Currency Wars_ The Making of the Next Global Crisis - James Rickards [113]
With this example of how complex systems operate and how vulnerable the dollar may be to a loss of confidence, we can now look to the front lines of the currency war to see how these theoretical constructs might manifest in the real world.
The history of Currency Wars I and II shows that currency wars are last-ditch responses to much larger macroeconomic problems. Over the past one hundred years, those problems have involved excessive and unpayable debts. Today, for the third time in a century, the debt overhang is choking growth and inciting currency war, and the problem is global. Europe’s sovereign borrowers and banks are in worse shape than those in America. Housing booms in Ireland, Spain and elsewhere were as reckless as the boom in the United States. Even China, which has enjoyed relatively strong growth and large trade surpluses in recent years, has an overleveraged shadow banking system run by provincial authorities, a massively expanding money supply and a housing bubble that could burst at any moment.
The post-2010 world may be different in many ways from the 1920s and the 1970s, but the massive overhang of unpayable, unsustainable debt is producing the same dynamic of deleveraging and deflation by the private sector offset by efforts at inflation and devaluation by governments. The fact that these policies of inflation and devaluation have led to economic debacles in the past does not stop them from being tried again.
What are the prospects for avoiding these adverse outcomes? How might the global debt overhang be reduced in a way that could encourage growth? Some analysts posit that the political struggle on government spending is just posturing and that once matters become urgent and key elections are over sober minds will sit down and do the right thing. Others rely on highly debatable projections of growth, interest rates, unemployment and other key factors to put deficits on a glide path to sustainability. There is good reason to view these forecasts with doubt, even pessimism. The reason has to do with the dynamics of society itself. Just as currency wars and capital markets are examples of complex systems, so those systems form part of larger complex systems with which they interact. The structure and dynamics of these larger systems are the same—except the scale is greater and the potential for collapse greater still.
Complexity theorists Eric J. Chaisson and Joseph A. Tainter supply the tools required to understand why spending discipline will likely fail and why currency wars and a dollar collapse may follow. Chaisson, an astrophysicist, is a leading theorist of complexity in evolution. Tainter, an anthropologist, is also a leading theorist of complexity as it relates to the collapse of civilization. Their theories, taken together and applied to capital markets as affected by contemporary politics, should give us pause.
Chaisson considers all complex systems from the cosmic to the subatomic and zeroes in on life generally and humans in particular as being among the most complex systems ever discovered. In his book Cosmic Evolution, he considers the energy requirements associated with increasing complexity and, in particular, the “energy density” of a system, which relates energy, time, complexity and scale.
Chaisson posits that the universe is best understood as the constant flow of energy between radiation and matter. The flow dynamics create more energy than is needed in the conversion, providing “free energy” needed to support complexity. Chaisson’s contribution was to define complexity empirically as a ratio of free energy flow to density in a system. Stated simply, the more complex a system is, the more energy it needs to maintain its size and space. Chaisson