Amortization

Capacity is a question of technology for calculating a cost charged to business for the use of savings as capital, and the qualifications, timing and terms that flow from those calculations.

These are technologies for creating and sharing information that can inform judgments as to how the business can be expected to prosper over time.

We all know that information technologies were transformed during the second half of the 20th Century – on a scale equivalent to, and maybe even exceeding the invention of the printing press, and moveable type, in the 15th Century – by computers.

This transformation became particularly relevant to Pensions & Endowments, and their capacity to allocate the vast aggregations of forever money that we, as society, entrust to their plenary powers of discretionary authority as capital for use in doing business, in 1983, when Mitch Kapor first released his Lotus 1•2•3 suite of software for business running MS-DOS on the IBM PC, which became Excel for the Mac in 1985 and Excel for Windows in 1987, and now is a ubiquitous feature on both Apple and Microsoft platforms today, giving financial professionals:

• spreadsheets for modeling out expectations for future cash flows through a business;
• desktop publishing for writing the private laws of negotiated agreement that can give legal meaning and consequence to modeled expectations and
• digital communication for negotiating agreements from remote locations, synchronously (via phone and now Zoom) and asynchronously (email, file sharing and text)

One application of these technologies is the calculation of mortgage-style amortization of loans made at fixed rates of interest (repayment in installments that change with each payment and increase over time, inversely to the rate at which interest accrues, to keep periodic payments equal over the life of the loan), in Banking & Insurance.

Another application is the calculation of selling prices for income-producing assets by discounting anticipated future profits at desired rate of return, to a net present value, in securities trading and corporate finance (Exchanges & Funds).

A third application, which is currently in use only in special situations like Real Estate and some Energy and other Infrastructure Projects, is calculating the amortization, to an actuarial/fiduciary cost of money, plus opportunistic upside, from enterprise cash flows, that automatically adjust to reflect actual cash flows as realized, of investments as equity that shares directly in free cash flows on a preferred return to an evergreen residual, basis.

It takes size, purpose and time to utilize spreadsheet math, desktop publishing and digital communication to negotiate these equity amortization investments.

The financier, or financing group, has to be large enough, in terms of the money they control, to be able to “sit across the table” from the business, and agree the details.

They have to have a purpose that allows them to agree a minimum return that is both necessary and sufficient to their needs.

And they have to be able to hold the investment for as long as the business needs, and is able to be the cost of, the money.

Pensions & Endowments, alone or in groups of manageable size (sometimes called “clubs”) have the size to negotiate with businesses of virtually any size.

They have a purpose determined for them by the contracts of their creation and continuation.

They have the time of that same purpose, which includes their own self-perpetuation, as “forever machines”.

This gives them the capacity to use these technologies to allocate their aggregations to businesses that demonstrate an ability to realize free cash flows sufficient to the self-perpetuation of fiduciary financiers.

It also gives them the capacity to qualify the business for alignment with their larger fiduciary purpose, of assuring security in a dignified future to some, and all, on:

• Suitability of the technology to the circumstances prevailing at the time (e.g. the energy supply technology of hydrocarbon combustion is no longer a suitable energy supply technology because of its deleterious effects on both habitat longevity (climate) and social equity (geopolitics);
• Duration of the social contract with popular choice over time (i.e. how close to senescence is it prudent to expect this business actually is); and
• Stewardship of how the business does business all the time, across all six vectors of cash flow through business:
  • Stewardship of Trade, with suppliers;
  • Stewardship of Engagement, with communities, of place, and of interest;
  • Stewardship of Reckoning, with the consequences, on Nature, on Society and on our shared Future;
  • Stewardship of Working, in the workplace;
  • Stewardship of Dealing, in the marketplace; and
  • Stewardship of Sharing, with the savers whose savings are transformed into capital into capital through Finance.  

These are powerful tools for exercising prudent stewardship of enterprise and the economy. through Finance.

Pensions & Endowments have the power to use these tools.

To date they are not using them.

And that is a problem. For humanity living on a planetary scale, within planetary limits, in the 21st Century, and beyond…

It is a problem that we can fix, as new 21st Century planetary citizens in this new 21st Century planetary commons, through participation in deliberation to update our common sense of their capacity, and to upgrade their common practice, as planetary scale fiduciaries.