Half full or half empty?
I am not one for astrology or predictions, especially when it comes to the economic outlook, other than to say I have learned that having a glass half full is infinitely better than the alternative.However, we all have to face what 2012 brings, and my view for next year – especially for SMEs – […]
|I am not one for astrology or predictions, especially when it comes to the economic outlook, other than to say I have learned that having a glass half full is infinitely better than the alternative.
However, we all have to face what 2012 brings, and my view for next year – especially for SMEs – is based on two events which occurred in late 2011. Neither is remotely related to the general election.
In the penultimate weekend of November I attended an interesting two-day legal conference. The topics were built around looking at how the legal profession may operate in the future, what threats and opportunities there might be, who might prosper and much more besides. One speaker arrived direct from London on the Friday afternoon and made a profound influence on all of us – both speakers and delegates. Chrissie spoke passionately about social networking and how it can change the way we work and importantly, how it can deliver more business. The audience were interested but not overly impressed, as most lawyers/law firms have yet to embrace social networking and many still block its use. Chrissie started with her own experiences as a lawyer who came to the profession late, having in an earlier life owned and managed a marketing business.
As a newly-admitted solicitor in a medium-size provincial English city, she used her persuasive powers to convince her boss to let her build new business using social networking. To say she was successful dramatically understates the results that delivered over $1 million of new business in 12 months – that equals little more than the average annual billings of four lawyers in New Zealand and all for ZERO cost.
A partner in an Australian firm attending the conference confirmed that so far this financial year his team has generated A$600,000-plus of new revenue, confirming that the techniques are culturally transferable. It is a game-changing process that we all need to learn more about. So much so I am off to Leeds to learn more. I came away from the conference invigorated and optimistic about 2012.
The second event that made me consider 2012 was a radio broadcast on the BBC World Service at 02:05 on the morning of 25 November. The programme, HARDtalk, was an interview with Australian economist, Steve Keen, and it made for sobering listening.
Steve, like Nobel prize winning economist Paul Krugman, holds very serious concerns that late 2011 is scarily reminiscent of 1929 and will lead to another great depression. The only thing that separates the two is that Steve considers we are already in one.
Both Krugman and Keen accurately predicted the Global Financial Crisis (GFC) of 2008. Whether or not you accept their opinions, Keen has compelling messages for the SME owner-manager sector, including:
• Pay down, eliminate personal debt.
• Nationalise the financial institutions, reorganise them and sell them off.
• Start all over again.
At a macro level his belief is that if the standard mechanisms are typically used for the elimination of excessive debt – bankruptcy – we may end up like Japan, where since 1991 its economy has effectively been stalled. In the West the outcome will be a jobless recovery which, if it extends over time, will severely test social order as a whole generation of young people fails to find work.
The cause of all this mess? The financial sector that has generated far more debt than society needs. The financial sector is, in Keen’s view, now dominating the political agenda. Keen, a capitalist, believes in ‘good’ debt to finance investment leading to productivity increases and business development.
Good debt is consumption-led and needs to continue. ‘Bad’ debt is where money is borrowed to gamble on rising asset prices – houses, land, farms, shares, financial instruments (bundled securities and derivatives) all carried out at the behest of the banks who profit from it – massively.
Good debt is, according to Keen, sustainable at rates around the rate of 50 to 70 percent of GDP. The trouble is, the gambling sector – investment banks – have blown this figure out to several times that amount.
In Australia the securitisation of mortgages, like here, has fuelled a property boom driven by debts that equal 100 percent of GDP on their own. It used to be ten percent of GDP.
Property prices are a classic ‘bubble’. The New Zealand figures are lower but not by much. The GFC solution, whereby governments printed money and gave it to the banks (who created the debt problem in the first place) is plainly wrong – printed money should go direct to debtors on the express understanding it is used to pay down debt. Left as it is, the banks are insolvent and running what amounts to Ponzi schemes where they lend money to finance asset purchases using money from the increased asset price.
If the financial environment as described by Keen turns out to be correct we are all in for a torrid time. The situation in Europe is just a start and for those who think the Euro crisis is irrelevant to New Zealand business, think again: For every dollar of credit or cash in New Zealand, 40 cents comes from overseas. If the banks who hold toxic sovereign debts are called to account and go bust, trillions will be wiped from the world economy and credit will simply dry up. The message has to be ‘get smart in lowering the cost of sales and stop borrowing money to finance asset purchase’. Either way this is good advice. Have a good 2012.
Ashley Balls is senior partner of LegalBestPractice. Visit www.legalbestpractice.com
Half full or half empty?
Ashley Balls offers up his prognosis for SMEs in 2012.