Barter 3.0

21st Century Credit Clearing & Beyond

Chris Cook

IRTA Convention Ocho Rios

14 September 2012

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

Market 1.0 – decentralised & disconnected

Market 1.0 – physical market presence

Market 2.0 - centralised & connected

Market 2.0 - presence via intermediaries

Market 3.0 - decentralised & connected

Market 3.0 - network presence

Market 2.0 reached Twin Peaks

Peak Credit - financial demand on people

Peak Resources - demand on finite resources

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

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

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

Funding – long term investment in productive assets

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

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

…..and in a Flight to Simplicity