Tuesday, January 31, 2012

Battle of the Infographics

Via John Collins in The Irish Times - why we should be grateful for all that Europe has done for us:


What we (and everyone else) has borrowed from Europe - via Zero Hedge - and why we'll never be able to pay it back (unless we print and print and print):

Friday, January 27, 2012

State-Subsidized Banking

Quote of the year so far from Michael Hudson:
Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator and extractive way, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs. Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss.
And as NAMA Winelake points out, the ECB is now saving Irish and EU banks the trouble of finding consumer and business borrowers.

Wednesday, January 25, 2012

What's The Strategy?

Is Ireland the next Kodak? It's an uncomfortable thought on the day we (you and I and all the other taxpayers) pay out €1.25 billion to the unsecured, unguaranteed Anglo Irish bondholders (lucky them). What's it got to do with Kodak? In case you didn't hear, the venerable old business filed for bankruptcy earlier this week. And the story of its demise has important lessons for Ireland.

Gary North relates a story about Kodak. It's from just a couple of years ago, and featured a recently resigned senior executive talking about the company he had just left:
He also told of a baffling conversation with a member of Kodak's management, revealing: "Just last week a Kodak executive came to me and said 'I think film will make a comeback', and I'm thinking 'who are you kidding?' That's the mentality that's stuck in that company and you've got to break that and they've never been able to."
Maybe now you can see the comparison? Think of all the talk recently about Ireland returning to the bond markets, not needing second bailouts, and our intentions to honour all our debts. Like the man said: 'who are you kidding?'

But the analogy between Kodak and Ireland goes further. Kodak failed because it didn't want to change. It just wanted to stick to the things that had worked in the past, hoping that the future would eventually catch up. Its arch-competitor Fujifilm, on the other hand, could see the same changes coming and so invested in innovation, new sales channels and was prepared to learn from its mistakes. As The Economist put it recently:
What are the lessons from the surprising stumble and the equally surprising success? First is the need to cannibalise oneself. Second is the importance of execution in addition to strategy. But most important, firms must resist looking for a magic wand when hard work in needed.
Ireland needs to get on with the hard work. And the hardest work is deciding on the strategy. I've just finished reading Richard Rumelt's superb book Good Strategy, Bad Strategy. He uses insights from history, business, and war to explain what makes a good strategy (read the excerpt from the Introduction to his book on his website to get a feel for his style and thinking). Rumelt explains the three elements - or kernel - comprising a good strategy as follows:

1. A diagnosis that defines or explains the nature of the challenge. A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.

2. A guiding policy for dealing with the challenge. This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis, usually by creating or drawing upon sources of advantage. It's also crucial - stresses Rumelt - to be clear about what you are not going to do.

3. A set of coherent actions that are designed to cary out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the guiding policy.

So let's think this through for Ireland. The diagnosis is 'easy': we are on a path that will not deliver a prosperous future for our citizens (though it has been pretty good for bondholders so far). The big challenge is to admit we need to change course and to identify a better way forward.

As for the guiding policy, the greatest source of advantage that we have is our people - at home and abroad. The skills, knowledge, experience, networks, influence and - yes - wealth of the Irish people can be used to deliver economic prosperity for us all. But only if such advantages are applied to the task of pursuing a better course. We must therefore decide not to continue along the current path.

Which brings us to the third element: coherent actions. The €1.25 billion handed over today could have been used to provide 10,000 start up businesses with €125,000. If we had made the 'pillar' banks (that we own) match it with low interest, non-recourse, 5 year loans then that would have given €250,000 to 10,000 start ups (or already established small businesses with growth ambitions). Assuming each start up hired 3 staff in addition to the founder then that would have created 40,000 jobs. But instead we handed it over to anonymous bondholders - an action entirely incoherent with any ambition to return Ireland to a path of prosperity for all its citizens.

Do we want to be Kodak or Fujifilm? We still have a choice. But we can't delay the choice forever:  Kodak shows us what happens when the hard choices are left too late.

Image credit: NAMAWine Lake

Tuesday, January 24, 2012

Melting Confidence

From Zero Hedge, on the 'confidence game':
But in this little seed of a criminal idea is a greater and more important truth: confidence is something that is shared by two or more people. It can grow or shrink, quickly or slowly, and has its roots in the social wiring most human beings share. And from an economic standpoint, confidence is an essential lubricant of any capitalist based system. You need confidence in the legal system, the market’s ability to set prices fairly, and in your fellow citizen to hold up their end of a bargain, just to name a few structural necessities.  And you need confidence that the underlying economy is sound, that you will continue to have a job, that interest rates will remain stable, that inflation is under control, and so forth, before you will spend freely.
Tyler addresses an important issue:
But the current picture of global consumer confidence from the Nielsen survey looks very much like one of those sketches of an iceberg in a children’s textbook.  A lot of the mass is below the surface, with only a tiny bit poking up out of the water. It pays to consider the possibility that global consumer confidence has gone through a semi-permanent shift to something below the waterline, invisible to producers of goods and markets alike. If true, this would mean that consumers will only slowly begin to reappear, essentially as the iceberg melts.
The confidence trend for Ireland - from Nielsen - shows how much ice is left to 'melt'. A lot:

Monday, January 23, 2012

I'll Have What She's Having

We've reached 1,000 jobs pledged on Hireland, in just the first five days. Hireland is a great example of behavioural economics at work. The core insight is derived from what Mark Earls calls 'facilitating copying': in other words, making people's behaviour and choices more visible in order to inspire others to copy them.

Hireland works by making visible what is usually invisible, i.e.: the creation of small numbers of jobs by large numbers of businesses. The Government publishes monthly information about job losses, but there is no equivalent measure of job gains. So if all business people see are headlines about job losses then they are going to be considerably more cautious about hiring, even if business pressures suggest they should. But if they see others hiring then maybe they can overcome their caution.

By getting hundreds (and hopefully, thousands) of businesses to pledge to hire staff, Hireland is a way of signaling a positive pattern of behaviour that is otherwise unobservable. Choice architecture and all that.

We are social creatures, we usually behave the way we see others behaving. So the task is to facilitate the right type of imitative behaviour. Or as Mark Earls puts it: 'I'll have what she's having'. And yes, it is inspired by that movie scene:

Friday, January 20, 2012

The Value of Values

From a recent speech by Chief Rabbi Lord Sacks:
A world without values quickly becomes a world without value. Economic superpowers have a short shelf-life: Spain in the fifteenth century, Venice in the sixteenth, Holland in the seventeenth, France in the eighteenth, Britain in the nineteenth, America in the twentieth. Meanwhile Christianity has survived for two thousand years, and Judaism for twice as long as that. The Judeo-Christian heritage is the only system known to me capable of defeating the law of entropy that says all systems lose energy over time.
Here's the question: can the eurozone survive if its members do not share the same values?

Tuesday, January 17, 2012

Be Bold

If there is a time for being bold it is now. I've had the great pleasure of working with a team from business, marketing and media backgrounds to get a new job creation initiative off the ground. It's called Hireland and so far we've gotten over 300 jobs pledged by businesses throughout the country since yesterday. Of course, Hireland won't create the jobs: individual Irish men and women running businesses will do that. Like they always do.

The job of every business owner and manager is to navigate their company through uncertainty towards the future. It's still very uncertain out there, but if you've gotten your business this far then there's a good chance you can benefit from an extra pair of hands or someone with fresh thinking to help get more customers and boost staff morale. So if you can, don't wait: pledge a job today...

Sunday, January 15, 2012

Navigating Risk

I was on George Lee's show The Business yesterday, talking about the prospect of 10 more years of austerity in Ireland (a la Richard Tol's 'a plague on both your houses' parting shot).  I was a little more sanguine than George (or Richard) about the next ten years. As I pointed out, you can tell economic forecasters have a sense of humour because they use decimal places...

In our increasingly attention-deficit culture we need to read more history. If I had been speculating about 'the next ten years' back in January 1912 I might have anticipated a bit more bother in the Balkans, some trouble introducing Home Rule in Ireland given Unionist intransigence, and not much else... It is unlikely I would have anticipated the First World War, the Russian Revolution, the disappearance of four empires, the Irish War of Independence and a global flu pandemic thrown in for good measure. It turned out 'the next ten years' were full of surprises.

Today, as in 1912, the world appears full of risks. The chart is from the WEF report on Global Risks 2012. The risk with the greatest potential for an adverse impact is that of 'Major Systemic Financial Failure', defined as:
A financial institution or currency regime of systemic importance collapses with implications throughout the global financial system.
Hmm, I wonder do they have any particular currency regime in mind? The bigger point is that an increasingly complex and integrated world is more vulnerable to 'a cascade of shocks', as noted in the Chatham House report on Preparing for High-impact, Low-probability Events: Lessons from Eyjafjallajökull. Or what historian Norman Davies calls 'the pitiless passage of time'. Much the same way the highly integrated world if pre-WW1 Europe proved to be vulnerable.

But the shocks can be on the upside too. Europe doesn't have an economic crisis: it has a banking crisis. Europe's major banks are bust: they've too much toxic debt on their books, including the bonds of eurozone governments that can't and won't be repaid. Right now the ECB, the banks and eurozone governments are playing a protracted game of musical chairs, and so far the banks are winning... But eventually the music will stop and the banks will be left standing. Democratically elected politicians will likely then be forced to nationalise the banks en masse, debts (sovereign and other) will be written off en masse and the hum drum task of producing goods and services that others want to buy will resume and once again improve the lives of Europeans.

We like to think of ourselves as superior to our ancestors. After all, they believed plagues and earthquakes and the like were the punishments of an angry god or gods. And yet here we are, in the early 21st century, inflicting misery on entire generations and entire nations because the balance of digital 'noughts' and 'ones' on computer servers - which is what comprises money nowadays - is somehow 'out of balance'. And so we are punished by an invisible imbalance that none can see but all must fear and worship. We're not all that superior to our ancestors after all.

If something can't go on forever it won't. Nor will the eurozone's game of musical chairs, nor Ireland's economic penury.

Sunday, January 8, 2012

Forget the Future

“The future is the only transcendental value for men without God.” Albert Camus
I've been reading a lot of history over the holidays. Truth is, I find history more useful than all the speculation that inevitably heralds the start of a new year. I've especially enjoyed Lars Brownworth's Lost to the West - The Forgotten Byzantium Empire That Rescued Western Civilization. You can listen to a free podcast series by the author here. The focus in the book is mainly on the rulers - good, bad and terrible. Of them all I rather liked Basil II - image opposite.

I also read Norman Davies' Vanished Kingdoms: The History of Half Forgotten Europe. Combined, the two books provide a useful reminder that stability and progress are the exception rather than the rule in human affairs. Especially in Europe. As Davies observes:
Most importantly, students of history need to be constantly reminded of the transience of power, for transience is one of the fundamental characteristics both of the human condition and of the political order. Sooner or later, all things come to an end. Sooner or later, the centre cannot hold. All states and nations, however great, bloom for a season and are replaced.
Lamenting the decline of history as a subject taught in our schools, Davies finds that:
Materialism and consumerism are rife. Young people have to learn in a cocoon filled with false optimism. Unlike their parents and grandparents, they grow up with very little sense of the pitiless passage of time.
What the young (and increasingly, their parents) need to learn from history is that:
Successful statehood, in fact, is a rare blessing. It requires health and vigour, good fortune, benevolent neighbours and a sense of purpose to aid growth and to reach maturity. All the best-known polities in history have passed through this test of infancy, and many have lived to a grand old age. Though who failed the test have perished without making their mark. In the chronicles of the body politic, as in the human condition in general, this has been the way of the world since time immemorial.
Such observations may seem pessimistic. But John Gray notes the importance of seeing the present - and the future - through the prism of history:
For believers in progress it must be a dispiriting prospect. But if you can shake off this secular myth you will see there is no need to despair. The breakdown of a particular set of human arrangements is not after all the end of the world.

Surely we would be better off if we put an end to our obsession with endings. Humans are sturdy creatures built to withstand regular disruption. Conflict never ceases, but neither does human resourcefulness, adaptability or courage.

 We tend to look forward to a future state of fulfilment in which all turmoil has ceased. ...But living in fear of the end is as stultifying as living in hope of it. Either way our lives are spent in the shadow of a future that's bound to be largely imaginary.

Without the faith that the future can be better than the past, many people say they could not go on. But when we look to the future to give meaning to our lives, we lose the meaning we can make for ourselves here and now.

The task that faces us is no different from the one that has always faced human beings - renewing our lives in the face of recurring evils. Happily, the end never comes. Looking to an end-time is a way of failing to cherish the present - the only time that is truly our own.
So forget the future. Nothing lasts forever: although incredibly the Byzantine Empire lasted 1,058 years until its fall on May 29th, 1453. History can help us be a little more sanguine about the times we live in, and the challenges we face. Others have faced considerably greater challenges in the past, with far fewer resources and poorer prospects for success.

Simply remember that we are Sailing to Byzantium, listening to the song from the singer on the golden bough
Of what is past, or passing, or to come.
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