Trade-Off - a study in global systemic collapse

Trade-Off  - a study in global systemic collapse 

Everyone who wishes to know what will happen unless everyone is aware of what may happen, should read the attached paper.

<em>Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse (pdf)</em>

by David Korowicz of FEASTA

A networked society behaves like a multicellular organism...random damage is like lopping off a chunk of sheep. Whether or not the sheep survives depends upon which chunk is lost....When we do the analysis, almost any part is critical if you lose enough of it.... Now that we can ask questions of such systems in more sophisticated ways, we are discovering that they can be very vulnerable. That means civilisation is very vulnerable.

Yaneer Bar-Yam, New England Complex Systems Institute 


This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supplychains globally, even where buyers and sellers are linked by solvency, sound money and bank intermediation. The cross-contagion between the financial system and trade/production networks is mutually reinforcing.

It is argued that in order to understand systemic risk in the globalised economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localisation of production and concentration within key pillars of the globalised economy have magnified global vulnerability and opened up the possibility of a rapid and large-scale collapse. ‘Collapse’ in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognised by policy-makers nor are they reflected in economic thinking or modelling.

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy.

The argument that a large-scale and globalised financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a largescale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

We consider one scenario to give a practical dimension to understanding supply-chain contagion: a break-up of the Euro and an intertwined systemic banking crisis. Simple argument and modelling will point to the likelihood of a food security crisis within days in the directly affected countries and an initially exponential spread of production failures across the world beginning within a week. This  will reinforce and spread financial system contagion. It is also argued that the longer the crisis goes on, the greater the likelihood of its irreversibility. This could be in as little as three weeks. This study draws upon simple ideas drawn from ecology, systems dynamics, and the study of complex networks to frame the discussion of the globalised economy. Real-life events such as United Kingdom fuel blockades (2000) and the Japanese Tsunami (2011) are used to shed light on modern trade vulnerability.

We have outlined how the risk of a major shock arising from decades of credit expansion and imbalances is growing. We have also seen that we could expect a similar shock from the effects of peak oil on the economy. What unifies both is a catastrophic collapse arising from a loss of confidence in debt, and the solvency of banks and governments. What would be unique is the scale of the shock and its ability to strike at the heart of the world’s financial system. But the implications are not just within the financial and monetary system. They would immediately affect the trade in real goods and services. As our economies have become more complex, de-localised and high speed, the implications on supply-chains could be rapid and devastating.

There are three general points that are worth noting. Together they point to the likelihood that the crisis whenever it comes can be expected to be very large and society unprepared.

The first is temporal paralysis:

As financial and monetary systems become more unstable, the risks associated with doing anything significant to change or alter the course increase (see also the discussion of lock-in in the final section). In addition, the diversity of national actors, public opinion, institutional players and perceptions works against a coherent consensus on action. Therefore the temptation is to displace immediate risk by taking the minimal action to avert an imminent crisis. This increases systemic risk. Some steps in the evolving crisis might be handled, for example, a Greek default. However, each new iteration of the crisis is likely to be bigger and more complex than the one before, while the system is becomes ever less resilient.

A second issue is what might be called the reflexivity trap:

The actions taken to prevent a crisis, or preparations for dealing with the aftermath of a crisis, may help precipitate the crisis. Therefore to avoid precipitation, the preparation has to be low key and below the radar of the public and markets. This limits the extent and scope of preparation, increasing the risk of a chaotic and slow response.

The final point is about black swans & brittle systems:

The growing stress in our very complex globalised economy means it is much less resilient, see the discussion in section 3.1 and figure 2. Thus a small shock or an unpredictable event could set in train a chain of events that could push the globalised economy over a tipping point, and into a process of negative feedback and collapse.

One cannot predict how such a financial and monetary collapse will occur, or when. However, in this section we are considering a scenario, ideally one that in the light of what we know of the economic conditions sketched earlier seems at least reasonable. This scenario should be considered a warning, but also a more general guide to how supply-chain cross contagion might operate in any financial/ monetary collapse.

I.1 The Living Fabric of Exchange

The Irish economy, the German economy and the UK, US and Chinese economies do not exist, except by virtue of their integration in the globalised economy. Conversely, each is a localised expression of a global system. At any moment a myriad of final and intermediate goods, commodities, information and people is moving back and forth across borders. Without those flows, which maintain socio-economic function and complexity, economies would quickly collapse.

Here we make a distinction between our imagined communities, in particular the nation state and the psycho-drama within and across nations, and our real dependencies, which are globalised. National economies can have local character and limited degrees of freedom, but they exist inter-dependently, just as a heart or lung cannot exist apart from the body and still retain its original identity.

The nature of this integration has been evolving in ways that are reflected in common conversations about the world becoming so much more complicated, globalisation, ‘the world being flat’, and the speed of change in the world. Broadly, we can say that the globalised economy has been growing in complexity. This can be associated with growing connectedness, interdependence and speed. There are many definitions of socio-economic complexity and quite a bit of debate as to its nature. At the most general we could start with the following:

Complexity is generally understood to refer to such things as the size of a society, the number and distinctiveness of its parts, the variety of specialised roles that it incorporates, the number of distinct social personalities present, and the variety of mechanisms for organising these into a coherent, functioning whole. Augmenting any of these dimensions increases the complexity of a society.m- Joseph Tainter

Real life examples of major supply-chain damage, from earthquakes say, show that the impacts can be transmitted globally through intermediate links in supply-chains. What is surprising is how vulnerable complex societies are to even a partial shut-down in trade for just a few days. Growing complexity and speed in processes has increased vulnerability. However, the globalised economy is remarkably resilient to such 'rips' in the fabric of trade, but when they do occur the economy can generally self-repair very effectively.

When Trucks Stop, America Stops

A Timeline Showing the Deterioration of Major Industries Following a Truck Stoppage

The first 24 hours

  • Delivery of medical supplies to affected areas will cease.

  • Hospitals will run out of basic supplies such as syringes and catheters within hours. Radiopharmaceuticals

    will deteriorate and become unusable.

  • Service stations will begin to run out of fuel.

  • Manufacturers using JIT manufacturing will develop component shortages.

  • US mail and other package delivery will cease.

    Within one day

    • Food shortages will begin to develop.

    • Automobile fuel availability and delivery will dwindle, leading to sky-rocketing prices and long lines at

      the gas pumps.

    • Without manufacturing components and trucks for product delivery, assembly lines will shut down putting

      thousands out of work.

      Within two to three days

  • Food shortages will escalate, especially in the face of hoarding and consumer panic.

  • Supplies of essentials such as bottled water, powdered milk, and canned meat at major retailers will


  • ATMs will run out of cash and banks will be unable to process transactions.

  • Service stations will completely run out of fuel for autos and trucks.

  • Garbage will start piling up in urban and suburban areas.

  • Container ships will sit idle in ports and rail transport will be disrupted eventually coming to a standstill.

    Within a week

    • Automobile travel will cease due to lack of fuel. Without autos and busses, many people will not be able to get to work, shop for groceries, or access medical care.

    • Hospitals will begin to exhaust oxygen supplies. Within two weeks

• The nation’s clean water will begin to run dry.

Within 4 weeks

• The nation will exhaust its clean water supply and water will be safe only after boiling. As a result gastrointestinal illness will increase, further taxing an already weakened health care system.

Holcomb, R When Trucks Stop, America Stops American Trucking Association

Civilisation is always and everywhere a thermodynamic phenomenon.

What Milton Friedman did not say.

The most significant changes in risk management have taken place in the past 7 to 10 years. Today it's not only about data gathering...but trying to figure out the relationship of things.

Joachim Oechslin Chief Risk Officer, Munich Re


Something sets off an interrelated Eurozone crisis and banking crisis, a Spanish default say, which spreads panic and fear across other vulnerable Eurozone countries. This sets off a Minsky moment when overleveraged speculators in the banking and shadow banking system are forced to unwind positions into a one-sided (sellers only) market.

The financial system contagion passes a tipping point where governments and central banks start to lose control and panic drives a (positive feedback) deepening and widening of the impact globally. In our tropic model of the globalised economy, the banking and monetary system keystone- hub comes out of its equilibrium range, crosses a tipping point, and is driven away by positive feedbacks to some new state.

This directly links to another keystone-hub, production flows. Failing banks, fears of currency re-issue,
fears of further default, collapse in Letters of Credit, and growing panic directly quickly shut down trade in the most affected countries. As the week progresses factories close, communications are impaired, social stress and government panic increases. After a week almost all businesses are closed, there is a rising risk to critical infrastructure.

Almost immediately internal trade and imports stops in the most affected countries, and there is impairment in a growing number of other countries. Trade is impaired globally via a credit crunch. This undermines exports from some of the most trade-central countries, with some of the most efficient JIT dependencies in the world. This cuts inputs into the production and trade into countries that were initially weakly affected by direct financial contagion. Globally, the spread of trade contagion depends on complexity, centrality, and inventory times and once a critical threshold is passed spreads exponentially until the effect is damped by a large-scale global production collapse (implying another keystone-hub, economies of scale is driven out of equilibrium).

Trade contagion and its implications feed back into financial system contagion, helping drive further disintegration. The interacting and mutually destabilising effects of keystone-hubs coming out of equilibrium destroy the equilibrium of the globalised economy initiating a systemic collapse.

Growing risk displacement in an increasingly vulnerable system is increasing the risk of system failure. Once the financial system contagion crosses a particular threshold the de-stabilisation of the globalised economy will be exceedingly difficult to arrest; this point may be in as little as ten days. Once a major system collapse occurs, scale, hysteresis, entropy, loss of critical functions, recursion failure, and resource diversion is likely to ensure that the features associated with the previous dynamic state of the globalised economy can never be recovered.

Everyone who wishes to know what will happen unless everyone is aware of what may happen, should read the attached paper.

<em>Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse (pdf)</em>