Currency Wars_ The Making of the Next Global Crisis - James Rickards [106]
Phase transitions are a way to describe what happens when a complex system changes its state. When a volcano erupts, its state goes from dormant to active. When the stock market drops 20 percent in one day, its state goes from well behaved to disorderly. If the price of gold were to double in one week, the state of the dollar would go from stable to free fall. These are all examples of phase transitions in complex systems.
Not every complex system is poised for a phase transition—the system itself must be in a “critical state.” This means that the agents in the system are assembled in such a way that the actions of one trigger the actions of another until the whole system changes radically. A good example of a phase transition in a critical state system is an avalanche. A normal snowfield on a flat surface is fairly stable, yet the same amount of snow on a steep incline may be in a critical state. New snow may fall for a while, but eventually one snowflake will disturb a few others. Those others will disturb more adjacent flakes until a small slide begins that takes more snow with it, getting larger along the way until the entire mountainside comes loose. One could blame the snowflake, but it is more correct to blame the unstable state of the mountainside of snow. The snowfield was in a critical state—it was likely to collapse sooner or later, and if one snowflake did not start the avalanche, the next one could have.
The same process occurs in a stock market crash. Buy and sell orders hit the market all the time just like snowflakes on the mountain. Sometimes the buyers and sellers are arranged in highly unstable ways so that one sell order triggers a few others, which are then reported by the exchange, triggering even more sell orders by nervous investors. Soon the cascade gets out of control, and more sell orders placed in advance and triggered by “stop-loss” rules are automatically executed. The process feeds on itself. Sometimes the process dies out; after all there are many small disturbances in the snow that do little harm. Sometimes the process grows exponentially until something outside the system intervenes. This intervention can take the form of trading halts, efforts by buying syndicates to reverse the flow or even closing the exchange. Once the cascade stops, the complex system can return to a stable, noncritical state—until the next time.
The recent multiple catastrophes near Sendai, Japan, perfectly illustrate how phase transitions occur in nature and society and how collapse can spread from one system to another when all are in the critical state. Tectonic plates, oceans, uranium and stock markets are all examples of separate complex systems. However, they can interact in a kind of metasystemic collapse. On March 11, 2011, shifting tectonic plates under the Pacific Ocean off the eastern coast of Japan caused an extremely violent 9.0 earthquake. The thrusting of the ocean floor then transferred energy from one system, the earth’s crust, to another system, the ocean, causing a ten-meter-high tsunami. The tsunami smashed into several nuclear reactors, again transferring energy and causing another catastrophe, this time a partial meltdown in uranium and plutonium fuel rods used in the reactors. Finally, the fear induced by the meltdown in the reactors contributed to a meltdown in the Tokyo stock market, which crashed over 20 percent in two days. The earthquake and tsunami