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.
The 2012 Pelosi GTxi SS/RT Sport Edition – Strategic Scenarios in a Time of Political Intervention
If you have a certain nostalgia for 1980s Soviet advertising, or if you’re interested in the current state of the semi-nationalized automobile industry, you’ll get a chuckle out of this “scenario,” an ad for the 2012 Pelosi GTxi SS/RT Sport.
It’s funny, and yes, it contains some fairly partisan political jabs. That kind of material is something I would studiously avoid in a professional context – especially this blog. That said, we’re not in ordinary times. I would say that the current level of government involvement now means that political analysis of industry developments is more important than ever.
As I have said previously, the government is no longer simply regulating industry or financing it through monetary policy – it is now managing companies with the taxpayers as stockholders who have a right to see their investments protected. This will necessarily require an analysis of politicians and their goals. This may mean our competitive analyses will lay bare political feelings in our own organizations. That was the risk of the U.S. Government’s bailout policies, a dramatically-increased politicization of the American – and global – business environment. And here we are.
Competitive intelligence, government acquisitions, and a hallucinogenic future
With the bankruptcy of General Motors, our economy has finally hopped over the plane’s wing into the Twilight Zone. Not that this event was surprising to anybody with a cursory interest in money or cars – GM bet its future on the world’s endless thirst for bloated Hummers and Yukons and left quality and disruptive innovation to Asian rivals, all while locked into being America’s largest private provider of healthcare and pensions. You can get six Jack Welches, ten Peter Druckers and those guys who started Google on board and even they aren’t going to figure a way out of that hole. Like any death of a long-sick relative it is still a shock without truly being a surprise. You’ll feel the same way when American healthcare self-destructs and when Social Security cracks in half.
The reason to stockpile peyote and brown acid is not the demise of a for-profit company, which should be a prosaic activity in a capitalist system. You’ll need some strong hallucinogens to deal with how this bankruptcy was done, and what it means. The failure of GM I was expecting; a failure accompanied by an additional thirty to fifty billion of my tax dollars was the pimp slap. Not only is the original “Fortune One” company declaring the death of its business model, now my children and I get to be 60% owners of the company for the foreseeable future. It almost makes me long for the good old days of 2008 when we simply handed bankers hundreds of billions to pay off their bad investments without the need to get seats on the board to protect collective shareholder investments.
The walls began vibrating songs and the chairs began dancing a frentic rumba when a psyche-shaking question occurred to me – How many freaking companies do I own as a taxpayer now? I am a proud owner of Fannie Mae and Freddie Mac, a lovely deal for the 50/50 partnership in which government covers the “loss” part of the equation and private investors cover the “profits.” I get 80% of AIG, those masters of risk management who set the planet on fire by insuring every transaction on Earth from credit default swaps to Mexican cock fights. I have shored up most of the gargantuan banks on the planet through easy loans so big that our inevitable inflation will soon give Argentina, Brazil and Ukraine a hearty, nostalgic laugh. Now, my government has made me a majority shareholder in a automotive company that will need to atomize the oldest and most-established industrial infrastructure in the world before it could ever hope to compete with the supply chains of Korea, China, Japan and India – though not a word has been written to describe the difficulty of this transition.
As a taxpayer, behold the fantastic portfolio of my future prosperity! I will take this group of investments over any crap that Warren Buffet might cobble together! And that guy Soros will soon be proven to be no match for the investment genius of Obama, Geithner and Bernanke!
The drug trip has barely begun, my friends, and the buzz of bailout is now set to become a thrumming, pulsating multisensory experience as this new market moves ahead into the new physics of crony socialism. There’s no longer any need to believe in gravity, density, or inertia since this new universe is created by executive fiat and is subject to change at any moment. Just consider one question about the moral hazard created in this hallucinatory plane of existence: who is responsible for competitive intelligence for all of these companies that I own?
In order to compete effectively, every company must have a system of intelligence to understand market developments and competitors behavior. This practice varies in sophistication from sending guys to trade shows once in a while to learn stuff, on up to formal intelligence bureaus working in the service of products managers, strategists, and the CEO him/herself. In a modern economy evolving as quickly – and if recent events are any indication, chaotically – making decisions without the benefit of up-to-the-minute data and analysis about the business environment is a sure way to catastrophe. In the world we used to call reality, organizations had a discrete, impermeable layer that separates “us” from “them” and “internal” from “external,” allowing us to look critically at the external world. Intelligence thus permits leaders to understand the future marketplace and take action to insure profitability.
The U.S. Government not only is providing capital to a variety of American industries, it has invested me as an American taxpayer with a majority position in several cases. Moreover, the layer between “us” and “them” is now more permeable than wet Kleenex – since corporations are taxpayers too, Ford’s taxes will make them part owner in GM. Consumers too have multiple interests at stake – buy a new Ford Fusion, and you may watch your investment in GM decline. Buy insurance from a smaller carrier and you may deny AIG, of which you own 80%, of one of the only sources of profit they have to offset their days at the craps table of global finance.
Let’s not forget the government agencies themselves – they are now shaping the market through legislation and regulation, financing the industry through the Treasury’s policy of monitarization, AND acting in the market – ostensibly – to assure the return on the billions of dollars of taxpayer capital they just promised for the coming decades. This is where some peyote may help you squeegee your third eye clean and see into the kaleidoscopic mask of the Bizarro Future. Some major questions loom:
- For America’s neo-mercantile companies, who collects the data in their search for competitive intelligence?
- Who does the analysis? The company that led itself off the cliff, or the federal government bureaucrats who have zero understanding of individual market dynamics?
- To whom do they report first? Cabinet secretaries or CEOs?
- What kind of information is the most important? Rational, measurable data about the objective business environment, or subjective data about political personalities and their connections to top companies? After all, the new shape of the market seems to have more to do with who had Hank Paulson’s cell number in October of 2008 and who had dinner with Geithner while he was at the New York Fed than it does any macroeconomic trends or intellectual property analysis.
I take it back, leave the hard drugs alone. The coming reality will rival anything that distorted neuronal activity might bring. Remember, this is about the moral hazard of the future. It is with the addition of an automotive company to the national portfolio that we finally complicate American capitalism to an unimaginable degree, like trying solve calculus regressions with ten variables. In a business world created through executive order and maintained through fake federal money, all other players in the market – if they are paying attention – should view future market dynamics with the confusion reserved for a fever dream. It makes competitive intelligence extraordinarily necessary, and partially impossible.
For our future – can we allow companies to destabilize economies like this again?
AIG claims that it believes that its business practice could destroy the capitalist system around the world.
If that is so, can any government really stabilize the system?
More importantly – won’t governments go out of their way to change the very nature of private enterprise to assure that this can never happen again?
Below is a recent internal memo from AIG about the risk it thinks it poses the world economy. What do you think?
Bailouts make us ask: what is the future of the corporation?
Next up on the bailout list: car companies, cities, healthcare, schools. I guess nobody’s business model is 
working very well, and now everybody needs money from the U.S. federal government, which of course is half a trillion in the red this year. Companies losing billions want loans from a government that’s losing billions.
I think that a lot of things are going to need a redesign in the next few years, to put it mildly.
Regardless, yesterday’s stars were the automotive CEOs who flew into to Washington DC to plead for the U.S. government to provide aid to its most important companies.
But wait, are they American companies? Chris Kelly at the Huffington Post provides an excellent bit of polemic, reminding us that Chrysler is actually owned by a $60 billion hedge fund called Cerberus Capital which owns, in addition to Chrysler:
A Japanese bank called Aozora
A Japanese real estate company called Showa Jisho
A Japanese golf course company called Kokusai Kogyo
An Israeli bank called Bank Leumi
A German bank called Handel und Kredit Bankhaus
A reinsurance company called Scottish Re, with headquarters in Bermuda
A British TV rental chain called Boxclever…etc.
This is a great point – we’ve spent decades making global capital so fungible, so fluid that it readily cros
s borders, ignores nationality, changes hands without making news. So can a corporation possibly be a national entity for which a certain government (and its taxpayers!) might claim responsibility?
If Chrysler isn’t a potent enough example, how about Citibank, which is getting “trouble asset relief” from the U.S. Treasury but is now is owned to an even greater extent by Saudi princes?
This begs HUGE questions. What is a corporation? To whom does it belong? What is the relationship between a corporation and the nation-states of the world?
If you’re in business today, and plan on staying in business through 2009 and beyond, these aren’t just philosophical discussions. This is your future. Give it some thought.
Scientific management in the face of economic meltdown?
Managers love spreadsheets. Quantifiable trends. Robust columns of numbers, properly formatted, 
balanced checkbooks. This is business! We’re not guessing, we’re not estimating, we’re taking a scientific approach to management!
Verifiable numbers are supposed to guaranteed better results, fewer scandals, more rational behavior.
In the wake of Enron, Global Crossing, and other book-cookers, the government hastily brought forth the Public Company Accounting Reform and Investor Protection Act of 2002, better known as Sarbanes-Oxley. These new, stringent requirements would supposedly protect investors from capitalizing companies that were, in reality, bleeding money while their executives took bonuses from Liberian hedge fund partnerships and the like. I come to understand from financial colleagues that Sarb-Ox is so complex it would make a Jesuit’s head explode.
This complexity was supposed to better results, fewer scandals, more rational behavior.
What’s the future of numbers if the numbers are wrong by hundreds of billions of dollars?
If we can’t manage scientifically, how will we manage when all this is said and done?
Nice time to check the foundation of industries
It seems that the fundamentals of the banking industry were unsound, and that ultimately this led to a collapse. It’s a question of structural assumptions – what is underpinning our industry? What might change? When could a tipping point come? These heady questions are often left to us futurist-types, but it seems like this week it would be a good idea for everybody.
For example, I would like to propose a betting pool on when the healthcare industry in America will need/receive its bailout. Between the demographics of the Boom generation’s retirement and the massive wasteful spending of our current system, the now $2 trillion industry has been forecast to increase to $4 trillion by around 2020.
My assumption – which I state here – is that this is structurally unsound. The economy as a whole will crack long before we get to $4 trillion. If we don’t change the structure of the industry, it will require one of those bailouts. What year do you figure it might be? 2015? 2023? 2025?
What about your industry? What assumptions are you using to justify the long-term profitability of your company? This isn’t gloom and doom, things might be great for you. But what’s the structural long-term?
This is a good week to ask those questions. The implications of failing to do so seem quite clear.
The United States Government: World’s biggest financial yard sale?
Our quip of the week comes from Miss April Swain, Competitive Futures’ expert in economic development and next generation risk management:
“If the government is in the business of purchasing worthless assets, what’s next? I forecast they’ll probably take over EBay, Craigslist, and Kenton’s National Flea Market.”
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.New project: Manufacturing 2020!
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