Beyond Peak Credit

I was invited by Manfrommiddletown to stray from my usual Blog home at European Tribune and post on the subject of Credit Default Swaps.

I find it hard to post on CDS without reference to the wider context, and in fact the reference here yesterday to the proposed Gas OPEC gives me the perfect excuse, since I have in recent days had a direct and intimate exposure to that initiative.

I have just returned to Scotland from ten days in Teheran, and was asked - by the head of the Iranian Majlis (Parliament) Energy Commission among others, to propose my ideas as to a possible structure for such a global gas market initiative.

For those who don't know, I was once upon a time a Director of the International Petroleum Exchange (now ICE Futures Europe), and since then have been busy in the area where markets and the Internet converge.

Now, as a result of blowing the whistle in 2000/2001 on oil market manipulation by traders and investment banks I lost everything I had - home, family, the lot - and was in the wilderness for a few years.

While relatively invisible, I haven't been idle in recent years and have been developing some new thinking about the next generation

Market 3.0

of markets, and also getting to the bottom of how global financial markets really work, and more to the point, should work...

Peer to Peer thinking appears to be becoming mainstream now, and indeed my Market 3.0 article has recently resurfaced in the tech world.

Following the Credit Crunch, however, and the eclipse of the investment banks, I now seem to be respectable again, to the extent that I was recently asked to give evidence to the UK Parliament's Treasury Select Committee in respect of Oil Market Regulation - a subject now temporarily off the political boil, of course....

I digress.

The purpose of my visit to Iran was to make a presentation in relation to an alternative financing structure to secured debt - the"PetroTrust" - and the possibility of "Unitisation" of energy that results.

I timed the following article, which appeared in Asia Times, and in Farsi in several Iranian newspapers, to appear prior to my visit

Beyond Peak Credit - a New Dawn for Iran?

I have been working for some seven years, with a background in global financial services at the highest level, to assist Iran in developing a coherent financial system fit for the 21st Century.

Throughout this sometimes painful process I have made clear that the Western “market economy” is fundamentally unsustainable and that its collapse would occur sooner rather than later.

Unfortunately, those decision-makers in Iran who received my advice took the mistaken – but conventional – view that the Western “Twin Peaks” financial market model based upon “Debt” (credit created as money by credit institutions) and “Equity” (in Corporations) was both sustainable and even desirable.

But, as I have been saying throughout, both privately and in articles published globally, this model never was sustainable. Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth's resources – particularly carbon-based energy.

The Problem - “Peak Credit”
The dollar-based global financial system is continuing a slow, and irreversible, collapse from the point - I call it “Peak Credit” - in August 2007 when the unsustainable US property price “bubble” finally burst.

The problem is not one of liquidity - ie the absence of money – Central Banks can print as much of that as necessary. The problem is a terminal shortage of capital or Equity in the global banking system – a solvency problem. The US government was previously able to resolve such a problem – as they did in the 1930's – by deploying unused domestic resources.

The US has brought forward, through its catastrophic waste of resources in Iraq, its “Suez Moment”. This is the realisation forced upon Britain by the US in 1956 that economic realities require an End to Empire. The US cannot resolve the insolvency of the Dollar-based global financial system without the assistance of their international creditors, and this requires a new global settlement – a “Bretton Woods II”.

It is ironic that Iran has been protected from being infected by the “Anglo Disease” by the very sanctions which were aimed at damaging her.

What is the Alternative?
We must recognise the distinction between “Money” and “Money's Worth” and ensure that the financial system reflects this.

Over 70% of Dollars created are in fact based upon the value of land use – and came into existence as loans secured by a legal claim or “mortgage” over land. Most of the rest of the Dollars are based upon the value of carbon-based energy (ie oil) much of which originated in Iran.

Firstly, in relation to energy, I advocate the replacement of the literally worthless (because “deficit-based”) Dollar created by the US Federal Reserve Bank with an “asset-based” “Energy Dollar” or “Carbon Dollar” value unit based upon the intrinsic energy value of carbon-based fuels.

This currency would be created by “Unitising” energy as “Units” redeemable against energy within the “PetroTrust” framework I am presenting in Teheran at the important International Oil Refining Conference on 11th/12th October. Such Units would then circulate globally, subject to mutual guarantees, within the framework of an “International Clearing Union” similar to that proposed by the great economist John Maynard Keynes at the first Bretton Woods conference in 1944.

Secondly, in relation to the value of land I propose a new “Co-ownership” framework for direct investment - “Unitisation” - in a new type of “Real Estate Investment Trust” (“REIT”). This would replace the conventional financing of land and buildings through secured “mortgage” lending which invariably gives rise to bubbles in land prices.

Such “Capital Partnerships” between Investor and User of Investment are in fact already emerging in the UK and will be immediately recognised by anyone who is familiar with the revenue and production sharing agreements which have been at the heart of Iranian and Middle Eastern commerce for literally thousands of years.

A National Equity?
The alternative to an unsustainable “Deficit-based” system can only be “Asset-based”: new forms of “Equity” -beyond the “Corporation” - to replace unsustainable secured Debt. Existing national accounting – based upon a “National Debt” - is fundamentally flawed but is unquestioned, and until recently, unquestionable.

I believe that Iran could be the first to evolve a “National Equity” to replace much of her – conventional “National Debt”.

The means to do so is simply to use new alternatives to the legal form Iranians – like everyone else – regard as a fixed constant – the “Limited Company” or Corporation. Once it is realised that alternatives to the Corporation are not only possible, but are emerging because they actually work better, then everything else will fall into place.

I am pointing out that Iran does not need to sell ownership and control of her natural resources to multinationals when she can simply “Unitise” and “sell forward” part of her production to investors, receiving interest-free finance in return.

A New Dawn
The resources of Iran in terms of energy, whether carbon-based or the energy of her immensely talented and young population, are phenomenal. I believe that it is possible for the Iranian people – with wise leadership, which is not lacking - to harness these energies and to “self organise” within agreed frameworks to meet the global challenges we face.

It goes without saying that Iran cannot address these challenges alone. But I believe that the simple, but radical partnership mechanisms now emerging will not only allow Iran to transcend sterile arguments and competition, but to do so in a way that integrates her eternal values with an optimal economic model which will cure the “Anglo Disease”.

Finally, to those in Iran who advocate reform, I have this advice: the last thing Iran needs is to reform itself to achieve a “Western” financial market model which has demonstrably failed. Indeed, Iran is fortunate that circumstances have prevented her from going down this road.

Instead, I believe that Iran should examine – from first principles – how a market economy might operate collaboratively to develop Iran's productive economy, rather than being operated as a casino for the benefit of financiers at the expense of the productive economy.

I look forward to working with my Iranian friends to achieve an economy fit for the 21st Century

and for anyone interested in my presentation, the raw slides (without the Farsi translation) may be found here

Introducing the PetroTrust

I was only concerned on this visit in relation to the use of the Petroleum application of what is a generic "Asset Trust" or "Capital Partnership" mechanism. It was suggested that I might on my next visit hold workshops, and meet the Majlis speaker - Mr Larijani - in relation to both this and the far more important subject of the application of Unitisation to land and property rentals.

Essentially, what I am proposing is a Debt/Equity swap on a massive scale so that secured debt is universally replaced by new forms of quasi Equity within partnership and trust based frameworks.

Interestingly, the use of two way partnership-based protocols/agreements as a framework to do this means that no legislation is required, and it also means that global application is possible.



Welcome to EP Chris Cook

I'm mulling some of these ideas, assuredly out of the box!

Is you want a global P2P based "market 3.0" network the immediate concern I have is security but very interesting concept change from a centralized system. I have to think about all of this, and am also wondering how game theory would predict a response. It is in the best interest to form clusters of some and thus centralize the decentralized? Just thinking out loud.

I think you can remove the IM framework for P2P is a server architecture in so many words, any medium/communication "payload" can be utilized, not just IM in P2P. (just my immediate geek thoughts).

(those who are not geeks, P2P is a network architecture, peer-to-peer) which things like torrents and distributed downloads/uploads are based.

Here is Chris Cooke's website, note the use of the mobius strip, this is high level systems architecture for lack of a better term, or concept paradigm shift level of ideas. (I think).



Chris has an interesting slide presentation about the credit crisis. Let's go vote it up.

Chris has been one of the voices out there who's been very clear about what's been going in. Banks have outsourced their risk, and that corporations in general have taken the "limited liability" insurance that the government gives them. With the new bankruptcy law, you and I lose everything if the economy puts us in a bind. But when a corporation goes bankrupt, their liability is limited to capital invested. But the big boys can walk away with millions of dollars so log at they have their money invested someplace else than their firm.

And you and I pick up the tab for this insurance, because corporations refuse to pay their "insurance premiums", i.e. their taxes.

Again, thanks Chris.

slides embedded

I'm not so sure about this slideshare site, good God, they put a lot of tracking code and their site tried to change my registry!

So, while I know how to embed flash without using other sites presented embedded code, normally most are ok. These slide share guys had a lot of extraneous stuff that probably shouldn't be posted.

FYI, just email me if you want to do multimedia presentations on here and how to implement it.