🦮S3T Aug 2 - Being the glue, Bank cuts, Fed hints, heatflation, AI laws, tax fairness, defense, DeFi lending

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In this edition of S3T:

• 📉 Interest Rate Updates: The Bank of England cut rates for the first time since 2020, and the US Federal Reserve hinted at potential rate cuts in September, amid concerns from Goldman Sachs about the timing.
• 📉 Market Concerns: Stocks fell due to rising jobless rates and a decline in manufacturing, but mortgage rates are easing.
• 🛡️ US Defense Readiness: A bi-partisan commission's report highlights the grim state of US military readiness, emphasizing the need for balanced defense spending despite economic constraints.
• 💵 Income vs. Taxes: US individuals earned $23 trillion in 2023, while top 500 companies made $41 trillion, yet corporations only paid 6.5% of taxes compared to individuals' 45.3%, raising questions about tax fairness.
• 🌡️ Heatflation Impact: Rising global temperatures will affect more than agriculture, impacting manufacturing and worker conditions, with a divide forming between those who can afford heat protection and those who cannot.
• 🇪🇺 Europe's AI Law: The EU's new AI law is now in effect, with compliance deadlines stretching to mid-2026, impacting global AI solution providers.
• 💻 Decentralized Lending: Morpho's successful funding round signals growth in decentralized lending, offering a new approach to risk management without traditional DAOs.
• 🤝 Leadership Skills: Being the Glue - Effective leaders need to navigate, communicate, understand resistance, adapt to dynamic changes, and listen to build strong, resilient teams.

Welcome to S3T, the essential newsletter, podcast, and learning platform for change leaders.

S3T shares 21st century leadership skills set in the context of emerging tech and the evolving economy. This is an unusual combination of skills, not usually taught together, but critical for the global and local challenges we face today. 

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If we can just make it to September...

This week the Bank of England cut its rates for the first time since 2020. In the US the Federal Reserve left interest rates unchanged, but hinted at cuts in September.

Some, like Goldman Sachs worry September may be too late. Stocks fell on Thursday (and again Friday) amid concerns over spiking jobless rates and a drop in manufacturing. Average mortgage rates seem to be easing.

Military Readiness & Spending

This week a bi-partisan commission released its assessment of the US National Defense Strategy. Back in 2022 when the current National Defense Strategy was released, Congress stipulated that a special commission would review and provide feedback on the adequacy of the National Defense Strategy. The resulting report (PDF) provides a grim assessment of US defense readiness: "The United States could in short order be drawn into a war across multiple theaters with peer and near-peer adversaries, and it could lose."

Gloomy assessments of US military capability aren't new (similar assessments from 2018, 2001 and 1980). These tend to be written by people whose job is to worry about national security, and by people who want to see defense spending increased.

None of this suggests defense spending is unimportant; effective and sustainable military readiness is critical.

It will always be difficult to balance the need for robust defense with the realities of economic constraints. The current math of inflation and US debt make it harder than ever to do that:

• 17% of the national budget goes to servicing the US debt
• 13% is spent on defense - people like to point to this figure - and how it’s so much bigger than other countries military spending.

Together these points highlight the need for national unity, public-private innovation partnerships especially in AI and emerging tech, as well as enhanced multinational cooperation. It also strongly suggests this is not the time for a new round of tax cuts on the largest tax contributors (corporations).

Comparing Income vs Taxes for individuals and companies

The latest data shows total earnings of individuals vs total earnings of companies continue to be lopsided. But not as lopsided as their shares of taxes.

• The total income of all US individual wage earners (from salaries, rental properties etc) was $23 Trillion (for 2023).
• The total income for all US Corporations is not aggregated, but Fortune 500 companies made $41Trillion in total revenue in the FY ending in March 2023. Together US Corporations earn about 3 Trillion profit per quarter or ~12 Trillion per year just in profit alone.

To run through the numbers again:

• $23 Trillion = Total income for all US individuals
• $41 Trillion = Total income for top 500 US companies

So naturally total corporate taxes should be equal or maybe almost twice as much as total individual taxes - right? Well...see the chart below, which shows latest full accounting of US Gov tax revenue:

• US Corporations paid 6.5% of the taxes collected by the US Government.
• Individuals paid 45.3% of the tax burden, and paid additional taxes via social security taxes, property and consumption taxes.

Link to original with full context, courtesy of the Tax Foundation. This was not an unusual year - here is the same chart for 2023. And 2022.

The top 500 companies alone make almost twice as much as the total wages of individuals, yet consistently pay 1/7 of the tax burden. (File this under "why it might not be time for another big corporate tax break".)

🥵Heatflation will impact more than crops

The World Economic Forum defines “heatflation” as a form of inflation that raises the prices of food as climate change impacts crops and livestock.

But rising temperatures around the world are also going to impact manufacturing plants and workers. This is already an emerging and under reported issue.

Innovators in Japan are preparing for a hotter future for workers with new kinds of heat reducing clothing.

At the 10th Annual Heat Solution Tokyo conference - an expo of air conditioning and cooling products, Leo Lewis (FT) noted 2 disturbing themes:

• Because actions to forestall climate change have not been adequate; extreme heat will be pervasive and heatflation will impact manufacturers not just farms.
• There will be a divide between communities and companies that can afford to protect their workers from the heat, and those who cannot (and likewise between companies that will pay for adequate cooling vs those who will not).

Related: Duke University's Heat Policy Innovation Hub recently hosted the first HeatWise Policy Partnership Summit, bringing together financial, insurance, government and community organizers to focus on evidence based heat interventions for rural communities, the concept of "blended finance" and the future of insurance. This is a great example of the kind of cross-disciplinary innovation that our 21st century challenges require.

Europe’s AI Law Goes into effect

The European Union's landmark law on artificial intelligence went into effect this week triggering a series of compliance deadlines between now and mid-2026.

Helpful: OpenAI shared this AI Act compliance primer which offers recommendations on how to plan for full compliance. The act applies to organizations outside the EU if:

• You sell a solution in the EU market
• You are an AI solution provider and you have an office in the EU
• Outputs produced by your AI solution are used by organizations within the EU

This will likely force organizations to add language about whether their solutions are allowed for use within the EU or not.

Bi-Partisan Crypto

The Harris campaign is reaching out to the crypto industry, the Block reports. Those close to the situation say the campaign is gathering info in order to develop a more informed position on crypto. This could be a welcome shift from the anti-crypto tone pushed by key players (Senator Elizabeth Warren and SEC Chair Gary Gensler) in the Biden administration.

I think this is a net positive because crypto and Blockchain architectures represent the future of digital assets - and possibly the future of money. Something this important and pervasive should not be a partisan issue.

Politically Related: This Foreign Affairs piece worries about the prospect of an "imperial presidency" thanks to the recent Supreme Court decisions.

The Future of risk management may be decentralized

Morpho a pioneer in decentralized lending successfully completed a new round of funding - a signal that decentralized lending is moving to a new level of adoption.

Decentralized Lending started back in the 2020 timeframe with a reliance Decentralized Autonomous Organizations (DAOs), but this was a non-starter for trad-Fi players who had issues with the DAO structure. Morpho offers a new more scalable more efficient approach you could call "permission-less risk management." The approach allows autonomous operations without risk adjustments by a DAO, which in turn lets lenders provide more capital to borrowers with lower overall risk.

Being the glue

Today’s political tensions, economic uncertainties and technology driven acceleration require leaders to bring together different disciplines and groups who may also have different perspectives about how to solve problems – or what the problems even are. The tensions in these settings can be hard to manage. More than ever we need leaders who know how to "be the glue" ...the connectors between groups that might not otherwise ever work or think together.

Many leaders are wrestling with conflicts among their teams or partners and wish they they knew how to "be the glue" and gain traction and forward momentum. If you’re in this category, I’m gonna show you how. It has a lot more to do with what you’re thinking and how you’re thinking vs any specific behavior.

How you think guides what you say and do

Here’s exactly how you need to be thinking when you are trying to bring people together: Keep these 5 things top of mind and soon people will be saying "You're the glue! You're the glue that helps us stick together and make good things happen in spite of the odds:

1. The difference between navigation and compromise. Compromise is trying to pick some random spot that is the least loathsome to the two extremes. Navigation is having an objective and recognizing that you may have to make a number of right hand turns and left-hand turns as you’re moving towards the objective.
   Now, some people will ask well what if there’s a disagreement about what is the objective? You need to move up one level: Why do you have this objective? Why do I have this different objective? What need or want are we expressing or alluding to when we state our objective? There is always something behind the stated objective of a person or group.
2. Low-key continuous communication. The calm flow of information is critical. Recognize that each of us lacks certain crucial information. As we communicate freely, and work together to solve the problem, our individual knowledge gaps will become more evident (to us), and at the same time, our collective comprehension of the problem becomes more complete. Everyone gets more clear about what we need to do and how we need to do it.
3. Read resistance and hesitation for what it is. Understanding why people are tense or resistant will help you deal with it more effectively. 99% of the time it’s because of a fear of failure, or fear of something going wrong.
4. Everything is dynamic not static - evolving and we are headed into new uncharted territory. Keeping an eye on how things are evolving and where things are headed is another key differentiator. Drive a common understanding that everything is changing. When everyone realizes in common that the entire landscape is changing around us and we all need to work together to find the best path forward that becomes a new kind of common ground. It gives you and your organization a level of effectiveness and resilience you won’t have if you're seeing everything as a pitched battle or zero sum game in a static situation. The way you talk about these things is important. You want to constantly show and share awareness of how things are shifting.
5. Listening is the most transformative culture building skill you can leverage. Listening is a very powerful way for you to signal that we all don’t know everything yet. We're open. We believe everyone deserves a voice. It’s another great way to signal that we all have knowledge gaps and that we need to help fill in each other‘s knowledge gaps. This will give you an edge and advantage when you are faced with situations involving uncertainty, where the road forward is not clear.

If you want to stand out as a capable resilient leader, these are some great skills and thought patterns to learn and use. Put them to use this week.

Keep learning: See the S3T Playbook: Harmonize Different Kinds of Expertise to Achieve Success.

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