Systemic Thoughts on the Eve of an Economic Meltdown

by Kurt Cagle

It's been a while since I've written a "non-directed" blog for xml.com, so while I will be covering a few XML topics here if you're not interested in economic systems theory, then you might as well skip this.

As I write this, it's about eight hours before the financial markets open in New York. The markets were closed today, Monday the 21st of January, for Martin Luther King, Jr. day, which may prove to be a bad thing in the morning. Today the average market loss globally was about 7% - here in Canada, the drop translated to a 605 point loss, or about 4.75%, on the TSX. The India Sensex fell 11% in two minutes before trading was halted. I can pull out other figures, but they say much the same thing.

It's hard to say what will happen in the morning - I'm not even going to try, though I have my suspicions. Enough fire control may have been put into place to keep the US markets from getting too badly singed (though I have NO doubt that few people at any brokerage firm in the country were allowed to stay at home today), but what you're seeing here is something that we've not seen in a long time ... the start of a worldwide stock crash.


7 Comments

James Noyes
2008-01-22 05:55:03
Nice article (again...) You have hit a number of points I have been on a soapbox with my think tank (o.k. the guys with whom I drink).


And on another note: you say "...I’ve occasionally been castigated in the past by readers about not talking about XML (or at least programming) related topics on this site"


I've seen that before, but it clearly says "by Kurt Cagle in Opinion " at the top of the article, so anything is fair game.


Keep them coming, I love them all (even the ones I disagree with)

len
2008-01-22 06:20:32
Ok, so now you are shilling for the New World Order? :-)


Improve your analysis from local and global controls (remember, controls are emergent: a response to measured events, so distance affects latency not force) and look at control orders (see cybernetics), specifically, how third order controls (aka, phylogenetic controls) emerge to correct events when second order controls create instabilities.

Kristian Armstrong
2008-01-22 07:11:45

Good job of linking your two main threads together


One frustrating aspect of this latest market crack-up is that a lot of folks understood that the recent run-up was essentially a Ponzi scheme writ large. Not just since the summer, but even over the last couple of years. I'm thing Krugman at NYT in particular, but even Greenspan with his "froth" comment expressed concern. So why wasn't the problem diverted? I think you're right about the structural causes. I'm not convinced however that the solution is informational. I think that the remedy should have been and will be equally structural. This could be re-regulation where needed, do-occulting of certain derivatives (ok, that's an informational concern), and so.


Finally, regarding your 'eh' acquisition project. Resist! I'm a Canadian, and can assure you it's word junk (like people in the US that say 'umnh hunmn' when you thank them).

Kurt Cagle
2008-01-22 08:34:13
James,


Thanks - my soapbox is getting rather well worn, but sometimes I have to get a lemon drop to help with the hoarseness.


Len,


Nope - taking a certain perverse delete in watching the collapse of hypercapitalism, just wish that there was a way that the people who have been most responsible for its excesses could somehow get their comeuppance without a lot of innocent people getting hurt.


The phylogenetic controls do emerge, in time, but these controls are not always themselves the obvious ones. The Fed cut interest rates by 3/4% today in order to stop the bleeding, and the US markets reacted about the way that you would expect them to react; however, such a stimulus in the face of deteriorating market conditions is going to take a while to have any effect, and because of the "leakiness" or fragility of the economy at this stage, the effect will either be to prolong the time necessary to recover or will make an even bigger, more catastrophic collapse occur in the near term future.


The markets NEED to collapse right now - there's far too much overcapacity in the system (especially in the financial system) and until that gets resolved risk cannot be priced even remotely accurately. What's happening now is that we are turning what was likely to be a sharp, but relatively short, recession into a long, drawn-out affair that may take years to recover from. That's why the second order instabilities are there in the first place.


Again (knowing how much you love them ;-) an ecosystem model - a recession is a forest fire - it removes excess fuel from the system. Small periodic recessions are painful to get through, but they often are highly stimulative of positive growth (the third order controls that you're talking about) afterwards, typically with more adaptive species. However, the longer you keep those fires from happening, the more that fuel builds up, and the more devastating the fires when they do come.


As I type this, the indexes are almost back in the black again after about a 4% plunge this morning. The fire's been stopped - again. The idiots who built in fire-prone areas will continue to build there, the strip malls will replace natural fire breaks and wear down the watershed even more, and then one day you get Santa Ana winds and a camper's cigarette, and before you know it half of Southern California's on fire. Systems like that, when they do collapse, do not collapse a little bit - the collapse a great deal, and no third order controls can stop them fast enough. That's what we're facing now.


Kristian,


The remedy must be structural - the information is there, but the incentives for continuing bad practices are too high to stop it, and business has largely managed to work around regulation - mainly by buying the government. In my (albeit limited) experience, once you reach that stage, then the structural changes will likely be forced by market conditions, and the harder the present regime tries to prop up the system, the worse the collapse will be when it finally does happen. My guess is that this process is actually underway, and it involves a transfer of both money and corresponding power from West to East.

len
2008-01-22 10:39:51
No disagreement here. One good effect of the writer's strike is that I am watching C-SPAN more than I might other wise. Over the weekend, I saw some glimmers of hope:


1. Mike OConnell (sp?) and other intelligence types are being interviewed or having roundtable discussions. The good news is the real professionals are starting to poke their heads up and talk sensibly about conditions around the world and their effects on the US. After the last eight years of nonsense and neo-connery, the US is coming to its senses.


2. The election debates. A good slate of candidates actually taking sides on issues, staking positions, and using less weaselry. Regardless of who one is for, the debates have substance again. We may actually get leadership this time.


Political issues are unavoidable because our financial systems are intimately tied to our political systems in the sense of where we put our money. A smarter agenda will fix some of the problems of finances.


The XML Bit: thee, me and all of our friends helped grease the economy but in so doing, we made it possible for chicanery to happen just as fast and easy. The second order feedback to the feedback is not making any process more transparent or more controlled. Instead, it simply sped up the processes. Yet I don't think the sand hill or the ecosystem metaphors are quite apt this time. Those are natural systems. The financial systems are not organic per se. They are pachinko. The weighting schemes are mechanical and can be adjusted. The problem is there is no means to stop the players from inserting coins and pulling the levers at high rates. In this I agree; adjustments both systemic and regulatory are needed.


All we could do with XML was grease the levers. We've done nothing to slow down the human hands. Should we?

Ric
2008-01-22 20:29:09
Kurt,


Yet another great article with so much depth is astounding.


Where do you find the time? Is it that you type 300 words a minute? But then how do you create the theme and fulfill your thesis so well ?


Maybe you should give up this blogging thing maybe try writing a book :)


A pleasure

Kurt Cagle
2008-01-24 14:50:46
Ric,


I type at a poky 50 words per minutes if I'm lucky, and manage to get these things written by using them as excuses to not do what I probably should be doing at the time ;-)


-- Kurt