Sunday, 11 December 2011

You can't call Galactic Central to fix world finance.

Financial shocks with billions and trillions in them are hitting the news a lot.  Europe hogs the headlines today but America has its share. (US credit downgrade and credit limit reached, AIG and Lehman gone, Solyndra gone, Social Security running into the red, Detroit failing as a city, California facing insolvency.  These stories overwhelm me some days.)

One reason:  Connectivity allows troubled outfits to hook into larger outfits to borrow stuff and "kick the can down the road". Over-connectedness means they do this in real time with no buffers. When something bad hits the fan, billions move to safer shores before you finish your bacon and eggs.  When the system of financial systems kicks those kicked cans further down the road, a limit will be reached. Our world's not that big and a limit is being reached that has never been reached before. The whole Eurozone is in a perilous ferment, drawing in the IMF, the USand China too.  Who do you call next, Galactic Central?      The entire hyper-connected financial system is becoming unstable and will change with suddenness in response to small additional shocks.  My forecast for Europe is startling changes will continue until buffers appear. That  means the European Common Market will partially dis-aggregate before it can stabilize with more currencies. Some firewalls will be created between classes of financial outfits that move money internationally - created both by law and through a belated sense of self-preservation.

A second reason: Risk-takers are using political power to transfer their losses to voters by while keeping their profits. I don’t remember this bailout factor being so obvious before. The left-wing view that government should do something about everything combines with the natural greed of stakeholders to produce a great deal of self-dealing legislation. Governments don't see themselves as risk-takers but they are aiding the transfer of those bad risks to their citizens. Because it is a natural law that governments everywhere spend all they bring in and a little more, they too need somewhere to kick the can. "If something can't go on forever, it won't".   Voters are going to push back soon and the first evidence will come from Europe where voters are tired of being told their votes aren't important to Brussels.

Behind this is the dynamic of digital networking that's compressing decision-making cycles into days and sometimes seconds. Is there a single word for this phenomenon? The possibility inherent in speed-of-light connectedness seems to have a life of its own.  What makes people line up on the sidewalk waiting for the new iPhone?.  This connectedness is a flame and we who like it and want more are its fuel.
Hyper-connectivity and short decision cycles have amplified our natural tendency to kick the can down the road and use other people's money ahead of our own. The world financial spiderweb is at it's current limit.  Small incremental changes will cause sudden big changes.  Until buffers are built, expect trouble.


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