Umair Haque / Bubblegeneration
umair haque  


Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Tuesday, July 13, 2010

Asymmetrical (Mis)allocation

It's easy to misallocate capital. It's really, really hard to reallocate it.

Take this nice NYT article about automated debt-collection lawsuits, for example. Let's use it as a starting point to connect the dots of misallocation, for a second.

Banks misallocated loans. People misallocated debt to meaningless, toxic junk, like"consumer goods", McMansions, and SUVs. Corporations are now hoarding "profit" - that misallocated capital coming full circle.

So here's the problem: call it an allocation asymmetry, if you like. Misallocating capital takes markets a couple of years, as "investors" pile in by the nanosecond. But reallocating it takes institutions - like courts, local governments, Congress, international trade treaties, etc - decades.

The misallocations above are going to take the better part of the teens to untangle, and then cut apart. We haven't even scraped the surface of the massive misallocation of debt banks made - little, if any, effort has been made to reveal or value the scale and depth of toxic debt. Lawsuits and the like will go on for years, chasing debt-laden households. It will corporations many, many years to unwind the cash on their balance sheets.

It's that asymmetry that's truly dangerous for the global economy - because what it suggests, at the end of the day, is a steepening of systematic risk, that should be reflected in higher interest rates. Or, worse, their monetary equivalent: deflation. Either one, of course, is where lost decades begin.

In that context, companies, countries, and people who can reallocate resources with greater agility will possess an explosive new source of advantage - in both financial and economic terms.

-- umair // 7:11 PM // 0 comments


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