By John Richardson
WE are proud to work with Paul Hodges, chairman of the UK-based chemicals company, International eChem, who in this superb FT Beyondbrics blog post, provides the kind of “connect the dots” top-down vision of the global economy that is all too rare out there.
Someone else that we highly rate is Gillian Tett, the author and FT journalist.
In her book, Fools Gold, on the global financial crisis, she talked about “silo thinking”. By this she meant experts in one particular field, for example, credit derivatives, who were so absorbed in their field that they were unable to develop the kind of top-down vision that Hodges is so good at. The result of this failure was that they missed all the warning signs ahead of the 2008 crisis.
Tett is a social anthropologist by training, and so she brought this seemingly “left field” approach to analysing how the financial world works. But her skills are not “left field” at all, because, in the end, it is all about people and how they behave.
What 2008 taught us was the following:
- When people are incentivised in the wrong way, this makes them very unlikely to even attempt to look outside their silos. Why question accepted wisdom, when, year after year, you were earning fantastic bonuses from selling collateralised debt obligations?
- Or if you were in the real world of selling chemicals and polymers, why ask too many awkward questions, when, year after year, the boom in US housing construction meant that you were easily beating your sales targets? Rocking the boat can often seem downright irresponsible when your priority is to take care of your family’s healthcare and other needs.
- And when even your bosses and leaders failed to sound any warning bells, where was the motive to even begin to think outside your silo? CEOS of many banks, along with many politicians and regulators, did not see September 2008 coming.
The trouble is that we have not taken any of the above on board.
We have instead merely attempted to stop the same crisis from happening again by, for instance, trying to ensure that banks are in the future always adequately capitalised.
Back to our silos we have gone because of how we remain financially incentivised – and because too few of our CEOs and politicians have the vision to understand that history never quite repeats itself in exactly the same way. The causes of any two crises are never exactly the same.
Everyone now, of course, knows that the 2008 crisis was caused by a credit bubble in the US, which centred on its housing market.
Wind forward to the 2009-2013 period. What should now be clear to everyone, all too late again, though, is this:
- Another credit bubble has played a major role in this new global financial crisis. This time the bubble was mainly in China, but was again largely centred on property.
- The bubble was created by China’s central bank. “China’s boom stabilised the global economy. But it was based on the largest debt bubble in history, with lending up from $1tn in 2008 to $10tn in 2013,” wrote Hodges, in his Beyondbrics blog post.
- To a lesser extent, other central banks, most notably the Fed, also created a “false calm” in oil, other commodities and equity markets through misguided stimulus programmes.
- The Fed might be tempted to pause in its withdrawal of stimulus.
- But that doesn’t really matter because China will not change its mind about withdrawing stimulus. This is what really counts – as it is China’s increase in debt that provided by far the biggest support to global growth in 2008-2013 (see the above chart, which illustrates this point).
So, what should you do about all of this if you work for a chemicals company? You should, for instance:
- Accept that, because of all the above, volatility in oil prices is here to stay. We also believe that the world economy cannot afford $100 a barrel crude for sustained periods of time. So you must manage your raw material purchasing and manufacturing tactics accordingly.
- Stand up and challenge anyone who claims that business will soon return to normal – and urgently do so, if this thinking is behind their budget projections for 2015.
We appreciate that this is a lot easier said than done when you are supposed to knuckle down, do as you are told, and always accept the opinion of your boss, even when you think it is wide of the mark.
And you might possibly think: “It is easy for the blog to challenge ‘group thinking’ as this what you have always had the freedom to do.”
True, we get what you mean. We accept that it is lot easier to stand on the sidelines and point these things out when your day job doesn’t involve something entirely different.
But what other choices do you really have right now?
We are here to help in this process.