Introduction flight to simplicity

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A Flight to Simplicity Chris Cook Kansas City 23 July 2012

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Transcript of Introduction flight to simplicity

Page 1: Introduction flight to simplicity

A Flight to Simplicity

Chris Cook Kansas City

23 July 2012

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About me - Trading Places

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

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Market 1.0 – decentralised & disconnected

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Market 1.0 – physical market presence

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Here: Market 2.0 - centralised & connected

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Market 2.0 - presence via intermediaries

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There: Market 3.0 - decentralised & connected

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Market 3.0 - network presence

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Here - at Twin Peaks

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Peak Credit - financial demand on people

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Peak Oil - demand on a finite resource

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

Credit

Capital

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Banks outsourced credit risk

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Freeing Capital to support more credit creation

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

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

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Partially – using credit insurance from insurers such as AIG

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

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

Investor Capital

Credit

BankCapital

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

Investor Capital

Credit

BankCapital

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

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

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Maybe the end of cheap oil spiked the bubble?

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

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But by now no-one knew where the Risk was

Investor Capital

Credit

BankCapital

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

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

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The problem is not shortage of money - liquidity

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It is shortage of Capital - solvency

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Solvency of Banks is one aspect

Capital

Credit

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The other aspect is the solvency of populations

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And a secular decline of purchasing power

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Loans which cannot be paid, will not be paid

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

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...threatening a deflationary spiral...

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....which requires periodic transfusions

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...to avoid Depression

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Quantitative Easing – increases quantity of money and prevents deflation

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

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

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

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

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

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

profit

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Financial demand – not consumption – has caused correlated commodity bubbles

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Markets have suffered a cardiac arrest

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

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Funding – long term investment in productive assets

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

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

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Resolution & Transition - Getting from Here to There

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

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

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Community Partnership Enterprise Model

Structure - Stakeholders

- Custodian

- User

- Manager

- Investor

Legal framework – Nondominium

Investment instrument - Stock

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Custodian

Payment

Investor Manager

%

%

User

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Legal Framework – 'Nondominium'

Two complementary agreements

Collective agreement between stakeholders jointly

Associative agreement between stakeholders individually or severally

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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)

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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

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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

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Investment Instrument - Stock 1.0

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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

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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

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A Flight to Simplicity


Peak Credit A Flight to Simplicity Chris Cook – BarCampBank London 5th July 2008.

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