Local currencies in distressed towns
Between the Greeks staying in the European monetary union, or Detroiters keeping their dry cleaners and doggie-daycares afloat, there is a considerable amount of talk about the role of currency. The crux of the European issue is that the Portuguese and Greek economies are so different from the French and German ones, it is difficult to keep one currency with the same rules and assumptions in play. The fringe actors are no longer able to keep up the facade required for membership in the club.
We are seeing a microcosm of this in local towns in America, and the issue comes down to the ability to maintain a central currency. We note with interest an uptick in stories about local currencies not seen since the banking meltdown of 2008 and 2009.
Last year, two Detroit tavern owners were sitting at the bar, sampling their beverages and bemoaning the local economy — no one in the city had cash, and when they did, they spent it in the suburbs. Then the pair hit on a solution: Print their own money.
It is, after all, perfectly legal for anyone to issue currency, as long as it doesn’t look too much like a U.S. dollar. Thus was born the Detroit cheer, a local scrip accepted by a handful of city businesses, including a pizzeria, an electrician and a doggy day care center.
But why would people go to such trouble? Money is money, right?
When the Treasury prints billions to bail out banks and automakers, people look for alternatives. These folks may look nutty now, goes the quip, but wait till the dollar goes the way of the Argentine peso. Then you’ll be exchanging a wheelbarrow of cash for a bay buck, local currency boosters say.
What could this mean in terms of business strategies? One of the most likely implications would be a return to local distributors, those able to deal best with the local market and even local currencies. Compare this to the recent trend of market consolidation in a variety of industries. It just doesn’t match.
First Greece and Portugal, but they are on the outskirts of civilization. First Detroit and Western North Carolina, but those places aren’t prime time.
Next…California? Spain? Iceland? New York State?
Greece, Portugal, and sovereign debt: The next phase
Somewhere between California’s budget shortfall and Vermont’s neosecessionist movement, somewhere between Arizona thinking of sell the gold off the dome in the state capitol building to Michigan pulling away police department units, somewhere between Portugal and Greece, it has become evident that just because the American and European Central Banks could solve “the crisis” through deficit spending, not everyone would be able to keep up the illusion.
Tyler Durden at Zero Hedge says it in typical brilliant, pithy, fin-de-siècle wit:
The only thing in this world worse than Hank Paulson showing up in Congress with his initial 3-page TARP proposal giving him unlimited control over the US printing press? 12 non-Hank Paulsons, all of whom speak different languages, all of whom are hell bent on bailing everyone and everything out (just not on their political or physical dime…or 10 eurocents as the case may be), and all of whom have no idea how to bail out others’ (and soon their own) economy… oh, and none of whom have access to Hank’s reserve currency printer. In short, more than 24 hours after announcing a “bailout” of Greece, nobody in Europe has any idea what they need to do to actually “bail” Greece out.
The larger issue here is the primacy of centralized banking authorities, central currencies, even central governments. Those large and unwieldy organizations can resist a great number of insults, and they have more options available to them that their smaller counterparts – but they are not invincible. When faced with a large enough catastrophe, they too must feel the pain, react, choose a new path.
It’s time to think in terms of scenarios. One scenario would be that the world’s central banks manage to keep the cash flowing among countries and banks and bond holders and municipalities, even in the face of expensive entitlements, shifting asset values, rising unemployment, and stagnant wages. Status quo. Now, what are the chances that things don’t change in the face of the trends that are so evident.
One other scenario is a series of defaults from smaller nations, regions, and municipalities unable to make their minimum payments, challenging the legitimacy of central control, requiring additional taxes levied on those areas who are tax-cashflow positive. What happens when entire cities, regions, and sovereign nation-states simply withdraw from the global system? What happens to currency? Which geopolitical tensions will flare up? What goods and services might stop flowing? What could happen in the next phase?
Look, if you’re running a business of any size, this is probably pretty heady stuff. Most of us never went to school to remake the geopolitical and financial systems. Nobody woke up this morning hoping to re-justify the fiscal reasoning behind the European Union, or the constitutional relationship of the U.S. federal government with the States.
Then again, nobody really wanted to be all that interested in subprime versus Alt-A mortgages, nor their relationship to CDOs and CDSs, did they? But we all got a good lesson.
If there’s a forecast in here from us, it’s this: we have a surplus of complexity in the world’s fiscal and financial dealings. Nobody can really understand them, which is why they are so hard to manage, even from New York, Washington, Brussels, and Hong Kong. And for that reason, things may get much less complex in the years to come.
Think about what that means.
One out of six construction loans in trouble – still a sunny forecast?
Many of my colleagues have been recently wondering how the media regarding the American economy could be so sunny in the face of increasing unemployment. 
Indeed, how could any recovery happen having doubled the unemployment rate? The U-3 unemployment rate hovers around 9.7%, while underemployment is at a record 16.8%. How can an economy supposedly based on consumer spending come back with twice as many people unable to spend?
Americans have a strong bias toward good news. We are historically, as a people, motivated and entrepreneurial, so rather than dwell on things like history or future trends, we would prefer to get right back to work. This is an admirable trait in general. So long as you are focused on the right things, unthinking hard work is preferable to endless bureaucratic meetings in which you decide a suitable course of action, only after multiple hearings from all parties, et cetera.
There are moments where a sunny disposition is the wrong thing. To be sure, there’s no point in whipping people into a depression-related psychosis, causing a run on the banks and prodding people to fling themselves off bridges because the end is nigh. And economics is at the end of the day a social science; sometimes when people simply think positively, things turn around.
Commercial developers headed for bankruptcy, naturally asking for a bailout
The most important part of thinking about the future is systems thinking. In our Future Intelligence method, the first part of every project or exercise is to map out the system of any business, activity, or market. Thinking about the beer market? Don’t just stop at consumer tastes, think about packaging, trasnportation, distribution, leisure, sports, etc. That way, you think not just about one kind of change, but the relationships.
This financial crisis is one long lesson on the interconnected nature of all industry, governance, finance, and geopolitics. This is going to surprise you all, but now, since they are part of the whole system, the commercial developers are now asking for bailouts from the federal government.
Let us not consider the merits of such a proposal, but just marvel at how much all of these industries are interconnected. Every actor in the system requires certain behavior from the others in order to survive. When one actor changes (e.g. suddenly ballooning the amount of credit) all the others respond.
Subprime mortgages are now changing the dynamics of the construction of mini-malls around the world.
It’s a mess, but at the very least it’s interesting.
If retail and commercial development are melting down, what comes next?
City economies now collapsing: OK, let’s take a breath
You know, we spend our time on the long-term future here, but it seems like everybody needs to pay attention to the next few weeks.
Today, several American mayors went on record saying their finances are in shambles, and now THEY need a bailout too.
Did the bailout plan really take none of these repercussions into account? Can we maybe stop and do a little scenario planning about what the next two months could look like before acting with $700 billion in our pockets?
Note to the Treasury Dept: we’re only one block away.
Bretton Woods, part two: how will it shape the future of finance?
Interesting piece by Gideon Rachman in today’s Financial Times regarding the upcoming meeting of the G20, 
dubbed Bretton Woods 2. Given the shambles of world finance, established and emerging economies are given a chance to sort of remake the world financial system.
Rachtman makes a good point that in 1944, the destruction of the world let us start with a clean slate. This time, we seem much less willing to upset the established order. Really, bankers aren’t even willing to give up their bonuses in the face of disaster, so completely overturning the power structure seems unlikely.
It seems that a whole host of institutions are going to receive makeovers. Will they be superficial or substantive?
The end of giant corporations?
My intelligence buddy August Jackson just made an interesting point: given the fantastic new AUTOMOTIVE BAILOUT that’s flirting with us, will the world lose its taste for giant, conglomerated corporate entities?
Seriously, what’s the upside of having businesses so large that governments believe they shouldn’t fail? We’re spending ludicrous amounts of tax dollars to keep banks alive. The U.S. federal government is running a debt that would cause any individual to choose bankruptcy. Now, the car companies feel that they need more of (my) tax dollars to keep afloat, because letting them fail would be far too painful for all concerned.
What is the benefit of companies so big, we can’t let them fail?
And if consolidation is so bad, why is the pharmaceutical industry considering even more of it?
Questions for this new age.
Sarkozy warns bankers of their “moral pact” with the nation
It seems that other countries are seeing the risk in allowing national bailouts to be used, not for unfreezing credit markets, but for high-stakes mergers, dividends, bonuses, and other business-as-usual activities.
Yesterday, French president Nicolas Sarkozy called the nations bankers in a room and essentially started screaming warnings not to do likewise. Actually, quite amusingly clear, forceful language from a head of state.
Highlights:
“Bankers have signed a moral pact with the nation.”
“[To the media] When you see something that looks wrong…SAY SO!”
It’s interesting how much of the future of business seems to ride on our reactions to this crisis. In addition to trend analysis, we constantly recommend actor analysis, the examination of the motivation and decision making processes of major players in any industry or system.
France appears to be reacting to the meltdowns in other parts of the world economy and sticking with a slightly slower, much more disciplined interaction between the state and private industry. And their head of state is making this a moral argument, a sacred trust between individuals and institutions.
What about other countries? We’ll be watching.
Strategic illusions and imminent disaster
James Pethokoukis at U.S. News and World Report believes that this $700 billion (come on, at least a trillion) bailout is much cheaper than the $30 trillion cost of not bailing out Wall Street and allowing the free market to function.
$30 trillion.
Let me ask – are we saying that our economy could possibly be upside down by multiple trillion dollars without us knowing it?
If that’s so, is this illusory wealth? What is real? What is a social construct? How can managers know anything? Why then do we have leadership, management, and regulation of any sort?
Man, I feel like these questions are necessary, but they sound like Albert Camus after nine glasses of Bordeaux.
Is our economy really that much of a post-modern construction?
It’s times like these that you really miss Peter Drucker.
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