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My Introspective

by Laurus Nobilis
My BrainCast

Strategic Management

Will Only "Umbrella" Corporation Remain? (I)

 

 

 

Where is globalization heading to? Why the financial balloon has to burst eventually?

 

Posted: Oct 2011


It is well known fact that the globalization is bringing integration of the world's capital. This means that the capital is getting more and more concentrated in the hands of fewer and fewer companies. This can be obvious from the daily example of acquisitions. Big fish is eating a smaller fish, until the even bigger fish comes. As the result, the world's economy is getting controlled by smaller and smaller number of companies. So, those companies are getting bigger and bigger power.

Recently this trend has been even proven by the scientific calculation model. It is not the biggest exploration fact, since we knew it even before. Still, it is interesting to see the “scientific” proof of globalization. But the question is: is this trend positive or negative for global economy and individuals?

It seems that this can be classified neither as positive nor negative, since we can find both examples of its effect. The bigger company is becoming more efficient, due to effects of economy of scale, standardization, research & development, etc. On the other hand, the grouping of industry into a few or even to single company is reducing competitiveness and innovation, as well as bringing monopoly.

Top 50 CompaniesStill, biggest problem lays in the fact in that there are almost no production companies, among top 50 corporations. Almost all from top 50 are financial institutions. It is interesting to notice that, for example, there are no companies such as Apple. The example of Apple Company is interesting because of their tremendous growth. Their annual budget is matching the budget of United States. If this is the budget of the company that is not at the top 50 list, imagine what is the budget of companies that are on the list? This is very interesting benchmarking.

The top 50 of the 147 superconnected companies

1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
9. UBS AG
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company

 



On top of that, the fact is that value of financial institution is not based on real value, but on inflated value. It is said that that there is only 3% of cash in the world. The rest of “value” is based on virtual value through bank accounts, stocks, bonds, etc. This virtual value is inflating balloon that is getting bigger and bigger. Occasionally, this balloon bursts, like in 2008 crisis.

How is possible that virtual value appear? The whole banking concept is based on inflating of value, like in the following two cases:

 

Bank Value Inflation Case 1

Bank Value Inflation Case 1Imagine banking universe consisted of one bank and customers A and B. The Customer A deposits the $1.000 to the bank, with the 5% of interest. The Bank is lending the same money to Customer with the 5% interest. So, after 1 year the money in the universe would increase for 10%. It is true that Customer B could have had that money if he saved it, instead of borrowing. But borrowing is saving time. So, at the end of this equitation, the whole universe is borrowing value from the future. Therefore, the financial balloon grows. But at the certain moment it bursts, since it is getting to difficult to extract value from the future.

 

Bank Value Inflation Case 2

Bank Value Inflation Case 2The other example of virtual inflation is Customer and the Bank A, Bank B, and Bank C. Customer is borrowing money from the Bank A. Since the Customer is borrowed more than he can repay, he decided to borrow additional money from the Bank B, to repay debt to the Bank A. Both banks are earning money on interest that comes from monthly installments. But since Customer is financially over stretched with two loans he decides to take additional loan at Bank C, in order to return debts to Bank A and B. But after a certain time the Customer can not return debts any more, since bank interest and monthly installments are getting cumulatively higher and higher, so he bankrupt. Banks have bad debts that they can not collect, so the balloon bursts. So, the value of universe was growing for a certain period, due to interest rate, but at the end the system collapse.

These two examples are rough representation, since economy is not limited to a few customers and banks. But if the majority of universe ( in the real life ) tends to behave in a way of spending value or trying to extract value by means of financial maneuvers and ghost investing into pyramid-like schemes, than global economy collapse may happen. What is our future if the top companies are consisted of financial institution?

Banking contributes to the real economical grows only if they are borrowing money to the economical entities that are producing values ( products ). If borrowed money goes to consumption, then the value is disappearing, since it is consumed. The chain of circular borrowing is not sustainable, unless there is creation of the value within that chain. Otherwise, the growth of the value is based on pure borrowing of the money from own future earning.

Once the financial chain is overstretched it collapses. Once one financial entity goes down it sinks the other, in the sequence similar to domino effect.

 

 

Resident Evil UmbrellaWhat is the future of the global market?

Are we going to face the “single company” market, like “Umbrella” corporation in the Resident Evil movie? Hopefully not, since that would kill the competition and innovation.

At same time that would bring to much power in the hands of the small group of people. The power is something that really unleashes someone’s intention.

As long as there is balance of power, the company acts in a balanced manner. Once the company is predominant, it can shape the market the way they want. Hopefully this will not happen.

 

 

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