Friday, September 3, 2010

The Limits to Complexity

For anyone interested in seeing the sources for facts/data presented in this essay, I can send you the Word document with references if you let me know.

A Fundamentally Flawed Perspective

     The current U.S. administration has its eyes dead set on more fiscal stimulus and/or monetary easing to counter the ever-growing threat of severe deflation on the horizon. Despite the trillions added to our Treasury and Fed’s balance sheets in 2008-09, the 2010 Q2 GDP number is anemic (1.6%) even when it can be trusted as accurate. Most of the ever-optimistic (and late-to-reality) American investment banks have significantly revised their estimates for 2010 H2 GDP down to around 2%, while most serious analysts agree it will be closer to a negative print. Existing and New Homes sales in July 2010 have experienced record declines in the absence of government subsidies (~27% and ~35%). Unemployment remains significantly higher than reported, as U-6 hovers at 17% and shows no signs of improving (includes workers who have given up looking for jobs – can we blame them when there are 5 workers for every job?). Close to 40 million Americans are on food stamps, 5 million on emergency unemployment benefits and 500,000 recently filed initial jobless claims in one week. Equity outflows from institutional investing firms have continued for months unabated and have totaled over $50 billion year-to-date. Confidence indicators have been gradually deteriorating among consumers and businesses, and that does not bode well for the largest pyramid scheme in human history.

     On the other side of the American political divide, conservative Republicans who claim to identify with tea party activists argue for fiscal austerity and less government regulation/intervention in the economy. Leaving aside the glaring hypocrisy of these politicians (many of them contributed greatly to a doubling of the federal debt and expansion of subsidies/entitlements from 2000-08), there are still several other troubling aspects to their alleged views. One of these aspects is the gross injustice of asking a majority of the population to forego promised entitlements and economic relief after we already decided to bail out a small minority of the population. Two wrongs don’t make a right, but neither does one wrong and a humiliating slap to the collective face. Another is the fact that many of these politicians have no idea what their policies really entail for the economy. As explained in sections below, it’s not as simple as cutting deficits, letting the free market take over and watching the flowers bloom as the sun shines on a new day in America. There will be a chaotic descent into economic depression and a need for governments to help mitigate the damages and promote structural reforms to the debt-based, fossil fuel economy. Speaking of fossil fuels, these politicians and pundits also naively ignore the critical issues of climate change and peak oil production or assume unregulated free(-falling) markets can eventually solve these issues on their own, without much negative impact to the economy.

     The main critique of this essay is that the viewpoints described above have a fundamentally flawed perspective on our current economic predicament. Whether it’s the left or the right, the free marketers or the socialists or many of the shades in between, the mainstream consensus is one of desperate hope for a rapid return to continuous economic growth, low unemployment, relatively cheap finance and rapid consumption of natural resources. More generally, there is an insatiable lust for maintaining complexity in our modern systems of economic exchange and social organization. Of course, this critique is not true of everyone in the mainstream camps described above, but I find it telling that we rarely (almost never) hear the word “complexity” or phrase “peak” anything mentioned in their bitter debates.

Complexity Analogized

     One of the most familiar complex systems to Americans is our country's inter-connected network of highways, which allow the interstate travel of goods and capital (humans included). This flow mainly passes through large urban centers that act as hubs for the rest of the network. We could have built these highways and then left drivers to their own decisions on how to use them, but it became clear that completely unregulated networks of travel imposed unacceptable safety/economic risks for our society. In fact, the potential risks and instabilities of such a system were so large that it may have completely broken down before it led to any significant gains. Instead, we resorted to licensing procedures and various vehicle and highway regulations.

     People who wish to take advantage of the highway system must first be taught the basics of operating a vehicle and pass a test of their knowledge. They must also follow the regulations imposed on them (speed limits, traffic lights, signs, etc.) and maintain their vehicles (annual inspections) under threat of economic or physical punishment. There is also the requirement that drivers get insured for accidents so that they will not pass off the cost onto taxpayers or innocent victims. All of the above are top-down policies used to manage a complex system containing numerous interacting variables. Many motor vehicle accidents still happen and many people still die each year because of them, but we have decided to put up with that level of instability in return for the efficiencies created. One can argue that even this somewhat balanced system is long-term unsustainable and destructive (especially considering environmental costs), but at least it has yet to fall apart.

     Now we can compare the highway system to the significantly more complex, expansive networks of the global economy and specifically the financial markets that make international trade/investment possible on a global scale. Individual countries (or even major cities in the larger state economies) can be considered the central hubs for much of these economic flows. The flows are greatly aided by the use of financial instruments (bonds, letters of credit, etc.) that are much easier to “manufacture” than the goods/services being exchanged, though they may be harder to comprehend. Financial markets provide humanity with a method for pulling future energy/resources (real or perceived) into the present, which allows for greater levels of present-day trade, consumption and investment. The key point here is that these sources of energy/resources may not exist and/or be easily utilized in the much depended on future. A system can only retain or evolve its complexity as long as new energy/resource inputs are provided to it in ever-larger doses.

     The credit bubble over the last few decades reflects an exponential growth of complexity in the global economy (and in all of human civilization as a result). In 1929 at the beginning of the Great Depression, the U.S. private debt to GDP ratio was about 150%. Fast forward to 2007, and we have more than doubled that ratio to a staggering 300%+ and many other countries have also followed in our misallocated footsteps (housing bubbles have developed in Canada, China, India, Australia and many Euro-zone countries to name a few). America could rightfully be accused as the primary driver of this bubble, since we have the global reserve currency and much of the debt incurred by people in other countries was denominated in dollars. We owe much of that status to our bloated military-industrial complex and reckless/malicious expansionist policies (the U.S. has 700+ military bases established around the world).

     We also see that public debt levels in the global economy have reached levels much higher than those in the 1930s. The public debt to GDP ratio for the U.S. is either 90% (total national debt), 150% (total debt including GSE debt) or 900% (total debt including GSEs and unfunded entitlement obligations), with the latter two being the most accurate, which is probably why the Chairman of the Joint Chiefs of Staff (Mike Mullen) called it the “single biggest threat” to national security. As a result of this debt-fueled private and public spending spree, economic activity has reached a very large scale and scope around the globe and many new inter-dependencies have been created between countries, corporations and individuals. American people have increasingly found themselves relying on megalithic grocery/retail stores to secure supply of food and consumer goods from across the planet, while American corporations rely on labor, parts and services from many different countries.

     Several global institutions have been designed to impose a top-down management structure for these complex economic and political relationships. Similar to state and federal regulatory bodies within a country, they are commissioned to “alleviate” inherent instabilities that arise from the operations of a complex, dynamic system. Needless to say, they have predictably failed at this goal even more miserably than the central governments of nation-states. The global credit (complexity) bubble is currently in the process of imploding due to its inherent Ponzi dynamics. As is the case with any Ponzi scheme, it can only be maintained if new entrants continue buying into it, but most economic actors (individuals, corporations and governments) are now saturated with debt as their cash flows have stagnated or declined (they can barely afford to pay down existing debts, let alone take on new debt). Multiple claims to existing real wealth are destroyed as the bubble implodes and our societal systems, which are mal-adapted to credit contraction and slow/negative growth, begin to experience immense destructive pressure. This process is quite evident in the Euro-zone, where entire “sovereign” states are quickly descending into utter insolvency despite the newly-formed credit facilities of the ECB and IMF (the latter recently decided to eliminate the borrowing cap on their facility in a final act of desperation).

      We must also keep in mind the role of feedback loops when discussing complex dynamics, since variable elements of a system constantly interact with each other in unexpected, but also generally predictable ways. As a system’s complexity increases, negative feedbacks provide a certain level of stability and the system can self-organize at a relatively stable equilibrium. However, at peak levels of complexity the negative feedbacks are overwhelmed by instabilities that have formed, and on the way down predictable positive feedbacks are the hallmarks. In a complex economic system that has reached peak financial activity, debt destruction from pay-downs and defaults leads to falling aggregate demand, suppressed prices, shrinking profit margins, increased unemployment, which further reduces demand and suppresses prices. American states on the brink of bankruptcy are all too familiar with these positive feedback loops, as their high rates of unemployment have led to low tax revenues, leading to spending cuts/tax hikes, leading to lower incomes and higher unemployment, leading to even lower tax revenues and massive fiscal deficits. These are just two of many positive feedback loops which occur in a debt deflation, and it is important to remember there are other factors involved and cross-interactions between separate loops within a system. They are also not limited to just the economy but eventually find their way into politics and societal trends at large.

The Devil’s in the Details

Neo-Keynesians’ House of Cards

     President Obama’s administration, with the aid of various academics (such as Paul Krugman) and media pundits (such as those on CNBC), have embarked on a mission to restore “business as usual” economic growth through the use of fiscal stimulus, “loose” monetary policy and direct government intervention in the economy. The American Reinvestment Recovery Act allocated about $820 billion to various local governments and companies in an effort to create jobs. What they don’t tell you about the ARRA is how much of that money, as a matter of necessity, is wasted in bureaucratic institutions that distribute and keep track of the money as it is funneled down to economic actors. Much of the money also goes to funding extremely misguided projects, such as tax credits for homebuyers that incentivized the construction of new homes when there is already a year’s worth of excess supply. Sometimes the money goes to fund the repair of roads that don’t even need any repair, as I have personally witnessed in my own community. New estimates have made clear that it is unlikely more than 1 million jobs were created by the ARRA stimulus, which amounts to $820,000 per job, some of which were not even productive for the general economy. Debt saturation and peak complexity is the primary reason why every additional debt-dollar spent into the economy produces significantly less than a dollar of productive economic value. The most that can be said by the administration about this fiscal stimulus is that it redistributed wealth from working class taxpayers to…well, other working class taxpayers, but also REITs (real estate investment trusts) and banks, and a bunch of money was lost in the process.

     The loose monetary policies being used include keeping the federal funds rate and discount rate at close to 0% (rate at which banks can borrow from each other and the Fed) and purchasing debt assets such as mortgage-backed securities and treasury bonds (“quantitative easing” to inject liquidity into banks). Our central bank is now sitting on a portfolio of around $2 trillion in securities and has recently decided to keep that value constant by reinvesting principal pay-downs on mortgage and agency debt into long-term treasuries. The above policies serve to keep a floor on mortgage rates and finance our government’s deficits at low interest (what used to be stealth monetization is now just monetization), while also providing cash to banks with the alleged hope that they will lend it out into the economy, where consumers and businesses will spend/invest the loaned money. Out there in the real world, no such lending has happened, as the banks are sitting on $1+ trillion in cash and the Fed is caught in a liquidity trap. This trap implies that any small increase in rates will have a disproportionate inverse effect on debt servicing costs and therefore spending and investment. As the notable Australian economist Steve Keen likes to point out, when the Fed’s objective is to create growth in the productive economy, the above policies simply amount to pushing on a string.

     Private markets are currently saturated with debt and therefore very few people want to borrow money, and very few lenders want to make loans at affordable rates since debtors can barely pay back what they owe now. As mentioned before, interest rates have bottomed out and there is minimal economic activity to show for it. The velocity of money in the economy has collapsed, and the Fed’s policies merely transfer large sums of taxpayer money to major banks that use it to blow more speculative bubbles in stocks, bonds, commodities, and derivative bets on the price movements of those assets. A prominent blogger/author named Charles Hugh Smith would ask “cui bono” (who benefits?) from these policies, and the answer would not be 90%+ of our population (the top1% hold 33.8% of all wealth and more than 50% of all stocks and bonds in America). Maybe a better question is who loses, and the answer to that would be a solid majority of American taxpayers and savers (since interest paid on deposits remains at next to nothing).

     Another tactic used by the current administration is to directly intervene in the housing market to keep mortgage rates low and support prices, since they view housing as the primary cause of the current crisis. The U.S. Treasury (taxpayers) is currently guaranteeing more than 90% of all new mortgages issued in the last year through the government-sponsored enterprises of Fannie, Freddie and also the FHA. As we can see with the large downturn in recent housing data, this intervention has merely allowed us to kick the can a few feet down the road, and the can became significantly larger after we kicked it. In effect, these interventionist policies keep prices artificially elevated for a little while and loan losses off of banks’ balance sheets, while homes become even less affordable for financially responsible people looking to buy. Even with record low mortgage rates, people are refusing to take on more debt to purchase an over-priced house unless there is a promise of a government handout lurking in the background, and the government simply cannot afford many more handouts. What much of the above interventionist policies amount to is a substitute of private debt held by politically influential groups for public debt held by the taxpayers and future generations, which ultimately creates even more disturbances in public credit markets and crowds out what’s left of private investment (more money has to go towards financing deficits).

     The administration has also presented several “structural” fixes of the health care and financial industries for public consumption. These bills were thousands of pages long and filled with new regulations and tweaks to existing ones that really did nothing to address the underlying fundamental problems with these systems. The health care bill did little more than give the health insurance companies 30 million new customers through government mandate, and the “finreg” bill failed to break up the TBTF banks, audit the Fed or create transparency for risky derivative products. More importantly, these new top-down regulations have the inherent feature of creating unintended consequences in our complex society, despite the alleged best intentions of their creators, and can even make the targeted problem worse. The financial reform bill created new restrictions on “angel investors” which will inadvertently stymie the creation/expansion of small businesses, while the behemoth investment banks will continue to exploit financial markets by hiring teams of lawyers to easily bypass the new regulations that affect them (as they are currently doing with the “Volcker Rule”) or by simply buying off the regulators. Meanwhile, as the administration pretends to combat fraudulent practices in the financial industry by creating a “Consumer Finance Protection Agency” (housed in the Fed), they actively aid financial institutions in committing accounting fraud by suspending federal rules that require them to mark their assets to market value (just another part of what many term “extend and pretend” policy).

     Finally, another recent tactic of current governments has been the use of central bank intervention to suppress a politician’s worst nightmare in a deflationary economy, currency appreciation. The Swiss National Bank has admittedly bought up billions worth of Euros to prevent the Swiss Franc from appreciating too much during the ongoing European sovereign debt crisis of 2010, but they ended up taking significant losses on those transactions (and I’m confident that Germany didn’t mind the boost to exports provided by the Euro at 1.20 against the dollar). We can be rest assured that the central banks of the U.S., Japan and China have done the same type of intervention and will continue to do so when they feel it necessary. Disregarding the inherent unsustainable nature of major economies racing to the bottom of the currency depreciation endgame, the marginal benefits of these interventions have severely contracted as their half-lives become shorter and shorter. Currency investors (who manage to trade $4T daily with 50x leverage) have realized that a central banker pushing a button somewhere to buy a few billion here and there will not change the fundamental economic realities faced by the global economy. Diminishing marginal returns, whether they are those of interventions or investments, are best viewed as a function of decelerating complexity. Razor thin margins in the global economy are no accident, but only the logical destination of our complex, infinite growth-based systems.

     We should also consider the possibility that some or all of the above policies will miraculously be successful in creating sustained economic growth, price inflation, and wealth creation. In the case of such a rare event, the question still remains of when and how intervention can be stopped, and whether we will return to the same credit-based, consumption economy we had in the past. Will we merely restart the credit bubble and restore our modern lifestyles in the developed world? These questions in turn raise the issues of continued over-consumption of resources, environmental destruction and accelerating climate change, which are the most important long-term issues that humanity faces. After all, how long can an economy continue growing when billions of its supporting members around the world are dying of starvation, thirst and/or resource wars?

Our Disingenuous “Saviors”

     Conservative politicians/pundits who adhere to the Tea Party mentality are, at best, disingenuous in their promises of returning to the status quo of economic growth and complexity with fiscal conservatism and small government. They suggest that many of our economic ills can be cured if we simply withdraw all government fiscal/monetary supports and drastically reduce public spending. Now it is true that spending should be drastically cut in certain areas, and intervention should be drawn down to a large extent, but the question then becomes what happens if we do that and not much else. The break down of complexity in a system does not adhere to human concepts of fairness, order or social stability. If these politicians actually follow through with what they promise, a lot of wealth will be destroyed as asset prices, wages and business profit margins fall drastically. Societies grown accustomed to continual growth and high standards of living will have their expectations dashed and will experience the societal equivalent of post-traumatic stress disorder. There will be deterioration in social order, an increase in crime rates, and an exacerbation of people’s distrust/paranoia of all groups perceived as “different” or those claiming a right to the same piece of economic pie (the increasingly heated debates over illegal immigration is a great example of this dynamic).

     Austerity measures are being pushed heavily in European countries and by many people in America concerned about public debt. Their concerns are entirely valid and something should be done to reduce deficits, but we must also be candid with the global population about what the term “austerity” really implies. It is actually another way of promoting reduced complexity in our modern society. Just as our debt-fueled private and public spending sprees have pulled forward energy/resources to maintain and evolve complexity, a global or nationwide savings plan would pull the resource rug out from under our extremely complex systems. This loss of complexity necessarily means much less economic activity and access to goods/services across distant locations. For example, a $1 trillion reduction in government spending could easily translate into an equivalent or slightly higher reduction in GDP. As profit margins for businesses are squeezed from price deflation, more people will be laid off and that will further reduce demand and prices in a classical positive feedback. A deflationary spiral into depression is an extremely messy process, and when it stems from a financial crisis, fragile supply chains of goods/services will be disrupted since producers, distributors and purchasers will have limited or no access to letters of credit. This aspect of a debt deflation was clear during the first Great Depression, when farmers would throw perfectly good milk into ditches while other people were starving down the road.

     The conservatives and libertarians also rave about the need for a complete extraction of government from economic and financial markets. While this extraction would certainly allow natural forces to take over and bring about a steady-state equilibrium sooner, it will be extremely ugly for some years. The method in which this is done is also important, because an immediate withdrawal of government supports from housing and financial markets would trigger major declines in economic growth and employment, as recent economic data should make evident. It would be more sensible to at least attempt a gradual withdrawal of support coupled with targeted aid to those most harmfully affected by the ensuing deflationary spiral. We should also remember that there’s a difference between funneling taxpayer money to banks via bailouts, quantitative easing, zero interest rate policy and various government backstops, and the government implementing fundamental structural reforms to the current setup of our financial institutions and credit markets. The latter must eventually be done to prevent the same exploitative systems we currently have from regaining their former levels of societal entrenchment.

Innovative Suggestions and Unanswered Questions

     There are several other suggestions for “solving” our problematic encounter with peak complexity that attempt to restart sustained economic growth without introducing loads of new private/public debt or harsh austerity measures. For one, the government could abolish the Fed and literally print their own money (as Lincoln did with his greenbacks) and distribute it to households so they can pay down debts and spend/invest in the productive economy. This would allow banks to regain some value on their bad loans while also allowing consumers to get out of debt and regain some old spending/investing habits. We could also couple these monetary injections with structural reforms to the financial sector, limiting the ability of private banks to create unlimited credit and blow speculative bubbles. However, we can't analyze this situation in the vacuum of the American productive economy, since after all we are a part of a larger financial complex that stretches across the entire globe. I still find suggestions such as this one to be significantly more sensible than pure Neo-Keynesian or Libertarian policy prescriptions, so I will simply present a few questions that immediately come to mind (some of these are semi-rhetorical):

  • How will the domestic banks react as their debts are paid down with freshly printed money? Will they be concerned about inflation?
  • What about institutional investors currently holding cash and treasuries as their primary assets? Will this new stimulus spark a "risk on" mentality where assets/commodities are bid up and treasuries are dumped for cash to invest in risk plays? Can the Fed soak up all of these dumped treasuries and keep interest rates from rising and consuming a large part of government revenue (which would turn us into a much bigger Greece)?
  • What about our foreign creditors who will see others dumping treasuries while debts incurred to buy their cheap goods are being paid back with printed money? It is true that there will be much more debt overhang than money printed in the stimulus program, but hyperinflation is not so much an economic event as a sociopolitical one (internal or external loss of confidence in government institutions).
  • How much moral hazard will be created by such a significant bailout of debtors and creditors? Is current moral hazard already so high that marginal additions to it will be insignificant, or will it push us to a point where people, corporations and their politicians will refuse to ever abandon the current Ponzi system?

      Another interesting policy idea is printed monetary stimulus and tax cuts for households combined with central bank monetization of treasury debt to offset lost tax revenues and keep interest rates stable. The federal income tax could be greatly reduced or even eliminated, and monetization could make up for the revenue shortfalls that result. This particular idea was actually mentioned by Ben Bernanke when speaking about Japan’s prolonged deflation and possible policy responses in a similar situation. Of course, with another idea designed to maintain the path of modern civilization comes more troubling questions (and all of the questions above still apply) :

  • As the dollar is devalued from printed stimulus and debt monetization, how will other major economies stuck in deflationary traps react to appreciating currencies and decreasing exports?
  • Follow up: Exactly how ugly can a trade war between major economies get?
  • How much stimulus will have to be applied before consumers and investors heal their scars, pull the cash out of mattresses and start spending/investing again?
  • Will the government pay back its expanded deficits with printed money, and if so what does this mean for the prospects of real or perceived inflation?
  • What will occur when “organic” growth has restarted and we attempt to unwind the drastic monetary policy interventions that have been undertaken? How do we restore our tax revenues in an acceptable way?

      In light of these unanswered questions and others not asked yet, it appears that the more “innovative” suggestions offered to solve our predicament are still underestimating our complex, global society’s unpredictable reactions to various manipulations at the margin. Similar to the mainstream policies heavily criticized earlier, they certainly tend to ignore the tougher questions regarding what we will do to create a more sustainable society once we are successful in restarting economic growth for the time being. In all fairness, that issue is much broader in scope and more complicated to properly analyze, but it should always be lingering in the background. Taking into consideration all of the above criticisms of policies that attempt to maintain economic complexity, it is hard not to conclude that greatly reduced complexity is the only path to sustainability. There may not be anything “wrong” with our desire to maintain the complex systems we have evolved up to this point in time, except the fact that this desire may not be compatible with the laws of nature.

The Limits to Complexity

     In 1972, several authors published a book entitled The Limits to Growth that explored the relationship between exponential population growth and finite resource supply/production. What they basically attempted to model was the extent to which a broad system (such as human civilization) could increase and maintain its complexity (best measured by population) in an environment with resource constraints that increase in an exponential or non-linear fashion. They viewed technological advances as a linear process that could not keep pace with the effects of population growth and resource depletion. In a subsection of the book, the authors made clear that their model was designed to illustrate what they termed “broad behavior modes” of human systems rather than make specific predictions regarding peak resources and population growth. They expanded on that concept using the following example:

 “If you throw a ball straight up into the air, you can predict with certainty what its general behavior will be. It will rise with decreasing velocity, then reverse direction and fall down with increasing velocity until it hits the ground. You know that it will not continue rising forever, nor begin to orbit the earth, nor loop three times before landing. It is this sort of elemental understanding of behavior modes that we are seeking with the present world model. If one wanted to predict exactly how high a thrown ball would rise or exactly where and when it would hit the ground, it would be necessary to make a detailed calculation based on precise information about the ball, the altitude, the wind, and the force of the initial throw. Similarly, if we wanted to predict the size of the earth's population in 1993 within a few percent, we would need a very much more complicated model than the one described here.”
     With the above example, the authors are in essence describing a complex, dynamic system whose specific behaviors are unpredictable. The global economy certainly fits into this category, and of course it is entirely based on our current supply of energy/resources or the loosely estimated future supply we have borrowed against. This latter aspect of complexity represents the top of our global economic pyramid that is in the process of breaking down via “financial crises”, but more on that later. Our task here is not to determine exactly how the system will behave in the near future, but to take a bird’s eye view of general trends between multiple interacting variables. This perspective is something our current leaders, media pundits and mainstream academics fail to account for, and that’s why many of their “solutions” fall way short of achieving anything sustainable and are many times extremely destructive. We desperately need a fresh, new perspective on our current economic predicament before we can figure out the best ways to navigate through it.

Standing On the Brink of Release

     Buzz Holling was instrumental in describing the adaptive cycles of complex ecological systems, and specifically he studied forest ecosystems. He identified 4 general stages of evolution in complex ecological systems (what he termed "fractal adaptive cycles"), and these could just as easily be applied to human systems that have been built on the foundation of those ecological systems (my descriptions will be greatly simplified – follow the referenced sources for more detail) :

1. Growth – The system finds an abundance of available resources and spaces which are exploited for material wealth, and this flow of energy/resources allows the development of many inter-dependencies, efficiencies and specialized functions. Diversity of agents within the system increases as does overall wealth.

2. Conservation – The system’s rapid growth decelerates as it becomes highly specialized and opportunities for novel exploitation strategies diminish. Increasing amounts of energy are directed towards conserving the existing system instead of growth, and “wealth” is extracted from the periphery to central parts of the system. The system’s complex inter-dependencies become more rigid and less resilient to disruptions that may propagate throughout the highly-connected networks of the system (Holling described the system at this stage as “an accident waiting to happen”).

3. Release – A relatively small triggering event exceeds the margins of error allowed in the system and pushes it into a chaotic liberation of energy and resources. The previous structures, relationships and complexities of the system are rapidly dismantled as central hubs deteriorate and networks are disconnected.

4. Reorganization – The fractured parts of the previous system re-structure themselves into more complicated relationships, but not necessarily in the way they were organized during the first growth phase. Typically, this phase leads to a restarting of the adaptive cycle in which many new opportunities for innovative development become available.


     It is also important to note that complex ecosystems are typically composed of smaller systems and are also embedded in larger systems, creating a nested set of self-similar structures. Typically, the larger system can absorb much of the release from smaller systems contained within it, and act as a “memory bank” that allows rapid regeneration of the smaller system. If an individual American company goes bankrupt, its assets can typically be absorbed and immediately put back to use by other companies in that economic sector (assuming it does not have TBTF status). However, if the larger system is synchronized with the smaller system during the release and reorganization phases, then it could potentially lead to what Holling terms a “poverty trap”, in which low levels of wealth and connectivity are persistent.

     It is pretty easy to see the progression of our global economy through the stages listed above. Since the industrial revolution, our fossil fuel inheritance has allowed local economies to become increasingly specialized, efficient and inter-connected with others to create even more efficiencies through trade and investment. On top of that, a smaller system of global finance has developed through equity and credit markets that traditionally facilitated productive investments in people, businesses and governments. Of course the last few decades have seen a rise in what can most accurately be called Ponzi finance, in which major creditors extract wealth from the global population by pushing non-productive debt on them and taking control of political institutions that could potentially stand in their way. To be fair to the debt pushers, we (in the developed world mostly) have gladly bought their drugs and have remained their loyal addicts to the bitter end.

     The 2008 subprime housing crisis was the spark that ignited the release of our complex financial system, and unfortunately finance is such a large part of the global economy that there is not much of a larger economic system to absorb the fallout. It is also true that our oil-subsidized industrial economy is approaching its own stage of release that cannot be absorbed by an alternative energy economy, and as if things weren’t dire enough, it is arguably the case that our entire atmospheric system is synchronized as well due to the ongoing process of carbon emissions and climate change (the effects of which we are certainly experiencing now). The processes of growth and conservation in these systems of varied scales may have been temporally different, but it appears that the tipping points triggering release are converging within a few decades at most.

     Instead of building resilience in the face of exponentially increasing complexity and decelerating growth, we have pushed forward full speed ahead and concentrated increasing amounts of resources/wealth in our corporate/governmental central hubs. We have become extremely vulnerable to any shocks that could potentially propagate throughout the system, as we recently witnessed when a few major banks held the entire global economy hostage. Now our debt-saturated governments are trying to save the current system by concentrating even more wealth in the center, but nature clearly has other plans. It is painfully clear that politicians, corporate executives, corporate media and all other central actors that have power to implement large-scale policies promoting resilience have chosen (intentionally or inadvertently – does it really matter?) their own material interests over that of the masses. We, as individuals and communities, must choose to implement our own policies of resilience, because we are ultimately a part of a much larger system than the economic, political or social systems that have been imposed on us.

We Can Survive With No Regrets

     Some people find economic theories and abstract mathematic principles extremely dry and unfamiliar. I’m pretty interested in economics and finance, but I still find it painfully boring to watch Ben Bernanke testify about monetary policy in front of Congressional representatives, who probably find it even more boring than I do (which may explain their weak excuses for questions). But most people familiar with the modern world, especially those of us in fully “developed” countries, have intimate experience with complexity on a daily basis. We are constantly bombarded with facts and data regarding events and trends progressing around the world. We attend colleges with dozens of specialized majors and tracks of study within those majors. People constantly tell us that the world has become “smaller” due to telecommunications technology, which is true in a sense, but they fail to mention the world has also become exponentially more complex.

     It is especially easy for us to identify the advantages of increased growth and complexity. These advantages are mostly materialistic in the sense that we have more financial “wealth” and higher standards of living. The disadvantages are sometimes harder to grasp since they are more ephemeral in nature. We are more isolated from nature, disconnected from local communities and uncertain about the future. Some of our most basic concepts and values, such as fairness, equality, cooperation, compassion and ethical behavior, have been watered down to the point of being topics for dinner tables or the occasional academic journal, but nothing else. There are certainly material disadvantages to a complex, highly-dependent society as well, since many people have lost the knowledge/ability to grow food, build things, fix things and generally be self-sufficient. However, there has been at least one extremely important advantage to complexity in the development of advanced communications technology, and especially the internet which has connected billions of people across the globe. Insightful thinkers can use the internet to communicate their ideas to people in a distant location such as me, and I can then use their ideas to write a short essay such as this one, and send it to several others. We can use the communications networks to take back some level of knowledge, cooperation and resilience that we may have lost.

     There are five general areas of resilience that every individual and family should understand and take incremental steps towards. These include food security, water security, energy security, health security, and financial security. There are many tremendous writers out there that have written and spoken volumes on these issues and have generously shared their knowledge with anyone willing to read or listen. One of these people is Chris Martenson, who has taken the time to write an entire series on the general steps anyone can take towards becoming more resilient and, as a result, more peaceful in mind. Here are the links to seven of the articles he has written to this date:

Getting Started

Water Security

Food Security (storing food)

Food Security (growing/preserving food)

Health Security

Energy Security (heat/power/communications)

Financial Security

     The quicker we individually quit acting like deer caught in the headlights, and take actions towards resilience, the better off we will be as a collective species on a planetary system that has generously supported us, and continues to do so. The upcoming years will truly be a unique, eventful chapter in the history of human evolution. Perhaps in whatever records of history that may survive this rapid transformation, we will be known as the “peak generations” who sacrificed their extraordinary wealth, lifestyles, and comforts for a more simple form of social organization, where we re-organized to create a sustainable, just society. More likely, we will end up being the “peak generations” that fought desperately to defy reality and ended up in a heap of our own rubble. Either way, we should not focus on what society thinks about us now or how we will be remembered in the future. We should only be focused on doing what needs to be done, and then we should do it with no regrets.


  1. I came across your blog via Nathan Armstrong's blog which I read almost everyday. Although I stay in Mumbai I follow international finance as I make a living trading and investing in the Indian stock markets (almost two decades). It's interesting to get a perspective from outside India as our market is mostly driven by FII flows as you may be aware.

    I also follow Jim puplva's analysis every week and the interview today with Joseph Tainter is eerily similar in view to yours (about complexity).

    I hope to read your analysis more often so keep up the good work........


  2. There's a conference coming up in Chicago at the end of the month where the questions you ask will try to be answered.

    Let me add to your discussion that automation and robotics will continue for permanently displace workers. That's why I support the national income the green party is backing (along with ending fractional reserve lending and moving the fed into treasury) or a national dividend like retired treasury analyst Richard Cook suggests. More solutions at

  3. Pretty Good Stuff

    Don't know the answers myself, but thanks for helping me refine the questions


  4. The ideas are cute, but are ultimately stupid.

    Every single one makes two assumptions: that society can break down, and yet safety and security will not.

    Having your own water supply sounds fine, but what makes anyone think that the 1000 other people who didn't prepare won't come and take it?

    Or that the government in its attempt to placate the other 1000, doesn't choose to confiscate?

    Yet more solipsistic, post-modern neoreligious crap in the lines of those who think shoving $40,000 worth of solar panels on your roof somehow negates all the carbon generated at the workplace, on the roads as the goods and services consumed are transported, in your car(s), by the hundreds of thousands of US troops abroad, and so forth

  5. Oh and having the Government print and distribute money is somehow better than the Fed? The Government can't balance a budget and be responsible with money, why would we be better off if they can print all they want then?

    A gold standard would be better than giving the Gooberment the keys to cookie jar.

  6. c1ue,

    You're worried that if you prepare someone will come take your stuff, so you therefore you don't want to prepare at all? Or that solar panels won't solve all of your energy needs, so you don't want to get any of them? Very illogical arguments.


    The government is at least elected by the people and theoretically accountable to them, while the Fed is wholly owned by private banks and has very little transparency or accountability. It's just an idea a lot of people have floated, and once again I don't think its a silver bullet "solution" to our predicaments.

  7. blogs his very laudable efforts to prepare and runs a local food co-op in Oklahoma. Please share this essay with him. I am a regular reader of Charles Hughs Smith blog and found your essay at the Automatic Earth blog
    I found it encouraging and will become a regular reader. Thank you.

  8. Michael, thanks for the link to Bob Waldrop's blog, it seems he has a lot of good info and analysis. I sent him a link to this essay if he wishes to read it.

    I'm also a huge fan of CHS and sent him a copy of this essay, so hopefully he finds some time to check it out.

    Thanks for reading!

  9. This was a very well thought out and written piece.

  10. Ash, you've probably seen Dmitry Orlov's posts / blog. His observations as well as writing style are excellent - I would include him up there with CHS in terms of quality. He just doesn't post that often.

    And BTW, your blog is great too, keep up the good work.

    c1ue, in terms of preparedness for collapse, CHS puts it in a very good perspective. I don't like to paraphrase him, but in short:
    1) Everyone personally needs to be prepared to be much more independent in terms of securing the basics
    2) At the same time, being a well-prepared survivalist loner wouldn't ensure your survival. Being part of a well-integrated community that takes of its members is a much better bet. This means that building up social capital is as important or even more important than building up supplies of water, food and medicines.