Transcript David-Korowicz-09051..

Pensions & Resilient Investment
David Korowicz
Risk/ Resilience
&
Feasta, The Foundation for the Economics of Sustainability
11th May 2011
Pensions
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►We are naturally concerned about our future welfare-food, shelter, health, security,
infrastructure- and increasing expectations of discretionary consumption.
►State pensions first introduced in 1889 (Bismark)-a feature of a new kind of
economy.
►Pensions are the means by which people directly, or via employers and
governments, defer current consumption to invest, via financial markets, in expected
future consumption of goods and services.
►In a Pay-As-You-Go system, assumption society can support welfare into the
future.
►Currently widespread concerns:
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Demographic changes
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Underfunding- 75% DB plans in Ireland
Investment in financial assets is growth & systems dependent
►Equities valuation (P/E) growth
dependent.
►Servicing debt (interest+principal)
Is a call on future growth
►The operational fabric of complex
society is maintained or enhanced
100%
90%
80%
4%
4%
25%
16%
6%
70%
28%
60%
50%
64%
48%
►The operational fabric includes:
Critical infrastructure, supply chains,
monetary stability, global discretionary
income...
Cash
Property
Fixed Income
Equities
40%
30%
Alternatives
20%
10%
0%
DB
DC
(€72 billion IAPF data 2009)
Welfare & Macro-System Stability
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Globalised Economy
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►Self-organised
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►Growth adaptive
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►De-localising & Integrating
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►Increasing Complexity
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►Increasing Co-dependence
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►Increasing production flow rate
Understood through Non-equilibrium thermodynamics
Occupation, Energy, Food
Three largest Occupational Groups
UK Census 1911
UK Census 2008
Domestic Service
Sales Personnel
Agriculture
Middle Managers
Coal Mining
Teachers
Food
Ratio of food expenditure to income
Urban Britain 1904*
63%
UK Household Survey 2008
10.4%
Primary food production-a few % of population
*British Board of Trade (1904)
in Poverty in Britain in 1904: An early social survey re-discovered Gazeley & Newel
PRUS Working paper 38/ 07
Infrastructure Interdependencies
Financing & policies
SEC; IRS
e-commerce,
IT
Trading,
transfers
Banking & Finance
Fuel transport,
shipping
Signalization,
switches,
control systems
Generator fuels,
lubricants
Storage,
pumps,
control systems,
compressors
Water for cooling,
emissions control
Pumps, lifts,
control systems
Personnel/Equipment
(Military)
FEMA; DOT
Emergency Response
Fire
suppression
Transport of emergency
personnel, injured, evacuation
Fuels,
lubricants
Fuels, Heat
Water for production, cooling,
emissions control
Potable & Waste Water
Switches, control systems
SCADA
DOE;
DOT
Oil & Natural Gas
Chemicals
transport
Location,
EM
contact
DOT
Transportation
Fuel transport,
shipping
I
T
SCADA
EPA
SCADA
Financing, regulations, & enforcement
Detection, 1st responders,
repair
Medical
equipment
Government
Communications
E
L
E
C
T
R
I
C
I
T
Y
Regulations & enforcement
e-government,
FERC; DOE
IT
Communications
Currency (US Treasury;
Federal Reserve )
Heat
Cooling
Miriam Heller, NSF (2003)
&
T
E
L
E
C
O
M
Critical Infrastructure
Institutions of Trust
Behaviour adaptation
Production flows
Monetary Stability
& Intermediation
Energy & Resource flows
Economies of Scale
Conditions maintaining stability at risk
Peak Oil
Peak Food
Highly Unstable Credit
System & Imbalance
Reduced energy flows forces a positive feedback on energy flows
Even this assumes
stable prices, investment,
general system stability
Energy declines implies reverse economic growth-unless substitute/ efficiency
Implications-financial assets
►Debt cannot be serviced in real terms
►Global banking system insolvent (real)
►Debt deflationary spiral+higher prices
+interest rate hikes
►deflationary cyclone
►Rapid decline in discretionary consumption
►Global banking contagion (derivative links)
Leading to supply-chain contagion
►Rising monetary opaqueness
►Tiny exit window
►Pensions in financial assets doomed
(McKinsey &WEF 2010)
Belief in no growth/collapse
Government & central banks unlikely to be prepared
Empirical
Energy &
food prices
Warnings
Stock & bond
markets
Psychologica
l
Confidence
to Fear
Actions
Asset
dumping
New Assets
Emergency
measures
Adaptation
opportunity
Time
Critical Infrastructure
Institutions of Trust
Behaviour adaptation
Production flows
Monetary Stability
& Intermediation
Energy & Resource flows
Economies of Scale
We are 100% invested in one view of the future
It is untenable
By habituation, our dependencies, thus vulnerabilities
obscured
What would we do, in the final days of macro-system
stability to protect our future welfare?
Resilient Investment
Definition
Resilient
Resilient
investment
investment
is the conversion of current financial and other assets adaptive
to large-scale market and general welfare stability into assets that serve to protect
the foundations of personal and societal welfare into the future should that stability collapse.
►Core Assets
►Localisation
►Social Capital
►Human Capital
►Co-dependency & interdependence
►Natural Capital
►De-financialise
►Low complexity
Investment Considerations
►Timing
►Discount Rate & investment returns
►Resilient investment in not green investment
►Avoidance of stranded assets
►Limited vehicles for fast conversion