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“Bad to the Bone” is sung by George Thorogood and the Destroyers. I thought you’d enjoy the irony.
Corruption, Distortion, Disruption
Transparency International does a fine job of identifying and classifying the world’s most corrupt countries. In so doing, Transparency International’s managers are exhibiting their ethnocentric view of the world. In the same way that we are not dealing effectively with the causes of poverty and terrorism in the world, we are not dealing effectively with the causes of corruption and distortion in economies. Economic disruption, distortion and corruption are closely linked.
The most disruptive concept regarding innovation today is not expressed in Facebook’s “Move fast and break something” or in Apple’s “Innovate or die.” It is expressed in FDR’s admonition that “It is the most important duty of a statesman to educate.”
Today’s technological innovations give rise to entrepreneurship and self-sufficiency on a global scale. They are disruptive in regard to the eradication of disease, moving from subsistence to sufficiency in farming, in the accessibility to financial services and accessibility to education.
The transformation is disruptive in regard to what Mohamed El Erian calls the “trifecta of inequality” — income, wealth, opportunity. The opportunity arises for concerted action from heightened global attention to inequality.
Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it. Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.
The Internet has brought a new level of disruption to markets and redistributed income, wealth and opportunity. This paradigm shift in the distribution of energy, communications and healthcare, and of wealth requires trade finance processes for support.
The Internet has made the educator Plato’s philosopher king. The most disruptive aspect of the Internet is in regard to political power. The equitable distribution of opportunity for increasing income and creating wealth cannot occur without it. In order to achieve the good, we must move beyond sufficiency
In his response to Marx’s assertion that Capitalism would die, Joseph Schumpeter asserted that capitalism could only be understood as a cycle of destruction and creation. In business and economics today, we prefer the term “creative disruption.” In the wake of the Great Recession of 2008, Joseph Stiglitz of Columbia University has explained how destructive inequality is to economic growth. In “The Price of Inequality,” Stiglitz wrote that “much of America’s inequality is the result of market distortions with incentives directed not at creating new wealth but at taking it from others.” Martin Wolf of the Financial Times has written exhaustively as to why bank lending is less useful as a driver of economic growth than government issuance of bonds.
The Capitalist Cure for Terrorism
In a moving article, “The Capitalist Cure for Terrorism,” Hernando De Soto linked the aspirations of the poor, the common entrepreneur with the need for property rights, title to land, to goods, and their use in the pursuit of wealth and happiness. The ecosystem of a country either accommodates these aspirations or it’s highly motivated aspirants have no recourse but to turn to violence.
The economic and financial ecosystem must be created within a country to serve the common, entrepreneurial aspirations of even the least of our brethren, even the financially “underserved.”
I do not intend to repeat or add to the extensive body of scholarly literature nor add to the pathos in the popular press documenting the extent and impact of inequality to the people of the Earth. I intend to show how trade finance impacts the distribution of income, wealth and opportunity and the massive ramifications of international trade finance on the monetization of opportunity throughout the world.
International trade has created wealth for the few but often at the expense of the many. This does not have to be the case! The Internet has changed this by facilitating worldwide knowledge about and understanding of trade finance which provides the opportunity for broader participation.
Wealth by representation
Multilateral trade is hugely rewarding to all parties. This has been true since the Middle Ages when fairs exposed the many to diverse goods from a multitude of places. The disruptive influence of fairs tended to concentrate wealth because of the way wealth was financed. The Medicis and Rothchilds developed a financial system involving drafts, bills of exchange, and correspondent banking — a system of wealth by representation.
It was no longer necessary for Cosimo de Medici to be physically present in Marseilles if he sold silk at a fair there. With Nostro and Vostro accounting and a correspondent bank in Marseilles, funds from the sale of his silk were placed as credit to Cosimo's account by draft. A draft is a demand for payment. It was possible to draw on the Marseilles account as well as accumulate funds there.
That system was incomplete however. The buyer of silk in our example, needed time to get the material to Paris where it would be used to dress the wealthy. The buying merchant needed time to get the silk to the dressmaker in Paris and had to wait for the dresses to be made, displayed, and eventually sold to the ultimate buyer.
An estimate of the time needed by the buying merchant to be “put in funds,” to receive payment determined the usance period of the draft which gave rise to a system which is widely used today, the usance or time draft. Instead of paying Cosimo on the spot, the buyer would sign a time draft as a promissory note. The draft had an issuer or maker who would be Cosimo in this instance. It was issued by the maker, Cosimo’s representative on his bank or its Marseilles orParis correspondent bank. The merchant buyer endorsed the draft as a promise to pay at a specified maturity date. By custom, the usance or time period of drafts was typically 30, 60, 90 days. Once “put in funds,” the dressmaker in Paris could pay the silk merchant in Marseilles by paying the merchant’s Paris account. The merchant could then credit Dominico’s account at the same correspondent bank in Paris.
The movement of money was thus separated from and became independent from the person who possessed the wealth to buy the silk in the first place. Wealth by representation and correspondence was born. In practice this system of drafts and correspondent banking tended to concentrate wealth. It is important to note that the Middle Ages and Renaissance during which fairs, drafts and correspondent banking evolved, were imbued with a conception of wealth as being God-given. By implication the poor were deemed unworthy of God's beneficence.
Wealth, mores and violence
The celebration of wealth in Europe was attended by magnificent architecture. The great cathedrals, the palace of the Doges in Venice, Bernini’s doors, the patronage of the arts, were made possible by the proceeds of this extraordinary wealth. International trade made possible Highclere, the magnificent estate and aristocratic way of life, the manners, mores, of the Granthams as featured in Downton Abbey. This way of life began to change with the Renaissance, the Reformation and the Industrial Revolution. Social change was manifest in both the development of craftsmen of extraordinary skill, by civilization on the one hand and by extraordinary violence and bloodshed on the other. In the process, the concept of wealth whether possessed by churches or princes, was redefined.
The redefinition arose from the belief that the poverty of people did not reflect the poverty of their souls. The wealthy had a responsibility to provide for the poor. This evolution in the concept of wealth formed during the Enlightenment, the revolutions of the mid-1800s, the industrial revolution, world wars and many other events of economic, social, political, geopolitical change. Wealth was also affected by these concerted forces, but the globalization of production, commerce and wealth creation resulted from an evolution in trade finance.
The Enlightenment, the Age of Reason provided the intellectual climate for the Declaration of Independence and the Declaration of Human Rights and changed the concept of wealth. It was not because of God that some were wealthy and some were not. With the Enlightenment came the idea that shared values were more important than individual opinions and that the wealthy were responsible to care for the less fortunate. This was called humanitarianism. The Age of Enlightenment was followed first by revolution and then terror which was unsustainable and replaced by the Restoration.
Danielle Allen in Our Declaration observes that after the phrase “pursuit of happiness,” there is a comma, not a period, and a connector, a dash which points to the five essential conditions upon which the pursuit of happiness depends
“— That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn [sic], that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.—”linking equality with these pursuits. Allen also reminds us that the list of self-evident truths does not end, as so many think, with our individual right to the “pursuit of happiness” but with the collective right of the people to reform government so that it will “effect their Safety and Happiness.” The sentence laying out the self-evident truths leads us from the individual to the community—from our individual rights to what we can achieve only together, as a community constituted by bonds of equality. Our Declaration boldly makes the case that we cannot have freedom as individuals without equality among us as a people.
The Age of Moi
Even today there are those who will readily embrace the idea that God determines who is wealthy and who is not and the word Inshallah — God willing — is heard a lot. There are others who would establish an Age of Terror as a mode of regime change. Today we live in the Age of the Intellectual “Selfie”; the vain idea that people are wealthy because of their own doing, their own smarts and wisdom all the while proclaiming proudly on all the social media, “I am wealthy and possess all the accoutrements of wealth because I am brilliant.”
Tim Cook of Apple has become the guru of another concept. “In the long arc of things you are only relevant if people love you,” he said.
Jorge Mario Bergoglio, wrote about the global trade and economic development impact of what he calls “ideological colonization,” development aid becomes subject to the ideology of the donor. Bergoglio, who as a priest in Argentina, wrote “We live in the most unequal part of the world which has grown the most and reduced misery the least. The worship of the golden calf has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy.”
Wealth is affected by a conflation of forces and ideologies. The globalization of production, commerce and wealth creation resulted from an evolution in trade finance which is now the subject of fundamental change and disruption. The intervention of central banks has become the default mechanism for economic adjustment in the economies of Europe, the United Statesand Japan. This default is caused by political leadership which defers increasingly to the central banks for the execution of fiscal policy. The result is dangerous and threatens to destabilize the equilibrium of the global financial system itself.
The recent QE or quantitative easing by the ECB (European Central Bank) resulted in a weakening of the Euro vis-a-vis the U.S. dollar. This move increased the relative value of the dollar which in turn made dollar-denominated goods more expensive and less attractive in global markets. There should be no need to remind the reader that the competitive devaluation of currencies was a major contributing factor to the Great Depression.
Fortunately, there is a strategic alternative to this dismal state of affairs for multinational companies which can be derived from witnessing in my career the death of many exporters as a result of foreign exchange fluctuations similar to what is occurring now.
When your goods suddenly become unwelcome in the foreign markets upon which you and your employees depend, you and your export company die. The injection of billions of Euros into the European economy is a de facto competitive devaluation. The principal downside of such a policy is not only the risk it creates for a cycle of competitive devaluations but that it cannot create the jobs so desperately needed by European youth. The solution is trade whether two-way or multilateral. By importing as well as exporting, an enterprise benefits as the cost of imported goods becomes more attractive, just as the price of your export goods increases. Trade is a two way street. It was so during the era of mercantilism. Britain exported tea to Boston fromCeylon and other equally exotic reaches of its empire. The empire also imported logs for masts, resin and other atelier for ships stores from America. This system was sustained by taxing the colonized and worked wonderfully well until Bostonians demanded no taxation without representation, while polluting the harbor with tea and forever conflating the issues of international commerce and representative democracy.
Even though economics and government are closely linked, international trade unfettered by the issues of taxation and politics is helpful because it benefits the consumers of the importing country with cheaper prices and stimulates consumer demand. The competition which imports fosters, forces domestic competitors to make better products and to price them competitively. Apple is better because of Samsung. Competition however also kills off the poorly financed.
The oil glut
Many oil and gas exploitation companies and their related industries suffer when the production levels of OPEC members and U.S. based producers begin to meet demand and prices fall. U.S. Steel in Pittsburgh announced layoffs of well paid workers making pipe because the firms that exploit tight oil have suffered from a drop in the price of oil.
Trade and trade policy is hugely influential on markets. Trade openness is the problem with the Chinese R4I or Resources for Infrastructure Investment model of geopolitical strategy which provides investment in exchange for such commodities as oil, soya, metal ores, etc. It does not foster the creation and development of organic or local entrepreneurship. Nor does it provide working capital for home grown SMEs (Small and Medium-sized Enterprises).
The economic development and job creation capability of countries is closely associated with providing pre-export and post-export working capital to the operating cycle of SMEs. Brazil is the perfect example to validate this point. For the size of its economy, Brazil has relatively few SMEs, about 20,000 in fact.
With all the sound bites of politicians, bankers and the captains of industry, about job development and economic development, the essential point demonstrated by FDR after the Great Depression is still not broadly understood. The dynamism, job creation and economic development of a country are closely related to the efficient provision of pre- and post- export working capital to SMEs that export. International trade and trade openness encourages this process by enlarging the trading prospects of the participants: Healthy SMEs = Healthy Economies. Here is an area where banks should productively apply their resources rather than paying high priced consultants and lobbyists to reverse Glass-Steagal and Dodd-Frankregulations.
Plutocracies, among which we now count the U.S., (according to Princeton University) are the ultimate corruption of the aspirations of democracy in the common pursuit of happiness. As Amartya Tsen demonstrated in winning the Nobel Prize in economics, economic growth requires democracy.