miércoles, octubre 25, 2017

RETHINKING EDUCATION / JOHN MAULDIN´S WEEKLY NEWSLETTER

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Rethinking Education

 
This week’s letter will be more like an Outside the Box than a Thoughts from the Frontline. I am feeling under the weather, and while I can read and move around somewhat, I am really not thinking all that well and am not up to wasting your time writing a letter that neither you nor I will be happy with.
 
Thankfully, my friend Peter Diamandis sent a letter detailing his vision of the future of education, and I want to share it with you. I have been struck by the number of times in the last year when, as I begin to talk about the problems our society will face in the coming years – especially as regards the future of work –someone says “The answer is more education.”
 
I don’t want to be glib, but our educational system is largely a failure in producing children and young adults ready for the future. Why we would think that more of that would be useful? What we need to do is completely rethink the whole concept of what we call education. I will admit to being somewhat at a loss, having read many treatises and essays on changing education, but finding nothing that really brings it together.
 
Peter lives and breathes the future. I attended his executive seminar at Singularity University many years ago – an experience I highly recommend – and he has spoken at my conference. He is the founder of the XPRIZES and so much more – the accolades would take a full page. Go to his wiki page if you’re curious.
 
I am going to reproduce his letter with few edits, and though it is a little longer than our usual Outside the Box, it is unusually thoughtful and thought-provoking. If you are interested in what education must and will become, here is a good place to start. And so, without further ado, here’s Peter.
 
Reinventing Our Kids’ Education
 
By Peter Diamandis
 
This week, Bill Gates announced his plan to invest almost $1.7 billion into reforming U.S. public education over the next five years.  
 
Of that sum, he allocated 25 percent to “big bets – innovations with the potential to change the trajectory of public education over the next 10 to 15 years.”
I’ve been thinking a lot about the future of education – both for my two 6-year-old boys and the employees of my companies.
 
This is a topic I’ll cover in depth at Abundance 360 in January in Beverly Hills. My guest presenters are Sebastian Thrun, co-founder of Udacity; Max Ventilla, CEO of AltSchool; and Carin Watson, EVP of Learning & Education at Singularity University.  
 
Earlier this year, I wrote a whitepaper on how I would reinvent K-12 education for an exponential world. You can read my thoughts below – or download it here: http://www.diamandis.com/education-white-paper
 
I started asking myself, given the fact that most elementary schools haven’t changed in decades (maybe longer), what do I want my kids to learn? How would I reinvent elementary school during an exponential era?
 
This blog covers five subjects related to elementary school education:
 
1. Five Issues with Today’s Elementary Schools
2. Five Guiding Principles for Future Education
3. An Elementary School Curriculum for the Future
4. Exponential Technologies in our Classroom
5. Mindsets for the 21st Century
 
Excuse the length, but if you have kids, the details might be meaningful. If you don’t, then next week’s blog will return to normal length and another fun subject. Let’s dive in…
 
Five Issues with Today’s Elementary Schools
 
There’s probably lots of issues with today’s traditional elementary schools, but I’ll just choose a few that bother me most.
 
1. Grading: In the traditional education system, you start at an “A,” and every time you get something wrong, your score gets lower and lower. At best it’s demotivating, and at worst it has nothing to do with the world you occupy as an adult. In the gaming world (e.g. Angry Birds), it’s just the opposite. You start with zero and every time you come up with something right, your score gets higher and higher.
 
2. Sage on the Stage: Most classrooms have a teacher up in front of class lecturing to a classroom of students, half of whom are bored and half of whom are lost. The one-teacher-fits-all model comes from an era of scarcity where great teachers and schools were rare.
 
3. Relevance: When I think back to elementary and secondary school, I realize how much of what I learned was never actually useful later in life, and how many of my critical lessons for success I had to pick up on my own. (I don’t know about you, but I haven’t ever actually had to factor a polynomial in my adult life.)
 
4. Imagination - Coloring Inside the Lines: Probably of greatest concern to me is the factory-worker, industrial-era origin of today’s schools – programs so structured with rote memorization that it squashes the originality from most children. I’m reminded that “the day before something is truly a breakthrough, it’s a crazy idea.” Where do we pursue crazy ideas in our schools? Where do we foster imagination?
 
5. Boring: If learning in school is a chore, boring or emotionless, then the most important driver of human learning, passion, is disengaged. Having our children memorize facts and figures, sit passively in class and take mundane standardized tests completely defeats the purpose.
 
An average of 7,200 students drop out of high school each day, totaling 1.3 million each year. This means only 69% of students who start high school finish four years later.
 
And over 50% of these high school dropouts name boredom as the No. 1 reason they left.
 
Five Guiding Principles for Future Education:
 
I imagine a relatively near-term future in which robotics and artificial intelligence will allow any of us, from ages 8 to 108, to easily and quickly find answers, create products or accomplish tasks, all simply by expressing our desires.
 
From ‘mind to manufactured in moments.’ In short, we’ll be able to do and create almost whatever we want.
 
In this future, what attributes will be most critical for our children to learn to become successful in their adult life? What’s most important for educating our children today?
 
For me it’s about passion, curiosity, imagination, critical thinking and grit.
 
1. Passion: You’d be amazed at how many people don’t have a mission in life… A calling… something to jolt them out of bed every morning. The most valuable resource for humanity is the persistent and passionate human mind, so creating a future of passionate kids is so very important.
 
For my 5-year-old boys, I want to support them in finding their passion or purpose… something that is uniquely theirs. In the same way that the Apollo program and Star Trek drove my early love for all things space, and that passion drove me to learn and do.
 
2. Curiosity: Curiosity is something innate in kids, yet something lost by most adults during the course of their life. Why?
 
In a world of Google, robots and AI, raising a kid that is constantly asking questions and running “what if” experiments can be extremely valuable. In an age of machine learning, massive data and a trillion sensors, it will be the quality of your questions that will be most important.
 
3. Imagination: Entrepreneurs and visionaries imagine the world (and the future) they want to live in, and then they create it. Kids happen to be some of the most imaginative humans around… it’s critical that they know how important and liberating imagination can be.
 
4. Critical Thinking: In a world flooded with often-conflicting ideas, baseless claims, misleading headlines, negative news and misinformation, learning the skill of critical thinking helps find the signal in the noise. This principle is perhaps the most difficult to teach kids.
 
5. Grit/Persistence: Grit is defined as “passion and perseverance in pursuit of long-term goals,” and it has recently been widely acknowledged as one of the most important predictors of and contributors to success.
 
Teaching your kids not to give up, to keep trying, and to keep trying new ideas for something that they are truly passionate about achieving is extremely critical. Much of my personal success has come from such stubbornness. I joke that both XPRIZE and the Zero Gravity Corporation were “overnight successes after 10 years of hard work.”
 
So given those five basic principles, what would an elementary curriculum look like?
 
Let’s take a look…
 
An Elementary School Curriculum for the Future
 
Over the last 30 years, I’ve had the pleasure of starting two universities, International Space University (1987) and Singularity University (2007). My favorite part of cofounding both institutions was designing and implementing the curriculum. Along those lines, the following is my first shot at the type of curriculum I’d love my own boys to be learning.
 
I’d love your thoughts – I’ll be looking for them
 
For the purpose of illustration, I’ll speak about ‘courses’ or ‘modules,’ but in reality these are just elements that would ultimately be woven together throughout the course of K-6 education.
 
Module 1: Storytelling/Communications
 
When I think about the skill that has served me best in life, it’s been my ability to present my ideas in the most compelling fashion possible, to get others onboard, and support birth and growth in an innovative direction. In my adult life, as an entrepreneur and a CEO, it’s been my ability to communicate clearly and tell compelling stories that has allowed me to create the future. I don’t think this lesson can start too early in life. So imagine a module, year after year, where our kids learn the art and practice of formulating and pitching their ideas. The best of oration and storytelling. Perhaps children in this class would watch TED presentations, or maybe they’d put together their own TEDx for kids. Ultimately, it’s about practice and getting comfortable with putting yourself and your ideas out there and overcoming any fears of public speaking.
 
Module 2: Passions
 
A modern school should help our children find and explore their passion(s). Passion is the greatest gift of self-discovery. It is a source of interest and excitement, and is unique to each child.
 
The key to finding passion is exposure. Allowing kids to experience as many adventures, careers and passionate adults as possible. Historically, this was limited by the reality of geography and cost, implemented by having local moms and dads presenting in class about their careers. “Hi, I’m Alan, Billy’s dad, and I’m an accountant. Accountants are people who…”
 
But in a world of YouTube and virtual reality, the ability for our children to explore 500 different possible careers or passions during their K-6 education becomes not only possible but compelling. I imagine a module where children share their newest passion each month, sharing videos (or VR experiences) and explaining what they love and what they’ve learned.
 
Module 3: Curiosity & Experimentation
 
Einstein famously said, “I have no special talent. I am only passionately curious.” Curiosity is innate in children, and many times lost later in life. Arguably, it can be said that curiosity is responsible for all major scientific and technological advances – the desire of an individual to know the truth.
 
Coupled with curiosity is the process of experimentation and discovery. The process of asking questions, creating and testing a hypothesis, and repeated experimentation until the truth is found. As I’ve studied the most successful entrepreneurs and entrepreneurial companies, from Google and Amazon to Uber, their success is significantly due to their relentless use of experimentation to define their products and services.
 
Here I imagine a module which instills in children the importance of curiosity and gives them permission to say, “I don’t know, let’s find out.”
 
Further, a monthly module that teaches children how to design and execute valid and meaningful experiments. Imagine children who learn the skill of asking a question, proposing a hypothesis, designing an experiment, gathering the data and then reaching a conclusion.
 
Module 4: Persistence/Grit
 
Doing anything big, bold and significant in life is hard work. You can’t just give up when the going gets rough. The mindset of persistence, of grit, is a learned behavior and I believe can be taught at an early age, especially when it’s tied to pursuing a child’s passion.
 
I imagine a curriculum that, each week, studies the career of a great entrepreneur and highlights their story of persistence. It would highlight the individuals and companies that stuck with it, iterated and ultimately succeeded.
 
Further, I imagine a module that combines persistence and experimentation in gameplay such as that found in Dean Kamen’s FIRST LEGO league, where 4th graders (and up) research a real-world problem such as food safety, recycling, energy and so on, and are challenged to develop a solution. They also must design, build and program a robot using LEGO MINDSTORMS®, then compete on a tabletop playing field.
 
Module 5: Technology Exposure
 
In a world of rapidly accelerating technology, understanding how technologies work, what they do and their potential for benefiting society is, in my humble opinion, critical to a child’s future. Technology and coding (more on this below) are the new “lingua franca” of tomorrow.
 
In this module, I imagine teaching (age appropriate) kids through play and demonstration. Giving them an overview of exponential technologies such as computation, sensors, networks, artificial intelligence, digital manufacturing, genetic engineering, augmented/virtual reality and robotics, to name a few. This module is not about making a child an expert in any technology, it’s more about giving them the language of these new tools, and conceptually an overview of how they might use such a technology in the future. The goal here is to get them excited, give them demonstrations that make the concepts stick, and then to let their imaginations run.
 
Module 6: Empathy
 
Empathy, defined as “the ability to understand and share the feelings of another,” has been recognized as one of the most critical skills for our children today. And while there has been much written, and great practices for instilling this at home and in school, today’s new tools accelerate this.
 
Virtual reality isn’t just about video games anymore. Artists, activists and journalists now see the technology’s potential to be an empathy engine, one that can shine spotlights on everything from the Ebola epidemic to what it’s like to live in Gaza. And Jeremy Bailenson has been at the vanguard of investigating VR’s power for good.
 
For more than a decade, Bailenson’s lab at Stanford has been studying how VR can make us better people. Through the power of VR, volunteers at the lab have felt what it is like to be Superman (to see if it makes them more helpful), a cow (to reduce meat consumption) and even a coral (to learn about ocean acidification).
 
Silly as they might seem, these sorts of VR scenarios could be more effective than the traditional public service ad at making people behave. Afterwards, they waste less paper. They save more money for retirement. They’re nicer to the people around them. And this could have consequences in terms of how we teach and train everyone from cliquey teenagers to high court judges
 
Module 7: Ethics/Moral Dilemmas
 
Related to empathy, and equally important, is the goal of Infusing kids with a moral compass. Recently I toured a special school created by Elon Musk (the Ad Astra school) for his five boys (age 8 to 13). One element that is persistent in that small school of 31 kids is the conversation about ethics and morals, a conversation manifested by debating real-world scenarios that our kids may one day face.
 
Here’s an example of the sort of gameplay/roleplay that I heard about at Ad Astra, that might be implemented in a module on morals and ethics. Imagine a small town on a lake, in which the majority of the town is employed by a single factory. But that factory has been polluting the lake and killing all the life. What do you do? It’s posed that shutting down the factory would mean that everyone loses their jobs. On the other hand, keeping the factory open means the lake is destroyed and the lake dies.
 
This kind of regular and routine conversation/gameplay allows the children to see the world in a critically important fashion.
 
Module 8: The 3R Basics (Reading, wRiting & aRithmetic)
 
There’s no question that young children entering kindergarten need the basics of reading, writing and math. The only question is what’s the best way for them to get it? We all grew up in the classic mode of a teacher at the chalkboard, books and homework at night. But I would argue that such teaching approaches are long outdated, now replaced with apps, gameplay and the concept of the flip classroom.
 
Pioneered by high school teachers Jonathan Bergman and Aaron Sams in 2007, the flipped classroom reverses the sequence of events from that of the traditional classroom.
 
Students view lecture materials, usually in the form of video lectures, as homework prior to coming to class. In-class time is reserved for activities such as interactive discussions or collaborative work – all performed under the guidance of the teacher.
 
The benefits are clear:
 
1. Students can consume lectures at their own pace, viewing the video again and again until they get the concept, or fast-forwarding if the information is obvious.
 
2. The teacher is present while students apply new knowledge. Doing the homework into class time gives teachers insight into which concepts, if any, that their students are struggling with and helps them adjust the class accordingly.
 
3. The flipped classroom produces tangible results: 71% of teachers who flipped their classes noticed improved grades, and 80% reported improved student attitudes as a result.
 
Module 9: Creative Expression & Improvisation
 
Every single one of us is creative. It’s human nature to be creative… the thing is that we each might have different ways of expressing our creativity.
 
We must encourage kids to discover and to develop their creative outlets early. In this module, imagine showing kids the many different ways creativity is expressed – from art to engineering to music to math – and then guiding them as they choose the area (or areas) they are most interested in. Critically, teachers (or parents) can then develop unique lessons for each child based on their interests, thanks to open education resources like YouTube and the Khan Academy. If my child is interested in painting and robots, a teacher or AI could scour the Web and put together a custom lesson set from videos/articles where the best painters and roboticists in the world share their skills.
 
Adapting to change is critical for success, especially in our constantly changing world today. Improvisation is a skill that can be learned, and we need to be teaching it early.
 
In most collegiate “improv” classes, the core of great improvisation is the “Yes, And…” mindset. When acting out a scene, one actor might introduce a new character or idea, completely changing the context of the scene. It’s critical that the other actors in the scene say “Yes, and…” accept the new reality, then add something new of their own.
 
Imagine playing similar role-play games in elementary schools, where a teacher gives the students a scene/context and constantly changes variables, forcing them to adapt and play.
 
Module 10: Coding
 
Computer science opens more doors for students than any other discipline in today’s world.
 
Learning even the basics will help students in virtually any career, from architecture to zoology.
 
Coding is an important tool for computer science, in the way that arithmetic is a tool for doing mathematics and words are a tool for English. Coding creates software, but computer science is a broad field encompassing deep concepts that go well beyond coding.
 
Every 21st century student should also have a chance to learn about algorithms, how to make an app or how the Internet works. Computational thinking allows preschoolers to grasp concepts like algorithms, recursion and heuristics – even if they don’t understand the terms, they’ll learn the basic concepts.
 
There are more than 500,000 open jobs in computing right now, representing the No. 1 source of new wages in the United States, and these jobs are projected to grow at twice the rate of all other jobs.
 
Coding is fun! Beyond the practical reasons for learning how to code, there’s the fact that creating a game or animation can be really fun for kids.
 
Module 11: Entrepreneurship & Sales
 
At its core, entrepreneurship is about identifying a problem (an opportunity), developing a vision on how to solve it, and working with a team to turn that vision into reality. I mentioned Elon’s school, Ad Astra: here, again, entrepreneurship is a core discipline where students create and actually sell products and services to each other and the school community.
 
You could recreate this basic exercise with a group of kids in lots of fun ways to teach them the basic lessons of entrepreneurship.
 
Related to entrepreneurship is sales. In my opinion, we need to be teaching sales to every child at an early age. Being able to “sell” an idea (again related to storytelling) has been a critical skill in my career, and it is a competency that many people simply never learned.
 
The lemonade stand has been a classic, though somewhat meager, lesson in sales from past generations, where a child sits on a street corner and tries to sell homemade lemonade for $0.50 to people passing by. I’d suggest we step the game up and take a more active approach in gamifying sales, and maybe having the classroom create a Kickstarter, Indiegogo or GoFundMe campaign. The experience of creating a product or service and successfully selling it will create an indelible memory and give students the tools to change the world.
 
Module 12: Language
 
I just returned from a week in China meeting with parents whose focus on kids’ education is extraordinary. One of the areas I found fascinating is how some of the most advanced parents are teaching their kids new languages: through games. On the tablet, the kids are allowed to play games, but only in French. A child’s desire to win fully engages them and drives their learning rapidly.
 
Beyond games, there’s virtual reality. We know that full immersion is what it takes to become fluent (at least later in life). A semester abroad in France or Italy, and you’ve got a great handle on the language and the culture. But what about for an 8-year-old?
 
Imagine a module where for an hour each day, the children spend their time walking around Italy in a VR world, hanging out with AI-driven game characters who teach them, engage them, and share the culture and the language in the most personalized and compelling fashion possible.
 
Exponential Technologies for Our Classrooms
 
If you’ve attended Abundance 360 or Singularity University, or followed my blogs, you’ll probably agree with me that the way our children will learn is going to fundamentally transform over the next decade.
 
Here’s an overview of the top five technologies that will reshape the future of education:
 
Tech 1: Virtual Reality (VR) can make learning truly immersive. Research has shown that we remember 20% of what we hear, 30% of what we see, and up to 90% of what we do or simulate. Virtual reality yields the latter scenario impeccably. VR enables students to simulate flying through the bloodstream while learning about different cells they encounter, or travel to Mars to inspect the surface for life. To make this a reality, Google Cardboard just launched its Pioneer Expeditions product. Under this program, thousands of schools around the world have gotten a kit containing everything a teacher needs to take his or her class on a virtual trip. While data on VR use in K-12 schools and colleges have yet to be gathered, the steady growth of the market is reflected in the surge of companies (including zSpace, Alchemy VR and Immersive VR Education) solely dedicated to providing schools with packaged education curriculum and content.
 
Add to VR a related technology called augmented reality (AR), and experiential education really comes alive. Imagine wearing an AR headset that is able to superimpose educational lessons on top of real-world experiences. Interested in botany? As you walk through a garden, the AR headset superimposes the name and details of every plant you see.
 
Tech 2: 3D Printing is allowing students to bring their ideas to life. Never mind the computer on every desktop (or a tablet for every student), that’s a given. In the near future, teachers and students will want or have a 3D printer on the desk to help them learn core science, technology, engineering and mathematics (STEM) principles. Bre Pettis, of MakerBot Industries, in a grand but practical vision, sees a 3D printer on every school desk in America. “Imagine if you had a 3D printer instead of a LEGO set when you were a kid; what would life be like now?” asks Mr. Pettis. You could print your own mini-figures, your own blocks, and you could iterate on new designs as quickly as your imagination would allow. MakerBots are now in over 5,000 K-12 schools across the United States.
 
Taking this one step further, you could imagine having a 3D file for most entries in Wikipedia, allowing you to print out and study an object you can only read about or visualize in VR.
 
Tech 3: Sensors & Networks. An explosion of sensors and networks are going to connect everyone at gigabit speeds, making access to rich video available at all times. At the same time, sensors continue to miniaturize and reduce in power, becoming embedded in everything. One benefit will be the connection of sensor data with machine learning and AI (below), such that knowledge of a child’s attention drifting, or confusion, can be easily measured and communicated. The result would be a representation of the information through an alternate modality or at a different speed.
 
Tech 4: Machine Learning is making learning adaptive and personalized. No two students are identical – they have different modes of learning (by reading, seeing, hearing, doing), come from different educational backgrounds, and have different intellectual capabilities and attention spans. Advances in machine learning and the surging adaptive learning movement are seeking to solve this problem. Companies like Knewton and Dreambox have over 15 million students on their respective adaptive learning platforms. Soon, every education application will be adaptive, learning how to personalize the lesson for a specific student. There will be adaptive quizzing apps, flashcard apps, textbook apps, simulation apps and many more.
 
Tech 5: Artificial Intelligence or “An AI Teaching Companion.”
 
Neil Stephenson’s book The Diamond Age presents a fascinating piece of educational technology called “A Young Lady’s Illustrated Primer.”
 
As described by Beat Schwendimann, “The primer is an interactive book that can answer a learner’s questions (spoken in natural language), teach through allegories that incorporate elements of the learner’s environment, and presents contextual just-in-time information.
 
“The primer includes sensors that monitor the learner’s actions and provide feedback. The learner is in a cognitive apprenticeship with the book: The primer models a certain skill (through allegorical fairy tale characters), which the learner then imitates in real life.
 
“The primer follows a learning progression with increasingly more complex tasks. The educational goals of the primer are humanist: To support the learner to become a strong and independently thinking person.”
 
The primer, an individualized AI teaching companion is the result of technological convergence and is beautifully described by YouTuber CGP Grey in his video: Digital Aristotle: Thoughts on the Future of Education.
 
Your AI companion will have unlimited access to information on the cloud and will deliver it at the optimal speed to each student in an engaging, fun way. This AI will demonetize and democratize education, be available to everyone for free (just like Google), and offering the best education to the wealthiest and poorest children on the planet equally.
 
This AI companion is not a tutor who spouts facts, figures and answers, but a player on the side of the student, there to help him or her learn, and in so doing, learn how to learn better. The AI is always alert, watching for signs of frustration and boredom that may precede quitting, for signs of curiosity or interest that tend to indicate active exploration, and for signs of enjoyment and mastery, which might indicate a successful learning experience.
 
Ultimately, we’re heading towards a vastly more educated world. We are truly living during the most exciting time to be alive.
 
(NOTE: At this very moment, the XPRIZE Foundation is operating a $15M Global Learning XPRIZE in which >100 teams are building Android-based software designed to take an illiterate student in the middle of Tanzania and get them to basic reading, writing and numeracy in 18 months.)
 
Mindsets for the 21st Century
 
Finally, it’s important for me to discuss mindsets. How we think about the future colors how we learn and what we do. I’ve written extensively about the importance of an abundance and exponential mindset for entrepreneurs and CEOs. I also think that attention to mindset in our elementary schools, when a child is shaping the mental “operating system” for the rest of their life, is even more important.
 
As such, I would recommend that a school adopt a set of principles that teach and promote a number of mindsets in the fabric of their programs.
 
Many “mindsets” are important to promote. Here are a couple to consider:
 
Nurturing Optimism & An Abundance Mindset:
 
We live in a competitive world, and kids experience a significant amount of pressure to perform. When they fall short, they feel deflated. We all fail at times – that’s part of life. If we want to raise “can-do” kids who can work through failure and come out stronger for it, it’s wise to nurture optimism. Optimistic kids are more willing to take healthy risks, are better problem-solvers and experience positive relationships. You can nurture optimism in your school by starting each day by focusing on gratitude (what each child is grateful for), or a “positive focus” in which each student takes 30 seconds to talk about what they are most excited about, or what recent event was positively impactful to them. (NOTE: I start every meeting inside my PHD Ventures team with a positive focus.)
 
Finally, helping students understand (through data and graphs) that the world is in fact getting better (see my first book: Abundance: The Future is Better Than You Think) will help them counter the continuous flow of negative news flowing through our news media.
 
When kids feel confident in their abilities and excited about the world, they are willing to work harder and be more creative.
 
Tolerance for Failure:
 
Tolerating failure is a difficult lesson to learn and a difficult lesson to teach. But it is critically important to succeeding in life.
 
Astro Teller, who runs Google’s innovation branch “X,” talks a lot about encouraging failure. At X, they regularly try to “kill” their ideas. If they are successful in killing an idea, and thus “failing,” they save lots of time, money and resources. The ideas they can’t kill survive and develop into billion-dollar businesses. The key is that each time an idea is killed, Astro rewards the team – literally, with cash bonuses. Their failure is celebrated and they become a hero.
 
This should be reproduced in the classroom: kids should try to be critical of their best ideas (learn critical thinking), then they should be celebrated for ‘successfully failing’ – perhaps with cake, balloons, confetti and lots of Silly String.
 
And with that I will sign off and wish you a great week, without the usual personal comment.
 
Your needing a little rest analyst,

John Mauldin

miércoles, octubre 25, 2017

CHINA´S GREATEST CHALLENGE / THE WALL STREET JOURNAL

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China’s Greatest Challenge

The country’s financial system has fueled its debt-driven growth and reforming it may be Xi Jinping’s toughest task

By Anjani Trivedi



Ending China’s dependence on debt-fueled growth may be the easy part of Beijing’s financial reform. Dismantling the complex and opaque system that grew up to satisfy the country’s insatiable demand for borrowing will be harder and more dangerous.

Chinese President Xi Jinping has been trying to get a grip on the country’s financial system since he took office five years ago, with Beijing’s efforts ramping up in the last year. The government pricked asset bubbles by pushing up interest rates while injecting cash to contain the damage. It issued new rules to rein in largely unregulated financial products that boosted lending while promising big returns.

Yet the scale of the problem remains daunting. China’s economy has grown increasingly dependent on its shadow banking sector for credit, boosting its assets to nearly $20 trillion at the end of last year, according to Nomura—a sixfold increase in just six years.

Banks have been the biggest enablers of the growth of the system’s dark underbelly. Recently, they have found important allies in nonbank financial institutions—a raft of trust companies, insurers, fund-management companies and securities firms that collectively hold some 20% of Chinese financial assets, according to Moody’s, up from 9% in 2010.

GAINING GROUND
Composition of China´s financial sector




In sturdy financial systems, nonbanks help fill gaps left by banks. In China, though, they add to the system’s peculiar distortions. Banks can sell bad loans—mostly made to struggling infrastructure-related or state-backed companies—to a nonbank. It can then package them as investments that it can resell back to the bank. Such transactions help banks artificially reduce nonperforming loan levels and capital requirements.

Nonbanks have also helped banks issue so-called wealth-management products. Banks sell these high-yielding investments to Chinese savers, pocketing the fee income but shuffling the funds off balance sheet—often to a nonbank—to be invested into various markets.



There are two main risks. These products are usually short-term, leveraged investments that often put their money in longer-term assets like bonds, creating potential maturity mismatches. And while banks have only explicitly guaranteed around a third of the products they’ve sold, there’s a high probability customers would demand compensation if products fail.

Yield-hungry small- and medium-size banks have become big buyers of these products too, adding to the circularity in China’s financial system. Outstanding wealth-management products held by banks rose to 20.6% of the total in 2016, from 3.3% two years earlier, Moody’s says.


CLAIMING CREDIT
Chinese Banks´claims on non-bank financial institutions



Mr. Xi’s big task is to rein in credit growth and eliminate the distortions in China’s financial system without slowing economic growth. That will be tricky. So far, every time China has tightened liquidity, cracks have appeared and markets have tumbled until the government eased its grip.

If banks are forced to start recognizing more of the bad loans they have have shifted off balance sheet, they will likely cut back new lending, hurting debt-laden state-owned companies the most. And clamping down on wealth-management products may help with transparency, but will mean banks taking a hit to their income.

Sure, Mr. Xi will have more control over the system after party meetings this week. Earlier this year, he created a cabinet-level committee to focus on financial stability, led by the central bank. He has plenty of capital and a mostly closed financial system to help deal with these problems.

If Mr. Xi doesn’t take the pain needed to tame the financial system now, its hydra-like growth will add further distortions to the economy. If he does, the risk is that the Chinese economy slows significantly, potentially creating social unrest and hitting the still vulnerable global economy. Reforming the Chinese financial system may be the greatest challenge of Mr. Xi’s second term.


Really Bad Ideas, Part 5: The Fed Should Have – And Defend – An Inflation Target


Central banks in general and the Fed in particular are struggling to understand a world in which they’ve thrown everything they have at the economy without generating “beneficial” inflation. Their confusion can be traced back to some profoundly false assumptions.


Here’s a good overview of the current debate:

Fed ‘should defend’ inflation target or risk losing credibility: Bullard 
(Reuters) – The Fed needs to mount a clear defense of its 2 percent inflation target and stop raising rates until the pace of price increases strengthens, St. Louis Fed President James Bullard said on Thursday. 
The central bank risks losing credibility, and perhaps triggering a recession, if it continues to insist on “normalization” and higher interest rates without better evidence that prices are firming, he said in an interview with Reuters. 
“If you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility,” Bullard said. 
Persistent weakness this year in the Fed’s preferred measure of inflation means “we more or less lost all the progress that we made the last two years” toward the 2 percent goal, Bullard said. Continuing to raise interest rates in that environment “can send a signal to markets that the inflation target is not that important.” 
The Fed’s preferred measure of inflation slipped from 1.7 percent in April to 1.4 percent in June, July and August. 
Bullard, a non-voter on policy until 2019, said colleagues who blame the decline on large, one-off price moves for some goods and services were too “finely chopping” their analysis, and overlooking the fact technology or some other force is restraining prices. The argument that recent weak inflation is driven by temporary factors is perhaps the dominant view at the Fed, with culprits including major changes in cell phone pricing and the impact of slower-rising Medicaid costs. 
“This idea of throwing out the unpleasant number and finely chopping the price index, you get down to a set of prices that barely can be considered representative and I think that is inappropriate,” Bullard said. “Maybe this is temporary, maybe this will bounce back. What I say to that is you want to see evidence…This is going in the wrong direction. And it is not consistent with the stories that the committee has been telling,” of inflation reaching the Fed’s target in the “medium term.” 
“If the committee continues to raise rates that could turn into a policy mistake…I think inflation could drift lower instead of higher. I think a misperception about where rates need to be in this environment could possibly trigger recession if it was carried to an extreme.” 
Bullard’s comments are a pointed intervention in a debate that is preoccupying policymakers worldwide, and forcing research into and a possible rethink of the way prices are set in the post-crisis world. Bullard himself completely reversed his assessment of inflation more than a year ago, flipping from among the committee’s hawks to now its most dovish.
Some Thoughts And Assertions

An inflation target implies that modest inflation is actually a good thing. This is simply wrong. Inflation is a “stealth tax” through which governments confiscate a bit of savers’ wealth each year without admitting it. If explained honestly such a trick would be a political loser always and everywhere.

Nor do rising prices increase growth or reduce debt. Just the opposite. Knowing that a currency is going to depreciate because the government has promised to make it so, rational citizens borrow as much money as possible since they’ll be paying future interest in ever-cheaper currency. This leads to what mainstream economists define as “growth” but is actually just 1) pulling future consumption into the present at the cost of lower consumption in the future and 2) malinvestment, as businesses, seduced by artificially-low interest rates, start projects that wouldn’t pass muster if the cost of money was realistic (that is, determined by market forces).

So the quality of the capital stock declines over time and productivity falls.

The result: A system where the amount of debt soars, the amount of bad debt rises as a share of total debt, productivity growth slows and the inflation needed to generate future “growth” rises steadily.

Governments are then forced to push interest rates ever-lower and eventually negative, which drains savers’ capital even more aggressively and tricks businesses into even more extreme malinvestment. Sound familiar?

An inflation target implies that economists can actually measure the phenomenon. This is also false. Right now, governments create an official inflation number by arbitrarily including some things and excluding others – like stocks, bonds, and house prices. The latter “assets” are for some reason assumed not matter to “the cost of living” when in fact they matter greatly. And many of them are soaring. As the following chart illustrates, stocks and junk bonds are up over 200% since 2009.




If you’re trying to save and invest, soaring financial asset prices make that process vastly more expensive, which is one definition of inflation. If you’re trying to find a decent home for your family, soaring home prices either make this impossible or squeeze out the other crucial things like health care, high quality food and good schools. Which is also a form of inflation.

Here’s a former central banker (funny how the former ones always seem to make more sense) on this subject:

Inflation isn’t low, it’s just hiding in the stock market: ex-head of Bank of Israel 
(Fidelity) – Inflation is not really low, nor is its cause a mystery, Jacob Frenkel, the former head of the Bank of Israel said Friday. 
The culprit is the global central banks, said Frenkel, who is now the chairman of JPMorgan Chase International. 
Keeping rates excessively low just gives people incentive to invest in the stock market, and nowhere else, he said. “Then all the inflation is reflected in the market, something that is not included in consumer price gauges.”
Frenkel said the low rates are also weakening the insurance companies and the pension systems that transmit monetary policy to the economy. So if you weaken the system, the effectiveness of policy is diminished. 
“So don’t be surprised if you are missing” a 2% inflation target, he said. 
Fed officials are debating whether they should raise rates again in December because inflation is so low. 
Frenkel said the markets would welcome higher rates. The Fed “should just do it,” he said.

But the biggest problem with an inflation target is that it’s a potentially disastrous admission of defeat. Lowering the value of your currency is, in effect, telling the world that you can’t manage your own finances without secretly stealing from those who trust you. Like most breaches of trust, this eventually leads former friends to abandon the relationship.

In finance, this manifests as an unwillingness to hold the offending money. Citizens in an inflationary economy quickly convert their paychecks into real things before prices rise further. Trading partners accumulate as little of the depreciating currency as possible, and swap the excess for better stores of value like sound currencies and gold.

Once this mindset takes hold, it’s game over for the inflating country. The Austrian School of economics calls the end of this process a “crack-up boom,” and historically it’s been the ultimate fate of badly managed currencies.

As for what should replace an inflation target managed by omniscient central bankers, the classical gold standard offers an example. For over a century prior to World War I, governments didn’t bother trying to manipulate prices. They simply defined their currencies as various weights of gold, a form of money whose supply rises by about 1.5% a year. This limited supply kept prices in line – inflation was, on average, negative throughout this time – without hampering growth.



One other positive side effect: People in those days weren’t forced to listen to clueless central bankers’ pointless debates.


Tackling Non-Inclusive Growth

Michael Spence


MILAN – Several years ago, I had the privilege of chairing a commission on growth in developing countries. Its members had significant economic, political, and social policymaking experience in the developing world, and despite their differences, they all agreed on certain crucial points. Two still stand out in my memory.       

First, as we concluded in our final report, non-inclusive growth patterns will always ultimately fail. Such patterns cannot produce the sustained high growth that is necessary for reducing poverty and fulfilling basic human aspirations for health, security, and the chance to contribute productively and creatively to society. They underutilize and misuse valuable human resources; and they often give rise to political or social turmoil, often marked by ideological or ethnic polarization, which then leads either to wide policy swings or to policy paralysis.
 
Our second broad conclusion was that sustained growth requires a coherent, adaptable strategy that is based on shared values and goals, trust, and some degree of consensus. Of course, achieving that is easier said than done.
 
Many developing countries have experienced extended periods of slow or no growth. In some cases, a country’s leaders are simply confused, and do not understand what needs to be done. In most cases, however, the ingredients of an effective “growth model” are well known, and the problem is a lack of political or social consensus about how to implement it.
 
Achieving a higher growth equilibrium is rarely a gradual or incremental transition. It requires a discontinuous leap in expectations and policies, and a fundamental shift in the political and social consensus. When these shifts occur, leadership plays a crucial role, by providing citizens with an alternative vision, based on common values, that all stakeholders can support. Such leadership can come from above, from below, or from a representative group. But as the persistence of low-growth equilibria in many countries shows, it often doesn’t come at all.
 
The spillover effects of non-inclusive growth are already evident almost everywhere, to varying degrees, in the form of social polarization, policy gridlock and incoherence, and a generalized loss of public trust. In this respect, developing countries’ experience holds potentially important lessons for policymakers and various stakeholders in advanced economies.
     
There has been some progress in identifying the factors causing economic inclusiveness to decline in the last three decades. This is important: only by understanding the nature of the challenge can we develop more effective responses to it. If we misdiagnose the problem with a flawed or rushed analysis, our response will be ineffective, and probably even counterproductive.
 
That said, the analyses conducted so far have not yet generated widespread awareness of the threat that non-inclusive growth poses to productivity and economic performance as conventionally measured. The adverse economic effects of non-inclusive growth grow and multiply slowly over time, and will continue to do so in the absence of collective action – usually but not necessarily manifested through government – to shift prevailing distributional patterns.
 
Some would disagree with this proposition, because they believe that the factors behind economic performance and dynamism are independent of distributional patterns. But I would remind them of the second lesson from developing countries’ experience: non-inclusive growth patterns undermine trust and eventually governance, in turn undercutting policymakers’ ability to sustain policies and strategies that support high growth.
 
To put it bluntly, insightful analysis has its uses, but change will not happen without a widespread social and political convergence around shared values and objectives – something that is sorely missing in many countries today. People need to trust one another and their leaders, and they need to agree on how to assess and respond to polarizing economic and social trends.
 
At the same time, continued inaction will fuel alienation, creating a vicious circle of distrust and paralysis that will have to be broken before effective action can occur. There are already many important initiatives dedicated to various dimensions of the inclusiveness challenge, which include not just income and wealth inequality, but also automation, artificial intelligence, and the future of work. Despite their good intentions, it remains to be seen if any of these initiatives will pave the way for effective policy responses.
 
The value of insightful analyses of such complex problems should not be discounted. But we cannot assume that getting the diagnosis right will be sufficient to overcome political gridlock.
 
The other key ingredient is direct engagement. Restoring public trust will require a deep and sustained commitment, and a new consensus that is broad enough to overcome the political and social divides that are now legion across advanced economies.
 
From this perspective, the proliferation of commissions and other initiatives that are structured around inclusion, which might seem excessive and redundant under less polarized circumstances, is actually very encouraging. Convening diverse voices from business, industry, labor, government, academia, and civil society – and doing so as frequently as possible – is exactly what is needed right now.
 
The engagement aspect of the inclusive-growth mission may seem a bit nebulous, especially next to concrete analysis. Nevertheless, it is crucial. Bringing together people who disagree or even distrust one another is the first step toward building a foundation for collective action in the future.


Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYU’s Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, Senior Fellow at the Hoover Institution at Stanford University, Advisory Board Co-Chair of the Asia Global Institute in Hong Kong, and Chair of the World Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the independent Commission on Growth and Development, an international body that from 2006-2010 analyzed opportunities for global economic growth, and is the author of The Next Convergence – The Future of Economic Growth in a Multispeed World.