Euros and bad debt

A common currency is really very simple both to create and dissolve. After all, the United States of America has had one for quite a while now. And contrary to conventional wisdom, it does not depend on capital flows, central banks or fiscal unions.

Eurozone under pressure. Photo from Wikipedia

The American dollar survives because all its constituents obtain their own debt ratings and therefore credit risks and payment obligations. Just because they share the same currency does not mean that New Orleans gets the capital obligations of North Dakota or New York.

But that is what Europe did. It ignored CAPM. The great international financial (or is that economics?) consortium decided that sovereign debt could ignore any capital requirement. You know, because it was safe.

It also turns out that despite their double dog promises and almost super human ethics, governments run sloppy books. Sometimes they even cook them. In an era where virtually all financial statements are unreadable, it may not be a good idea to rely on them for deal making.

Question: will putting governments on double secret probation help? Brussels seems to think so. The rest of us might be forgiven for viewing that suggestion as a comedy movie script, since ‘stern warnings’ have never worked on other nations no matter how often it is tried.

The Greek option

Both Los Angeles and New York have larger economies than Greece. And both are very likely to go bankrupt in the next decade. We will of course immediately kick them out of the US dollar, allowing them to devalue their new currencies and become ‘more competitive’ with the rest of the USA and the world.

Their populations will cheer their politicians’ prescience as their standards of living plummet even while their debts remain in US dollars. Any further concerns will evaporate as they whistle to work at all the new jobs that flock to the now deflated oasis of prosperity. And all previously unstable economic structures will now be viable at the new lower currency rate.

It is hardly worth mentioning that there is a simpler (and sillier) alternative to this inflationary option. New York and Los Angeles could renegotiate their debts and restructure their obligations and regulations in order to remain solvent in the future.

Countrymen, unite

Another alternative for New York and Los Angeles is to give up their sovereignty. After all, they do deserve to lose something; they led their people on. They have driven huge economies of millions of people to the brink of misery. Better that Texas and Ohio now take over the reins and guide them through their misfortune.

Similarly, Germany can take control of a more centralized European Central Bank (ECB) action which forces a new and decidedly non-sovereign European fiscal union. That way, Mediterranean provinces can adopt whichever austerity pogrom or program seems sensible to their new masters.

There will be two ironies to this new European union. The first is obvious; the world went to war less than a hundred years ago to prevent just such a union. And none of its people want it. But then, the majority of Europeans did not want a European Union either. Call it the wisdom of the crowd.

The second irony is really no less obvious. For it was bureaucratic bungling from the top of the hierarchy that created a financial mess that contravenes grade 9 finance. Now we are led to believe that more bureaucracy and control will fix it.

The other option is to allow failing states to fail. After all, they have been doing so since time immemorial, including quite recently. And contrary to current wisdom, the world did not end.

The benefits of this approach, despite the immediately painful adjustments to the populace, are many. First, it avoids further delay caused by more money printing, which will make the effects of default worse when it inevitably arrives. It allows each state to create solutions and restructuring plans unique to their situations and cultures. It preserves autonomy. It gives all of us the benefit of multiple examples. It avoids further centralization which in humanity’s history has always ended badly. And certainly not least, it tends to marry error with payment.

End of the Euro zone

The discussion of Greek default, which makes up 3% of the Euro zone economy, now includes ending the Euro zone. Think about the incestuous leverage implied in that statement. Now it must be remembered that it is mostly a zone in name only. And if anyone should leave the Euro zone, it should be Germany and some of the other northern states, leaving the Euro to wallow along with Mediterranean debt.

But all that discussion aside, why would a bankrupt state need to leave a common trading zone? The two are totally unrelated.

Perhaps the best irony of the Chicken Little cry of the European crisis is the one move that everyone wants to avoid; Greece should immediately scatter the barnyard by moving to default. Why wait? At least then all the chickens would return to their own roost.

The last thing Greece should do is leave the barnyard. Threatening to do so is exactly the wrong move.

The outmoded centralized mainframe model is a good analogy for organizational trends. Managers continue to learn that centralization and control surrounded by robotic job descriptions may economize keystrokes and mechanics, but fall short in the much more important spectrum of decentralized, networked discernment where innovation, adaptability and peer pressured ethics flourish. 

They put a man on the moon with IBM 7090s

Centralized software systems struggle to efficiently understand that Mary (the customer’s bookkeeper) runs payables on the last Friday of each month, and that sending out a faceless, automated late notice to her firm only engenders negative vibrations.   More importantly, the centralized system will never replace the local relationship of the firms’ two bookkeepers, engendered because they take their children to the same day care and most importantly, the emergent ideas they come up with over coffee on how they can work more seamlessly together. There is little future in centralizing payables if it takes an emergent agent off the field.  Ant colonies would never dream of it.  Neither would any adaptive, creative complex system.

Adaptation, productivity and self-actualization are local, just like evolving complex systems and markets. Lately large organizations have been leveraging that power by loosening their structures and providing safe harbor for movement, community, and activity. Everyone has the innate ability to innovate, create, fail, and adapt if only the rules allow it.  Given the proper combinations of elements, reliability and creativity can amplify together, much as reconstituted wood chips form a bond stronger than the original tree.

References

Photo courtesy of Library of Congress

There is evidence that organizations will continue to decentralize beyond multi-disciplinary teams and matrix structures. For it cannot be coincidence that technology continues to find its value in individual empowerment.  When it introduced the personal computer (PC) in the early 1980s, IBM threatened its own existence by subcontracting its birthright to Microsoft and Intel in one of the most spectacularly failed bets against empowerment in the technological age.  It marked one of the only times it did not use its own internally developed hardware and operating systems.  IBM quickly headed towards bankruptcy as the PC and the resulting explosion of technology forced the computer industry into a massive restructuring that left the mini-computer industry in a shambles; companies like DEC, Prime, HP, Control Data, Wang and TI saw their product lines obliterated with their own viability along with them.

IBM under Louis Gerstner saved itself from ruin in one of the most astounding turnaround examples of decentralization ever attempted. It may be that IBM’s present structure now mirrors many organizational fundamentals laid out on this website partly because it at one time so firmly rejected them.  The organization restructured from a hierarchical, unidirectional corporate culture to a broader based, decentralized one in less than 5 years.  They rejected their blue suits, sold buildings and ended up with almost half their workforce working from home in their pajamas.  They re-centered and refocused, and reversed their services and hardware mix of business on services, and sales and profits exploded.

Now IBM has obliterated most of its corporate hierarchy.  It relies on multi-disciplinary teams that reflect combinations of geography, function, customer segment and industry focus, depending on the situation.  They involve themselves in the open source communities which would have been unthinkable in their proprietary days of yesteryear.  But surely none of this expansion of adaptability and profitability and productivity would have occurred if their competitors and the markets had not forced them to react to preserve their viability.

To be fair, who could have predicted the explosion of creativity and innovation of turning millions of PC users into active entrepreneurs? After all, computing economics clearly show that centralized networks with dumb terminals are much less expensive to design and maintain.  That was the overwhelming organization of the computer industry even in the mini-computer world.  That hierarchy looks great on paper and proves more inexpensive to produce, purchase, maintain and deliver computing power.  Those economics remain true to this day.

But one huge factor was left out of the equation.  What was missing was the idea of autonomy. What was missing was the degree that control suppresses creativity. What was missing was an understanding of developmental psychology. What was missing was an in-depth appreciation of just how intrinsic complex systems (in this case free markets) are to innovation.  What was missing was just how incredibly productive users could be if they weren’t sitting around waiting for centralized IT department programmers and instead could themselves develop applications and mash-ups and innovations.

Corporate organizational structure is still hampering productivity, creativity and reliability.  Organizations both in their structure and their strategy often make bets against the individual, and they continue to do so in pendulum like swings in both micro and macro trends. They always eventually lose.  If you don’t believe me, ask IBM.

References

Photo courtesy Wikipedia Commons

The above picture symbolizes both technology and organizational change. Still wet behind the ears, in 1991 I was purchasing used mini-Vax systems as servers for Novell networks. They were faster and more inexpensive than PC’s, and cold room costs were sunk. Those pricing trends foreshadowed mini-computer markets.

If I remember correctly, we were the first in the state to cobble Vax systems together with Novell networks. Back then Peter Norton, not Bill Gates, was a G~d to teenage nerds everywhere, driving Microsoft and Intel innovation, and no self-respecting 80286 PC went without a QEMM-386 to make it effective.

This period also marked the last attempt by IBM’s misguided proprietary corporate policies regarding PS/2, which all nerds knew would inevitably fail.  It signified IBM’s continued denial regarding the structural change PC’s represented for technology.  No programmer I ever knew willingly dealt with it.