Unexpected and Unsuspecting

The future confronts us with an impenetrable complexity.  And the future is now.  Hidden within this new reality is an unexpected menace that we can only barely imagine.

In the densely interconnected world of digital networks, instant communication, and global markets we find ourselves arriving in what appears to be a seductively attractive frontier, but which in fact masks entirely new dimensions of danger.

It is a new and unpredictable world, and it hides hazards of unimaginable magnitude.

Exponential population growth and digital connectivity, along with warfare, fragile commercial distribution systems, and the global transmission of deadly diseases, are all contributing to rapidly intensifying complexity.

However, it is the immensity and density of digital networks that is most difficult to comprehend.  And it is here where we are learning that complexity itself can behave in very strange and disturbing ways.

Complex systems are capable of spiraling out of control suddenly and inexplicably.

Living as we do in the instability of today’s world, I think it important that we understand this.

In his book, “Ubiquity”, science writer Mark Buchanan writes that a natural structure of instability is in fact woven into the fabric of the world.

He writes that complex structures and processes – in geology, in rush hour traffic, in financial markets, and in the many intricate networks of human society – have a natural tendency to organize themselves into what’s called a “critical state,” in which they are poised on what he describes as the “knife-edge of instability.”

A critical state occurs when a system is poised for sudden change.

Some mathematicians and scientists now believe that a pervasive instability is a fundamental feature in nature – and in the structures of human societies.

Any event, even a small one, can have an effect that seems far out of proportion to its cause. A single grain of sand, for example, will cause a sand pile to avalanche. But it is impossible for us to know which grain of sand, which individual maneuver in heavy traffic, or which specific circumstance in the financial markets will trigger inevitable catastrophe.

What is the difference between something that is complicated and something that is complex?

James Rickards, who I introduced to you in the previous post, answers this question in his book, “The Death of Money: The Coming Collapse of the International Monetary System”.

Rickards explains: “Many analysts use the words ‘complex’ and ‘complicated’ interchangeably, but that is inexact. A complicated mechanism, like the clockworks on St. Mark’s Square in Venice, may have many moving parts, but it can be assembled and disassembled in straightforward ways.

“The parts do not adapt to one another, and the clock cannot suddenly turn into a sparrow and fly away. In contrast, complex systems sometimes do morph and fly away, or slide down mountains, or ruin nations….

“Complex systems include moving parts, called autonomous agents, but they do more than move. The agents are diverse, connected, interactive, and adaptive. Their diversity and connectivity can be modeled to a limited extent, but interaction and adaptation quickly branch into a seeming infinity of outcomes that can be modeled in theory but not in practice.

“To put it another way, one can know that bad things might happen yet never know exactly why.”

James Rickards goes on to expound on the instability of today’s financial markets and global economy.  He writes: “Bankers’ parasitic behavior, the result of a cultural phase transition, is entirely characteristic of a society nearing collapse.

“Wealth is no longer created; it is taken from others. Parasitic behavior is not confined to bankers; it also infects high government officials, corporate executives, and the elite societal stratum.”

Today the financial markets and monetary system are again poised “on the knife’s edge of criticality.”

My message here is the importance of preparing for severe unforeseen shocks.  It is essential that we not panic when confronted with the unexpected.  We must remain steady on our feet when others are ready to stampede.

Only with a commitment to justice – and the self-discipline for ethical behavior and moral responsibility – will we hold our communities together and begin to rebuild.

Yes, the road to freedom requires courage, but getting there depends on responsibility.

Tom

Please look for the next post on or about October 20: Why the Bankers Are Trapped.

New readers can find a project description, a draft introduction to the forthcoming book, and several chapter drafts on this page.

Common Sense

Leaves 2

“We cannot solve our problems with the same thinking we used when we created them.”
–Albert Einstein

“Democracy is finding proximate solutions to insoluble problems.”
–Reinhold Niebuhr

“Society is always taken by surprise at any new example of common sense.”
–Ralph Waldo Emerson

Why the Bankers Are Trapped

Few seem to grasp that we have arrived at a turning point; a nation and a world confronted with extraordinary structural change.

To think of the future in terms of recovering the past will not be helpful. We must pick ourselves up, hit the reset button, and move forward in a manner that is congruent with a rapidly changing reality.

I am not a banker or economist. I cannot speak with authority regarding the fragile conditions to which we are exposed. But neither am I trapped in past assumptions or blinkered by custom. My intent here is to monitor a transition I think we should all try to understand.

There are many aspects to the changes we are experiencing, some with immediate implications, others longer-term.

However, I think it useful to begin with a particular question with critical immediacy: “Why is the Federal Reserve unable to return the economy to some semblance of order?” Or, to put it another way: “Why has nothing actually been fixed since 2008?”

Here we find a powerful illustration of what is meant by structural change.

The short answer to these questions is that they want to believe they are dealing with a cyclical crisis rather than a structural crisis.

Again, why? Because the truth represents an unbearable existential threat.

Structural change has shifted the economy into a long-term deflationary trend, which presents financial institutions and governments with an impossible situation.

I refer you here to James Rickards’ recent best-seller, “The Death of Money: The Coming Collapse of the International Monetary System”. A monetary economist and former banker, Rickards is an adviser to the Pentagon and CIA.

Using simple math, Rickards’ explains how “in effect, the impact of declining prices [deflation] more than offsets declining nominal growth [GDP] and therefore produces real growth.”

Most of us would think this is a good thing.

He writes: “Despite possible real growth, the U.S. Treasury and the Federal Reserve fear deflation more than any other economic outcome. Deflation means a persistent decline in price levels for goods and services. Lower prices allow for a higher living standard even when wages are constant, because consumer goods cost less. This would seem to be a desirable outcome, based on advances in technology and productivity that result in certain products dropping in price over time….”

Why is the Federal Reserve so fearful of deflation that it resorts to extreme measures to oppose it? Rickards gives us four reasons.

First, deflation has a severe impact on government debt. “U.S. debt is at a point where no feasible combination of real growth and taxes will finance repayment…. But if the Fed can cause inflation…, the debt will be manageable because it will be repaid in less valuable nominal dollars. In deflation, the opposite occurs, and the real value of the debt increases….”

Second, deflation impacts the debt-to-GDP ratio, causing foreign creditors to lose confidence and demand higher interest rates. This is an urgent problem because the debt is continually increasing. Budget deficits require new financing, and interest payments are being financed with new debt.

Third, deflation is a major problem for banks. As Rickards’ puts it, “deflation increases money’s real value and therefore increases the real value of lenders’ claims on debtors…. But as deflation progresses, the real weight of the debt becomes too great, and debtor defaults surge.”

The fourth problem with deflation is about taxes. When a worker receives a raise, the additional income is subject to taxes. But, if the cost of living drops by the same amount, the worker in effect receives the same raise and the government cannot tax it.

“In summary,” writes Rickards, “the Federal Reserve prefers inflation because it erases government debt, reduces the debt-to-GDP ratio, props up banks, and can be taxed.”

“Deflation may help consumers and workers,” he says, “but it hurts the Treasury and the banks…. The consequence of these deflationary dynamics is that the government must have inflation, and the Fed must cause it. The dynamics amount to a historic collision between the natural forces of deflation and the government’s need for inflation.”

Such are the difficulties and dilemmas of structural change.

Tom

Next week: Insolvency and the Devaluation of the Dollar.

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