Pages

Search My Blog & Website

Wednesday, April 29, 2009

Using the Theory of Constraints & Six Sigma to Fix Critical Components of the Economy


Constraints are all around us. The theory of constraints is a lean problem-solving concept based on a simple concept, that a process can not move faster than the slowest part of the process.

Our economy as a complex enclosed system has constraints and it will respond to stimulus as quick as the slowest link in the economy. The chart on the left illustrates some major components of the economy. They all need to be improved for the stimulus to realize benefits, otherwise it will be a temporary patch.


The root of the problem lies in three areas:

1. The concept of printing money and the process followed to release cash into the market. The Federal Reserve Bank - which is not a government entity - is provided the authority to distribute the nation's currency and supervise banks which are members in the system. When the US releases currency into the market it requests the Federal Reserve Bank to print dollar bills in return for an interest payment on the amount. No real assets are provided as collateral to backup the value of the printed currency. The value of the currency is only backed up by the reputation and promise of the US government to accept the currency as a form of payment. As users of the currency lose faith in the governments ability to keep the promise the value can drop significantly. One reason for the poor confidence in the currency, is the automatic depreciation of the currency the day it was printed. For every US dollar printed a small percentage is due to the Federal Reserve Bank as interest on that printed dollar, in a sense every dollar released into the market is really worth 0.98 of a dollar, if we assume an interest rate of 2%. Add onto this, the fact that the US government is running into a non-stop deficit in social security, and other areas leading to increase in bond issuing to countries such as China and India, further diminishing the value of the US currency.

2. Interest rate or usury is another problem in the overall system. The fact that currency value depreciates today based on some future value determined by an interest rate automatically leads to inflation, and future depreciation of natural resources. Charging interest is like pumping steroids into a body builder, eventually at some point the body will collapse.

3. Selling what we don't own. The idea that goods and services can be sold without actually owning them creates a virtual commodity system, not backed up by real commodities or assets.

Unless these areas are fixed no stimulus package can work on the long term. Some simple steps to address this issue are:

a. Identify the constraints of the financial and monetary systems
b. Exploit the constraint or re-engineer
c. Subordinate other steps in the overall process to the improved constraint
d. Revise the constraint if it has not been eliminated by steps b and c
e. Repeat the steps above for other constraints

Applying this into practice can be as follows:

a. Identify the constraints of the financial and monetary systems
- Currency not backed by a true tangible asset (some natural resource like gold or silver)
- Currency being depreciated the day it is printed, solely due to interest
- Distribution and sale of products that do not exist (example lending money to a business when the bank does not have the exact cash reserved, selling a commodity that one does not own and has not yet paid for)
- Using interest rates to discount projects, assets and commodities to a future value, leading to valueless future assets, commodities, natural resources

b. Exploit the constraint or re-engineer
- Re-engineer the monetary system that issues a currency based on a true asset and not just a promise
- Re-engineer the concept of future valuation
- Re-engineer the concept of wealth circulation

c. Subordinate other steps in the overall process to the improved constraint
- Use a sustainable natural resource to backup the value of an issued currency
- Use joint partnerships, gifting (0% loans) and entrepreneurship, moving away from interest bearing loans of money that is not owned by lenders.
- Base future valuation on true-value (value proposition) provided to global society rather than a discounted interest rate.

d. Revise the constraint if it has not been eliminated by steps b and c
e. Repeat the steps above for other constraints

No comments: