"Trade-Off": A Study In Global Systemic Collapse

Tyler Durden's picture




 

And now a little something for everyone who consistently has a nagging feeling that at any second the world is one short flap of a butterfly's wings away from complete systemic disintegration: according to David Korowicz of FEASTA, and his most recent paper: 'Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse." that just may be the case.

Without further ado, we hand over the mic to the author:

This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supplychains globally, even where buyers and sellers are linked by solvency, sound money and bank intermediation. The cross-contagion between the financial system and trade/production networks is mutually reinforcing.

 

It is argued that in order to understand systemic risk in the globalised economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localisation of production and concentration within key pillars of the globalised economy have magnified global vulnerability and opened up the possibility of a rapid and large-scale collapse. ‘Collapse’ in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognised by policy-makers nor are they reflected in economic thinking or modelling.

 

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy.

 

The argument that a large-scale and globalised financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a largescale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

 

We consider one scenario to give a practical dimension to understanding supply-chain contagion: a break-up of the Euro and an intertwined systemic banking crisis. Simple argument and modelling will point to the likelihood of a food security crisis within days in the directly affected countries and an initially exponential spread of production failures across the world beginning within a week. This  will reinforce and spread financial system contagion. It is also argued that the longer the crisis goes on, the greater the likelihood of its irreversibility. This could be in as little as three weeks. This study draws upon simple ideas drawn from ecology, systems dynamics, and the study of complex networks to frame the discussion of the globalised economy. Real-life events such as United Kingdom fuel blockades (2000) and the Japanese Tsunami (2011) are used to shed light on modern trade vulnerability.

Think of the attached 78-page paper as Nassim Taleb meets Edward Lorenz meets Malcom Gladwell meets Arthur Tansley meets Herman Muller meets Werner Heisenberg meets Hyman Minsky meets William Butler Yeats, and the resultant group spends all night drinking absinthe and smoking opium, while engaging in illegal debauchery in the 5th sub-basement of the Moulin Rouge circa 1890.

The final product is frightfully spot on and should be read by every person even remotely close to setting policy (which is why it won't be).

Another rather notable excerpt dealing with financial system supply-chain cross contagion:

Something sets off an interrelated Eurozone crisis and banking crisis, a Spanish default say, which spreads panic and fear across other vulnerable Eurozone countries. This sets off a Minsky moment when overleveraged speculators in the banking and shadow banking system are forced to unwind positions into a one-sided (sellers only) market. The financial system contagion passes a tipping point where governments and central banks start to lose control and panic drives a (positive feedback) deepening and widening of the impact globally. In our tropic model of the globalised economy, the banking and monetary system keystone hub comes out of its equilibrium range, crosses a tipping point, and is driven away by positive feedbacks to some new state.

 

This directly links to another keystone-hub, production flows. Failing banks, fears of currency re-issue, fears of further default, collapse in Letters of Credit, and growing panic directly quickly shut down trade in the most affected countries. As the week progresses factories close, communications are impaired, social stress and government panic increases. After a week almost all businesses are closed, there is a rising risk to critical infrastructure.

 

Almost immediately internal trade and imports stops in the most affected countries, and there is impairment in a growing number of other countries. Trade is impaired globally via a credit crunch. This undermines exports from some of the most trade-central countries, with some of the most efficient JIT dependencies in the world. This cuts inputs into the production and trade into countries that were initially weakly affected by direct financial contagion. Globally, the spread of trade contagion depends on complexity,  centrality, and inventory times and once a critical threshold is passed spreads exponentially until the effect is damped by a large-scale global production collapse (implying another keystone-hub, economies of scale is driven out of equilibrium).

 

Trade contagion and its implications feed back into financial system contagion, helping drive further disintegration. The interacting and mutually destabilising effects of keystone-hubs coming out of equilibrium destroy the equilibrium of the globalised economy initiating a systemic collapse.

 

Growing risk displacement in an increasingly vulnerable system is increasing the risk of system failure. Once the financial system contagion crosses a particular threshold the de-stabilisation of the globalised economy will be exceedingly difficult to arrest; this point may be in as little as ten days. Once a major system collapse occurs, scale, hysteresis, entropy, loss of critical functions, recursion failure, and resource diversion is likely to ensure that the features associated with the previous dynamic state of the globalised economy can never be recovered.

The above explains why the central planners of this world, all of them well-aware of the implications of what has just been said, will literally fight to the death to prevent the global system from reacquire its balanced natural state, which for 30 years they have been pushing further and further away from in other to perpetuate as long as possible, an unstable status quo, which has benefited a disproprtionately smaller number of systemic participants, and has lead the system far beyond its tipping point level. Sadly, the system will eventually regain balance: that is what nature dictates. When it does, a politically correct way of saying what happens it that "the previous dynamic state of the globalised economy can never be recovered" while a less PC framing would be "all hell will break loose."

The author continues:

We have outlined how the risk of a major shock arising from decades of credit expansion and imbalances is growing. We have also seen that we could expect a similar shock from the effects of peak oil on the economy. What unifies both is a catastrophic collapse arising from a loss of confidence in debt, and the solvency of banks and governments. What would be unique is the scale of the shock and its ability to strike at the heart of the world’s financial system. But the implications are not just within the financial and monetary system. They would immediately affect the trade in real goods and services. As our economies have become more complex, de-localised and high speed, the implications on supply-chains could be rapid and devastating.

 

There are three general points that are worth noting. Together they point to the likelihood that the crisis whenever it comes can be expected to be very large and society unprepared.

 

The first is temporal paralysis:

 

As financial and monetary systems become more unstable, the risks associated with doing anything significant to change or alter the course increase (see also the discussion of lock-in in the final section). In addition, the diversity of national actors, public opinion, institutional players and perceptions works against a coherent consensus on action. Therefore the temptation is to displace immediate risk by taking the minimal action to avert an imminent crisis. This increases systemic risk. Some steps in the evolving crisis might be handled, for example, a Greek default. However, each new iteration of the crisis is likely to be bigger and more complex than the one before, while the system is becomes ever less resilient.

 

A second issue is what might be called the reflexivity trap:

 

The actions taken to prevent a crisis, or preparations for dealing with the aftermath of a crisis, may help precipitate the crisis. Therefore to avoid precipitation, the preparation has to be low key and below the radar of the public and markets. This limits the extent and scope of preparation, increasing the risk of a chaotic and slow response.

 

The final point is about black swans & brittle systems:

 

The growing stress in our very complex globalised economy means it is much less resilient, see the discussion in section 3.1 and figure 2. Thus a small shock or an unpredictable event could set in train a chain of events that could push the globalised economy over a tipping point, and into a process of negative feedback and collapse.

 

One cannot predict how such a financial and monetary collapse will occur, or when. However, in this section we are considering a scenario, ideally one that in the light of what we know of the economic conditions sketched earlier seems at least reasonable. This scenario should be considered a warning, but also a more general guide to how supply-chain cross contagion might operate in any financial/ monetary collapse.

Everyone who is curious how the European endgame will (not may) plays out (especially all the bureaucrats at the ECB and the Bundesbank) should read what ensues. Because it is not pretty. Here is a snapshot:

Globally, monetary systems would become increasingly opaque. A lack of money, operational banks, currency re-issue, inflation and hyper-inflation expectations would become a reality in many advanced economies in and outside the Eurozone. Debt deflation would in its formal sense start to die-nobody would (even if they could) pay down debt, nor would there be any credit. Production would be increasingly shut down, while complex societies got a rapid lesson on the extent of system dependency.

 

The perception of continued socio-economic disintegration would alter behavioural responses such as trust radii and social discount rate.

 

Finally, financial system supply-chain cross-contagion is a re-enforcing negative feedback driving the globalised economy away from its stable state and into a new collapse one.

Granted the above is dubbed a worst-case outcome, but one which is inevitable unless authorities admit that it is a distinct possibility and actively prepare a contingency plan, which however in itself is somewhat self-defeating because as the Eurozone crisis has demonstrated the mere admission of reality is enough to propagate the system into a whole new level of unsustainability, and so on until the system cross a final threshold beyond which there is no salvageability. The author himself acknowledges this:

We do not like to think of ourselves as potentially irrational herd animals (that will be the Jones’s). We seek narrative frameworks that purport to explain our good fortune, ideally in ways that flatter. Reinhardt and Rogoff called it the This Time It's Different syndrome  as each age sought to deflect warnings by arguing we're smarter now, better organised, or living in a different world. Just as the sellers of an overpriced home will convince themselves that it was their interior decorating skills not an inflating bubble that got them the good deal.

 

Of course warnings may keep coming, and almost by definition, from the fringes. When assessing risks that challenge consensus, people are more likely to defer to authority, which generally sees itself as the representative of the consensus. Furthermore, as a species with strong attachments to group affirmation, being wrong in a consensus is often a safer option than being right but facing social shaming, or especially if found to be wrong later.

 

Far better to say: “Look, don't blame me, nobody saw this coming, even the experts got it wrong!”

 

But even if we can appreciate a warning, the inertia of the status quo generally ensures acting on such warnings is difficult. In general we chose the easiest path in the short-term, and the easiest path is the one we are familiar and adaptive with. We would rather put off a hard and high consequence decision now, even if it meant much higher consequences some time in the future. However, if each step on the path of least resistance is a step further from where we ideally should be, the risks associated with doing anything rise as the divergence is so much wider. Eventually one's bluff may be called, but not yet, and hopefully on somebody else’s watch.

 

The consensus can often be correct and the marginal voices may be deluded. The point for the risk manager is to try and step through cognitive and social blind-spots by first recognising them. This is particularly true if the risks (probability times impact) considered are very high.

 

Unfortunately, it is very clear that we have learned almost nothing general about risk management as a societal practice arising from the financial crisis. We have merely adopted a new consensus, with a questionable acknowledgement that we will not let this type of crisis happen again. However, the argument in this following report is that we are facing growing real-time, severe, civilisation transforming risks without any risk management.

Which brings us to the conclusion:

We are locked into an unimaginably complex predicament and a system of dependency whose future seems at growing risk. To avoid catastrophe we must prepare for failure.

 

We are entering a time of great challenge and uncertainty, when the systems, ideas and stories that framed our lives in one world are torn apart, but before new stories and dependencies have had time to evolve. Our challenge is to let go, and go forth.

 

Our immediate concern is crisis and shock planning. It should now be clear that this is far more extensive than merely focussing on the financial system. It includes how we might move forward if a reversion to current conditions proves impossible. That is we also need transition planning and preparation. Even while subject to lock-in and the reflexivity trap, this will be most effective if it works from bottom-up as well as top-down.

 

Finally, neither wealth nor geography is a protection. Our evolved co-dependencies mean that we are all in this together.

Everyone who wishes to know what will happen unless everyone is aware of what may happen, should read the attached paper.

Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse (pdf)

 

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Sat, 07/14/2012 - 23:05 | 2616736 Imminent Collapse
Imminent Collapse's picture

So, it's true. Just as we suspected.

Sat, 07/14/2012 - 23:09 | 2616742 q99x2
q99x2's picture

Nah, It would be true if the same guy didn't own everything and there were actually other people with more than a food stamp and piece of fire wood that had something left to lose.

Sat, 07/14/2012 - 23:15 | 2616744 nope-1004
nope-1004's picture

Since inception, banks created a system of slavery.  Everyone finances EVERYTHING.  Once the lending market became saturated in 2000, more slaves were needed, so lending standards were lowered and easier credit was made available to the walking dead.  The banks created this disaster, thinking that infinite compounding returns based on leverage and shadow loans can be made in a finite world.  Duh....

 

Sat, 07/14/2012 - 23:59 | 2616791 Dr Benway
Dr Benway's picture

I'm not sure if I agree that banking by definition is an evil scam and so forth. The way it works now, sure of course it is. But some sort of banking and finance system seems necessary to me, just not this squiddy crony klepto banking system we have now.

 

http://s1144.photobucket.com/albums/o489/_DrBenway/

Sun, 07/15/2012 - 00:19 | 2616816 FreedomGuy
FreedomGuy's picture

I agree with you DB. I think banks are the bartenders that keep serving up drinks to the drunks (governments). The drunks have police and guns by the way, too. They also set all the rules by which the bar runs so it is hard to piss them off. Without consequence. The deal is the bartender lets them run an infinite tab for fewer bad bar regulations.

Ther is nothing inherently wrong with banking. They play the crony-socialist game as it exists and to whatever advantage they can. So do all other industries.

Sun, 07/15/2012 - 00:20 | 2616823 Dr Benway
Dr Benway's picture

That's an excellent analogy! Reminds me of the Sopranos when Tony nearly eats that restaurant into the ground.

Sun, 07/15/2012 - 00:26 | 2616832 mcguire
mcguire's picture

it is incredibly naive to think that we are heading into system collapse "without managment"..  they have been planning... oh, have they been planning.   remember the missing $2 trilion announced by rumsfeld on the eve of 9/11??? FEMA????? continuity of goverment has been the shadow boom industry of the past decade.  

Sun, 07/15/2012 - 00:34 | 2616844 Dr Benway
Dr Benway's picture

Come on, do you really believe all these asshole bankers meet in a secret location wearing robes and performing rituals to Satan?

 

Or do you think they are just fools, gamblers who painted themselves into a corner after years of profligacy, regular people who just got perverted by greed?

 

I tend to lean toward the latter explanation.

Sun, 07/15/2012 - 00:40 | 2616854 mcguire
mcguire's picture

they did war games on this last year!!!  of course they are not fools... again, it is naive to think that this is not being managed.. http://www.theblaze.com/stories/unified-quest-2011-pentagon-war-games-u-...

 

Sun, 07/15/2012 - 01:57 | 2616916 Dr Benway
Dr Benway's picture

Well OK I guess I'll have to check that out.

 

It's funny though, everywhere else I'm considered the lunatic fringe, on Zero Hedge I'm a moderate.

Sun, 07/15/2012 - 02:07 | 2616923 putaipan
putaipan's picture

very good dr. benway mcguire.... now we are getting somewhere . as the fields of conspiranoia and deitrology are defined and come closer together- greed fear ignorance v.s. control omnipotence intelligence- we will have to decide which jubillee to choose from- theirs or ours. economic escatology indeed!

Sun, 07/15/2012 - 07:14 | 2617026 schismjism
schismjism's picture

Here is an interview with him on the topic... it's pretty good... well worth the listen...

 

http://fromalpha2omega.podomatic.com/player/web/2012-04-17T16_29_23-07_00

Sun, 07/15/2012 - 09:39 | 2617118 Comay Mierda
Comay Mierda's picture

this organization seems like a bullshit soros/rockefeller front

preaching about climate change and how we are all fucked unless we pay carbon taxes to these ass clowns (nevermind the climate-gate emails and the real research done by real scientists showing the Earth is cooling)

http://www.feasta.org/2012/07/13/climate-change-and-peak-oil-two-sides-of-the-same-coin/

they are so clever they even fooled ZHers. (is that saying much lately?)

Sun, 07/15/2012 - 10:13 | 2617149 economics9698
economics9698's picture

You ZH’ers get caught up in some banking bull shit sometimes.  Hang the central bankers; go back to gold and silver, 100% fractional reserve banking.  Life goes on.

Sun, 07/15/2012 - 11:24 | 2617262 mcguire
mcguire's picture

comay, i thought the same thing.. the impact of the article, however, stays the same.. it means that it goes from the 'independent analysis' category to the 'predictive programming' category... the 'scariness' of the article stays the same. 

one thing is for sure, it explains how such an obviously smart guy could "overlook" the existence of the massive 'continuity of government' efforts going on underneath the scenes here and around the globe.. 

as for ZH: the ZH thesis has never truely embraced the implications of all of the individual pieces of evidence it churns out on an hourly basis.. that is, the global conspiracy and where it is leading us.  the ZH thesis is this; corporate greed and the "wrongness" of keynsianism will lead to system collapse.  the global conspiracy thesis is this; global actors expect and are expediting system collapse, because it is only from chaos that the new world order can be built.. "ordo ab chao". 

Sun, 07/15/2012 - 11:39 | 2617279 Comay Mierda
Comay Mierda's picture

+666

Sun, 07/15/2012 - 11:45 | 2617292 cleverlemming
cleverlemming's picture

I counted 14 references to peak oil. The sky is falling!

Mon, 07/16/2012 - 19:48 | 2622256 dvfco
dvfco's picture

Great document. I read it from cover-to-cover.  However, it was very repetitive.  The writer of the abstract couldn't have done a better job in summarizing the thesis.  To me, the author is correct.  However, the most rural areas will not suffer in any way like the cities.  If you think the song, "Country Boy Can Survive" is a joke, thye're not kidding.  People growing up in the middle of nowhere aren't survivalists, but they sure as heck can surivive.  Their idea of a weekend of fun is hunting, fishing, cooking-out, camping-out, swimming, etc.  To every urbanite, that's their idea of hell.  I picture 30 year-old new-age yuppies trying to make hotel reservations out in the country when the crash does come.

You only need on thing to survive a crash - remember that EVERYTHING TASTES LIKE CHICKEN!

Sat, 07/21/2012 - 19:03 | 2639408 Lednbrass
Lednbrass's picture

In such a situation any yuppies heading out to the country should not even bother. They will have a tiny chance of survival where they are but none showing up in a strange area during tough times.

Sun, 07/15/2012 - 11:50 | 2617293 cleverlemming
cleverlemming's picture

oops, sorry

Sun, 07/15/2012 - 10:33 | 2617183 Jake88
Jake88's picture

it is completely fubar

Sun, 07/15/2012 - 11:56 | 2617339 The Big Ching-aso
The Big Ching-aso's picture

 

 

This is one hell of a camel.  2 ton straws one after another & it's still standing.

Sun, 07/15/2012 - 16:00 | 2618178 Michael
Michael's picture

Does this mean people in the USA are going to have to make shoes in our own country again? Oh the horror. The Horror.

Sun, 07/15/2012 - 21:20 | 2618986 Bringin It
Bringin It's picture

I have converted to flip-flops.

Sun, 07/15/2012 - 14:00 | 2617803 Nachdenken
Nachdenken's picture

"Greed fear ignorance vs. control omnipotence intelligence".  I should have known : intelligence is on the other side.

Sun, 07/15/2012 - 09:31 | 2617105 kraschenbern
kraschenbern's picture

Here's a thought.  Intelligent beings tend to be "self organizing".  Lots of possible organizations, cliques, cabals, secret societies...Every possibility becomes an actuality.   All systems seem to have the trait of self-perpetuation and striving for dominance.  We live in interesting times.  No further explanation is required.  Just pick a team to join (or not).

Bankers team in the lead at the moment.

Sun, 07/15/2012 - 11:31 | 2617271 mcguire
mcguire's picture

i used to believe in systems theory.. i stopped with niklas luhmann, thinking he had adequately explained a theory of everything, much in the terms you just described.  then came 9/11.  this proved to me something completely different, the existence of the 'occult agenda'..  the ugly fact is that the higher you go, all roads lead to luciferianism.  

http://www.mefeedia.com/watch/32463793

if you watch the above video and reorganize what you know about world history, systems theory makes less sence, and what the bible says makes more sense.  

Sun, 07/15/2012 - 11:14 | 2617246 JPM Hater001
JPM Hater001's picture

"everywhere else I'm considered the lunatic fringe, on Zero Hedge I'm a moderate."

Paraphrasing caddie shack-
Don't sell yourself short doc. You're quite the lunatic.

Sun, 07/15/2012 - 02:26 | 2616924 CompassionateFascist
CompassionateFascist's picture

  And now, let's cut through the complexity with a little parable. Around about 2006, I was sitting in my cab having a conversation with one of the company big wheels, a plankholder with 20% of the stock who drove occasionally because he enjoyed it. He was also a local real estate tycoon with c. 6 heavily mortgaged rental properties. I told him in so many words that the entire political economy was a debt-financed Ponzi scheme, and that housing prices were in a gigantic EZ-credit forced bubble. He said, "No, no. There are safeguards now. We could never have another Depression." This astute individual is now living in his mother's garage. As for me, I continue to invest in lead - .308 for my lovely M1A - because we are all about out of time. 45 days and counting to the IranWar. Then it all goes.

Sun, 07/15/2012 - 05:15 | 2616976 Vic Vinegar
Vic Vinegar's picture

Bullshit.  No way you had a cab ride and didn't bring up the Jews.

Sun, 07/15/2012 - 09:45 | 2617128 FEDbuster
FEDbuster's picture

Vic read it again, he was the cab driver talking with one of the Cab Co. owners.

Stocking up on .308 is a risk and counter party free investment.  Don't forget some food and a water filter, too.

Sun, 07/15/2012 - 14:26 | 2617310 cleverlemming
cleverlemming's picture

This started off like a Thomas Friedman anecdote.

 

So, he asked me, "why don't poor people want to work?" And that's when it struck me. The world is a giant tampon. Only flattened.

Sun, 07/15/2012 - 04:37 | 2616964 AUD
AUD's picture

The latter explanation is the correct one Dr Benway. What you need to understand is that it is the government which allows the gamblers to paint themselves into a corner, then gives them a pass out of their predicament with its monopoly over the monetary system.

It does it for the simple reason that the government has been bankrupt since at least 1918. It relies on the banking system to monetise its debt, since that is what banks do - monetise debt. If the present monetary system dies, so does the government. These people think they are gods, look at Kevin Rudd or Hillary Clinton in the US. Gods are immortal.

Re. your article, this Nicholas Bolton fellow, wasn't he the one who tried some pump & dump scam with a insolvent construction company a few years ago?

Sun, 07/15/2012 - 05:39 | 2616982 Dr Benway
Dr Benway's picture

Yes that's right, he got the board to greenmail him at other stockholders expense, by acquiring enough of an interest to assure mutual destruction.

 

The listed investment sector is in serious serious Minsky-moment level trouble so it's not surprising that dubious characters are drawn to it. The sector has been relying on issuing truckloads of shares to fund the ponzi, but it is getting harder to do so.

 

Also, it is questionable whether even ASIC, with its RainMan-esque levels of incompetence, can let this go on much further. The investment companies are paying dividends twice of what they earn, covering the difference with share issues, then bragging about their dividend yield. They have bought around 20% of each other to prop up share prices.

Sun, 07/15/2012 - 05:59 | 2616990 AUD
AUD's picture

The sector has been relying on issuing truckloads of shares to fund the ponzi, but it is getting harder to do so.

That sounds exactly like the junior gold mining sector on the ASX. I've wondered for a while now about all this 'mining boom' talk when many of these 'juniors' are trading well below their 2008 lows. They are shit companies, all talk & no gold, & no dividends, but still a real mining boom should see their share prices doing well.

Sun, 07/15/2012 - 06:28 | 2617000 Dr Benway
Dr Benway's picture

I am not so sure that people will be so easily enticed back into shares in the foreseeable future. On a gut level, I think people are wising up to the scam. To achieve a global ramp big enough to make shares seem attractive, they would have to do the mother of all QEs, and they don't dare do that, because what if they try it AND IT FAILS? Then they would be staring into the abyss.

Sun, 07/15/2012 - 06:40 | 2617007 AUD
AUD's picture

Maybe, but its the notion of a Boom! I'm getting at. A Boom! - note the word BOOM - is a credit phenomenon. There is next to no credit issuance in the junior mining sector, thus I find it difficult to believe their really is a Boom!

I know there is a Boom! in government credit but that's global, except for Greece.

Sun, 07/15/2012 - 06:29 | 2617001 AUD
AUD's picture

One other thing. If these companies are inflating their share prices by buying each other up, they must either have the 'cash' or be pledging their 'assets' to some bank as loan collateral.

The Minsky moment might not just be the listed investment sector. In fact, you'll find a pile of the same shit on the balance sheet of the RBA. Not that they would admit it, but the Minsky moment might go all the way to the top.

Sun, 07/15/2012 - 06:41 | 2617009 Dr Benway
Dr Benway's picture

Well the Minsky moment I was referring to is for the subset of LICs that trade at a premium to NTA.

These companies buy a bunch of listed shares as assets, then issue their own shares which they trick granny-type investors into buying. (Yes its a tawdry racket. Truly lame.) The LICs try to push their share price above NTA, because that means scamming the granny double and getting an immediate hit of free money.

But if they manage to push share prices above NTA, that means that they will have to pay more in dividends. The equation they are trying to settle is this:

* Pay higher dividend yield than the company's assets generate

* Have a higher share price than the company's net tangible assets

* Have a higher dividend yield growth rate than that of the company's assets

* Have a higher share price growth rate than that of the company's assets

So by pushing their share price far above their NTA, they are sowing the seed of their own destruction, because that means that the high amount of dividend will necessitate a high stock issuance which in turn will lead to an even higher dividend payment next time. This feedback loop would at some point be irreversible.

Sun, 07/15/2012 - 07:02 | 2617021 AUD
AUD's picture

Understood but if these shares are listed, then the LIC's must have a bank account with which to by these shares. They either have the 'cash' or they are borrowing it 'on margin'. If the latter is the case, the bank has exposure to the credit of the LIC, an IOU of some kind.

What's the IOU of the LIC worth? I'll let you in on something. The RBA was massively exposed to LIC type credit in 2008, though maybe not the institutions you are talking about. That's why the RBA needed a multi billion loan from the Fed.

The Ponzi scheme goes right to the top. Minsky Moment?

Sun, 07/15/2012 - 07:34 | 2617034 Dr Benway
Dr Benway's picture

Aha now I understand what you are saying. That is a truly terrifying thought. Maybe I was very naive in thinking they wouldn't ramp each other with margin. But it would explain a great deal if you're right.

 

And if all shares are propped up by similar antics, not just LICs, then we are of course facing not the third largest Ponzi in history but the financial apocalypse when it all pops. Which I guess was the theme of the article.

Sun, 07/15/2012 - 07:48 | 2617016 Dr Benway
Dr Benway's picture

edit

Mon, 07/16/2012 - 13:51 | 2620919 Diogenes
Diogenes's picture

Not necessarily. They can buy some shares, pledge them as collateral to borrow money, use the money to buy more shares, pledge the shares as collateral to borrow money, and so on to infinity or 100:1 leverage.

 

Mon, 07/16/2012 - 23:41 | 2623070 thriftymost
thriftymost's picture

You never saw Eyes Wide Shut?

Kubrick was nobody's fool.  That flick was not just entertainment.

Sun, 07/15/2012 - 06:38 | 2617008 Lord Koos
Lord Koos's picture

Just because management is saved does not mean they will have the wit to do anything besides a knee-jerk security lock down, which is a reaction, not a solution.

Sun, 07/15/2012 - 10:34 | 2617175 Vooter
Vooter's picture

I think it's even more incredibly naive to think that when the collapse comes, it's going to be "managed." LOL...you might as well just be saying, "Don't worry--everything will be fine," or (as the article mentions), "This time it's different." Your "managers"--no matter how much money they have or how big their armies are--bleed just like everyone else, and when the day finally comes that their fellow humans are pointing guns in their faces and not backing down, they'll run for the hills, just like other nefarious "planners" have run for the hills throughout human history....

Sun, 07/15/2012 - 21:27 | 2618998 Bringin It
Bringin It's picture

Who said "Never let a crisis go to waste."?

Sun, 07/15/2012 - 01:04 | 2616879 Mr. Fix
Mr. Fix's picture

Complete and  total self-reliance will probably be one's only means of survival.

 Certainly, small communities that work together will survive.

 People who depend on banks, will be doomed.

 People who depend on a government handout, will probably die.

 Many many people will die,

 those that go out of their way to fight back, will also die.

 I'm betting survivability of what is coming will come down to a combination

 of being virtually invisible,

 off the grid( which would collapse anyway,)

 and being able to survive on the fruits of one's own labor.

 A total collapse is just that.

 Survival of the fittest.

 Although you can't prepare for each and every possible scenario,

 you can certainly  prepare for the most obvious ones. 

Sun, 07/15/2012 - 01:14 | 2616896 El Tuco
El Tuco's picture

A couple of weeks ago I had read the story of someone who survived for a little more than a year surrounded by enemy during the Bosnian War.

If things ever got that bad here in the USA, well gold isn't gonna help anyone make it through.

He mentioned that the only way you could survive was to be part of a larger group. Food and Ammo were the only things that mattered. They would whore out their own women for food and ammo.

The only people that made it were the ones in large groups. Anyone who wasn't , no matter how well armed they were or how much food they had were basically killed for it.

 

Sun, 07/15/2012 - 01:31 | 2616904 Dr Benway
Dr Benway's picture

You wouldn't happen to have a link by any chance? Sounds like an interesting read.

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