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Society At The Edge Of Chaos

April 20, 2012

Economy, Finance, History, Politics, Wealth

We tend to assume that history moves slowly and cyclically. For example, it is commonly thought that empires grow old, over extend themselves and finally collapse and that this will eventually happen to the United States just as it has with every other empire. Similarly, most people believe that global warming will eventually have serious consequences for our planet or that natural resource depletion will constrain growth over time. However passionately we believe in one or more of these ideas, they nevertheless seem somewhat remote to us, something that will affect us, or even our children, only many years in the future. But, what if history is not cyclical and slow moving, but rather, arrhythmic with sudden dynamic moves? What if civilizations collapse, not over centuries, but over a few years?

Harvard historian, Niall Ferguson, believes that great empires are examples of complex systems consisting of large numbers of interactive components. They exist, he says, on the ‘edge of chaos,’ between order and disorder, and have much in common with natural complex systems. We know from studies of such natural complex systems as the weather or sand piles that complex systems can appear to be stable while undergoing profound changes. Then, after reaching a critical point, they transition suddenly from stability to crisis. We see this when a single grain of sand causes a sand pile to collapse or the flapping of the wings of a butterfly causes a hurricane in the home counties of England. In addition, when things go wrong with a complex system the scale of the damage cannot be anticipated. A forest fire before a fire, is teetering on the edge of a breakdown, but there is no way of anticipating whether the fire will burn out of control or be easily contained. Similarly there is no way of anticipating the damage caused by earthquakes, epidemics or financial crises.

History provides numerous examples of sudden collapses (not slow declines) that are associated with the mounting cost of servicing debt. In 1598 Spain was using 100 percent of its ordinary revenue to pay interest payments on its debt. Suddenly, the game was over for the golden age of Spanish history. From 1751 to 1788 interest payments in France rose from 25 percent of tax revenue to 62 percent. The Estates General was summoned in 1789 because of the fiscal crisis. The French Revolution followed and ‘the rest is history’. The Ottoman Turkish Empire was spending 17 percent of its revenue in 1868 to service its debt and 50 percent in 1877, after which the Ottoman Empire began to rapidly fall apart. In the mid-1920s Great Britain’s debt charges were absorbing 44 percent of total government expenditures and exceeded defense spending. Britain’s problems got significantly worse after 1945 when the United States had the cheek the request that their lend lease debts be repaid. Churchill may have thought himself an equal with Roosevelt and Stalin at Yalta in 1945, but within a few years Britain had lost its empire and the Suez Crisis in 1956 confirmed that Britain could not move a finger in the world without the permission of the United States.

The western world expects the U.S. to muddle through this current financial crisis and eventually ‘do the right thing’ and tackle its structural debt problems. However, with 30 year bond yields hovering around 3 percent there is no incentive for Congress to do anything other than push the can down the road for the next generation to deal with. However, as interest payments take an increasing share of revenue, defense spending will continue to be squeezed and at some point the U.S. will spend more on debt servicing than defense. At the same time foreigners who own one third of total U.S. debt are reducing their exposure to Treasuries. It doesn’t take a rocket scientist to figure out where all this is leading to.

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“I admire addicts. In a world where everybody is waiting for some blind, random disaster or some sudden disease, the addict has the comfort of knowing what will most likely wait for him down the road. He’s taken some control over his ultimate fate, and his addiction keeps the cause of his sudden death from being a total surprise.” Chuck Palahniuk

“Sometimes you just have to take the leap, and build your wings on the way down” Kobi Yamada

“When the number of factors coming into play in a phenomenological complex is too large scientific method in most cases fail. One need only think of the weather, in which case the prediction even for a few days ahead is impossible.” Albert Einstein

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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9 Comments on “Society At The Edge Of Chaos”

  1. conceptualhistorian Says:

    An excellent outlining of the issues – my background is nothing to do with finance or economics, but I can easily follow (and agree) with most of your comments. Coming from a background of anthropology and history I sometimes wonder if most of our political, social and economic problems stem from the fact that while we’ve achieved some amazing scientific advances as a species, emotionally we haven’t really left the hunter-gatherer stage. Just a thought…

    Reply

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  3. History of Capitalism Says:

    Ah! And it is not merely economic problems that can cause collapse overnight. Humans have dug ourselves into our own graves before in regards to environmental issues. Famine is something inconceivable right now to the average American but remains a very real issue. And let’s not forget the impact of the Black Death…

    Reply

    • Malcolm Greenhill Says:

      Absolutely right, although the current financial crisis seems to have made the world ‘fragile’ in Nissam Taleb’s sense. We no longer have the strength of ‘anti-fragility’, so society is more susceptible to another black swan event, whether that be disease, a larger Fukushima type nuclear accident or close encounters with a stray comet.

      Reply

      • History of Capitalism Says:

        I have always been skeptical about the idea that we ever could really prepare for a comet, but generally yes, fragility is precisely the term for it. I had heard about Nissam Taleb’s Black Swan Events and have been meaning to check him out.

        Reply

  4. Hanne T. Fisker Says:

    “Sometimes you just have to take the leap, and build your wings on the way down” How brilliantly said, love it 🙂

    Reply

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