Thursday, July 16, 2015

Increasingly Unstable.......THE CALM BEFORE THE STORM!

Increasingly Unstable

Western countries are increasingly displaying symptoms of instability as described by Nassim Taleb, the author of the The Black Swan, ever since the publication of an essay written with Gregory Treverton entitled "The Calm Before the Storm."

The piece was published in the January/February edition of Foreign Affairs - the official magazine of the Council on Foreign Relations.

In their essay, Taleb and Treverton highlight five characteristics that could help identify states that - while appearing stable on the surface - may actually be quite fragile.

The five characteristics they view as major factors in instability are:

- centralised decision making,

- lack of economic diversity

- high levels of debt and leverage

- absence of political variability

- lack of track record in surviving shocks

Although centralization reduces deviations from the norm, making things appear to run more smoothly, it magnifies the consequences of those deviations that do occur. It concentrates turmoil in fewer but more severe episodes, which are disproportionately more harmful than cumulative small variations.

Recent events would suggest that the 
EU is increasingly centralising authority and decision making in Brussels. Indeed, Greek Prime Minister Alexis Tsipras recently stated that Greece's creditors had made it clear that bailed-out countries had no right to self determination.

The entire western world is incredibly vulnerable to the third factor - over-indebtedness - which is described as "the single most critical source of fragility."

Since the 2008 crisis - caused by excessive debt -  global debt has increased by one third. In May the McKinsey Institute reported that total global debt was now around $199 trillion - $27,204 for every person alive today.

The U.S. is particularly vulnerable in this regard. It's total Federal debt is over $18 trillion while its GDP is estimated to be $17.71 trillion. At the same time its unfunded liabilities are estimated to be a more than a staggering $100 trillion - a sure source of instability as these payments come due.

While western leaders like to promote the notion of political pluralism it is clear from the consistently low levels of participation of voters at election time that the people who live with the consequences of their decisions that the public do not generally see credible alternatives.

It becomes increasingly apparent that decisions are made by lobby groups and vested interests only to be rubber stamped by governments of varying persuasions.

It is true that the powers that be have done a remarkable job at averting the day of reckoning but does that constitute a track record of surviving shocks?

The authors believe that exposure to any one of these factors is a symptom of instability. They add that exposure to multiple factors presents an exponential increase in risk.

The wider public and the press seem unjustifiably complacent at this time. It seems likely that the seemingly unending "recovery" is simply the calm before the storm.

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