot meet their obligations.
On the positive side, we feel there will be opportunity in the disintermediation of risk. Having intermediated risk is similar to credit leverage, and if one can avoid it at all costs, one likely has a higher chance of economic survival in the 2008 Depression.
In an extreme example, this is why holding one's money in one's mattress may be far better than leaving it on deposit in a bank. If a true bank run develops (i.e. every bank has its own run), cash and deposits will be rationed-by-queue. One only needs to look at Zimbabwe today to see how bad that sort of thing can get. People in Zimbabwe right now are queuing up at banks every day to withdraw the equivalent of 25 cents U.S., the maximum withdraw allowed by law. One shouldn't think it will never happen in the United States, or in other developed countries.
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