The further to the left or the right you move, the more your lens on life distorts.

Thursday, July 29, 2010

Edge of Chaos

Niall Ferguson has written an article in The Australian that every member of the Obama administration, the congress, and the ever-growing political class should read and understand. He suggests systems theory can and should be applied to great powers, and at the moment, system theory foreshadows danger for the United States.
Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.
Complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes, what scientists call the amplifier effect.

Empires exhibit many of the characteristics of other complex adaptive systems, including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognised because of our addiction to cyclical theories of history...

Has the Great Recession of 2008, coupled with President Obama’s ineffective and ideologically unsound approach to it become the “trigger” that might lead to our economy going “critical.” I certainly hope not, but Ferguson, a professor of history at Harvard University and the Harvard Business School, sees ominous signs.
Alarm bells should therefore be ringing very loudly indeed in Washington, as the US contemplates a deficit for 2010 of more than $US1.47 trillion ($1.64 trillion), about 10 per cent of GDP, for the second year running. Since 2001, in the space of just 10 years, the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year. According to the Congressional Budget Office's latest projections, the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050.

These sums may sound fantastic. But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues.

The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020, 36 per cent in 2030, 58 per cent in 2040 and 85 per cent in 2050. As Larry Kotlikoff recently pointed out in the Financial Times, by any meaningful measure, the fiscal position of the US is at present worse than that of Greece.

Are we “on the edge of chaos?” The question does seem overwrought, but at some level, polls indicate that a majority of the American public is beginning to ask it, even if that majority cannot enunciate it clearly.

With unemployment at almost 10 percent, our deficits higher than at any other point in history, and an administration perfectly willing to grow those deficits and at the same time engage in class warfare (“tax the rich”) as its vacuous solution to our problems, there is cause to worry.