Thursday, November 1, 2007

WIKINOMICS & THE CRAZIEST CREDIT MARKET HYPOTHESIS EVER (AGAIN)
[Latest Global Dollar Liquidity measure: +14.6% annual growth rate; latest Endogenous Liquidity Index: -16.8%]

Economist Edward Yardeni recently wrote: "The global economy is in the midst of the greatest boom of all times". The IMF's World Economic Outlook estimates global growth at "a solid 4.75%". Commodity prices tend to confirm that bullish view. Yet one fact remains hard to explain: interest rates are generally low, both in real and nominal terms. Whatever happened to credit demand? Why are interest rates so low in the midst of "the greatest boom of all times"? While walking by the Olympic Stadium in the south district of Amsterdam, I had an eureka moment as I saw this IKEA advertisement: "Design your own life". It reminded me of one of the craziest posts I ever wrote for this blog, back in March: Wikinomics & the Credit Demand Conundrum.

The post dealt with an article by economist-investor Thomas Nugent, which provided a clue to the low interest rate environment. This is the key quote:

What is interesting is that, with a booming economy, business-loan demand is falling, not rising. This is not your father’s traditional economic expansion. Productivity is mitigating the need for bank borrowing. To see this, think about the notion of infinite operating leverage whereby business technology is, in effect, “taking over.” Higher sales-GDP from applications can be considered “pure productivity” that doesn’t tax resources or drive up prices.

If Apple Computer sells more songs over the Internet, people are simply downloading more songs at a buck a song. This transaction has neither fixed nor variable expenses and therefore adds to GDP as pure productivity gains. This type of activity increases GDP without price pressure. It’s pure productivity, and it brings into question the entire rationale for expectations that the Fed will be raising interest rates just because GDP is growing (at least until more evidence accumulates of potential labor-market tightness).

Now back to IKEA. The furniture giant is in effect "crowdsourcing" its design process. Scandinavians are, apparently, very good at that. Back in March, I listened a Monocle interview on the amazing turnaround at Danish toy maker Lego. According to CEO Jørgen Vig Knudstorp:

We completely changed the way we run the business. We really involve users to an extreme degree ... They even decide their own products ... We are not involved in the design process ... We have become more virtual ... We have open-sourced the company and it does not take a lot of investment to generate a lot of cash.

Bingo! By "open-sourcing" the company, Lego needs to invest ... less. That is also, apparently, IKEA's bet. Demand for credit slows down, even as the economy continues to march forward. Wikinomics, anyone?

[UPDATE: take a look at the Lego Factory, Lego's crowdsourcing device].

8 comments:

Anonymous said...

Very interesting insight, Augustin. I think you're onto something.

t said...

Interesting idea, and no doubt true to a certain extent, but why then are broad money measures increasing, if they are not needed?

Anonymous said...

"This transaction has neither fixed nor variable expenses"

I call BS on that. The author is stating that there are no fixed costs associated with hosting a website (iTunes), and no marginal costs associated with providing more downstream bandwidth and processing more transactions. Uh, ok.

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