Adonis Diaries

Posts Tagged ‘Ben Bernarke

Black Swan model: Can rare catastrophic events in complex man-made systems be controlled?

Note:  The application of the Black Swan model to the “Arab” Spring revolts and in southern Europe, and the financial crisis will be explained in the follow-up article.

Warning! Pay closer attention to the “predictable” but unexpected rare calamitous events!

Black Swan is a term coined after discovering a black swan a couple of years ago.  People firmly believed that all swans were white:  A few might have observed a black swan but refused to identify it as a swan; or black swans are common sight in particular regions and people had no idea that black swans are considered rarity all over the world and might be purchased for their weight in gold to be raised in zoos!

You know the adage: “If an event can occur, it will happen“, meaning, it does not matter how low the predicted probability of occurrence of the rare events, it will strike “unexpectedly”.  If there is a chance in a million for an asteroid to smash onto earth, an asteroid will fall on our head: Asteroid did fall and transform earth several times in the last four billion years.

Just think on the even lower probability of “being who we are, as an individual”.  You could naturally have been an inanimate object, a plant, another animal species, born somewhere else, lived after birth, survived to be 5 year-old…

The Black Swan theory states: “In complex systems, especially man-made complex systems, it is not feasible to comprehend all the interactions among the hundred of variables affecting outcomes. In man-made systems, we have to allow natural fluctuations that are at work.  The rare predicted calamitous events  will strike unexpectedly, and we will fail to react accordingly and adequately if we consciously avoid to consistently take them into consideration in our analysis and reports.”

The unexpected events cannot be analyzed as odds in card games or casino games:  Human behavior with thousands of variability in moods, emotions, conventions, conviction, personal experiences… cannot be predicted as games are.

Natural sciences such as engineering, physics, chemistry, architecture, astronomy, planet explorations…are within the linear domain of thinking life and the universe.  Social and human sciences, epidemics, economics… are within far more complex domains, and the linear methods that mankind was trained to resolving problems and fluctuations are not adequate to be transposed to complex systems.

We are better equipped to predicting lunar eclipses, but not stock evolution, or foreign political upheavals.  It is NOT the “last grain of sand that crashed the structure or the bridge…”  The last grain was the catalyst for the failure but not the cause.  The fault is in the designed system, and not in its components.

For example, the “subprime” was not the cause of the financial crisis in 2008: It was just the latest among the catalysts of hazardous financial tools.  The cause was a faulty financial system that the political decision-makers failed to redesign in due time, requiring courageous and determined positions to ironing-out the serious problems growing out of proportions in risky behaviors, in an unregulated system, and in instantaneous pouring of massive liquidity to “stabilizing” a fragile outmoded designed and faulty system.

There is this trend of confusing catalysts with causes:  The designers of a system do not necessarily have this confusion, but the political decision-makers and owners of the systems that purposely confuse the general public as catastrophes strike.  Two psychological biases are at the sources of confusing catalysts with causes:

The first bias is our illusion in our capacity to control volatility in man-made complex systems. For example, we focus on the “normal working” of a system and we delete from our analysis and reports the minor fluctuations or rare events that are occasionally occurring.  In a sense, if there are no variations, there are no information worth controlling.  This tendency of feeling very comfortable dealing with only a “stable” system leads to forgetting the consequences of calamitous rare events.

The second psychological bias is the illusion that acting on a factor is better than doing nothing and letting the system work-out its fluctuations.  For example, authorities think or are pressured to think that they were elected or appointed to act and react on any variations, instead of doing nothing when fluctuations are within the norm.  Consequently, it is these actions that usually exacerbate a system going bad and out of proportion.  For example, Alan Greenspan and later Ben Bernanke lowering the central bank interest rates to almost negative rates in order to “stabilize” a fragile faulty financial system that needed major redesign.

The Fukushima disaster of the melting down of three nuclear reactors is a typical example.  It is NOT the earthquake and the tsunami that are the causes of the meltdown:  They were the catalysts.  The cause is a faulty designed system for generating electricity that is highly dangerous and built in a region frequently exposed to high levels of earthquakes and tsunami.  The economic risk trade-off was meant for normal functioning of a nuclear plant, and the consequences of  a serious event striking was swept under the carpet for three decades.

The owner of the power nuclear plant and the government blamed natural phenomena as the causes and toned down the lethal exposure to radiation for over a month.  Why?  It is better not scare the people! What?  It is better to let people die peacefully than give them the proper information to decide on their own plan of actions?

It is normal for mankind to be wary of the volatile aspects in life.  In the past, mankind managed to block-out drastic fluctuations from their consciousness in order to survive:  Mankind figured out the major trends in hazard in order to foresee and adopt simple models they could control for administering and managing their lives and the survival of the community.

The behavioral model should allow normal fluctuations in behavior to react within normal realities.

Simple models have been replaced by complex models, but within the past linear mentality and comprehension.  You may understand a few interactions among three main variables, but when man-made design inserted hundreds of volatile factors in a system, we should no longer expect to have total control on the complex system.

If we are not ready to design reasonable fluctuations in a system, and be ready to take seriously the problems of rare occurrences, and be trained to react to calamitous rare events, then it is wise to stick to simple systems that individual operators can understand and can control.

A man-made system should not be designed to eliminate all the faults, ill-behavior, and limitations of mankind, but to factor them in, and be trained to react adequately to these variations:  The operator has to be constantly motivated to learn and be vigilant to minor fluctuations and comprehend the main interactions.

Note 1: Nassim Taleb, a mathematician, was a trader and worked for 20 years as consultant to large investment banks in New York and London. He created Empirica LLC for trading.  He is engineering professor at the polytechnic institute at the University of New York.  Taleb published “Savage hazard” and “The Black Swan:  The power of the unpredictable.”

Note 2: Mark Blyth is a Scottish professor of international political economy at the university of Brown (Rhode Island).  He published “Great Transformation: Economic ideas and institutional change in the 20th century”.  A new book is to be released “Austerity: The history of a dangerous idea

Four years later:  World Financial and economic conditions deteriorating

In 2010, the US witnessed economic growth of 3.2% , customer consumption growth of 4.4%, and a doping increase of export of 8%.  Normally, the US should have paid this monetary creation with hyper-inflation, worse than what Germany experienced in 1920.  Chairman Ben Bernarke declared this year, 2011: “The US economic growth is deteriorating”.  What is happening?

In 2011, the world is experiencing unbriddled speculations that madly increased the prices of basic food ingredients, industrial interests sacrificed in Europe, and the Arab world witnessing massive upheavals.  The people in Spain, Portugal, and Greece are emulating the Arab tactics for non-violent sit ins in main locations and demanding reforms in the priority of budget cuts:  Shifting the focus from benefiting the rich classes to the common people.

The rest of the world has decided to counter-attack constructively to US monetary policies of dumping worthless dollars.

Since the dollar is still the world currency reserve, it is the rest of the planet that is subjected to inflation.  Edouard Tetreau, an ex-financial analyst consultant, wrote an essay “As the dollar kills us” affirming that the dollar is currently the main enemy.  The French Edouard said: “In order to relaunch its economy, without paying the price, or tightening its budget cuts, or fighting inflation, the USA managed to export all the problems to the rest of the world.”

If the US can sustain a budget hole of $1.4 trillion in 2010, quickly reaching two trillion in 2012, the Federal Reserve (US central bank) was conducting a ludicrous monetary policy:  It loans to banks at real negative interest rate and keeps the money press in full work.  The FED has surpassed China in February as the number one holder of US Treasury Bonds.

The International Monetary Fund (IMF) is admitting: “Four years after the financial crisis, confidence in the stability of world banking system still need to be entirely restored.”  What Ben Bernarke qualified as as “the worst financial crisis in world history” did not generate any penal sanctions to Goldman Sachs, Morgan Stanley, JP Morgan.  Actually, these falty financial institutions received bonuses for the crisis.

Three years of G20 meetings and reunions conserved intact the flammable system.  Andrew Cheng, first counselor of the Chinese Commission on banking regulation said:  “it is a case of the financial institutions capturing and dominating the political systems in the developed States.”

China decided to react constructively of the worthless dollar by focusing its growth in its internal market: Agricultural lands, infrastructure, ports, mining, social development…

Edouard Tetreau suggest that the rest of the G18, excluding US and China, that weight twice heavier economically and financially counter with the following remedies:

One: Delocalization and reforming the market of essential prime agricultural and energetic products, which are actually based in New York and Chicago.

Two: Assuming the instoration of financial and commercial protectionism to challenge the dumping of US dollars and Chinese social dumping.

Three: Delocalization, outside the US, of the World Bank and the IMF.

Four: Replacing the dollar with a real world currency.

Note:  Edouard Tetreau published “20,000 billion dollars” in 2010.

The greatest illusionists; (September 13, 2009)

The Federal Reserve, the World Bank, the International Monetary Fund, the European Central Bank, The Central Bank of France, and the Central Bank of Germany are spreading false data of economic recovery and financial system improvements, with the main target of cheating the public in order to regain “confidence” on the archaic liberal capitalist system.

For a year now, no substantive regulations on liberal capitalism have been instituted.  The Chairman of the Federal Reserve Ben Bernanke is at it again; he said lately “We should not attempt to impose on credit lenders heavy restrictions that might prevent the development of new financial products and services in the future. We all know that the improvement of easier access to credit has reduced costs and widened the range of choices.”  Are not the liberal new financial gimmicks for easier credit that brought on the crash of 2008 and the several crashes before it?

What “confidence” is these great illusionists trying to resurrect from the tomb without a clear alternative financial system?  So far, bonuses are extended to the financial acrobats crossing dry rivers while employees are sinking in troubled water and not finding decent jobs.

The USA is experiencing an official rate of unemployment of 10%  (the actual rate is hovering around 15%) and the European States are witnessing even higher rates of unemployment, especially in Greece, Spain, Ireland, and Portugal. For 2010, the International Organization of Labor (IOL) is expecting an additional 60 millions of unemployed and an additional 200 millions of people earning below two dollars a day.

The States of California, Illinois, and New Jersey have declared bankruptcy; they lost over 30% of their assets during the financial crash.  These States refused to increase taxes for decades and they are no longer able to increase taxes because of their restricting legislative structures. The Security and Exchange Commission (SEC) is allocated a mere budget of one billion dollars to spend on 3,500 employees. The same SEC that failed to uncover Madoff’s practices for over 30 years and even asked for his expertise many times! There is this joke in the financial circle of Shadock maxim “The more frequently you fail, the higher the odds for success in the future”.

There are several economic time bombs strewn around; they may blast one after another or all together. Among these time bombs we can explain the following: Obligatory Crash, Effective increase of interest rates, Refinancing of public dept, Monetary over valuation, and Newer and botoxed up (lifting) exotic financial derivatives.

The public debts of the USA, France, and Britain are expected to reach 90% of the GNP in a couple of years; Japan will hit the 200% mark. Obligatory Crash is more imminent than forecasted previously. The real values of the treasury bills of these nations designed to refinance the public dept will collapse abruptly.  Chinese households have been saving for two decades and accumulated three folds savings during the last 7 years; these savings are re-invested in purchasing treasury bills of the developed States.

Pretty soon, the citizens of the developed nations will start bypassing their State middlemen and purchase directly Chinese treasury bills for higher returns; especially that the Chinese currency is endemically undervalued and cannot but goes up. Then, what will happen?  Would the USA declare the Chinese treasury bills illegal or not marketable in the US market?  The USA did that previously with other less powerful nations, but antagonizing China is a different ball game.

Effective increase of interest rates has been eating up any economic improvement in the indebted nations. The price of obligations has been decreasing. Let us say if an obligation returned $30 on the thousand and it is re-purchased at half the price for the same return, then the State is effectively paying $60 for the thousand. Thus, with the doubling of the interest rate, States will not find takers for new issues of obligations but by offering the higher interest rate.

When allowed, central banks of States may refinance public debts by purchasing titles on the open market and, thus sustain the prevalent interest rate.  This process is in fact creating new money printing and devaluing the currency value.

The developed nations have  over valuated currencies because they are unable to compete in other emerging markets like China, India, and Brazil. The exterior balance of commerce is thus in deficit and the currency keeps over valuating; it is a vicious cycle unless the developed nations reduce drastically the price of their products to be able to compete.  China is able to keep its currency under valued simply because it can afford to sell at competitive prices.

Before WWI, the economic principle was “Demands carry the economy”.  Then this principle was upturned; it now states “Offers carry the economy” which means “We produce and then we find ways to encourage consumers to purchase.  We entice the consumers by promotional gimmicks, by much lower prices, by creating new trends of standards of living, and by lavishing plenty of credits.”

It worked for a while until what is being produced is getting too expensive, of lower quality, and basically not that essential in tight financial downturns.  How about educating the consumers of what is essential for resuming a decent life without the faked propaganda of what constitute a “high standard of living”?

Note: I read lately that 48 States in the US are bankrupt and the real deficit is 56 trillion instead of the official 13 trillion.

The greatest illusionists; (September 13, 2009)

 

            The Federal Reserve, the World Bank, the International Monetary Fund, the European Central Bank, The Central Bank of France, and the Central Bank of Germany are spreading false data of economic improvements with the main target of cheating the public to regain “confidence” on the archaic liberal capitalist system.  For a year now no substantive regulations on liberal capitalism have been instituted.  The Chairman of the Federal Reserve Ben Bernarke is at it again; he said lately “We should not attempt to impose on credit lenders heavy restrictions that might prevent the development of new financial products and services in the future. We all know that the improvement of easier access to credit has reduced costs and widened the range of choices.”  Are not the liberal new financial gimmicks for easier credit that brought on the crash of 2008 and the several crashes before it?

            What “confidence” is these great illusionists trying to resurrect from the tomb without a clear alternative financial system?  So far, bonuses are extended to the financial acrobats crossing dry rivers while employees are sinking in troubled water and not finding decent jobs. The USA is experiencing an official rate of unemployment of 10% and the European States even higher rates. For 2010, the International Organization of Labor (IOL) is expecting an additional 60 millions of unemployed and an additional 200 millions of people earning below two dollars a day.

            The States of California, Illinois, and New Jersey have declared bankruptcy; they lost over 30% of their assets during the financial crash.  These States refused to increase taxes for decades and they are no longer able to increase taxes because of their restricting legislative structures. The Security and Exchange Commission (SEC) is allocated a budget of one billion dollars to spend on 3,500 employees. The same SEC that failed to uncover Madoff’s practices for over 30 years and even asked for his expertise many times! There is this joke in the financial circle of Shadock maxim “The more you fail the higher the odds for success in the future”.

            There are several economic time bombs strewn around; they may blast one after another or all together. Among these time bombs we can explain the following: Obligatory Crash, Effective increase of interest rates, Refinancing of public dept, Monetary over valuation, and Newer and botoxed up (lifting) exotic financial derivatives.

           

            The public debts of the USA, France, and Britain are expected to reach 90% of the GNP in a couple of years; Japan will hit the 200% mark. Obligatory Crash is more imminent than forecasted previously. The real values of the treasury bills of these nations designed to refinance the public dept will collapse abruptly.  Chinese households have been saving for two decades and accumulated three folds during the last 7 years; these savings are re-invested in purchasing treasury bills of the developed States.  Pretty soon, the citizens of the developed nations will start bypassing their State middlemen and purchase directly Chinese treasury bills for higher returns; especially that the Chinese currency is endemically undervalued and cannot but goes up. Then, what will happen?  Would the USA declare the Chinese treasury bills illegal or not marketable in the US market?  The USA did that previously but antagonizing China is a different ball game.

            Effective increase of interest rates has been eating up any economic improvement in the indebted nations. The price of obligations has been decreasing. Let us say if an obligation returned $30 on the thousand and it is re-purchased at half the price for the same return then the State is effectively paying $60 for the thousand. Thus, with the doubling of the interest rate States will not find takers for new issues of obligations but by offering the higher interest rate.

            When allowed, central banks of States may refinance public debts by purchasing titles on the open market and thus sustain the prevalent interest rate.  This process is in fact creating new money printing and devaluing the currency value.

            The developed nations have monetary over valuated because they are unable to compete in other emerging markets like China, India, and Brazil. The exterior balance of commerce is thus in deficit and the currency keeps over valuating; it is a vicious cycle unless the developed nations reduce drastically the price of their products to be able to compete.  China is able to keep its currency under valued simply because it can afford to sell at competitive prices.

 

            Before WWI the economic principle was “Demands carry the economy”.  Then this principle was upturned; it now states “Offers carry the economy” which means “We produce and then we find ways to encourage consumers to purchase.  We entice the consumers by promotional gimmicks, by much lower prices, by creating new trends of standards of living, and by lavishing plenty of credits.” It worked for a while until what is being produced is getting too expensive, of lower quality, and basically not that essential in tight financial downturns.  How about educating the consumers of what is essential for resuming a decent life without the faked propaganda of what constitutes a “high standard of living”?


adonis49

adonis49

adonis49

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