Market Curiosity: Exploring Markets And Systems

January 9, 2009

When will it all finally blow up?

Filed under: Systems — Tags: , — Jeff Fitzmyers @ 6:45 pm

How ‘complex adaptive systems’, like the USA’s financial institutions, probably fail:
– Once things get past the critical point of no return, the amplitude and/or frequency only increase (exponentially?) until the system blows up. Maybe a maximum of 2-4 cycles past the critical point.
– The whole system will be affected. “(h) A disturbance introduced into an organization at any one level reverberates at all the levels it covers. The extent and severity of such disturbances are likely to be proportional to the degree of integration of that organization.” Globalization?
– The blow up happens quickly because when the power of the new overcomes the force of the old, a large chunk of the whole system’s energy is released. Iceland imploded in about 3 days. And Jeff Clark, an excellent trader suggests, “… It’ll happen overnight …”
– I venture results are rather predictable once past the critical point since the non-linear resiliency is minimized (exponentially?) toward the linear end blow up. That is why standard “diversification” is not working.
– Then another, possibly, even probably, quite different, system builds up again… “Surviving the crisis is different than thriving post-crisis.” From Michael J. Mauboussin’s interview with Doug Erwin who is affiliated with the Santa Fe Institute

Can a blow up be averted?
– When too much debt (a type of leverage) relative to actual productivity is the proximate physical problem, more debt will only make things worse (exponentially?). And more debt is what people are throwing at the system.
– Mauboussin’s interview: “… The ability to “manage” a complex system is low. One might as well try to “manage” the weather. So a degree of humility might be appropriate.” Unintended consequences are high. “Biologists have consistently failed to manage systems like national parks and wetlands where the network structure is, if anything, simpler than that of markets.”

What seems destined:
+ Debt will deflate. What is referred to as “US Dollars” are actually Federal Reserve Notes: a debt instrument that pays zero interest and never mature. A dollar used to be 371 grains of sliver.
+ Precious metals will inflate because they have no counter party risk and can’t be printed at whim.

+ Where’s the big bust? Is the new system growing faster than the old one is crashing?

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