Recapitalising Europe
Forget about recapitalising the French Banks, saving Greece, (or the Euro)….
Euro Dominoes
Continuing our conversation on Innovation
Yes, we admit it! The headline statement above is all about grabbing your attention. We are not advocating any disorderly default crises.
What we believe is that the ‘agricultural’ economic base and the semi-integration of Europe, via market and monetary union, without going the full circle of political and fiscal union as well, has at this point failed.
Not that a major concerted (and concentrated) effort to ensure it does not fail will end in failure itself. But has anyone really asked the question: At what financial cost?
If an US Treasury Secretary, Timothy Greitner, has to take the unprecedented step of flying across the Atlantic to come and join a European Union Finance Ministers meeting, then something big must be on the cards!
Is he going to come and tell Germany and France in person to just let Greece go?
This reminds us of a stanza from Felix Dennis’ poem “How to Get Rich” about timing:
“Good timing? To win it You gotta be in it. Just never be late To quit or cut bait.
This might just as well be the message for Europe: How not to get Poor. The key words are “Never be late to quit or cut bait”.
What we believe is happening behind the scenes is the planning for an orderly default mechanism and Euro ‘disbanding’.
The more Angela Merckel’s resolve hardens around saving the Euro, the less we believe Europeans themselves are warming to this concept.
So what about Innovation then?
We started this article with the intention of continuing our conversation on Innovation.
So, what we mean by Recapitalising Europe actually is related to addressing the culture of decay that has enveloped Europeover the last few decades. If Europe is referred to as the ‘Sick Man’, then there must be something behind that statement.
And we believe that it is the general lack of support for invigorating Europe that is a key driver.
What do you mean, we hear you ask?
In the quest to unite Europe, we have built a framework of a European parliament, a Council of Europe, a judicial system, etc.
With these institutions have come regulation, rules and edicts. Sometimes messy, sometimes helpful. But at this juncture, we are so overrun by nonsensical regulation that the will and spirit to be creative and innovative has drained away from the general citizenry.
This is a very, very sad state of affairs. The young European citizens have lost their ‘psychological contract’ with the wider Europe and European integration goal. High rates of youth unemployment across Europe is breeding a generation of disengaged European citizens and ultimately is an opportunity and efficiency waste in the medium term.
But how do we Recapitalise a spirit of Innovation in Europe?
This is a key question we are going to ask of our network and as part of our general ‘outreach series’ and report back on our progress towards establishing an Innovation Framework for Recapitalising Europe.
Please ‘tune-in’ again soon for a status and progress up date.
theMarketSoul ©2011
Related articles
- German Chancellor Angela Merkel backs moves to recapitalise eurozone banks (telegraph.co.uk)
- More and Confused Europe? – Part 3 – It is Uncertain… (themarketsoul.com)
- £250,000 get-out-of-the-euro prize (independent.co.uk)
- Europe: The land of promise (tradingfloor.com)
Get your calculators out
Yesterday the Independent Commission on Banking (Vickers Commission) published its long anticipated, yet low in surprises report on Banking Reform in the UK.
See:
Rather than rehash the analysis already performed, we only have two items to add at this stage:
- Get your calculators out, or at least keep the Quants busy, because unravelling and implementing reforms are going to cost a lot of money (and we all know who pays for that at the end of the day)
- How do we create the ‘Imperfect Competitive’ markets or at least address Oligopolistic Competition more effectively?
In a fiercely competitive international market space the desire to aggregate banks and financial institutions and hence reduce cost economies of scale at the expense of risk accumulation is overwhelming. (Which the discredited Sir Fred Goodwin ex Chief Executive of Royal Bank of Scotland [RBS] can testify to only too well)
Let’s hope the Vickers Report is not the start of the death knell of the UK financial services sector; or perhaps in a cynical way, that is exactly what is (intended) needed to address the UK’s long-term structural reliance on the financial services sector at the expense of a more balanced portfolio of productive output and activity.
theMarketSoul ©2011
I blame John Maynard Keynes (JMK)
Ever since the Great Depression and JMK’s ‘The General Theory of Employment, Interest and Money (1936)‘, have we had more intense government interference and hence taxation in most advanced economies. Thank you JMK.
But seriously, how much is too much? There must be value in controlling fiscal policy, monetary policy and (social) employment policy, but is this being done in an integrated fashion and with ‘value maximising’ principles?
We at theMarketSoul Limited believe this not to be the case.
We prefer to take a leaf out of Joseph Schumpeter’s book and view the economic cycle as either short (1 – 2 years), medium (around a decade) and long-term (many decades).
The trouble with any form of economic analysis is that taking any temperature readings during any specific cycle is just that – A temperature reading. Meaningless without being set in its proper context. We generally have a major problem in identifying where we are in any given long-term cycle.
It is only with hindsight and the historical perspective that we can truly determine where we were and where we thought we were heading.
It is our belief that we are (still) in the midst of a major paradigm shift, triggered by the innovation wave of the ICT revolution over the last 20 years.
We still have not fully grasped the consequences and full extent of this ‘drift’ to a new equilibrium.
As one of the unintended consequences we are currently facing up to a sovereign Debt balloon and are desperately trying to determine when we will encounter ‘Peak Debt’.
One of the popular libertarian ideals is to cut government’s stake as a percentage of total output of GDP. We endorse this view, but it appears that at the end of the day (because we have forgotten what Laissez faire looks like); we’ll still need someone to keep the lights on, adjust the interest rates and collect our taxes. All this in the name of job creation…
theMarketSoul ©2011
The Flight – Keeping an eye on the real 30 Year Treasury Yield Rates
The real (inflation adjusted) 30 Year T-Bill rates have since the beginning of the year averaged 1.72% (simple averaging).
Since the beginning of September 2011 the average real rate has dipped to below 1.00% to 0.99%. (Our measurement).
Does this mean that the flight to other asset classes is now in full-swing or rather; where on the ‘flight to safety’ trajectory do we believe we are now?
We offer no opinion, but keep your beady eye on the T-Bill rates in the months to come, especially when the election process officially kicks off in the USA.
theMarketSoul ©2011
The Credit Quake of 2008 – 2009 (Revisited)
We were reminded today of a blog post we made on 21 October 2009 we made regarding the Credit Crisis of 2008 – 2009, at the time.
Some of the lessons learnt and discussed there are still relevant today, especially our comment regarding the fact that the Credit Quake would have ‘after shocks’ for a few years to come:
“…we are still in the midst of a major equilibrium adjustment and the ‘step down’ or up from the previous level will continue to be uncomfortable for many years to come.”
Please follow this link for the full article detail:
http://themarketsoul.blogspot.com/2009/10/comments-from-lay-economist-on-credit.html
theMarketSoul ©2011
Crafting the Cynical Generation?
…continuing our conversation in the Economics of Taxation series (part 2)
A European Generation ‘E’ enquiry – (‘E’ for employment)
Referring to our previous article entitled ‘The Economics of Taxation’, today we elaborate and flesh out the basic ideas around taxation.
The basic idea is that any form of taxation becomes a drain on productive resources and at some point counter productive in attempts at balancing the government budget. For a fuller explanation of the effects of tax rate rises see the Laffer Curve analysis and the Cato Institute’s Dan Mitchell explain the Centre for Freedom and Prosperity’s view on Fiscal policy.
Source: Wikipedia – Laffer Curve
Two specific points are made by Dan Mitchell in his explanation, which bears thinking about:
- We don’t necessarily want to be at the point on the curve where government revenue is maximised, due to other factors such as the disincentives of maximising tax declaration by tax payers or the cost of collecting that revenue in the first place (sub-optimisation effects)
- Growth (in the economy) incentives fall well short on the upward side of the Laffer curve. In plain English this means that economic growth is maximised somewhere where people have the incentive to retain as much of their hard earned income and that point is somewhere well before we reach the Government Revenue maximising point. (The second Laffer Curve graph above captures this point in a more visual and understandable format). At point D on the curve economic growth will be maximised and note how it still falls well short of the Government Revenue maximising point B.
The behavioural question that fascinates us at theMarketSoul ©1999 – 2011 is how come citizens in Europe are able to tolerate so much more of an overall higher tax rate burden than our cousins across the pond in the United States?
theMarketSoul ©2011
A cynical swipe at the ‘Consumer end’ of the money (value) chain
Today’s short opinion piece revolves around the recent rail fare increases announced in the UK.
It strikes us as a very cynical way of rewarding behaviour and policies implemented by previous governments and parliaments to now go and increase the ‘tax’ on rail commuters when the switching policy from road to rail has meant that more rail passenger miles are being racked up versus road miles and supposedly turning off the tax flows into the Treasury from fuel duties, because more rail journeys are being undertaken.
Yet again the pendulum has swung the other way and at the consumer end of the bargain, we are being sent a confusing message us to which behaviours the government wants to encourage us to take.
Less government, less interference, less confusion. Let the (a well governed) market help efficiently incentivise people to do the right thing at the right time for the right price.
For more information about the Economics of Taxation just click the link in this sentence
The Economics of Social breakdown
How do we define the state of our nation at the moment?
For a little while now we have been experiencing an ‘unease’ with the communication revolution and the disparate nature of communication tools at our disposal. On the surface it would appear that what is happening is that rather than bind together a society it is having exactly the opposite effect.
The recent riots in the UK is just a small manifestation of this general unease.
From a purely economic and dispassionate analysis of the situation, we would offer the following opinion:
We don’t have a ‘broken society‘, as is such an often uttered phrase, but rather a complete misunderstanding of the disconnect between our ‘old / slow business models’ and the pace at which technology moves and changes the rules of engagement.
The pace of change in organisational design, planning and execution models lags multiple-fold behind the pace of technological advancement. It almost has an exponential relationship and due to this factor, we have not yet come to grips with applying new technology to ‘old world’ thinking, with its checks and balances and control mechanisms.
The disconnect between the pace of the communication revolution and the nature of diminishing returns has led to a massive gap in appreciating the fact the occasionally we have to pause and reflect on where we are and where we want to be.
Both the continuing economic crisis, pace of change, realisation that the future does not hold the same promise and prosperity as the recent past; are all infliction points that have amplified and spilled over into anger and the violence of the past few days.
So what we have is a ‘broken understanding’ of how different factors of production, such as land, labour, capital, enterprise and innovation has drifted further apart and caused unnecessary and unsustainable concentrations of accumulated power and risk amongst differing population groupings in the UK and elsewhere.
Remember, all five of these factors of production listed above need to work in harmony, in order to add, create and manage value and output that are useful and life sustaining necessities for all citizens.
Let’s address the gap between political and civil society to ensure sustainable progress and development for all.
theMarketSoul © 2011
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- X Factor culture fuelled the UK riots, says Iain Duncan Smith (guardian.co.uk)
- ‘Go sustainable, be responsible! European civil society on the road to Rio+20′ (3eintelligence.wordpress.com)
- Global Civil Society Under Attack (prweb.com)
- Communication Breakdown (relationshipremedy.com)
- Business insurance news: Malicious spam ‘could cause computer breakdown’ (premierlinedirect.co.uk)
US Treasuries – 4 trading days on and rates look rosy?
Today’s brief commentary piece tracks the US Treasury Yield curve of 5 August 2011 (before the Standard & Poor’s downgrade announcement) and the closing rate on 10 August 2011.
As can be observed, across the board, the T-Bill yields of 10 August are lower than on 5 August 2011.
It begs the question:
Is a ratings agency downgrade actually good for business?
The table below reinforces the point:
At least the volatility we have been observing in the stock markets of late, has not yet manifested itself in the capital markets. How long can this continue?
US Treasuries – An FX or a market call?
So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor’s finally took the ‘big step’ on Friday 5 August, after the major markets closed.
Image via Wikipedia
So what next?
In our article ‘US Treasuries – Are the markets really that bothered?‘ published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.
Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:
Is this an FX or market call?
What we meanby this question is:
Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?
All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.
Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.
How the US Treasury and administration now react will be crucial.
Who are we going to trust to make this big call?
Image via Wikipedia
theMarketSoul © 2011
Pleae refer to our disclaimer page
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Economics of Taxation
There are in essence only two ways of taxing citizens:
- A Tax on Stock (Wealth)
- A Tax on Flows (Income or consumption)
taxes (Photo credit: 401K)
Within these two tax methodologies are hidden the minutiae of the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.
Now step back second and consider the tax take flows from these two options:
With Incomes and consumption generally on the wane, where else can the taxing authority turn for sustaining or growing their net tax take? Only on the stock of capital assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.
Image via Wikipedia
Another salvo was launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle. Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial and highly skilled management talent, reversing the recent drain or threat of ‘brain drain’ from taxpayers in this tax rate band.
Tax (Photo credit: 401K)
theMarketSoul ©2011
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A sigh of relief?
Some say that in life timing is everything…
And so too it is with economics. We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.
Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.
In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14th Amendment.
And this is where the timing conversation picks up its thread again. The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending. Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt. In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries. If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.
If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.
But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.
theMarketSoul ©2011
The US Treasury Yield Curves #2 – Do you factor inflation into the deal?
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”
They win both ways!
theMarketSoul ©2011
Source Material: US Treasury web site:
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The US Treasury Yield Curves – Are the markets really that bothered?
Image via Wikipedia
As a general introduction today we will look at two US Treasury Yield curves. The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.
In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate. The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011. There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.
The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011. As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.
Yield Curve 2
In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site)
It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.
theMarketSoul ©2011
Source Material: US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx
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A Storm in a ‘Tea’ cup
Never resist the temptation to start a discussion with a pun.
In our previous article we highlighted the ‘battle royal’ on Capitol Hill to get a proposal agreed to address the possibility of a US Treasury default, whether actual or technical on or after 2 August 2011.
So the Republicans could not muster together enough support on Thursday to ensure safe passage of the bill to the Senate, where it looks likely to be overturned or severely amended in any case.
There is obviously a lot of back room dealing going on over this and analysts in Europe (taking their beading eyes off the Greek and now Italian and Spanish dominoes) have started to pay attention to the goings on across the pond. We heard one commentator mention the fact that the USA’ reputation has already been affected by this, irrespective of the fact that a default occurs or not.
So there you go. The fringe minority floating in the ‘Tea’ cup with a lack of the ability to look over the brim of that particular cup, might in fact achieve their overall objective of raising their own profiles, albeit at the expense of the nation’s reputation and standing as a pillar of the international capital market.
Look, we are not choosing sides here, because at the heart of the matter is the fundamental principles of civil society versus the public sphere debate raging and continuing to rage in the USA.
In our next article we will highlight some of the basic differences in opinion and views on the size and influence of government in the USA versus Europe, via the Rahn curve analysis.
Until then, it is tick, tock; tick, tock whilst we await the vote and subsequent consequences and fall-out from the US debt ceiling debate.
theMarketSoul ©2011
united states currency seal - IMG_7366_web (Photo credit: kevindean)
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Hold your nerve!
It is a confidence thing.
We are so very, very close to seeing and experiencing another colossal collapse in confidence in the world’s financial system.
This time it is driven by the ‘US Debt Ceiling impasse’. A steady flight to gold has been taking place over the past few months and even though most informed commentators believe the US Treasury ‘default scenario’ is not likely to physically occur, the mere threat of a default has not yet managed to ‘focus the minds’ of the US congress house of representatives locked in an ideological battle over fundamental economic policy and direction.
Image via Wikipedia
At stake here is a scenario that will make the 2008 financial crisis wane into insignificance, should the threat of a US Treasuries default actually play out.
Yet, very few mainstream headlines outside of the United States have been published about this potential catastrophic event. And we are only a few days away from the edge of disaster (Default D-Day is chalked up for Tuesday 2 August 2011) and the Washington Post has a default clock ticking down on this deadline web site.
If a default actually occurs, confidence in the international capital and currency markets will have been breached and no serious commentator has yet fully quantified or effectively mapped out the potential consequences of this potentially disastrous collapse in capital market confidence.
The only significant contribution we can make at this publication is to cross our fingers, hold as much in cash and liquid (non US dollar) assets and hope that some real focus and a meeting of minds occurs before Tuesday 2 August 2011 on Capitol Hill.
theMarketSoul ©2011
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The Elusive “G” Factor – Part 1
[Economics in a Nutshell]
An Introduction
There is a conundrum here somewhere! As a libertarian leaning Think Tank organization and publication, we instinctively know that more government interference in the economy and bigger government per se is not a good thing. And so is sovereign debt and the servicing of that debt. Both are drains on the economy and economic potential of any sovereign nation, yet both are necessary evils too.
But where lies the ‘sweet spot’ between the size of government, fiscal policy, sovereign debt (if necessary)? The magic formula or ratio between the public and private sectors and their respective shares of the economic output pie?
These are questions the political and business leaders are struggling to understand and define in Europe and the USA at this point in time in order slowly and arduously drag their economies back to a ‘normal growth cycle’.
Economy (Photo credit: Donald Macleod)
Part of the challenge we believe is the massive imbalance created by the shifting nature and sources of production, combined with the rapid uptake of technology and the disruptive influences of technology. Our planning cycles and hence levels of understanding and ability to adjust the factors of productions to keep up with these disruptive forces are being severely challenged. Or maybe our grasp of the theory underpinning our economic models just aren’t up to coping with the rapid nature of change and forces of change in the global economy.
As has been argued in previous articles, by its very nature the instruments we utilise to adjust economic activity and output in specific geographical locations, namely fiscal (tax) and monetary policy, are very blunt instruments and not as effective and able to cope with the speed of change in given economies. But are their any other mechanisms we can utilise to adjust unfavourable behaviours and activities in order to get back to equilibrium?
A further factor we believe is a lack of understanding of where exactly we are in the global economic adjustment life-cycle. There is no real comprehensive understanding and agreement at best of these influences. True mechanisms like the G8 now G20 have been created to address more global challenges, but there is hardly ever consensus and a collective will to act in unison to address the bottlenecks and imbalances in global economic activities.
With this introductory article we have laid out some of the areas to explore and bring back into the ‘light of scrutiny’ as part of a deeper understanding of the nature of our global economic state and status.
theMarketSoul © 2011
Economy (Photo credit: John H McCarthy)
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BASiQx promotion
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theMarketSoul ©2011
Collaborative nano and micro business ventures
“Don’t waste a good crisis” – not entirely sure who first uttered these immortal words, although a Google search on initial analysis seems to attribute it (or some very similar words) to Rahm Emmanuel, the current Chief of Staff of the White House, part of the Barack Obama administration. The actual phrase might be attributed to an economist called Paul Romer.
However, irrespective of who uttered the words initially, it is true that borne out of crisis the spirit of innovation always seem to rise like a new Phoenix bringing both hope and opportunity with it.
That is the great gift that the ‘study of scarcity’ that is economics provides us with.
We have the chance to think creatively about new platforms of collaboration and how Charles Handy‘s ‘Shamrock Organisation’ will eventually play out.
At the moment we are conducting a research study into how nano and micro businesses might find new routes to market and sustain themselves during these strained economic times as part of the extension of the outsource provider to the Shamrock Organisation. We will be trying to uncover some of the factors that lead to collaboration and other forms of formal and informal business structures that promote and underpin this form of collaboration.
Please watch this space for updates in the very near future.
theMarketSoul ©2010
Random Collisions of Chance
Chance and spontaneity are two interesting phenomenon required for innovation and creativity.
We were reminded of this in an interview recorded of a LinkedIn executive recently*. He stated that chance encounters are “where we make some of our most significant connections“, be it your life partner, business associates, etc. and that speeding up those chance encounters was one of the fundamental principles and aims of social networking.
That idea struck a chord with us. Like our free market principle of ‘Spontaneous Order’, random collisions and network creation, leading to opportunity exploitation and ultimately wealth and welfare maximisation is intuitively an attractive proposition.
So, we have the mechanisms in place, with online tools and social networking sites, but how much of this activity is outward focussed revenue and income generating? What is meant by this is that the revenues are not focussed on increasing advertising and network operator revenues, but individual participant to participant’s opportunity flows.
And beyond building an online presence with followers and individuals being influencers and thought or trend leaders in their domains, how many of us focus on being revenue leaders and wealth and welfare ‘maximisers’ in this space?
Do you have personal metrics of success, which help inform and modify and moderate your personal behaviours to ensure that you maximise your ‘Return on Ether-time’? [ROET]
Maybe it is well worth a thought because in the neo-classical world of market participation, if you aren’t in the market and making a living (or a half descent living) from it, you might get marginalised and lose out on the wave that hit us when Web 2.0 arrived.
* We are searching for a link / reference to this interview. Once we have found it, we will update this post
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Risk-Based Change Management
Introduction
Cost cutting has been a priority in the private sector, ever since the financial credit quake started in 2008, yet the words currently are ‘austerity measures’ and budget cuts in the public sector.
Most of the cost cutting in organisations has been along the tactical and operational lines and we believe that in the ‘age of austerity’ we are within, revisiting cost cutting from a more strategic perspective would add significant value to both the private and public sector organisation alike.
Budgeting (Photo credit: RambergMediaImages)
A Zero Based Approach
Within most organisations budgeting and budget setting is an incremental affair. It is very much focused on a business as usual mentality and the status quo is rarely questioned or scrutinised with any level of depth and rigour, as long as the financial plan delivers the numbers senior managers anticipate and the investor community expects.
Yet this is exactly the kind of ‘tyranny of the status quo’ that has destroyed a significant proportion of value in organisations over the past two years.
A zero based approach addresses some of the short comings associated with incremental budgeting and financial planning. It is by no means a perfect replacement for incremental budgeting, it cannot address all the strategic issues and it is fraught with its own pitfalls, yet we assert that a focus on some recent lessons learnt in organisations that have implemented cost cutting via a zero based approach can add value to our clients budgeting and financial planning systems.
Zero-based budgeting can be summarised as the process of preparing financial plans from a change perspective, normally building the financial plan from scratch (the zero base), viewing the process as if the organisation has not delivered the particular service of product in focus before.
Some of the lessons learnt are briefly listed below:
- Many versus few – Instructions and the interpretation thereof by individual users
Journal of Human Capital (Photo credit: Wikipedia)
- Focus on the Full Time Equivalents (FTEs) and people cost early in the process
- Check Payroll Data integrity
- Understand thoroughly the organisational restructuring issues (get Human Resources understanding the financial budgeting language early in the process)
- Ensure a distinction between building a Business Case versus Budgeting
- Confidentiality (how, who, what and staff and managerial morale implications)
- Education process and ensuring skills, knowledge and information convergence to ensure the budget is delivered as a value added ‘conversation’
- Appreciation of management style versus timetable for budget delivery
- Over communicate (more information is better than more or inadequate assumptions)
- Concentrate on the budget story (strategy and changes) and ‘hang’ the budget numbers on the end of the storyline (Making the budgeting process less ‘threatening’ to budget owners)
These lessons can be separated into two distinctive themes, namely the Human Capital dimension and the Systems issues.
Themes to be aware of
As far as the Human Capital dimension is concerned the major lesson is to ensure that both the budget holders and prepares are fully cognisant and understand the language of both budgeting and what the inherent risks and concerns around a zero-based approach is.
Key issues and risk are around work stream teams from different disciplines (HR, Finance, Operations, IT and marketing) not always having a common language and frame of references for similar linguistic terms and phrases. Ensure that potential for misunderstanding the objectives and delivery mechanisms are addressed early in the Zero Based Budgeting approach.
Foster a culture of empathy within the management ranks and never underestimate the emotional impact that getting rid of people can have on both the managers having to make the tough calls and both the staff being called upon to leave and the staff morale of the people earmarked to remain behind and deliver the business as usual processes.
As far as the Systems issues are concerned, ensure that enough time and preparation goes into the planning and delivery of the Zero Based Budgeting mechanisms and tools, as you will be running a process that has not been utilised and thoroughly tried and tested under operational conditions before. There are risks in the following areas to be aware of:
- Data integrity
- Spreadsheet modelling and calculation errors
- Documentation and the support services (handling budget holder queries and concerns)
- Skills and knowledge of the budget holders and preparers might be limited
A diagram showing the flow of knowledge in the Financial Planning Profession (Photo credit: Wikipedia)
Conclusion
As was suggested in the Lessons Learnt listing above, over communicate with managers, budget holders and preparers and staff. Ensuring that adequate information is made available in comprehensible and non-technical language is the key to success. Too often we have seen ‘lazy’ and shortcut assumptions being made, when a little bit of extra effort, ‘digging’ and asking the right people with the operational knowledge the right questions would ensure a more robust and rigorous budget.
Finally, ensure that both the process and outcomes are well documented and articulated as they serve as your shield and defence when the reality does not turn out as the best laid financial plan might have anticipated.
We view Zero Based Budgeting as a risk-based change management tool that assists and informs the senior managers in any organisation of the opportunities and risks inherent in designing and building innovative change processes to help add value to the organisation’s overall performance.
At theMarketSoul ©1999 – 2011 we have practitioners available who can assist you on a consultancy basis to operationalise the full 360 degree Financial Management practices most organisations require in order to ensure that they remain competitive, profitable and continue to create value.
Related articles
- Alight Selected to Speak on Planning Maturity Curve at ASMI and CFO Events in 2012 (prweb.com)
- What Expert Financial Planning Services Can Do For Your Money (ruralstops.blogspot.com)
- Budgetary Process (thinkingbookworm.typepad.com)
- What is Budget (preint.wordpress.com)
Continuing conversations in Friction Costs: Increased Friction Costs II
A few weeks ago we published what seems like our most popular blog article to date, namely Increased Friction Costs.
As it has been our most read article, we thought we might continue to build on the theme of Economic Friction Cost.
Image via Wikipedia
Williamson (1993) published some work on Transaction Cost Economics (TCE) in a book entitled The Economic Institutions of Capitalism’. TCE is an equilibrium theory and looked more closely at the firm level or micro-level analysis and at behavioural aspects of ‘rational choices’. Up until that point most economists had only considered production cost as part of profit maximisation assumptions, and not at transaction costs within the firm.
Transaction Cost Economics focuses predominantly on the governance of ongoing contractual relations (Williamson, 2007).
Image via Wikipedia
But what exactly, in practical terms are Friction Costs?
As stated in our previous article there is a large element of hidden costs implicit in Friction Costs. Friction Costs can be highlighted by analysing the end to end or life cycle costs of any product or service. A general rule of thumb that is applied to life-cycle costing is to take the visible ‘advertised’ cost and double it up. That exercise generally gets you very close to the full life-cycle cost of any product of service. This rule of thumb works with large capital projects, as well as estimating the full employment costs of hiring people.
But friction costs go further than this. You might call it the fourth dimension of costs as it incorporates time value and opportunity cost elements.
Time value has two specific meanings for us here:
- Time value due to down time, loss of productivity, etc. This is more accurately referred to a value of time
- Time value in terms of the diminishing purchasing power of money, due to factors like inflation and opportunity costs when money is not put to beneficial uses. This is the general use of the term Time Value of Money and ustilises Present Value techniques via a discount rate to work out the equivalent value of money in today’s purchasing power terms, whether we look into the past or into the future.
Thus, the two areas we have to focus on during the expansion of the Friction Cost exploration in the next article will be time value and opportunity cost elements, as part of our enquiry into delving into a better understanding of Friction Costs.
theMarketSoul ©2010
Related articles
- On Friction and Sharing (downes.ca)
- Friction Forms Frustration (preconflictcontrol.wordpress.com)
- Curation Saturation, and Why We Might Need Information Friction After All (brasstackthinking.com)
Risk Management Ideas
Risk has as one of its essential elements TRUST as a foundation.
Trust on the other hand has many other factors that interplay and interact on it.
Markets are created when there are needs that are not immediately met from you local environment and therefore scarcity exists. Market participants step in to fill this ‘needs’ void.
Image via Wikipedia
As for any subset of Risk, either Operational, Market, Liquidity, Interest, etc. a big part of the assessment process it not just about looking inward and assessing the risk profiles, risk attitudes, risk systems, etc., but an important part of the process is stepping into the realm of uncertainty and looking outwards and the wider market context we find ourselves in.
Being too prescriptive about the individual risk profiles and control systems will only stifle innovation and growth. Some say we need a very healthy dose of growth right now, whereas others are content with the new world order of the ‘anti growth economic’ bias (our description of austerity) we have already entered in the Western Hemisphere.
Our positive risk management framework, also known as Value Oriented Risk Management encapsulates both risk and uncertainty management and combines it with the best offerings of Value Based Management. (For more information or to contact us, please click on the Contact us link or read the article entitled “The Intersection – Where Risk, Value & Reward“ link by clicking on the embedded link.
Our Value Oriented Risk Management is the positive Risk Management focus, acting as an enabler ensuring that you unlock value in your organisation a midst the regulatory compliance constraints added to your management agenda.
TheMarketSoul ©2010
Related articles
- Do banks and colleges understand risk management? (normanmarks.wordpress.com)
- Integrate risk management with the rhythm of the business (normanmarks.wordpress.com)
- Risk Management: adding to uncertainty! (fitforrandomness.wordpress.com)
- Why is residual risk so important? (iso27001standard.com)
US Treasuries – Expanding the confidence time horizon
In our previous analysis piece on the Erosion of Confidence in the Capital Market, we discussed the downward trend in US T-Bill since 2006. In today’s brief analysis piece we have expanded the time horizon to the last 10 years from the beginning of 2001 to the end of the second quarter in 2011 (being June 2011). The view is each quarter end point for both 1 and 10 Year US T-Bills for this 10 year period.
What is interesting about both the 1month, 1 Year & 10 Year charts is the steady rise in rates (and economic confidence since the Iraq war in 2003 for both 1month and 1Year T-Bills). The Iraq war was declared on 19 March 2003 and this is the low point of the yield curves, followed by a steady rise in yield rates to their highest point (1 Year T-Bills) on 27 June and 18 July 2006 at 5.28% respectively.
The other point to note is the steady state of the 10 Year T-Bills between 2001 to 2006 bouncing around between 4% and 5% and then the steady erosion in returns since Q3 2006. As of 19 August 2011, 10Year T-Bills yielded a nominal 2.07% or a real (inflation adjusted) return of 0.02%.
The flight to more traditional bullion assets or other currency classes has been marked, with currencies such as the Swiss Franc, Canadian Dollar, Sterling Pound & Australian Dollar appreciating in value relative to the US Dollar as the flight to perceived safer haven assets classes and categories continue.
Our sister site (theVirtuousContinuum, launching on 26 August 2011) will have a more detailed briefing and analysis regarding the lack of Global coordinated Financial and Economic Leadership in order to stem the tide of confidence ebbing away in the global capital, commodities and wealth markets.
theMarketSoul ©2011
Source Material:
US Treasury web site at: http://www.treasury.gov
The source input data is available by clicking on this link
August 21, 2011 | Categories: Analysis, Economics, Free Market, Market Economy, Opinion | Tags: 2011, Analysis, Blogging, Blogs, Commentary, Economics, Economy, Free Market, FX, Market commentary, market confidence, Monetary Economics, Opinion, Political Economy, Synthesis, T-Bills, Thoughts, US T-Bills, us treasuries, US Treasury Yield Curves, Views, Yield Curves | 1 Comment »