The Non-Money, Unstructured Finance Economy

Here is an very interesting commentary on non-money and unstructured finance side o fthe economies, specifically the contemporary economic events in the US and India.  Please share your thoughts in the comments section below.

by Mr. Francis Lobo

Mr. Francis Leonard Lobo is a Mechanical Engineer from the University of Poona. His education has been in prestigious institutions in Poona like St. Vincents High School, Ferguson College & College of Engineering. He is also a Life Fellow of Indian Institution of Industrial Engineering & a Member of All India Management Association.  He has over 50 years of industry & business experience as a planning engineer, company executive, in-company counselor, company director, mentor, consultant, trainer, & CEO.  He has written several books like “Getting Things Done  —  Strategies for Success”; “Strategies & Techniques for Successful Selling  —  The Sales Mission” etc.


We are in a MONEY CENTRIC ECONOMY  —  Everything is measured or attempted to be measured & assessed in money terms. The poor & the weak, even though they have the numbers & the law on their side, are helpless against exploitation & the greed & the self-interests of the rich & the powerful. This is resulting in growing disparities between the rich & the poor. Millions are being cheated out of education & higher education & affordable health care on the plea that these should be privatized & be run like corporations on commercial lines for profit.

In 2008 the economy faces the following challenges & opportunities, most of which require us to look at the non-money, unstructured finance space:
– The rising value of the rupee
– How to utilize the wealth generated by the in-flow of foreign capital into the share market
– The globalization of the retail trade & the threats to the livelihood of millions
– The energy crisis
– Global warming & climate change
– The uncertainties & threats posed by terrorism
– The challenges to rational thinking & the emergence of the power of religious fundamentalism
–  The deficiencies in the present form of governance.  —  The dependence on the discretionary powers of the bureaucracy. The centralization of power in the hierarchical structure be it in the family, in business or the government. The first-past-the-post system of elections, with all its aberrations, where the swing votes of even small groups can determine who is elected. The slow judicial process resulting in a growing backlog of tens of millions of cases.
– The myth of an Ownership Society, where ownership of assets like houses, is based on borrowed money & these assets have to be surrendered or foreclosed if the interest & principal cannot be repaid. This is resulting in Tent People in USA similar to the slum dwellers in India, driven out of their homes & having to live in temporary structures under bridges or in open spaces
– The shortage & the rising price of food as land & water required for food production are being diverted to other applications.
– Overhanging all this is the possibility of an Economic Recession in USA, with its impact on the Global economy.


Finance is the invention linking Sellers & Buyers


Prior to the invention of money, exchange of goods & services was by the barter system. However, what is not understood is that even today most of the transactions are of the non-money type. Though money is the centre around which the economy rotates, it is only a small part of the total global economic activity. But the centralization of power in money makes it dominate the economic scene. Those who have control over money, with the required liquidity, either their own or with borrowed funds from banks, financial institutions & the market, can determine what will be done & at what price. If we are able to understand the total world of money & non-money, we shall be able to take multi-dimensional, multi-layered decisions, which are inclusive of all sections of society & which are sustainable & balanced.


The Union Finance Budget of 2008 has granted loan waivers to 4 crore farmers amounting to Rs. 60,000 crores. This is a non-money measure because the money is not there in the first place, it is only in the books & will not enter the economy unless it is paid back by some means to those from whom it has been borrowed. It also doesn’t cover the total indebtedness of the poor, who pay extortionist rates of interest to private money lenders. The loan waiver doesn’t tackle the injustices, frauds & poor economic planning, which resulted in poor revenue generation to pay back loans & interests. However, it does have a powerful non-money impact on the economy creating Hope, reducing Stress & Fear & improving Mental & Physical Health. It has been found that in USA many diseases were eradicated long before the vaccines for prevention & the remedies for cure were discovered through the mere hope created in the society that things were getting better all round & that solutions through science were on the way. When there is no easy, safe & cheap way of recovering what is due to you it is advisable to convert a disadvantage to advantage  —  Generate goodwill through a loan waiver, create an obligation to be reciprocated later,  build an image of one who is reasonable, forward looking, compassionate & considerate


In food grain production there are the Direct Costs of seeds, fertilizers, pesticides, hired labor, operating & maintenance costs of machinery & equipment used, interest on loans, energy & electricity.

The pricing of food grains are done so that they are affordable to the common man. Food & water are basic for human existence, survival & growth. It is the primary responsibility of those who govern to ensure that these are provided. Only a small fraction of the population can live on manufactured food & bottled water  —-  the majority of mankind cannot. A famine is a human disaster for which the government is accountable. Food subsidy is a necessary cost to ensure the well being & survival of the human race.

If water has to be transported even by irrigation, the infra-structure costs become astronomical. Through specialization mono cultivation may give initially higher yields but in the long term it results in soil degradation & increased use of artificial inputs.

But, apart from the direct costs there are the hidden costs of land & water, soil & weather suitability for the type of food grain cultivated, agricultural research, labor put in by those who own the land. Added to these are the risk factors resulting from weather conditions, pests, crop diseases, floods, soil degradation & erosion, pilferage & other causes. If all these costs are factored in the actual costs will be several times more than the prices charged.

The value of land can be seen when it is put to alternative uses like industry, real estate development, warehousing & storage, mining, hotels, entertainment & other business uses. In the case of oil the concept of “Replacement Cost” was introduced by President Jimmy Carter during the period of the First Oil Shock. While it costs practically nothing to extract oil from the earth, to generate oil from other sources like coal & shale, which at the time cost several orders of magnitude over the costs of production of oil from crude, determined the replacement cost. The extra cost of oil was meant to be used to create alternate forms of energy. Whether this was done is anybody’s guess. Today supply, demand & market forces determine the price of oil. In the case of land the current price of land is taken for determining the compensation — not the replacement cost of rehabilitating the land affected. They do not even see any of the benefits resulting from the alternative uses. Unstructured finance sees the current price of land & what it could fetch when put to alternate use. Money power is used to get the land at a throw away price, which may be attractive to a farmer in debt & distress but it is subsequently sold for several hundred times the price at which it was bought by creating visions, dreams, notional values with ambience, landscapes, infra-structural development, amenities, conveniences. Land bought at a few rupees a square foot is sold for several hundreds, if not thousands, some years down the road. Money power enables the investors to wait till the price reaches the desired heights.

The advanced countries are being challenged because they are subsidizing their food grain exports. Their subsides are not to poor farmers but to ensure that the investment in agriculture is sustained & these assets don’t lie idle & become a drain on the economy to maintain. The advanced economies are buying time to cut subsides. In the mean time they are diverting land for bio-fuel. A few years from now there will be no need to subsidize exports because there will be no food exports to subsidize.


Pricing for paying for Carbon Credits & reducing carbon emissions are related to the costs of investing in new technologies to prevent greenhouse gas emissions from rising above a certain level.

The benefits from development are fairly easy to work out  —  income & revenue generated, increase in productivity, less travel & waiting time for the affluent, etc. Unfortunately the economic benefits don’t go to those affected.

The “Social Costs of Carbon” are aimed at taking into account higher food grain prices & intangibles such as destruction of the eco-system, environment quality, the displacement of people from their homes, disease & death. How does one put costs on bereavement & destruction of human communities? How does one cost human life? The economics of development haven’t arrived at satisfactory answers.


The fluctuations on the stock market have been studied by economists & others & some have even been awarded the Noble Prize for their insights & discoveries. The conclusions are not very palatable. Pricing is based on Speculation  —  What will happen in the future. The speculation has nothing scientific about it  —  It is more often based on a mind-set, gut feel, rumors, soft information & emotions. High P/E Ratios [Price : Earning] are justified that these are based on future expectations of profit growth, not on current performance. The collective wisdom of the market is not infallible. In any case it is the judgment of the few at the margins, who do the trading & can manipulate what goes go  —  the bulk of the investment doesn’t come into the minute-to-minute working of the stock markets. It is also not possible to know how a company is performing on a minute-to-minute basis, it is all speculation. Judgments are more often based on what is promised than what has happened. If 100 is promised & only 95 is delivered, the management is penalized for falling short. But if only 40 is promised & 50 is delivered, the management is toasted for excellent performance. Those who make money on the stock market take credit for their good judgment & making the right decisions at the right time. Reasons for losses are seldom talked about. The Stock Market Index should not be taken as an indicator of the state of the economy.


Marketers are at pains to justify that marketing decisions cannot be subjected to scientific investigation as Marketing is an Art. A great marketing man is an artist who can see the invisible, join the dots & paint a picture, which others cannot see. The intangibles are Image, Brand Name, Quality, Service, Peace of Mind, Safety, Security, Ambiguity, Fears & Uncertainties. Techniques are used to give Value to these, which often have no rational basis. The existence & frequent occurrence of economic cycles should make us realize that the processes used are flawed & need to be continuously reviewed & modified on an On-Going Basis. The Standard Operating Procedures [SOPs] cannot hold good for all time to come.


In the times ahead we must understand & appreciate that there is a lot more than the structured & hard facts & figures that are presented in cost information, asset & balance sheets. There are hidden costs, opportunities & unexpressed values. There are the costs & prices of tomorrow, which must be considered in today’s decisions. We must educate ourselves & others so that money power is countered by Knowledge, Intelligence & Experience.

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