SYSTEMIC SHOCKS

A top-level conclusion from my book Brave New War is that security in the future, from economic to physical to environmental to social, will be measured by our responses to a never-ending series of global systemic shocks derived from a plethora of sources. Unfortunately, we are likely to fare badly. The reasons for this are simple, the global system is:

• Too Big. Simply, the system's scale is far beyond the ability of nation-states, or a community of nation-states, to manage when it suffers a breakdown. In the case of the current financial collapse, the global shadow banking system (a globally inter-networked collection of unregulated financial products) is approximately $450 trillion, as compared to a US GDP of $15 trillion or a global GDP of ~$60 trillion. Put another way, the financial liabilities of the highly leveraged Deutsche Bank are 80% of Germany's GDP and Barclay's liabilities are 100% of the UK's GDP. As the leverage underlying the shadow banking system unwinds and more banks fail, the scale of the loses experienced will rapidly exceed nation-state budgets.

• Too Fast. The speed at which shocks spread in this globally interconnected system is faster than the response time of governmental institutions (tight coupling). In this financial crisis, the cascade of failure in the system spreads at the speed of information networks and computer automation in trillion dollar increments. The upshot is that the government's impacted will likely take hasty measures, like the 3 page Paulson plan in the US, without the analysis, orientation, or synthesis necessary to produce high quality results.

• Too Complex. The system's function is beyond understanding. This is due to a lack of data (opacity either due to the nature of the system or by design as in the shadow banking system), the number of variables or connected systems, a lack of long term historical data on its operation in its current configuration, etc. The result is that efforts to mitigate the system's excesses produces pyrrhic victories (where the corrective action produces negative outcomes, like how efforts to ramp biofuel production impacted food prices). Worse, due to the system's complexity and the lack of an effective means to address its excesses, we are reduced to treating symptoms of failure (as with the Paulson plan) and even then under violent debate.

Epilogue

The inevitable outcome of systemic shocks at this magnitude will be an inevitable delegitimization of the nation-state as our trust in the ability of leaders to take effective corrective action evaporates. Further, nation-states will expend the majority of their resources on hasty and relatively ineffective corrective actions, which will make them collectively more prone to damage in the future and which will preclude the investments required to mitigate future crises. The cycle of delegitimization and resource depletion will continue until the nation-state is unable to respond at all to future calamity (the scale of this financial crisis is such, we may as well forget about any chance of early action to delay or prevent global warming, peak oil, water scarcity, food shortfalls, pandemics, etc.). In short, we will see a proliferation of hollow states.

NOTE: Due to the networked design of our global system, small events can be amplified into global shocks -- either through unmitigated positive feedback loops or a breakdown in the system's core assumptions.

Comments

[SWIMMER21]

Gasp ! What a great post ! Sadly or hopefully, I don't know, I just follow you in all your analysis about hollow states.
Building resilient systems is more than ever a necessity.

[Duncan Kinder]

As conventional financing becomes more difficult, illicit financing will grow.

Here is a discussion of how illicit financing can corrupt a veterinary ( or - by analogy - a physician's ) practice:

quote:

Because most veterinarians own their own clinics and homes, valuable commercial real estate is an essential part of their business and therefore the sale of a veterinarian's practice often entails the transfer of substantial real estate property. It is in this transfer of ownership of a veterinary or medical practice business from one doctor to another that the integration phase of the money laundering occurs. Predatory lenders readily offer hundreds of thousands or even millions of dollars of credit to medical and veterinary doctors so that that they can buy their new medical practice. It is extremely rare for a lawyer or an accountant to be hired by the purchasing young veterinarian as they are often credit challenged and therefore taking financing from the former practice owner and working directly with the seller's agent. The price of the practice becomes secondary to the financing terms and the real estate broker makes a very enticing financing package which includes the illegal funding.

Real Estate firms that deal in commercial properties are in an excellent position to do the layering process of money laundering. Staging the veterinary practice sale into several parts – 1) Equipment, 2) Business Records and Client List, and 3) Real Estate, makes it easier to hide related transactions. Only the Real Estate Title Transfer is a regulated process, the rest are private confidential contracts with paperwork only shared between the parties to the transaction. The seller's broker encourages the buyer to borrow heavily from commercial credit companies such as local banks, credit unions, MasterCard, VISA, and Discover to keep paying the increasing interest charges or balloon payment on the business loan.

Layering can be accomplished through secondary leans against the new buyer's real property and are often obtained by the broker when the new business owner becomes so overburdened with debt that he/she is unable to secure independent credit from other sources. At this point the new business owner borrows money from the seller's broker or goes bankrupt. Under such financial hardship the new business owner is in no position to question the source of funds that secured his ownership of the business – this is part of the placement of illegitimate money. If he/she refuses such illegal funds, all real property of the practice will be seized by the seller and the Credit Card companies as unsecured creditors lose everything they lent the buyer.

:end_of_quote

http://www.opednews.com/articles/Money-Laundering-Mortgage-by-MedicalWhistleblow-080929-950.html

[Duncan Kinder]

Just a follow through to my prior post.

One of the basic criticism of the American health care system is that it is too capital intensive - featuring such high tech items as CAT scans, etc. Much of its notorious high cost results from that.

As capital dries up, further capital intensive medicine will become more difficult.

A subsystem of resilient communities would be resilient health care. The structure of resilient health care would be less capital intensive than the current American system.

[moon]

Without the nation-state, what happens to the US Constitution? Can it be decentralized and self-organized from the distributed, resilient communities? I'm a scrub, amateur student of history, but I am reminded of the Protestant Reformation. Can the US Constitution survive a failure of the USG, propagated by American agents, who of course would re-interpret the document perhaps from the bottom-up? I'm looking for forecasts and other holdings forth.

[Joshua]

moon: Can the US Constitution survive a failure of the USG, propagated by American agents, who of course would re-interpret the document perhaps from the bottom-up?

Sadly the likely answer to your question is no. Simply put, most if not all of the document is based on the implicit presumption of a traditional nation-state. Perhaps bits and pieces of the existing Constitution could be adapted to govern RCs, but without a nation-state to govern, vast portions of the document would be rendered meaningless. (Why, for one small off-the-cuff example, would a landlocked RC need a navy?)

In any event, if the current Constitutional order were indeed to fall, there's no guarantee that anyone would even be interested in resurrecting it, even at the resilient-community level. For starters, who would want to bring back a model of government that had just failed so spectacularly on such a grand scale? What's more, if our constitutional republic ends as it began - in revolution - we may not be fortunate enough to have another George Washington to usher in the RC era; historically, budding tyrants like Cromwell, Robespierre and Ulyanov are much closer to the norm for revolutionary leaders. For this reason, at least some early attempts at RCs are likely to devolve into localized despotisms, but due to the nature of RCs their impact should at least be much more limited than their present-day counterparts in the nation-state system.

ISO 10013, Guidelines for Developing Quality Manuals, element 4.2, gives detailed suggestions for creating a quality manual. It defines a quality manual, among other requirements, as a document that should “…consist of, or refer to, the documented quality system procedures intended for … planning and administration of activities which impact on quality…”