The Core-Periphery Model   (June 11, 2013)

What assets will the core/Empire protect? Those of the core. What will be sacrificed? The periphery.

In periods of crisis, scarcity and instability, key resources flow from the periphery to the core. We can witness this in plants, which respond to drought by sacrificing peripheral foliage (that fueled growth in times of abundance) to save the core functions necessary to surviving the drought.

This core-periphery model has a number of interesting dynamics. One is that expanding the periphery yields diminishing returns, and so these high-cost, low-yield assets are jettisoned first just as a matter of prudent risk/asset management.

This dynamic has been explored in books that address devolution and collapse, such as The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization , Overshoot: The Ecological Basis of Revolutionary Change and Collapse: How Societies Choose to Fail or Succeed .

One example is a farming community based in a narrow valley served by a river. Crop production can be increased by carrying water up the sides of the valley to irrigate new high-maintenance terraced fields, but the farther the water must be carried, the lower the net energy gain of the crop.

In eras of scarce water, the marginal upland fields will be abandoned. In other words, systems shrink (or in the worst-case scenario, fail) from the periphery to the core.

We can see this dynamic is the Eurozone credit/debt crisis: the core-nation banks in Germany, the Netherlands and France feasted in times of plenty on periphery nations' sovereign debt and housing bubbles, reaping enormous profits by extending credit to periphery countries and their banking/housing sectors.

When collateral suddenly declined/became scarce and the yield on expanding debt reversed from positive to negative, the core Eurozone nations protected their banks at the expense of the periphery countries' banks and sovereign debt.

I covered this in depth (thanks to correspondent David P.) earlier this year:

The Deeper Meanings of Cyprus (March 18, 2013)

The Real Cyprus Template (the one you're not supposed to notice) (April 8, 2013)

Which Dominoes Are Next to Fall in Europe? (April 10, 2013)

Put another way: credit panics start in the periphery because that's where the risk and overshoot of debt to collateral are highest.

There is another overlay to the core-periphery model: neocolonialism. I explained this in The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012). The classic colonial model is a simple core-periphery dynamic: the core nation extracts commodities and low-cost labor from its colonies (the periphery) and sells its own high-margin manufactured goods to the captured-markets of its colonies.

It's tough to beat this wealth-accumulation scheme, but as overt colonization fell into disfavor/became too costly to profitably maintain, the model shifted to a financialization-neocolonial model in which credit from the core nation establishes a very real financial/political dominance in periphery nations.

In the Eurozone, we see how the assets and income streams of the periphery nations are transferred to the core nations' banks by one means or another--in the Eurozone, the European Central Bank and its proxies are being used as intermediaries.

American hegemony of the global financial system creates political, diplomatic and "soft" power. No wonder the stock markets of financial core countries such as the U.S., Germany, France and Japan have risen: global capital is exiting high-risk periphery nations and seeking the relative safety of dollar and euro-based assets.

In our pastoral valley analogy, it boils down to this: where do you want to control arable land--next to the river, or halfway up the mountainside?

The Pareto Distribution also plays a role in the core-periphery model. As I noted way back in 2007 at the height of housing bubble 1.0 (bubble 2.0 is now playing in housing markets everywhere), the core-periphery model of extending credit to skim ever-riskier returns leads to increasing vulnerability to Pareto-distribution effects: Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

The 4% of subprime homeowners who defaulted not only popped the housing bubble, they also triggered a meltdown in the global financial system. This dynamic can shuffle the core-periphery rings in a disconcerting fashion: countries that considered themselves securely in the core (for example, Spain and Italy) discover they're now in the inner ring of the periphery--still too valuable to sacrifice but no longer core.

We also see the core-periphery model in urban-suburban demographics. The efficiencies and amenities of city centers are more attractive to younger households than distant exurbs with expansive yards and long commutes. Even if gasoline were less costly, the time and hassle factor of commuting, multiple-auto ownership, etc. makes the core more attractive than the periphery.

Cash-strapped cities faced with difficult decisions on where to trim services inevitably choose to protect services to the high-density core and cut them in the lower-density periphery.

Proximity to the core lowers costs and risks: where do you want to control arable land--next to the river, or halfway up the mountainside? Yes, your land adjacent to the river may get flooded from time to time, but that risk is more than offset by the benefits in times of water scarcity.

What assets will the core/Empire protect? Those of the core. What will be sacrificed? The periphery.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition 1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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