Thursday, November 27, 2008

Exciting Times?

The last three months have been quite amazing times. The A$ has gone from 95 to 60cUS - investment banks have folded, mortgage houses been bailed out, shares have fallen 50% in value.
So what how did this happen?

The short answer is that the government bodies that should be regulating the financial world have not done their jobs.

All around the world the regulators have allowed companies to hide the interconnections between themselves and satellite companies, and with trading partners and customers.

If you go back to my theory on the source of wealth, you can see that the spirit of the laws and regulations on company reporting and disclosure as designed to make transparent the links between the real source of wealth and the participants in that transformation of energy - ie reading a companies report should allow you to identify the source of wealth creation and the share of the wealth that passes to each participant - worker, owner, shareholder, etc.

But financial speculators derive their wealth by bleeding wealth out of the real system and they have been adept at convincing regulators that special cases exist for not disclosing the methods they are using - things like linking shares to special voting rights, pre-emptive rights over assets, cross management deals, and the hoary old "commercial in confidence" has been used to argue that the books of these companies are not open to public viewing.

The results have been a bloating of the non-wealth producing (and wealth bleeding) non-energy transformation sector to the point of failure.

Now, if these were just normal businesses with bad business plans or tough trading conditions, their failure would free up energy sources for other businesses to transform and continue to create wealth, and individual business collapse (while hard on those involved) is not a problem for everyone else. But speculators are parasites on real businesses and they know that failure for them disconnects them from wealth, and they use all their political powers to remain linked to the real economy - even though that damages everyone else.

The longer answer is that we use the same currency for both real economy energy transformation transactions and speculative transactions. This links speculative failure to the real economy. But it doesn't have to be this way.

Its normal for other currencies to be nominated in deals. A lot of import export contracts are written in US dollars even though neither importer or exporter lives in the USA.

If we had the FINO - a currency used only for speculative trading in shares, derivatives, futures contracts, and anything that was not directly linked to energy transforming activities, then a failure in regulation, or a collapsing bubble of speculations would affect the exchange value of the FINO back into other real currencies, and this internalisation of risk would provide the feedback loop to drive self regulation.