Friday, May 8, 2015

Can the 1% (Financial Elite) Overpower a Complex System?

Recently I attended a speech given by Jim Rickards in which he laid out his case for his "complexity theory" for markets. At first this may seem like one of those academic debates that the average person wouldn't have much interest in. Most people just want to know what will happen ahead of time so they can make better personal financial plans. 

However, this debate can be translated into the real world where we all actually live. First a quick summary to frame the debate. 

Jim says that most modern economic models that are used to make predictions are based on what he calls equilibrium models. He says those models use the old bell curve most of us probably vaguely recall from high school or college. Long story short, he says the bell curve assumes that an extreme crisis type event is very rare. So rare we are not likely to experience one in our lifetime. These models also suggest to policy makers that they can just do some minor tweaking to monetary policy if things get off track. In this regard Jim views these models as too simplistic.

In contrast, he believes that real world markets are very complex. He says we can apply complexity theory used in other advanced areas of study to markets to make better predictions. The complexity theory assumes that systems are complex and dynamic. Too complex and dynamic for mere humans to control over time. In this model, a crisis event is much more likely to happen sooner than expected because some "blind spot" that policy makers don't see coming surprises them. In this article by Bank for International Settlements General Manager Jaime Caruana, he talks about such blind spots being a real concern. He gives his views on what should be done to address them. The point being that he does acknowledge the blind spots exist.

Applying this to the financial environment we live in today, Jim thinks the current global financial system is too complex and too unstable to be sustained over the long term. At some point an unknown trigger event will show up unexpectedly to initiate a major crisis (he calls it the snowflake that triggers an avalanche). Since all the numbers in the system are much bigger than they were in the 2008 crisis, he expects this crisis to be much bigger this time around.

The reason we should care if Jim is right about this is that the present financial system is so big and interconnected now (a feature of a complex system) that a major crisis now would absolutely impact our daily lives. Jim is not talking about just a downturn in the economy. He is talking about a major event that is historic in natureSo there is much more at stake here than just a debate between academics over some models and graphs. 

An interesting question arises out of this debate to me. In doing research for this blog I regularly come across alternative news sites that believe wholeheartedly that there is an intentional plan behind the scenes by the financial elite to move the world toward a great crisis so that they can then solve the crisis at a global level (instead of at the local or national level and bypass national sovereignty).

Another way to look at this point of view is to say that those who believe in a planned crisis think that the 1% have obtained so much power and influence within the present system that they can actually overpower the complexity of the system and obtain outcomes they desire. They think they can use what amounts to brute force to insure a crisis unfolds at a time of their choosing. They come from this world view so it's natural for them to believe a new crisis will be a planned event.

In contrast, Jim Rickards believes the system is too big, unstable, and complex now for even the 1% to sustain and manage it over time. He thinks some event that they simply cannot foresee will arise at an unexpected time to trigger the crisis. So this world view sees the new crisis as just an unplanned event in a complex system. Interestingly, Jim does not see the 1% losing control of the system though. Instead he sees the same people rewriting "the rules of the game" to fix things after the crisis. A reasonable question if we have a complex system is whether or not the same people who were unable to prevent a crisis would be trusted by the public to fix it?

You may ask at this point:

If I have to live through a major global financial crisis, do I really care if its planned or unplanned? 

A fair question. But it does matter because a planned event implies evil motives carried out on purpose with no regard to human suffering to obtain power. An unplanned event implies people with good intentions who simply failed to manage risks in a complex system. I'll leave it to readers to decide how they feel about the answer to that issue.

I will say that at this time, based on everything I have read and studied so far on this, I think Jim Rickards is likely to be proven correct. No matter how powerful any special interests may become, they simply cannot control all possible risks. This article in the Daily Mail provides an example of what I mean. It's about how the internet is becoming so crowded that in just a few years it will reach capacity. This may cause potential disruptions in the whole world wide web. When you read this article you can see how complex just the internet by itself is. We now rely on it in a critical way to support the global financial system. But what if it were to fail for any reason? The internet is just one complex subset of many complex factors that could impact the global financial system

A major radiation burst from the sun disrupting communications is another example. What if Russia were to create an EMP disruption to the power grid somewhere over the United States some day? What if cyber wars intensified and took down major stock markets? How can anyone be sure that a "herd mentality" (one feature of a complex system) won't cause people to behave in unexpected ways during a crisis event? 

You get the idea. No one can possibly foresee and control all these risks. Also, even if they did plan a crisis, they could not be sure the crisis would be "fixed" in the way they would prefer. For example, the world could end up more decentralized instead of more global if most people blamed the financial elite for causing the crisis in the first place. It's just another unknown in a complex system.

The main point I am trying to make however is that I believe Jim Rickards has it right. The odds of another unplanned major financial crisis are vastly increased due to the size and complexity of the present system. What  I don't know is if we will get one any time soon or how the crisis would actually be resolved if we do get one. Jim thinks we will get one in the next 2-3 years resulting in a reset of the global monetary system.

This dynamic of the 1% attempting to overpower the complexity of the system will be interesting to follow in coming months and years to see what happens. I'm sure there will continue to be at least two world views on the cause of any new major crisis. One of the features of a complex system is diversity of views. 

Meanwhile, the US Fed continues to project a picture of relative stability where no new major crisis arises. Of course, if we get no crisis at all, that would be great. But Jim says his work with complexity theory tells him the odds favor one at some point and that the US Fed won't see it coming. Former Treasury Secretary Tim Geithner agrees, but says the 1% can manage it.

For the average person, the best approach is to have a personal plan in mind in case we do get another crisis regardless of what causes it. It's impossible to prepare for everything, but some plan is better than no plan. Once you have a plan, don't waste time worrying about things you cannot control. Just follow events and stay informed. That is a practical way to deal with a complex system if you live in the 99% world that most of us do.


  1. Excellent writeup. At one time, I gave some open ear to the possibility that the financial elite would create an event to able to "save" the world with a single worldwide currency. But my view has changed drastically. Theses guys can't even manage national economies, much less try to coordinate central planners of countries with varying socioeconomic statuses. I agree with Rickards that the system is too complex, and a crisis will occur because of worldwide indebtedness brought on by 100 years of Keynesian academics. But I disagree with Rickards that the financial elite will maintain control. They will rewrite the rules, but confidence in them will be lost. People will turn to companies and corporations they have learned to trust for solutions instead of governments and international organizations. I expect major world tech players like Apple, Google, Amazon, Paypal, Microsoft, and startups (like some you have previously mentioned) will fill the void and benefit greatly.

  2. Great comments. If enough people feel the same way you do, then the outcome will probably be different than Jim is expecting. I think it actually fits in with his complexity theory because its another unknown factor in a complex system (part of the diversity of views). I will add that he did mention in his Dallas speech that how the public reacts to things is an unknown factor. I have come to appreciate Jim Rickards because he is not dogmatic and will adjust his ideas if the facts do not support them. Many people of his intellect are not willing to do that. It's pretty obvious that he is a brilliant thinker when you hear him in person. I always enjoy hearing his views on things.

    It will be interesting to see how it all plays out over time.