Introduction
Investing in the future is like walking on a tightrope; the prudent mind is often conservative. Conventional prudence stipulates caution, for those who lean too far into the future run the risk of falling flat on their face. Reckless enthusiasm needs little introduction, but it is equally true that those who do not bend forward when moving into a stiff gale land on their backs; and those who don’t care to look ahead will not realize what is ahead.
The Post-COVID Challenge to Conventions
The post-COVID world and generative artificial intelligence continue to challenge convention and status quo. Existing systems, including financial systems that were built or have their foundation in the post-industrial revolution world, are being challenged. The future of work and the commercial mortgage crisis in the United States, represented by the failure of WeWork as a business, indicate the festering systemic change.
The winds of change can also be seen in the continuous failure of conventional economic theory. Economists around the world have been perplexed by the post-COVID world. Conventional economics has been predicting a recession, either a soft or hard landing, for the past three years. Most predictions of either a soft or hard landing have been continuously proven wrong. None other than organizations like the World Bank, the International Monetary Fund and the U.S. Federal Reserve appear to have read economic trends wrong.
‘New Normal or No Normal? How Economists Got It Wrong for 3 Years’.
Consumer Behavior and Inflation
NYT records how economists first underestimated inflation post-COVID financial relief and then underestimated consumer and labor markets. The piece quotes Torsten Slok, an asset manager at Apollo Global Management, “the forecasts have been embarrassingly wrong, in the entire forecasting community…we are still trying to figure out how this new economy works”.
The piece suggests, between COVID lockdowns and the U.S. government's enormous response, standard economic relationships stopped serving as a good guide to the future. Economic models tell us if unemployment is high people would pull back from consuming, especially if companies charged more. In March 2021, in the U.S. prices started increasing on the back of ravenous demand; unemployment was above 6 percent, yet it did not stop shoppers or consumption.
As inflation showed staying power, central banks started raising interest rates to cool demand. Economic models began predicting that the move would plunge the economy into recession. Not only did the recession fail to materialize, but consumers continued shelling out money. The NYT piece quotes Karen Dynan, an economist at Harvard; she thinks that part of the issue was lack of good real time data on consumer savings.
‘Inflation is your fault’, why people are so mad about high prices, why do they keep buying such expensive things?
The piece notes people hate inflation, just not enough to spend less. One of the central tensions of today’s economy is that things are going great, yet everyone is miserable. The author notes in some ways, people have nobody to blame but themselves. The piece traces the reasons for the conundrum as tight labor markets leading to wage inflation, availability of discretionary capital causing consumers to be less price-sensitive, increase in discretionary spending by consumers and change in consumer behavior and consumption patterns; the piece concludes that American consumers are better off even though they don’t like it.
Winds of Change and Generative AI
The winds of change are clearly visible. To borrow NYT’s headline, the only outstanding question is if the change is permanent or temporary. Existing economic models that stand perplexed by events of the past years, are yet to factor in significant digital disruption that generative AI is expected to unleash. At the risk of conjecture, digital disruption has the potential to render today’s outliers tomorrow’s rule.
Given that significant change is expected, it is fair to assume that existing macro and micro economic models and financial models run the risk of becoming redundant. Evolutionary economics that currently sits on the fringe of conventional economic theory could perhaps occupy an important place if not challenge some of the existing feature sets of conventional economic theory. [3]
Economies and business will have to lean forward into the future failing which they run the risk of reading wrong and falling on their backs.
Martin Greenberger's Insights from the '60s
Martin Greenberger, an Associate Professor at the Sloan School of Management, MIT; wrote a working paper in the ’60s (later published as a book) titled Banking and the Information Utility. [4]
As part of a broader discussion on the concept of an Information Utility and where banking would be 20 to 30 years from the date of the paper; Greenberger discussed the possibility of an automated credit exchange and a real-time operating interconnected system called ‘time sharing’. The system helps each of the users define their requirements and through intermediate results gives the user the impression that it is continuously accessible and immediately responsive.
“Automatic credit could move in just as fast, but probably will not because of legal barriers and financial inertia. It will come, however. Its convenience to the customer, its benefits to the retailer, and its other economic incentives are too striking to be overlooked by our entrepreneurial society” (emphasis supplied). Within 15 years it may already be challenging checks for sovereignty.
Let us speculate on the form the development will take. Automatic credit bureaus will increase in number and expand in scope. They will find that supplying credit information has limited potentials and that consummating transactions is a logical and profitable way to give. They will take over the customer's liability and begin to trade information with banks and other credit operations. Gradually, communication networks will connect the computers and memories of cooperating enterprises, and new organisations will be created to forge the links and provide compatibility.
As the system evolves, more companies and stores will begin to appreciate the economic advantages of eliminating their receivables and credit activities. Customers will be paying monthly bills by Touch-Tone, and mightily enjoying the consequent reduction in check writing and book balancing. They will be using separate dialling cards for each bill, plus another for their bank account, and they will welcome the opportunity to trade these in for one general-purpose card that pays the itemized bill of the credit exchange. This card will be an early form of the money key. It will eventually be the same instrument that the customer carries to identify himself and establish credit when he goes shopping. The customer will applaud its replacing the onerous packet of credit cards he totes around today.
By now, the credit exchange will be feeling the need for greater liquidity. Since the customer is carrying his money key with him at all times, the credit exchange can encourage him to pay for his purchases as he makes them by offering an instant discount. It can also permit him to specify a future date for consummation of the transaction at a proportionate reduction in discount. As Putnam Livingston has remarked, the time value of money is certain to attract greater attention as automatic credit systems bloom.
On the other side of the ledger, employees will be requesting the automatic assignment of salaries to their accounts in the credit exchange. With the communication network at a high state of development, companies will have little reason to mail out pay checks. During the nighttime shift, their computer systems will feed the payroll directly into the information network. Payroll credits will be distributed to the proper accounts like messages through a message switching centre. Since companies will have eliminated their receivables, they will be able to pay employees frequently, perhaps even daily, as a special service. This will make it easier for employees to avail themselves of instant discounts when making purchases. Ultimately, companies will send wage rates to the credit exchange, and then communicate with it only on an exception basis and not regularly; for example, when an employee is promoted.
Thus, the flows of money into and out of the units of our economy will tend to become smoother, more continuous and more synchronised with the physical flows of goods and services and the productive processes that give rise to them. Float will vanish and cyclical fluctuations of the economy will be dampened.
In the ultimate automated system, money flow will change from a movement of documents to an electronic transfer of information. Bank accounts of individuals and corporations will become electronic records containing data on future earnings, to facilitate credit ratings and payroll processing, as well as data on past accumulations. Frequent statements will be transmitted to subscribers with detailed listings of transactions. A complete historical file of all transactions will be maintained in electronic form for audits and error checks. The electronic records will be conveniently accessible to persons with the authority to see them, and inaccessible to others.
The fact is that money is basically information, and the banking industry is what Oettinger called it last July at this conference: "A Fiduciary Financial Information System" (emphasis supplied).
Banking and finance are very important components of a very big information business that includes: education, research, statistical surveys, medical diagnosis, engineering design, marketing, management control, communications, security and commodity trading, publishing, libraries, traffic control, federal fiscal and monetary operations, and numerous other intellectual, economic, and political activities. The rapid and continuing growth of information processing technology is going to have a major impact on all of these activities. As they reach higher and higher levels of automation, they will want to share data and establish communication links for their mutual advantage. The information utility that I discussed in the Atlantic article will provide the necessary interfaces and make cooperation economically attractive.
Early forms of the information utility are already in various stages of budding. Items:
- Time sharing experiments like Project MAC at MIT are educating present and future researchers in the power of interactive computers, and are pushing forward the state of the art;
- The KEYDATA System of Charles Adams Associates is bringing time sharing into the commercial arena and extending it from the largest government agency to the smallest liquor dealer;
- The QUICKTRAN Service of IBM has been given national publicity in full-page newspaper advertisements, and this is just the start of time sharing at IBM;
- The TRADIVAC System is planning to accept and match orders to buy and sell securities over an electronic counter from brokers everywhere, and expects to be profitable as soon as volume exceeds 70,000 shares per day;
- The company-wide computer systems of American Airlines, Metropolitan Life, and Westinghouse, to mention just a few, are continuing to create competitive pressures;
- AT&T is brandishing and honing its multi-edged swords preparing for the government to remove some of the regulatory sheath;
- while another giant in the communications industry has been working with a consulting firm to test the temperature of the market
Evolution of the Financial Landscape
Some of the predictions of Greenberger we notice and enjoy every day and some are yet to come; the delay in what is palpably common-sense evolution of finance appears to be less about availability of technology and its benefits to stakeholders and more about inertia within the financial community and policymakers, which are by default conservative.
Greenberger’s thesis is true especially in the current digital world. Elaborately composed titles of ownership and certificates of indebtedness that we have treasured will gradually wither and disappear. Floats and lags in money flow will vanish. Income and expenditure streams will assume greater certainty and the economy will become internally stabler.
The commercial customer will become more sophisticated in his investment behavior and money market activities and demand deposit balances will level out and possibly turn down.
Banking Evolution Insights
The rapid post-COVID change in banking was predicted by Greenberger in the 60’s. He records a reduction in operating costs, dwindling base of bank loans and increased competition from the customer.
He concludes aptly by stating policy will change, structure of interest rates and service charges will change, market operations will change, procedure for negotiating loans will change, the process of underwriting will change and that indeed the entire nature of banking will change. Greenberger deliberately leaves open the identity of his proposed credit exchanges and information utilities.
There has been significant thought since, on the lines proposed by Greenberger. But never has the need for a ‘financial information utility’ been more acute. For consumers, regulators and finance to become more universal, intelligent, real time and sophisticated, information asymmetry that exists needs to be addressed.
Paving the Future Path
The need for consumers, regulators and finance to reduce ‘information asymmetry’ is most acute in distress. Distress depending on the economic cycle comprises 6% to 25% of financial systems.
Solvendo, having recognized the primal need to differentiate between signal and noise and generate actionable intelligence for the stakeholders of finance, has architected and built the next generation of Information Utility.
It is our thesis that actionable intelligence will empower the next generation of finance, where money itself is data and intelligent.
References
- [1] Please see New York Times article dated 14th October 2023 titled ‘New Normal or No Normal? How Economists Got It Wrong for 3 Years’ at https://www.nytimes.com/2023/10/24/business/economy/economy-interest-rates-inflation.html?smid=nytcore-ios-share&referringSource=articleShare
- [2] Please see Atlantic article dated 1st December 2023 titled ‘Inflation Is Your Fault’ by Annie Lowrey at https://www.theatlantic.com/ideas/archive/2023/12/inflation-prices-buying-habits/676191/
- [3] Please see more on ‘Evolutionary Economics’ at https://www.cambridge.org/core/publications/elements/evolutionary-economics
- [4] Please see working paper titled Banking And The Information Utility by Martin Greenberger, Associate Professor Sloan School of Management and Project MAC Massachusetts Institute of Technology at https://dspace.mit.edu/bitstream/handle/1721.1/46920/bankinginformati00gree.pdf?sequence=1&isAllowed=y#page61