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Musings Report 2021-31 7-31-21 Risk is Rising
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For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
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Risk is Rising
I've been writing all year about risk, as my sense that systemic risk is rising to potential flashpoints continues to be supported by data.
I just recorded a video program with Gordon Long in which we discuss why "The World Just Got A Lot Riskier." Our focus was on the transfer of financial risks from elites to commoners and risks building up beneath the surface of the financial system.
I've also covered the rising risk of social disorder / cultural revolution a number of times, and health-related risks, as Covid most heavily impacts the elderly and the unfit/unhealthy.
(I understand Covid skepticism, but I can report from first-hand sources (physicians who have already had Covid and who can tell the difference between Covid and pneumonia and the flu, and who have treated hundreds of Covid patients) that the Delta variant is real: it's highly contagious and sickens younger people, including children. It is different enough to be viewed as an entirely new threat.
Who to trust in a world of competing Us and Them narratives? From a pragmatic perspective, the most trustworthy sources are people you know who are living in the trenches and who have no financial or ideological axe to grind. At least that's my view.)
Then there's the risks of drought, fires, floods and other extremes of weather, as "100-year weather extremes" seem to be occurring every few years (or recently, every few months).
I've endeavored in many blog posts to explain how risks pile up beneath the placid surface and then suddenly erupt when buffers have been consumed and systemic fragilities manifest.
Today I want to discuss two general dynamics of large-scale complex systems, and connect the dots of all these different risks.
1. Controls on any phenomena come from the next larger scale.
2. Critical phenomena in a system/network can be initiated by small defects in the structure.
The first dynamic is interesting because the human tendency is to over-estimate our control of complex systems.
For example, we think genetically modified seeds, chemical fertilizers and pesticides are the key controls of rising agricultural yields, a.k.a. "the green revolution," but soil fertility, evolution and the weather are larger scale systems than seeds, fertilizers and poisons.
Extreme weather can wipe out a harvest regardless of seeds, fertilizers and poisons, drought can dry up reservoirs that irrigation depends on, frosts can wipe out harvests and orchards, and so on.
Insects and bacteria can evolve to evade chemical poisons, and depleted soils eventually fail to respond to GMO seeds and chemical fertilizers.
In economics, the stock market is what most people focus on, but the bond market is the larger scale system, and the bond market is controlled by the larger scale system of currencies.
The conventional assumption is that finance is the largest-scale system that controls everything else: energy, supply chains and so on, and finance is ultimately controlled by the Federal Reserve.
But in reality, energy is the much larger scale system that controls finance, for while finance can create trillions of new units of currency and credit out of thin air, oil, natural gas, solar panels, wind turbines, etc. require consuming enormous quantities of oil, coal and natural gas to be brought into production. Without energy, the financial system collapses along with the global industrial economy.
As for the Fed's control: if the Fed continues pushing wealth inequality to new extremes, then the social upheaval / cultural revolution this will generate will be outside the Fed's control.
The second dynamic--critical phenomena in a system/network can be initiated by small defects in the structure--is interesting because criticality (typically used to describe the beginning of self-sustaining nuclear fission) remains a poorly understood feature of self-organizing (emergent) systems.
"Critical phenomena" is another way of describing criticality, when a system shifts to another state or phase that is quite different from the initial conditions. In Musings 27, I used traffic gridlock as an everyday example of the way in which complex self-organizing (emergent) systems transform from a stable and predictable initial condition to a completely different condition:
"Traffic jams are actually very complicated and mysterious. On an individual level, each driver is trying to get somewhere and is following (or breaking) certain rules, some legal (the speed limit) and others societal or personal (slow down to let another driver change into your lane).
But a traffic jam is a separate and distinct entity that emerges from those individual behaviors. Gridlock on a highway, for example, can travel backward for no apparent reason, even as the cars are moving forward."
The collapse of the condo high-rise in Florida is another example of an apparently stable and permanent structure suddenly changing from a towering grid of rectangular boxes into a pile of rubble and bent steel rebar.
"Run to failure" is another example of small defects bringing down the entire system. Push an engine long enough and eventually one critical part will fail, and that causes the engine to fail.
In the financial sector, there are many parts which few of us really understand (I certainly don't), such as the repo market, credit default swaps, etc., any one of which can trigger a collapse of the global financial sector.
It's instructive to recall the 2008 Financial Crisis in light of these two dynamics. Recall that the entire subprime mortgage market that triggered the Global Financial Meltdown was around $2 trillion, and the problem loans that became impaired amounted to about $300 billion. So $300 billion of impaired mortgages toppled a market 7X larger ($2 trillion), and this $2 trillion market almost toppled a system 80 times larger (the $160 trillion global financial system).
You see how the dominoes of small defects trigger larger scale failures which then trigger even larger scale failures: the $300 billion in impaired mortgages very nearly collapsed the $160 trillion global financial system, and the Federal Reserve's subsequent bailout of the global banking sector totaled $16 trillion-- 10% of the entire global financial system, and fully 50 times larger than the problem mortgages ($300 billion).
Observers had been identifying subprime lending practices as structural defects for years, but the incentives to reap massive profits over-rode perceptions of rising risk.
In a similar fashion, the incentives to "kick the can down the road" led to costly structural repairs of the condo being put off.
I submit this is a precise analogy to the present. Debt and leverage are hidden away in a multitude of "small defects" in the global financial system, each of which is the equivalent of rusted rebar and crumbling concrete in an apparently stable and permanent global financial system.
As for health risks, Covid cases in the U.S. have risen from 16,000 on June 30 to 122,000 on July 30, a 7.6X increase in a month. (Note that the PCR test is being phased out in favor of more reliable antigen tests.)
As for social upheaval, look no further than people wearing masks being assaulted and vaccinated people refusing to wear masks because they no longer care if the unvaccinated get sick. Assessing the criticality of social conflict is not something that can reduced to quantification; as with traffic gridlock, small changes suddenly trigger larger scale consequences without much warning.
As for supply chains and real-world availability of essentials, the disruptions in supply chains and food/energy production are not going back in time in 2019. The equivalent of traffic gridlock has already occurred, and these large-scale systems have already transitioned to a new state that is materially different from their initial (circa 2019) condition.
Virtually all the systems we depend on are controlled by larger-scale phenomena that are not within our control, and many of the complex systems we depend on are seeded with "small defects" that can trigger an avalanche of "critical phenomenon" that collapse the entire system.
Simply put, the vast majority of systemic risk is invisible, and so we continue to mistake good luck for permanent stability.
Highlights of the Blog
Posts:
Why Don't Billionaires Pay the Same High Tax Rates the Rest of Us Pay? 7/30/21
The Moment Wall Street Has Been Waiting For: Retail Is All In 7/28/21
America Is a Moral Cesspool, and Student Loans Prove It 7/26/21
Best Thing That Happened To Me This Week
Distributed the first of the lychee harvest--first task after picking the fruit is sorting, as the bugs and birds take their share and those have to be discarded. Then boxing up those for shipments and bagging those delivered directly.
Bonus Best: my 1973 Les Paul Deluxe guitar finally made it home (thanks to my sister and a suggestion from my brother) after being in storage during the past few years of transition
From Left Field
With average daily consumption of 2.2 liters of Coca-Cola, Chiapas leads the world (via John F.) -- yikes--as cheap as bottled water...
Trees Interact With Each Other Through An Underground Web--this makes sense...
Is This the Beginning of Runaway Global Warming? -- let's not forget about feedback loops...
Great Salt Lake is shrinking fast. Scientists demand action before it becomes a toxic dustbin.
Ethereum Co-Founder Says Safety Concern Has Him Quitting Crypto
Confronting Our Next National Health Disaster — Long-Haul Covid
Billboard's U.S. Money Makers: The Top Paid Musicians of 2020--interesting...not as much money as I anticipated...
Review: Clean Energy Exploitations: Finally the real story-- add up the extraction and production costs, and then define "clean"...
Call Me a Traitor: Daniel Hale exposed the machinery of America’s clandestine warfare. Why did no one seem to care? -- Endless War exhaustion,,,
War: Business as Usual: Too many Americans don't understand the horrors of US regime-change operations. -- relatively few Americans even know someone in uniform...
Global supply chains buckle as virus variant and disasters strike-- geopolitical maneuvering has barely even started...
Alarming COVID study indicates long-term loss of gray matter and other brain tissue -- add in the higher risks of stroke...
"Love, by its very nature, is unworldly, and it is for this reason rather than its rarity that it is not only apolitical but antipolitical, perhaps the most powerful of all antipolitical human forces." Hannah Arendt
Thanks for reading--
charles |
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