Our Economic Problem is Deeply Systemic, So Too Must Be the Solutions

September 30 2008 / by Alvis Brigis
Category: Economics   Year: 2008   Rating: 5 Hot

To effectively solve the present global economic crisis we must first put it in the proper context and learn from the past. This is not being done, and so we may well exacerbate this situation in the months and years ahead.

I’m increasingly worried about our economic crisis and future not not because it’s so unexpected, but because of how complex and deeply systemic it appears to be. The tandem forces of financial erosion and social sector rot have created a situation where it appears our valuation of the whole is seriously out of whack with actual value contained in the U.S. dominated global economy.

Financially, we’re facing up to $2.5 trillion home mortgage losses to US taxpayers, have been losing $2 trillion annually due to regular inflation, will spend up to $2 trillion in Iraq when all is said and done, and must deal with a $500+ trillion gorilla in the room also known as the worldwide derivatives market.

The latter is especially frightening in light of the fact that annual worldwide GDP last year was just $54 trillion, with the U.S. accounting for $14 trillion of that. In other words, the derivatives market (including futures, options and unregulated credit derivatives) is just under 5x the size of the annual global GDP. Back in 2002, this market was approximately $100 trillion, or 2x the annual global GDP. That’s 500% growth in just 6 years, largely attributed to credit, mortgages, hedge funds and other financial vehicles that I don’t fully understand.

Even conservative folks like investment mogul Warren Buffet have labelled derivatives a potential financial weapon of mass destruction because they do not seem to be tied tightly to any base value. Still, derivatives are factored into the valuations of major financial institutions (which are now toppling like dominoes) and, directly or indirectly, most publicly traded companies. So if the derivative market collapses, it’s going to take a huge number of companies with it – many, many more than have already bit the dust.

Now, this is the point in this editorial where I make clear that I am no economist (a line that I’ve now seen written many times by writers and bloggers similarly trying to assess this situation), but... I am still capable of putting 2 and 2 together, which in this case means taking a look at the social structures and markets that appear to be so overvalued by the global and U.S. economic systems.

Socially, we are facing a big infrastructural crumble here in the U.S. that will cost us billions or trillions, our education system is expensive and will costs us billions or trillions in productivity as the economy demands new skills, a similarly rotten private health care system has left millions uninsured and could seriously strain national reserves, an escalating unemployment rate is never a good sign, the federal health standard crisis in nursing homes coupled with a longevity-driven boom in senior citizens indicates additional expenses down the road, stagnation in our national web connectedness may not seem like a big deal but could be the most critical development failure of them all, and so forth – the list goes on and on, and I’m sure you can add multiple items to it.

Worst of all, we’re faced with a government fundamentally incapable of collectively processing and acting on this reality. Due to a combination of institutional inertia and a hugely complex and seemingly mystical problem many systems based solutions are simply not even on the table.

Now, imagine you are a venture capitalist and that this mis-managed mess of a system is a company that you are looking to invest in. Would you invest at a rate of 5x (equivalent to a 5 forward P/E ratio) the annual stated earnings (many of which are also paradoxically based on the derivatives market)? If the answer is “no”, then you’ve just admitted that you too agree the world system is overvalued. And if the answer is “hell no” then you believe the U.S. centered world financial system is significantly overvalued.

So, if in fact the world financial system is due for a massive and punctuated correction, which could be the case, what are we to do? How can we up the intelligence of our increasingly stupid leviathan? It’s not going to be easy, and it may be that the only way to do so is through an incredibly stressful systemic crisis. That being said, very generally speaking, we can care, count and act, as Evo Devo systems futurist John Smart likes to say.

Thanks to the looming crisis, Part 1 is underway. Everyone is certainly paying attention.

Part 2 is tricky due t the inherent complexity. Right now, economists, politicians and scholars are all talking in local generalisms and sound bytes, blaming either one another or simple scapegoats like the mortgage crisis (which of course was the catalyst here). To effectively supplement their understanding, they must look to emerging concepts like Generational Dynamics and Evo Devo systems theory, lest they miss out on the broader context of this situation.

In particular, anyone who hasn’t read up on the Fourth Turning, should quickly get into the literature and get on the path to comparing the similarities (and dissimilarities) to the Great Depression, aka the previous fourth turning.

Part 3 will not be accomplished by the uniformed who seek to prop up the existing system without endeavoring to fundamentally change its underlying valuation structure – a sentiment increasingly shared by intuitive popular thinkers and pundits like CNN’s Glenn Beck:

Until we collectively figure out what exactly is happening and why, we are likely to make additional missteps that could exacerbate the increasingly delicate situation. Call me crazy, but I don’t think that most leaders in Washington or at the Fed are thinking about this in the right context.

And, yes, that could result in another great punctuated generational recalibration, which ultimately may be necessary to upgrade and reform the central global brain and nervous system.

Comment Thread (1 Response)

  1. Geez Alvis, this and your post on the fourth turning do make me nervous about my short term future, but I do believe in rapid spurts of change as opposed to long slow steady changes, so it all does make sense to me. Thank you for pointing out the danger of derivatives.

    Can you talk a little bit more about how you think this punctuated generational recalibration will unfold?

    Posted by: Mielle Sullivan   October 03, 2008
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