by Andrew White | April 2, 2020 | Comments Off on Have You Stashed Enough Cash?
In the Economist magazine March 21-27th, 2020, there were a couple of articles that I found fascinating. The main article explored the role of cash in the current humanitarian and economic crisis. The cash crunch that firms face is real and is going to change many of our lives. Perhaps forever.
Readers of this blog will know I am an economist by education. I find it remarkable, stimulating and amazing that I am where I am at Gartner. An economist view of efficiency and understanding of behavioral economics leads to some pretty good IT-related insights; and insights not readily recognized by IT specialist. Throw in a little psychology education and perhaps you can work out how I landed here. But to return to the story…
As soon as it was clear that the fall-out from Covid-19 was going to lead to consumer activities shutting down, it was clear a major economic disruption was going to take place. It was also clear it was going to be centered on cash. In The Cash Crisis: Down The Drain, you can learn about how the consumer and social shut-down wave that went around the world, and is still in many places, was going to shutter all consumer related businesses: retail, restaurant, travel, entertainment and so on. As these firms suddenly realized their cash flow models stopped working quickly. It was clear that preserving cash is job one.
It turns out that being the amateur economist I am, I happened to research the role if treasurer a couple of years ago. I did this in support of a wacky and still as yet unpopular notion that a chief data officer is in fact a treasurer: they look after the firms’ cash (or money) equivalent in data value. Forgetting the lack of interest from clients in this idea, I pressed ahead and learned of the work a treasurer or CFO undertaken to provide the funding for a firms’ investments. A CDO should do the same: manage the firm’s stock of data and proved the needed data and insight for any prioritized business venture.
What the Economist article does nicely is explain the sequence and linkages between each stage of the funding process, through the entire economy, starting with the consumer and then through B2B, including the backstops: banking and ultimately the central banks. The article is excellent, and it helps provide a laymen’s understanding for how the financial system is to important, complex, and hard to manage. It’s why so much of what we take for granted just works and it’s of a scale that no one person understands it, or one institution can control it.
The second article, The Surging Dollar: Multi-Colored Swap Shop, explores a fall-out that follows from the situation explained in the first article. As central banks all around the world further move back or into near-zero or negative interest rates, and buy up ever more debt, even company stock in the case of Japan, the impact on currencies is massive. As central banks are not coordinated, a massive influx of credit in one currency region can upset the exchange rates. But as each region repeats the exercise, the numbers give way to how the market perceives risks in the effective use of the cash ingestion.
At the end of the line is the dollar. The mighty dollar.
The article explains how, through all the liquidity increasing efforts, the bulk of the world still settles trade in dollars. So even thought the cash supply chain breaks down (the first article), parts of the chain still function. So, demand for dollars increase. The Fed floods the market with more liquidity, but more dollars are demanded. It’s a nasty trap to find oneself in. At least being short of dollars is a problem. Which is why the Fed has opened swap lines for other central banks to trade their reserves for dollars. The Fed becomes the worlds’ central bank.
The final article looks at another angle: how do economies recover after massive drops in GDP. The article, Economies can rebound quickly from massive GDP slumps – but not always, looks at some data that analyses many examples from history. The results are not good: recovery is likely, but they are rarely, if ever, as complete as you might hope.
There tends to be all manner of lags and reasons why past growth trends are hampered. This does not bode well for us given our lack-luster economic and productivity growth since the last financial crisis.
The good news, from where I sit, is that data, analytics and AI, and lots of other aspects of Information and technology, are ready, able and willing to help with immediate coping strategies for the crisis, but also to help guide and inform smart cost optimization efforts, and to lay the spring-board for investing in opportunities that will present themselves when a recovery of sorts makes its presence known. There are so many ways in which data and analytics help with monitoring the immediate crisis; help cope with demanding cost management practices; and also identify critical investments to be protected or even increased in order to punch out of the slump.
Until then, keep you cash handy.
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