The huge compression of the investment horizon towards an extreme short term bias continues to be a major barrier to real recovery. A methodology to develop a direct capital flow between investors and the real economy is now desperately needed. Reflexivity, or simply put, the fact that markets have de facto no self adjusting mechanisms, should now be a most powerful wake up call to build the foundation of new economic and financial approaches; to explore new frontiers to save a declining West.
Yet, the lack of clarity and real awareness of this structural fault, of a sense of urgency, and so of any systemic action to resolve this unbalance is worrisome.”Tactics without strategy is the noise before defeat” Sun Tsu
Why is the problem of term horizon compression so important?
The extreme contraction of the investment time horizon into the very short term (up to a space of a nanosecond) can be seen as the most serious of the current structural problems. It distorts the value of enterprises, their very nature, reduces their availability of capital, their ability and opportunity to use it, creates permanent instability through a vicious spiral, with higher volatility, uncertainty, new “asset bubbles” and skyrocketing commodities and food prices. This favors the compounding of activities that are risky and unproductive.
A report from Simon Mikhailovitch of EIDESIS explains the current situation of psychological denial well: “The ‘Establishment Paradox’ is reluctance of incumbents to mount aggressive responses to secular disruptions, even though this is the surest way of protecting their longer-term interests. Oftentimes, secular shifts require restructuring and, almost invariably, incumbents delay tough decisions until the situation becomes untenable, by which time both the scope of the disruption and the cost of the fix have risen exponentially.”
Dr. Mikhailovitch also observes: “The economy would require a perfect alignment of reduced government spending, robust real growth, and ultra-low interest rates… Yet, we need to grow but we cannot borrow because this would exacerbate the debt problem. We need to generate cash beyond the debt service to pay down principal but, with rates at zero, growth could lead to inflationary pressures and higher rates. This would increase the debt service costs, decrease the ability to retire debt and imperil overleveraged entities. We need to consume less in order to pay down personal debts but 70% of our GDP relies on consumer spending and if everyone saves, the economy declines. We need to import less and export more but we have outsourced a lot of our production overseas and rebuilding productive capacity requires new borrowing”.
“What we really need is a vehicle for creating tremendous new real wealth that would be sufficient to overcome our earlier fiscal debauchery. This requires new revolutionary products or technologies on the scale of the Internet and telecommunication revolutions combined. The latter two bailed us out of the early 1990s real estate and credit crashes, which were minor compared to the latest debacle. This time, in the words of police chief Brody from the movie Jaws: “we are gonna need a bigger boat!”
I challenge that, Systemic Economics, the methodology to develop a direct capital flow between investors and the real economy, is that much needed bigger boat.
Conventional macroeconomics has failed. New methodologies should now lead our actions to achieve an indispensable real sustainable recovery as outlined in: Operation Direct Growth: The New Avenue to the Real Economy.
Without waiting in vain for things to miraculously self adjust, we need to actively work on the above defined set of problems, develop a new applied approach to economics and finance, a multidisciplinary systemic methodology which affects the political economy, corporate governance and economic development. This is the aim of Systemic Economics.
Systemic Economics is a comprehensive group of new methodologies for achieving solutions that are necessary for the absence of automatic market adjustments and a level playing field, the presence of unbalances and distortions, or by legacy resistance. Systemic Economics approaches reality in its constant flux, addresses its issues in their systemic implications, and it is centered on real human development.
We need to gain a sense of urgency and the intent to make a genuine world impact beyond the beauty of pure academic models. The global financial crisis must directly inspire us and reflexivity be the foundation of applied research: the initial space and motive of Systemic Economics. It aims to bridge the gap between capital (endowments, pension funds, etc) in desperate search of proper sources of long term yield, and the real innovation opportunities (new enterprises, infrastructure projects, the real economy) “starving” for capital support, trust and direction. These new methodologies will unleash capital, direction and stability to foster innovation, education, and long term creation. The focus is on SME (Small and Medium Enterprises), the real engine of growth, to turn around the current structural crisis.
A main tool is “Direct Investing”, a new dynamic asset class, efficiently redeploying stable capital to SME from principal investors, to generate synergies and optimal use of resources and processes. (Operation Direct Growth ) Such methodology enables systemic stability, reducing volatility and uncertainty, avoids capital freezes and shortages, during slowdowns. Direct investing contributes to a new investment management discipline, new financial approaches with the opportunity to generate real diversified returns, sustainable prosperity, bringing capital and resources closer to R&D, universities and research centers at crucial times for sustaining innovation and improving its access to future generations of entrepreneurs.
The SMEs are now suffering from the consequences of unfair competitive advantages, unbalanced capital allocation, financial instability and high volatility, a deteriorating environment for “sound” businesses, innovation and infrastructure projects, a fall in the level of confidence and trust, a withdrawal of the banks’ support. It is necessary to eliminate any barrier to the use of alternative capital channels, “shock absorbers” during crisis, and facilitate a diversified funding base. Lengthening of the investment horizon and long term capital deployment, will favor a needed improvement in corporate governance and transparency.
The impact of the entrance of a “strong hand”, a solid long term investor, among the enterprise’s shareholders will generate huge added value of strategic macroeconomic relevance.
More on the Systemic Implementation in the Real Economy
- A further stage of Systemic Economics is its modular implementation on territorial development, by a geographical area or a municipality with a view to attract productive capital and restore local finances. The modularity and geographical customization feature of this approach are relevant. Systemic Economics research and implementation developments are run in parallel, and feed each other in a continuous effort. Territorial development and multidisciplinary exchanges are enhancing factors and can be designed for any countries.
- Reflexivity has a relevant role and this approach a wider application and scope for a rational and systemic utilization of resources, free markets and investments, mainly in the West. Yet, the opportunity to develop Systemic Economics is unprecedented at a time of opening up new democracies in previously “secluded” areas of the world as outlined in: Reflexivity, Historic Shifts and Systemic Economics. In the Middle East, the fall of legacy structures can make this model part of the development “project for the next century”.
- Systemic Economic methodologies will also be a beneficial step towards restructuring traditional businesses. Creating and promoting new operating models and better governance for the enterprises subject to the plan’s investment. The aim is to spread capital more evenly across enterprises to generate real diversified returns, prosperity, stability and progress.
- A priority focus must be on evaluation of SME as investment subjects and their “creditworthiness” also in terms of proper governance and in sectors with growth potential such as: new technologies, renewable energy, sustainable growth, biotechnology, life science, IT, creative industries, education, economic rationalization/re-conversion, infrastructure projects, and in “green” sectors that will receive incentives to favor demand.
“Knowledge must come through action.
You can have no test which is no fanciful save by trial” -SOPHOCLES
We need revolutionary products of high-impact and vital importance to solve the current structural problems. These are extremely challenging times and confusion is abundant. A sense of urgency and responsibility is the opportunity for change. Methodological, systemic innovation and real implementation force are the conditions necessary to reach the ambitious goal of Systemic Economics: to resolve structural damages and ignite a sustainable recovery.
This enhances both, a new theoretical space and a real implementation opportunity through new radical measures. It promotes a practical and more modern use of economics. It lays the foundations of a new economic and financial theory for a better, freer and more open society.
Systemic Economics, in the form of “direct investing” and of its following developments, is an applied methodology, a technique, not just theory. It is a problem-solving exercise, not an abstract work out. Someone pointed out that it should be named Empirical Economics. Besides the label name, following capital redirection, the implementation of territorial development and proliferation of players, are further stages of this model.
We need to accept the challenge of the unknown in spite of all fears.