(Excerpt): ...But this time I had James Rickards’ new book Currency Wars on my Kindle (a device from customer-friendly Amazon that makes my life simpler and easier), and while waiting for a flight I came across this:
The third principal is that complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirements by a factor of a thousand, and so on. The fourth principal is that complex systems are prone to catastrophic collapse. The third and fourth principals are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.
That’s a pretty good framework for understanding these huge, complex, mostly dysfunctional industries. They’ve spent decades consolidating and concentrating and now have to generate sales on pretty much any terms, no matter how questionable, in order to avoid death by complexity. The customer takes a back seat to the desperate institutional need to survive and the product gets crappier and crappier until the production/delivery system breaks down.
The same dynamic is at work in the global financial system, says Rickards. In the US, a dollar of new debt produced nearly that much in new GDP in the 1960s. But today the return on new debt is negative. From here on, we can borrow as much as we want and the only result will be more debt. Wealth won’t increase at all. But we can’t stop; as with any other Ponzi scheme, the choice is more debt or instant bankruptcy.
This stage is generally followed by catastrophic failure, with the only question being what else the financial system takes down with it. As Rickards puts it:
A considerable challenge arises when one considers the interaction of human behavior and market dynamics. The complexity of human nature sits like a turbocharger on top of the complexity of markets. Human nature, markets and civilization more broadly are all complex systems nested inside one another like so many Russian matryoshka dolls….When you apply this paradigm to finance, you begin to see where the currency wars are headed.