Archive for October, 2010

October 9th, 2010

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Resilient Systems : Lessons from the Christchurch rumble

Non-stop media coverage aside, it does feel like we are experiencing more frequent natural disasters. . Perhaps we should call them natural events since they seems to happen with such regularity that we should be very well prepared and learn to live with them. It was somewhat ironic then that the city of Christchurch should receive an international Civil Defence Award prior to the recent 7.1 earthquake. The response to the earthquake was very impressive from the Civil Defence HQ downwards into the community. Of course nothing is perfect and it’s probably telling about our level of expectation that some were unhappy about how the council handled things. The fact that no one died is quite incredible, due to a combination of strict building standards, low population density and the time of the quake. But what was of interest to me was how the city residents responded. There was a definite feeling of everyone looking outwards and willing to help. The fact that the city could get back on its feet so soon was testament to the resilience of its people.

So what makes systems resilient? Simply the ability to bounce back from a shock or unexpected event. Generally this is applied to ecosystem shocks: the ability of ecosystems to regenerate. But people can be resilient, in the way they respond to shocks such as the loss of a loved one. Communities can also be described a resilient if they can recover from an event which effects the whole community. More and more resilience will become a major part of any community planning scenario. Christchurch has done well in this area and I am sure lessons will be learnt from recent events.

When we look at building resilience into our systems it’s worth looking at the key stress points. During the earthquake a couple of these stressors became clear: one was money and the other was the exchange of  services. People needed to buy stuff yet with power down there was no way of paying via the usual channels and many people didn’t have cash on them. Also people needed to exchange goods and services but again there were problems with communication, power and availability.

It’s at a time like this that we see the promise of local community currencies come to the fore. One such system was the Lyttleton Timebank which operates in a small and geographically constrained community. This is a perfect setup for a successful community system. More and more these type of systems will become part of the fabric of a successful and resilient communities. Watch a story about them here

October 6th, 2010

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The Art of Currency War

It’s been 3 years since the G7 made a serious call for the Yuan to appreciate. But not much has happened since then (apart from a complete meltdown in the global financial system) except for the global trade imbalances to worsen. We are now faced with the distinct possibility of more currency mayhem as markets reach another tipping point.

We are starting to hear more overt language from both officials and the general media about the potential for currency way, namely competitive devaluations, capital controls and other measures to shift currencies to where they should be or where officials would like them to be. Sovereign states have always messed with their currencies whether to screw their own people or other nations. It’s always about self-interest. But at some point the beggar they neighbour approach fails and we race to the bottom. There is no doubt that China is the key here but it’s played a very smart hand and has the US over a barrel. The geo-political arm wrestle is at full bore here and we don’t get to see much of it in the news. At some point though the surplus nations must adjust their currencies to bring the trading world back into equilibrium otherwise the whole system will fall apart. Keynes predicted this would happen and its been a 70 year work in progress. Kondratiev would be impressed.

The question is why hasn’t that happened already. You would imagine that a country with a trade deficit and an ongoing current account deficit (swollen by interest on borrowings to cover the trade deficit) would see its currency weaken and surplus countries would see the opposite. THis change in currency rates would, other things being equal, reverse the flow of trade and all would be rebalanced. On paper maybe but in the real “free market” that doesn’t happen. Why? Because deficit countries tend to have higher interest rates (in order to attract the capital it needs to pay off its debts) and those higher yields attract more and more capital looking for a home. So we have the ludicrous situation of one country lending another country the money to buy its goods…….that is not a recipe for long term success….unless you happen to be running a criminal organisation where your goal is to get your clients hooked on the product…..

It’s also known as debt slavery. And it must stop.

So does this mean we are headed for a new Plaza/Louvre Accord? I think that will be very difficult to achieve at the moment. It’s unlikely the Chinese would accept a single focus on the Yuan. It would almost be better to completely realign the whole global currency system where all surplus/deficit currency rates were realigned to new levels. The obvious problem (other than agreeing new rates) is that there would be nothing to stop markets moving rates right back. This suggests capital controls may come into play (Brazil is already trying something here with its bond market) perhaps in the manner of Malaysia.

More over steps such as currency intervention can be a problem unless the stars are aligned in your favour. Trying to weaken a surplus currency is next to impossible as the SNB found to their chagrin when buying huge amounts of Eur/Chf at a time when the market was actually desperate for Chf. The Japanese are repeating the same mistake as the Swiss by intervening, cutting rates, increasing liquidity and generally flapping about in the Yen. At this point in time they have made no progress at all. Why? Because the market wants to own surplus currencies and not the $. At some point $/Yen will collapse which will suit the US though probably not the Japanese.

For deficit countries with an appreciating and overvalued currency like New Zealand there may be better opportunities for influence. More on that net time.

For now though begun the currency wars have.

October 1st, 2010

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Gekko is back: Greed is still good but now it’s Legal

So finally Gekko is back. Last night I had the pleasure of seeing Wall Street 2: Money Never Sleeps. It doesn’t disappoint. It pushes all the right buttons and manages to communicate the current situation with reasonable clarity. I will be interested to see how the person in the street views it.

I enjoyed the quick hello from Charlie Sheen as Bud Fox and Oliver Stone made a few cameos himself. The plot was fairly straightforward but the message of the film was stark: the system is untenable and has been seriously abused. Sure Gekko used to buy companies and strip them down and sell them on: the ultimate art of financial efficiency and productivity improvement. But now it’s about financial engineering which has nothing to do with the business itself.

As Gekko notes in a speech to a group of students and alumni, the share of GDP generated by financial services got as high as 40%………it used to be around 7%.

This orgy of financial speculation has left our global economies in tatters and we rush to pick up the pieces. Blame lies all around so that shouldn’t be our focus (they lent it, you spent it!) but the ramifications are very serious. We know well that the global financial system nearly collapsed and after trillions of dollars in bail outs and stimulus, it still looks very shaky. Payback will be painful.

The new “Bud Fox” character, carrying the torch for alternative energy, asks the “bad guy” what his number is, how much it would take for him to walk away from the business. His answer: “more”. It’s become nothing more than ego, a game as Gekko would describe it. Ultimately it’s a loss of understanding and values. The disconnect between the financial markets and the real world has grown so wide that a chasm has been created, a big black monetary hole which is dragging us all in. This film has much more impact than Mike Moore’s recent treatise on capitalism because it paints a truer picture: the excess, the egos, the glamour….and the frailties of us all.

Susan Sarandon has a neat role as a nurse turned real estate speculator. She painfully encapsulates the shift from real, productive work to speculation on house prices. Needless to say she comes a cropper.

The bail outs continue and moral hazard is everywhere. Is Gekko redeemed? Not really. He’s more human but the guy still loves the game and is happy to play even under the new rules. The trillion dollar question for the audience is simple: will the rules be changed?

Don’t hold your breath.

About

"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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