irta conference - barter 3.0 intro
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Barter 3.0
21st Century Credit Clearing & Beyond
Chris Cook
IRTA Convention Ocho Rios
14 September 2012
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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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Market 2.0 - centralised & connected
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Market 2.0 - presence via intermediaries
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Market 3.0 - decentralised & connected
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Market 3.0 - network presence
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Market 2.0 reached Twin Peaks
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Peak Credit - financial demand on people
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Peak Resources - demand on finite resources
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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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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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Funding – long term investment in productive assets
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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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…..and in a Flight to Simplicity