Financial Crisis? What Financial Crisis?

6 January 2009

But it is a wakeup call.

This financial crisis is not new and has been expected for a while…Some have been issuing warnings since around 2002 (but were ignored as alarmists). By mid 2007, it was already fairly obvious that a global crash was imminent. So why does it come as a surprise to governments, businesses and ordinary people who are now either losing their jobs or having to cut back?

Yet there seems to be little good reason to slow down business activity, at least in Japan. The Yen is the strongest it’s even been and has been gradually getting stronger and stronger over the decades. Surely, there is a huge opportunity there? There is no need for such sensationalist gloom and doom-mongering. The sophisticated infrastructures are still intact and work efficiently. We still have electricity and gas and water. Trains and buses still run on time. There is still a relatively plentiful supply of food. Property values may have crashed but the buildings are still standing and in good condition. Schools and hospitals and libraries and government offices are still open. And television stations continue to churn out news, movies and entertainment. In short, the world is still turning!

In this article I will present an approach that may allow you to exploit the many opportunities that have arisen as a result of the current financial turmoil.

How did we it get into such a mess in the first place? I believe that, despite the unprecedented access to information, most of us have been trained to live lives of studied ignorance, as in previous ages when people were mostly illiterate or uneducated. In some ways, we haven’t advanced all that much. Just because you might be highly “educated” doesn’t make you impervious to this affliction. Indeed, some of the most ignorant people are highly qualified doctors, bankers, professors – primarily because they are so confident of their knowledge and seldom question it.

Schools teach us to accept facts on authority. We are discouraged from thinking skeptically, particularly about the process of learning itself, and the purpose of school education – which is ultimately so that we can go to university to be ‘qualified’ and get a ‘good job’.

Educators will argue against this. But think about it…. As a student, if you felt there was an alternative explanation for an historical event, say, you would be marked down if you expressed this point of view in the exam. So instead you simply learnt the point of view that was “correct” for examination purposes. Similarly, were you ever given the opportunity to discuss what you want to learn in the first place? If you studied mathematics, would you have been allowed to learn about investment and finance, or fun stuff like topology or game theory? And if you studied history, would you have been allowed to study Asian History or the History of Science, as opposed to whatever was the standard syllabus (American & European History?)

Only a very few schools rate students on their ability to present an argument, based on good quality research and critical thinking. In general, the quality of even post-doctoral research and analysis is appalling. A typical case in point is the recent debacle regarding Olanzapine.

We are being lied to consistently by the very people who are supposed to safeguard our interests. It suits them that the majority of the population accepts their “explanations” for how the economy works and about taxes, health, education, warmongering, and even the state of the environment.

Henry Ford said a hundred years ago that if people really understood the financial system there would be a revolution. Not much has changed since then.

Most of what we know and believe has been carefully conditioned over the years. We are almost as indoctrinated to believe in our Capitalist, Consumer way of life (whether Japanese or Western) as the Soviet or Chinese children were made to believe in the merits of Communism and the socialist way of life.

This perhaps hasn’t been planned deliberately. I doubt there is a secret society of wealthy and influential families conspiring together to make it so. Usually, these things come about simply because it becomes fashionable. It was fashionable for quite a long time to believe that women were mentally inferior to men and were biologically designed to stay at home and look after the family. It was fashionable amongst eminent doctors to believe that blood-letting was healthy or that anesthetists were quacks. It wasn’t so long ago that knowledgeable professionals advocated for eugenics as a means of purifying the human race. And up until the 1970’s doctors were fairly convinced that masturbation was unhealthy. More recently, most of us were willing to believe in the effectiveness of powerful psychoactive drugs for dealing with discipline and behavioral problems in young children… Doctors, lawyers and politicians in the UK also readily accepted that women could harm or murder their babies as a way of drawing attention to themselves (MSBP or Munchausen’s Syndrome By Proxy is what it is still called). And insurance companies in the US readily fork out millions of dollars for treatments identified by the DSM (Diagnostic & Statistical Manual) published by the Psychiatric Association. Yet it isn’t based on scientific principles at all. And despite this, people who are diagnosed as having a personality disorder under the DSM are routinely considered sufficiently dangerous or incompetent by family courts to have their children taken away.

Judges do not question the underlying validity of the DSM or the professionalism of the practitioners involved.

You are a highly skilled and experienced professional. Do you think, however, that you are immune to this kind of ignorance? For myself, despite being on my guard for attempts to hoodwink or indoctrinate me, I am often astounded at the depths to which I have been deceived. It very often goes to the core of our value systems. Our “Capitalist” lifestyles probably depend to a great extent on the wholesale squandering of fossil fuels. We value convenience and choice and “freedom” and material comfort. Personally, I would find it extremely difficult to live the life of a Buddhist monk, only eating before 11am and entirely dependent on others for my food. Yet, approximately 90% of the people in the world live lives not so different (but perhaps without the “spiritual” nourishment that the monks have).

The very basis of our financial systems seems to be based on a gigantic pyramid scheme – albeit very sophisticated. Like most MLM businesses, the successful people are those higher up the pyramid – those who get in early and quit while they are ahead. But this kind of system only works if the 90% at the bottom of the pyramid supports the 10% at the top. If you look at the mathematics, pyramid schemes become saturated very very quickly.

In my humble opinion, the boom and bust economic cycles of the 20th century are a direct result of the pyramid principle in action. Just on a larger – and now global – scale.

Take the recent property crash in America. The only way that a property can increase in value if someone else down the line buys it at a higher price. The only reason why he would do so is because he believes that he can sell it to the next man for an even higher price. But when you reach saturation point, the people at the bottom of the pyramid can no longer find anyone left to buy into the scheme.

Banks and financial institutions depend on the expansion of the pyramid in order to justify their existence. Finance 101: a bank borrows money from you, the depositor, at X% interest and lends it out to someone else at X+y% interest. If they have no-one to lend to then they can’t pay you your interest. So banks tend to find creative ways to lend to people who simply cannot afford to borrow. This works so long as the properties they buy continue to increase in value.

When this is no longer sustainable, the people at the very bottom are saddled with loans secured on properties that are worth less than the original loan. So they have to make up the difference out of their own pockets! And, ultimately, it is these poorer people who support the entire financial structure by spending the next 10 years of their lives paying off their debts – either directly by negotiating a repayment schedule or indirectly by increased taxation and an increase in the cost of living.

Where do governments find the $800 billion or so to rescue the banks and bolster the economy? Either by printing money (which therefore means that it becomes worth less over time) or by borrowing from the people (which gets paid back through sustained high levels of taxation).

It can make one feel cynical that so much money can be magicked up when one hears that nine million children live in refugee camps at any one time; or that around the same number die every year from treatable conditions such as malnutrition or malaria and that it would take around $18 billion (or the cost of four aircraft carriers) to prevent most of these deaths. Perhaps there is an unstated accord to indulge in a form of ‘natural’ population control (after all, 9m extra poor people in the world every year might simply exacerbate the poverty problem); or perhaps the livelihoods of the people dependent on the aircraft carrier construction industry has higher priority than a few million poor children who have no future anyway… It does seem grossly unfair, however, that money can be found when it’s expedient, but obtaining comparatively small amounts of money is often problematic.

I’m not a finance expert, so I may have got some of the details wrong. (Please comment below if you can support or refute this notion.) I do believe, however, that most of us are fairly ignorant about what really happens behind the scenes and how it affects our work, our incomes and the cost of living.

My guess is that the underlying reason why governments and big businesses often get it so wrong is these institutions operate on the basis of “it’s other people’s money”. At the end of the day, it doesn’t really matter if the money is wasted. After all, the worst that can happen is you lose your job; and for a CEO this isn’t always such a bad thing if there is a golden parachute involved. For a politician or senior civil servant, either the departmental budget is reduced (or simply not increased!) or the person responsible (or his scapegoat) gets pushed sideways.

There is really no strong incentive to deliberately and thoroughly think through the repercussions of any particular plan. A simple process that might help would be to work through a particular proposal using Edward de Bono’s Six Thinking Hats framework. But hardly anyone knows about it (and very rarely in the public sector), let alone makes use of it as a matter of course.

As ordinary people we don’t question the fundamentals of business practices, trading and investments, and the economy in general. Even if our job involves finance or budgeting or accounting or planning. Indeed, we are deliberately discouraged from doing so, usually through confusion or omission of information. The aim is to maintain “confidence”. We seem to understand that so long as everyone else feels confident then the global monetary and banking systems won’t collapse and we can keep our jobs, borrow money, and buy things. No one wants a run on the bank, even if we know that there isn’t enough money in the bank, because then everybody suffers. And there’s nowhere else to keep our money anyway, other than keeping cash or buying gold perhaps.

And even this is fraught with difficulties. What kind of cash should we keep? Yen? Dollars? Euro? Baht? The value of any of these currencies fluctuates so wildly that it is impossible to know which is a “safe” currency. A hundred years ago, one British pound could buy you $100 worth of goods. Now you get only $1.50. For many years the South African Rand was worth more than a dollar. Now it’s only worth 10 cents! And in the early 70’s, $1 bought you around ¥350. Now you only get ¥90 to the dollar.

And what about gold? Sometimes it’s worth a lot: it was $850 (per ounce) at one point in 1980; but mostly it’s been around the $400 mark. Some people say it could eventually reach $2,000. $800 in 1980 is worth $2,000 in real terms today. So gold should already be at this level if it had kept its value.

As for full-time employment, jobs are not as secure as thousands of people are (re) discovering. The more flexible and entrepreneurial self-employed consultant, contractor or businessman is in a better position to weather economic downturns. Primarily because they are practiced at responding to market conditions. Permanently-employed people are in very shaky positions – their jobs can be terminated in an instant: when there is (yet another) financial crisis, when the CEO makes a blunder, or if the company becomes bankrupt, is sold/merged, or simply transferred to a new country. They do not have basic skills to think creatively, to sell themselves, to read the market or to ask the right questions. Most employees work in a world that seems to be stable and secure; and they have no idea how their work affects the overall wellbeing of the company; or how external forces shape their futures. Very few employees actually understand the Big Picture of how the company operates and how the quality of their work or actions affects the profitability and sustainability of the company. Our modern day corporate companies are not so different from a Ford production line of 100 years ago, other than the fact that today’s products are more “knowledge” based.

It is perhaps a little facetious to over generalize. Many things have improved beyond measure since 100 or even 50 years ago. We live in a truly magic age of instance communication, cheap and abundant food, flying carpets that can whiz us across the globe in a day (it took the Mayflower two months to cross the Atlantic) and automated systems that make life extraordinarily convenient.

But many things have also stayed the same. We are all remarkable creatures of habit; and we seldom learn from our experiences, good or bad. It’s only when something really bad happens that people sit up and notice. But in time, we forget. It was just twelve years ago that we had a spectacular meltdown in Asia. Are our business practices and personal habits any different now as a result of that? Probably not. Seven years before that there was a fairly serious downturn in the US. Three years before that the property bubble burst in the UK. And in 2002 there was a dotcom crash.

There are lessons to be learnt from all these crises. Governments, banking and financial institutions have sometimes implemented measures that protect our wealth, but on the whole the measures seem to have been sticking plasters that unravel again a few years later. Sufficient to maintain the illusion of “confidence” until the next time and perpetually delay any really serious meltdown… We hope.

Some say that this time it will be different. Our way of doing business and managing the economy is inherently unsustainable. Maybe there will be a return to the Gold Standard, and the true (lack of) value of currencies such as the dollar will be exposed. It may take 5-7 years for all of this to unravel and, along with other self-defeating habits, the downturn will be a lot deeper and a lot longer. Whether this comes to pass or not, only time will tell.

It does seem tomake sense that in a global economy, there should be a single universal currency. The individual states of America manage with a single currency, and so now do the European member states.

Now is a good time for reflection and fundamental restructuring and development for the future. It is a golden opportunity to harness the wealth of knowledge, talent and expertise already existing in your organization. People are not so busy selling and fulfilling orders. Now that it is quiet, you can use this time to develop your people (who already have an innate knowledge of your product, the industry and your corporate culture) and work on new products and strategies in preparation for the future.

Letting otherwise productive staff go has a double cost. The first is that it costs 2-3 years’ salary to recruit and train a replacement in terms of fees, delays, errors and lost opportunities. And the message you send to otherwise loyal staff members is that their jobs are not as secure as they thought; which means they will be more amenable to transfer out to another company if the opportunity presents itself. If I were a headhunter, I would look for likely candidates by deliberately targeting those companies that had let go the most people during this crisis.

Instead of cutting back, companies should use this opportunity to invest. Many people find this concept difficult to grasp. Saving a million dollars on cutting costs and laying off of staff seems better than investing the same amount on exploiting new opportunities. In the short term, you may save a million dollars. But think of what is likely to happen in the medium to long term.

An economic crisis is, however, the ideal excuse to get rid of useless or negative people. Many employees do become entrenched in corporate life and are no longer productive, but it is often difficult to get rid of them without a significant reason. Bad managers should also be removed while you have the opportunity – those who block progress and treat their subordinates like serfs. Particularly those who “do” rather than “manage”.

That aside, it is unfair and bad business practice to lay off otherwise talented staff during this time. It’s a sign that the business has been operating on an unsustainable basis. Intimate knowledge of the corporate culture, clients, business practices & procedures, trade secrets are being leaked to savvy competitors (those who take up the slack quicker when the economy improves)…

Much better, then, to keep them on for those 2-3 years and develop them so that they become more productive (by value) in the future. Most accounting and trading practices don’t allow for this kind of long-term internal investment of human capital. It takes strong leadership to take this kind of action and to persuade investors that this is better for them in the long term. Most traders and trading systems only look at trends in the figures, without really looking at the fundamentals of the business model and the strength of the corporate infrastructure.

Except for people like Warren Buffet of course.

Besides, with the Yen being particularly strong compared with the dollar, pound, euro and wan, it is relatively cheap to employ American, European or Korean labor, so long as you can retain them in their home country.

Here are some additional approaches you might want to consider as a strategy for dealing with the crisis:

  • Invest in intellectual capital
  • Care for your staff
    • Staff are unlikely to move on to higher paid jobs(the competition?) if the environment is pleasant, they have a social network and support for their family, get on with their superiors and colleagues and have a career path that suits their personal goals (which may be no path at all, but just enjoying their work day…)
    • Eliminate bullying
    • Encourage leaders to praise and appreciate subordinates
    • Remove bad managers – allow “stars” to excel at their expertise without necessarily gaining status through management. Teach managers to manage (vision, delegate, coach) not work as hands-on experts.
  • Encourage entrepreneurship, independent consultancy positions particularly for part-time/contract staff), develop a business mindset.
    • Encourage creative and critical thinking
    • Overcome barriers to providing honest feedback
    • Make it safe for whistle-blowers
  • Implement Six Thinking Hats in all your meetings.
  • ·Foster creative ideas
    • Test the best ideas – pilot studies, mini start-upventures, etc.
    • Implement the ideas that work
  • Understand customer care, and how it impacts on every aspect of the organization
    • Product promise
    • Customer service
    • After sales support (and guarantees)
    • Encourage and reward complaints – feed back into product development/customer service/operating procedures
    • Staff and suppliers are customers too
  • Learn to work “smart” not busy.
    • Are there superfluous activities in your organization that can be dispensed with?
    • Is it really necessary to have people working 8-10-12 hours a day? Maybe they can do the work in 4 hours and spend the rest of the time either spending time just thinking, or with their colleagues or their customers, learning from each other and strengthening relationships,or have more time with their family, or spending time learning & improving themselves. (Most people only do 4 hours productive work per day anyway; they just look busy for the other 4+ hours!)
  • Apply the Seven Habits

If you’ve gotten this far then you are probably fairly serious about your business and would like to consider various avenues to take advantage of the current economic climate.

Please contact me if you’d like to have a discussion about it. I am happy to visit you at your convenience.

I’ll be in Japan until Jan 14, 2009 and after that in Bangkok.

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