A Flight to Simplicity

Chris Cook Kansas City

23 July 2012

About me - Trading Places

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

Market 1.0 – decentralised & disconnected

Market 1.0 – physical market presence

Here: Market 2.0 - centralised & connected

Market 2.0 - presence via intermediaries

There: Market 3.0 - decentralised & connected

Market 3.0 - network presence

Here - at Twin Peaks

Peak Credit - financial demand on people

Peak Oil - demand on a finite resource

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

Credit

Capital

Banks outsourced credit risk

Freeing Capital to support more credit creation

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

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

Partially – using credit insurance from insurers such as AIG

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

The Result was a bigger Credit Pyramid than Banks alone could sustain…

Investor Capital

Credit

BankCapital

…and an opaque 'shadow banking system' of Investors holding sliced and diced risk

Investor Capital

Credit

BankCapital

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

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

Maybe the end of cheap oil spiked the bubble?

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

But by now no-one knew where the Risk was

Investor Capital

Credit

BankCapital

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

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

The problem is not shortage of money - liquidity

It is shortage of Capital - solvency

Solvency of Banks is one aspect

Capital

Credit

The other aspect is the solvency of populations

And a secular decline of purchasing power

Loans which cannot be paid, will not be paid

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

...threatening a deflationary spiral...

....which requires periodic transfusions

...to avoid Depression

Quantitative Easing – increases quantity of money and prevents deflation

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

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

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

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

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

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

profit

Financial demand – not consumption – has caused correlated commodity bubbles

Markets have suffered a cardiac arrest

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

Funding – long term investment in productive assets

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

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

Resolution & Transition - Getting from Here to There

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

In fact, the answers lie prior to the 18th Century“

Community Partnership Enterprise Model

Structure - Stakeholders

- Custodian

- User

- Manager

- Investor

Legal framework – Nondominium

Investment instrument - Stock

Custodian

Payment

Investor Manager

%

%

User

Legal Framework – 'Nondominium'

Two complementary agreements

Collective agreement between stakeholders jointly

Associative agreement between stakeholders individually or severally

Collective Agreement

Governs creation, issue and exchange of Stock, holds bank accounts and title/transaction registries

Stakeholders have negative veto rights

Interfaces with people and organisations (legal persons)

Associative Agreement

User – pays for the use of productive asset (land, energy, IP)

Manager – receives a proportional share in the flow of use value

Investor – acquires Stock consisting of 'unitised' use value sold forward at a discount

Complementary to the collective agreement – akin to a 'for profit' limited company's shareholder agreement

Nondominium - Outcomes

A consensual non-statutory 'development corporation'

Neutral – removes ego and politics

Collaborative - stakeholder interests aligned – no principal/agent problem

Social Business – shared surplus/ 'not for loss' - relationship-based not transaction-based

Sustainable - everyone has an interest in minimising cost of use over time

Investment Instrument - Stock 1.0

Stock 2.0 – Back to the Future

Stock - an undated credit returnable in payment for use value of productive asset

Sold at a discount – eg £1.00 of Rental Stock sold for 80p gives an absolute return of 25%

Rate of Return is literally the rate at which Stock may be returned to the issuer

Rate is not fixed, but depends on whether there is a flow and what it is

Stock - Outcomes

Competitive - no compound interest

Secure – no default risk, and the more affordable the rental, the more secure the return

Liquid – single asset class, not fragmented by date or interest rate

Liquid – Manager will always buy Stock on behalf of Users for redemption at best offer < or = to £1.00

A Flight to Simplicity