Currency Wars_ The Making of the Next Global Crisis - James Rickards [112]
Consider a second hypothetical case, shown in Table 2 below. The groupings of individuals by size of group are identical to Table 1. This system of critical thresholds is identical to the system in Table 1 with two small differences. The critical threshold for the first group has been changed from T = 500 people to T = 100 people. The critical threshold for the second group has been changed from T = 10,000 people to T = 1,000 people, while all the other values of T for the remaining three groups are unchanged. Put differently, we have changed the preferences of 0.3 percent of the population and left the preferences of 99.7 percent of the population unchanged. Here is the new table of thresholds with the two small changes shown in bold:
Table 2: HYPOTHETICAL CRITICAL THRESHOLDS (T) FOR DOLLAR REPUDIATION IN U.S. POPULATION
Now what happens when the same one hundred citizens repudiate the dollar as in the first case? In this second case, one hundred rejections will trigger the critical threshold for one thousand people who now also reject the dollar. Metaphorically, more people are running from the movie theater. This new rejection by a thousand people now triggers the critical threshold for the next one million people, and they too repudiate the dollar. Now that one million have repudiated the dollar, the next threshold of one hundred thousand is easily surpassed, and an additional ten million people repudiate the dollar. At this point, the collapse is unstoppable. With ten million people repudiating the dollar, another one hundred million join in, and soon thereafter the remaining two hundred million repudiate at once—the rejection of the dollar by the entire U.S. population is complete. The dollar has collapsed both internally and internationally as a monetary unit. This second system is said to be supercritical, and has collapsed catastrophically.
A number of important caveats apply. These thresholds are hypothetical; the actual values of T are unknown and possibly unknowable. The T values were broken into five bands for convenience. In the real world, there would be millions of separate critical thresholds, so the reality is immensely more complex than shown here. The process of collapse might not be immediate from threshold to threshold but might play out over time as information spreads slowly and reaction times vary.
None of these caveats, however, detracts from the main point, which is that minutely small changes in initial conditions can lead to catastrophically different results. In the first case there was no reaction to the initial repudiation by a hundred people, while in the second example the entire system collapsed. Yet the catalyst was the same, as were the preferences of 99.7 percent of the people. Small changes in the preferences of just 0.3 percent of the population were enough to change the outcome from nonevent to complete collapse. The system went from subcritical to supercritical based on almost zero systemic change.
This is a sobering thought for central bankers and proponents of deficits. Policy makers often work from models that assume policies can continue in a steplike manner without unpredictable nonlinear breakdowns. Money printing and inflation are considered to be the answer to the lack of aggregate demand. Deficits are considered to be an acceptable policy tool to increase aggregate demand by stimulus spending in the public sector. Printing money and deficit spending continue from year to year as if the system is always subcritical and more of the