December 16, 2010
Wondering what went wrong, much of the world is still gassed by bloat deflating from the global financial bust. A Compression view of the global economy as a physical entity helps explain it. Financial valuation is a human overlay on physical reality, a tangle of logic and emotion that often masks that reality. Herd mentality chasing financial valuation growth makes bloat inevitable; overvalue and bust; undervalue and do nothing.
But accepting that the world is resource-limited leads to questioning how long this system can keep motivating us to expand. Until accustomed to it, Compression thinking seems arcane, but today’s financial systems are also complex. Determining exact cause of the system blowing a hole confounds its experts. Debate on how to kick-start stalled financial growth drains political energy. Most mainline economists think the West is in for prolonged financial doldrums. A Compression view suggests thinking of our situation in a new way to redefine issues.
Financially, the global economy is sized in trillions, so the 2007-08 blowout numbers were zingers according to Henry C.K. Liu (N.Y. banker and economist). Between summer 2007 and March 2009, the global market cap valuation dropped by $34.4 trillion, a little more than half. Markets caps recovered a bit, so by January 2010 they were only $16.4 trillion below the 2007 peak – still more than U.S. GNP. (Not sure where Henry gets his numbers.)
If trillions boggle you, divide by a trillion; then reflect on what a simpler number represents – the rise and fall of collective human valuations. A lot of both bloat and blowout is only in our head – and in our commercial cultures.
Americans’ share of this de-bloating: about $8 trillion in market cap, and $6 trillion in real estate valuation. Markets partly recovered. Real estate didn’t, but the land and most buildings are still there, whether valued in pennies or giga bucks, so fixing the mess is mostly a realignment of our own collective valuation numbers accompanied by psychological pain. Just ask anyone involved in mortgage foreclosures.
Do valuation games unnecessarily complicate our lives? Suppose we emphasized measurements of what we physically do, and guided ourselves by them, would that simplify our problems? Would it help clarify long-term direction?
Financial thinking prods fast growth, paying off debt with lower value dollars later; a fun party while it lasts. Sucking up big asset deflations is the hangover of this transactional system. It sets up social obligations that most of us take seriously or it would not work at all, but resetting these obligations within a different system of thought will be an emotional migration that can only occur at human speed.
Right now, we prefer the easy route out: re-start financial growth, postponing long-term problems, both for companies and for economies. None of us can think long-term as long as financial pressures urge us to perform immediately, and as has been noted in business, if you don’t survive short-term, there is no long term. But if we recognize the limitations of a finite world, our root obligations clarify: escape this transactional morass to assume far more responsibility than trading human valuations.
Despite railing about emphasis on short-term results, the commercial world barely sees this, if at all. Its logic is that only when we get enough money can we can afford to deal with long-term problems, but there’s never enough money, so this logic never turns that corner. And yes, some people will attempt to game any system, but we’re at a point where we can no longer afford the luxury of short-term thinking, wasting resources and learning too much the hard way.