Adventure of Strategy

My “aeroplane reading” this trip has been David M. Smick’s “The World is Curved.” Bill Clinton has called it one of the top three books on the financial crisis. Alan Greenspan has called it “an essential read for those who wish to understand the workings, politics and distresses of the global financial system.” Others endorsing the book are a veritable who’s-who of international finance.

The book outlines how the crisis of 2007 – 2009 unfolded both generally and, in quite specific and easily understood terms, exactly what went wrong in 2008 and how/why it might recur. He points out that the actual quantum of sub-prime debt was quite small, relative to global capital pools. (A mere $200 billion in a global economy worth several hundred trillion dollars.) The problem was the lack of knowledge of who owned the toxic assets and the consequent breakdown in trust. He stops just short of actually predicting that we will see a repeat performance in due course in the Far East, given the ballooning number of non-performing loans and far more opaque banking practices in China.

Smick warns of over-production in China, and how this might unfold in coming years. He points out that the GDP of China is only about 3x that of The Netherlands. (The most recent data on the IMF website places it currently at about 3.6x.) Yet, the country produces more steel than the USA, Europe and Japan combined, with 30% of steel prduction being directed towards yet more steel production.

He notes the intent on the part of the Chinese automobile industry to produce 20 million units per annum by 2012, at which point domestic demand is estimated only to be 9 million units. Who, he asks, is going to buy the remaining eleven million units? He writes of the stockpiling of commodities. What, he asks, would be the impact of a slowdown in the Chinese economy, leading to an unloading of these goods into the global economy? Japanese strategists, he says, remember well the 1960s when that country’s economy grew at 10% per annum on the back of massive steel production, only to deflate to 4% as the steel bubble deflated. He quotes Chinese officials as saying that a GDP growth of 8% is the bare minimum required to avoid serious political disruption. Essentially, Smick argues that a significant risk exists that this level of growth may prove unsustainable.

A chapter is devoted to the crash of the British Sterling currency in 1992, as an illustration of how quickly and disastrously poor policy decisions can cause things to become unstuck. He writes of the shrinking ability of central banks worldwide to deal with crises as the global financial systems become more globally integrated and complex. He likens central banks to firefighters who rush to blazes only to find that their ladders and houses do not reach the upper floors of the burning building. He comments on the emergence for the first time of “class warfare” in the United States and on the folly of relying on higher taxes for upper income brackets as the solution to current ills. Not argues that this will effectively kill the entrepreneurship and innovation in which lies the real solution to America’s travails. He quotes a 2008 Morgan Stanley investment report that noted than in a national with three hundred million citizens fewer than nineteen thousand households enjoy immediately available, investable financial assets of $25 million or more. More than 40% of Americans, he writes, do not have sufficient savings to sustain a family of four at the poverty level for four months. He writes of how current U.S. policy is steadily retreating from the drive towards globalization that characterized the prosperous Clinton era and worries about the long-term effects that this might cause.

The final chapter is titled “Surviving and Prospering in This Age of Volatility.” In it, Smick calls for a better understanding of the factors at play, including climate change (another major wild card in the future) and a broad international strategy for dealing with the Chinese financial and manufacturing “juggernaut.” Above all, he calls for a reformation of “today’s dangerously flawed financial architecture, including the system used to assess and allocate risk.” The world faces a dilemma. On the one hand, unbridled greed by U.S. and European bankers in under-regulated environments nearly brought the western world to its knees. On the other hand, over-regulating the industry will simply cause capital to move to less regulated markets. Already, there are suggestions that higher risk financial services are simply moving east; out of the USA to Europe and beyond to the Middle East and Far East. He warns against a sledgehammer, “Sarbanes Oxley” approach.

While written primary through an international finance lens, the book is important reading especially for lawyers in firms with international practices. As important, perhaps, as Thomas Friedman’s “The World Is Flat 3.0: A Brief History of the Twenty-first Century” from which the book borrows its own title. The point is inescapable: we live in a globalized world and the degree to which one can circle the wagons, even if one wants to, is extremely limited. The legal profession is also becoming increasingly globalized and lawyers who serve clients with sophisticated global operations need to understand the issues that Smick raises every bit as clearly as do the nation’s policymakers, if they are to serve their clients adequately. Even wholly within the USA, lawyers need to be at the forefront of helping the entrepreneurial startups that have been the lifeblood of innovation in the American economy for decades now, to be able to access capital again. The legal profession cannot sit idly by and wait for clients to come to them with specific legal issues. Clients need business advice about the legal ramification of changes to their business environment. There is much that they “don’t know that they don’t know.” As never before, the lawyers that dominate this space will be those that take to heart David Maister’s concept of being a “trusted advisor” to their clients. And that work proactively with their clients to help them understand how the changes impact their business strategies, rather than simply viewing everything through a purely legal lens. Sometimes, that will involve working, perhaps quite extensively, with the clock switched off.

This is a book that I intend reading a second time, with a highlighter to hand this time. It can be found at Amazon here: The World Is Curved: Hidden Dangers to the Global Economy

I would meed Jesus or Buddha.