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Guest Post: Why Suppressing Feedback Leads To Financial Crashes
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Central-planning manipulation "works" by closing all the safety valves of market feedback, creating a dangerous but politically appealing illusion of stability and "growth."
If we see the economy as a system, we understand why removing or suppressing feedback inevitably leads to financial crashes. The essential feature of stable, robust systems (for example, healthy ecosystems) is their wealth of feedback loops and the low-intensity background volatility that complex feedback generates.
The essential feature of unstable, crash-prone systems is monoculture, an artificial structure imposed by a central authority that eliminates or suppresses feedback in service of a simplistic goal--for example, increasing the yield on a single crop, or pushing everyone with cash into risk assets.
Resistance seems futile, but the very act of suppressing feedback dooms the system to collapse.
Removing or suppressing feedback seems to work wonders because the systemic risks generated by this suppression are pushed out of sight. The euro is an excellent example of this dynamic.
The system of national currencies is in essence a gigantic feedback mechanism, as the relative value of a nation's currency reflects its cost structure, trade deficits or surpluses, fiscal deficits, interest rates, central bank policies and a host of other inputs.
A currency that is allowed to fluctuate acts as a "safety valve" feedback when an economy become imbalanced. If the costs of production in one nation are relatively high, its exports will decline and its imports will rise. This leads to large trade deficits, which (except in the case of the reserve currency, the U.S. dollar) lead to lower currency valuations, which feeds back into imports and exports: imports become relatively more expensive as the currency loses buying power internationally, and exports rise as the nations' goods and services become relatively less expensive to other nations.
The net result of this currency feedback loop is to lower imports and increase exports, bringing the trade deficit back into relative balance.
The euro effectively removed this complex feedback from all the economies that accepted the euro. This is the root cause of the European debt crisis: credit was allowed to reach insane levels of fragility and excess because the feedback that was once provided by national currencies and central bank/fiscal policies was removed from the system.
This is why claims that the European Central Bank (ECB) will "do whatever it takes" to maintain the euro's suppression of feedback are doomed to failure.Removing or suppressing feedback allows risk and structural imbalances to pile up to the point they threaten the entire system. This is the case in Europe, Japan, China and the U.S.
In Japan and the U.S., the central banks and fiscal authorities in the central state have suppressed market feedback by pushing interest rates to near-zero and then using the central banks' unlimited ability to create money to buy government bonds. This suppresses feedback from the bond market and from the political sphere, as cheap money and unlimited issuance of government debt (bonds) enables politicos to avoid painful restructuring and choices.
If you eliminate feedback from the markets, you get asset bubbles and huge deficits.
Those extremes goose "growth" for the short-term, but the suppression of feedback only dams up risks and imbalances: out of sight, out of mind. But the imbalances haven't vanished; they're piling up unseen in the system, where they eventually break out at the system's weakest point.
Central-planning manipulation "works" by closing all the safety valves of market feedback, creating a dangerous but politically appealing illusion of stability and "growth." But the consequences of removing or suppressing feedback are catastrophic longer term, as the imbalances and risks pile up unseen until they bring down the entire system.
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I don't know anything anymore, the whole thing is just fucking fucked.
C.H.Smith stating the bleeding obvious! Economics101 for Dummies. ONLY found here on the Hedge!
Lucky he's let us in on this little secret that nobody here has thought of yet! ... because ... obviously, none of the "White Shoe Boyz" have any idea either ... or else ... it's really part of a plan to deindustrialise** the West and bring on a 'New Order' out of 'The Chaos' cough 'Ordo ab Chao' cough....
</tinfoil shit>
** Not that it wouldn't have happened anyway - with the Western worker pricing him/herself out of the labour market - UNLESS CAPITAL had been invested in automated manufacturing and another way found to distribute the benefits among the sleeping population sitting in front of their idiot box, errr, society.
Time to put on some thinking caps, people, and to stop whingeing.
Hint: First step is SECESSION from the Federal Globalist Unions.
http://www.youtube.com/watch?v=LAf0QnLFS7Q
Wow so whipping the mule until it drops over dead might actually cause the mules death?
'The Fed is now the ultimate power in the universe'. Day late and a dollar short, many were saying that a LONG time ago and warning what would happen but everyone said they were crazy kooks...conspiracy wingnuts and whatnot.
Meh...humanity totaly deserves everything that's coming to it.
I agree. But, um.... this won't affect my Social Security, Medicare or EBT benefits, right? Because I was PROMISED those benefits and you can never take them away from me.
Full faith and credit, bubba!
Please do not worry.
"
"Meh...humanity totaly deserves everything that's coming to it."
To Hell with "Humanity" the evil do'er it deserves everything it gets and more!
What about you and me, do we deserve it too? Where did we go wrong?
1. You don't deserve anything.
2. You went wrong by participating in the system cause the system is rigged for takers and you most likely are a maker.
Everyone deserves everything....and BTW all this is irrelevant anyway since in about 8 billion years the sun will go supernova and engulf the earth anyway...totaly wiping out even the FED!
"... many were saying that a LONG time ago ..."
In the US since the beginning of the Republic.
It's in the Constitution: 'only gold and silver shall be used as money'
Ever hear the saying: "Not worth a Continental"?
The forefathers committed the "fiat money sin" during the American Revolution.
They intended that it not happen again by forbiding fiat money in the Constitution.
I'm just gonna put a brick on this leaky pressure release valve on the boiler...see, all fixed!
pile on.....the moar briiics...... the merrier......
Reminds me of episode where Archie Bunker sticks a penny in the fuse box to stop the circuit from breaking. It works... but it also causes a fire.
Well no shit, if my pain receptors for example are not working I have no idea how bad my hand is getting burnt when I have it on a hot plate. You may not feel it but the damage sure is real and eventually manifests itself in a dead useless hand at some point and/or elsewhere in the system like nerve and/or pain problems up the arm and into the shoulder. The analogy most certainly holds true here in the financial markets.
If you eliminate feedback from the markets, you must eliminate it from the alternative blogosphere too! Otherwise, there will be some....
cognitive dissonance... along the way to a perfect world of submission to the new ... Perfect World Ordu!
http://youtu.be/GiCDidzmmL8 \I.G.Y. (What A Beautiful World) - Donald Fagen (1982)'
Pt TWO of my daily dissent from the new perfecly boring world of the financialized ''all new\all the time -ZH-66.6/ see Pt ONE
3623027 here
So that the Ottomans, converted to the Sunni Islam of their conquered western Anatolian populace, through the slaves and technology transfers provided to them by their Khazarian slaver buddies, grew rich in weaponry and white women … from the west. ///while east of their stake, in the highlands and plains of greater Anatolia, a different crew cherished the old ways, of horse and sheep herds, hordes of black goat skin yurts crowding the horizon whilst the campfires of a thousand warrior clans converted to a militant Shia Islam still cherished the trances of their Siberian shamanistic lore, and worshipped viaa syncretic mixture of spiritual traditions liberally spiced with Sufi mysticism and the poetry of the steppes.
Qizilbashi(red headed ones)Shias… Aq Koyunlu(white sheep tribe) morphing into Alevis and other deviations of an Islam much changed from the Sunni orthodoxy have been the silent survivors of a Sunni terrorist continuum that suppressed divergent expression of Allah’s Grace… and had still lived on in strength in the Ottoman Empire as an embarrassing reminder to the crypto-jewish sabbateans who become the last Sultans’ executioners and inheritors of their competitors in the game of hiding behind orthodoxy, via the taqiyya path of "dissimulation, secrecy" which the Alevi Kurds and KaraKoyun peoples have used to preserve themselves in the face of Sunni Islamicist hegemony for centuries. The outlaw poets and savants of the Anatolian peasantry, like Pir Sultan Abda, Yunus Emre, and the other Rumi-like mystics of the traditions of the far Persian East were tolerated to a limited degree, but when no longer able to be amorphized into the Bektashi compromise, had to be eliminated as per the new ‘secular’ Ataturk state of mythic PanTurkism which brooked no deviations from it’s kabbalistic formula for modernization and destroying the underlying continuum of dissent that had always been the true current of Anatolian tradition… no matter who the current masters in Istanbul!
And that reprise of the unorthodox continuum of the true nature of the Anatolian historical framework… a mixture of peoples of Semitic, Turko-mongol, Persian, Arabic and Europoid descent, blended into a frisson of formerly Christic, aministic\shamanistic\ Muslimised but still unorthodox variations… is the key to understanding the present moment of incipient chaos which awaits at the gates of the fabled crossroads of empires on the Sea of Marmara!
Search out, on your own time, the story of the ‘Sivas massacre’ and the burning(at the stake)of the master of the saz, and his companions … for the ‘sin’ of divergence from the Salafist AKP style orthodoxy now being imposed(temporarily) pon our greatly unorthodox Anatolian resistance.Not that it matters, much... compared to the latest painting of the tape in Stocklanistan.
"Hey, what's goin on in the ME Tylers? Nuttin much... get a subscription to Stratfor or Debka if you really need to know... we don't go there no more!"
Surpressing feedback creates irrelevance.
When they want to, people find a way to have input and to be relevant. If one avenue is surpressed then they find another way. IMO, the reason the corrupt system has been allowed by the people to exist for so long is because people, as a whole, do not believe it has materially affected the IMPORTANT things in their lives.
When it becomes important then people "as a whole" find a way... and generally that surprises those who had previously believed that they "lorded over the "powerless" sheep".
Thanks, CHSmith. We have to analyze and understand how systems work in the real world, or modern society will continue blundering around until we destroy everything on the planet.
Reality is composed of systems, in which causal chains are not strictly linear. But we've been pushing and pulling linear levers to control reality, oblivious to the real world consequences.
We need to get it through our heads that the desired short-term results are paid for later by the long-term catastrophic results.
Failure to take into account feedback mechanisms is a large part of the reason why WASS.