Wednesday, June 30, 2004

SDB does his best to apply Chaos Theory

everywhere, particularly to the economy. (BTW thanks for naming that previous post what you did, Steven. I was feeling like I needed some attention. I got it from the IT KGB when I clicked on that link instead of this one.)

Anyway, the kicker:

Oop! A little explanation first:

Chaos theory studies systems which are iterative, such that the system state at time Tn+1 is a function at time Tn, where the system has a property known as extreme sensitivity to initial conditions. Among other wonderful and pernicious results from Chaos Theory is that long term detailed behavior of such systems cannot be predicted, even if the system itself is fully understood and the behavior is deterministic. Long term prediction requires exact knowledge of the starting state, but in natural chaotic systems you can't actually know the starting state with sufficient accuracy. The more initial error, the sooner your prediction goes awry. There will always be some initial error, so your prediction will always go awry eventually.

So then:
That's true for capitalist economies. [ed. note: In context, the first sentence doesn't really refer to the quoted paragraph, but I don't think it harms the meaning] The world's economy is preposterously huge and complicated and intricate, and can potentially be affected by anything from solar activity to scientific advances to outbreaks of diseases to fads. Some stimuli end up having no effect at all, because the system apparently compensates. Other stimuli can cause radical changes. Sometimes the effects "ring" and then dampen out over time; sometimes they result in what seems to be a permanent change in overall state. A lot of the time it's damned hard to even know what happened.

It was originally believed that all systems eventually settle into a state of equilibrium, but we now know that's not true. Some systems naturally oscillate, and some systems are subject to long term alterations in behavior which seem to be permanent and irreversible which are not induced directly by external changes. And the long term behavior of some systems is naturally irregular.

And in fact, most other nations generally drive economic recovery using exports.

Which means they can't recover unless someone else is recovering who wants to buy lots of their stuff.

Which usually means the US, which has had a chronically high trade imbalance for a hell of a long time, causing some to predict that we're heading at high speed for a cliff.

I don't know. I don't think it's possible for us to maintain a huge trade deficit forever. But I'm not so sure that the situation is quite as straightforward as those doomsayers claim.
...
We can't maintain a huge deficit in our balance of trade indefinitely. But the Fed buys some bonds every year and injects some new money into the economy by doing so, because our economy is growing. As the world economy grows, then if it continues to rely on dollars as a de-facto international currency, doesn't that mean it would need a rising supply of dollars, gotten from us via a moderate trade imbalance?

I don't know. What I do know is that if we got radical about trying to balance our trade in the short term, we'd risk setting off a world-wide depression. Last one of those ended up setting off a world war.

I also know that anyone who claims they know for sure what will happen in any scenario is either lying or deluded. No one knows what's really coming. No one can know. And that includes the decision makers at the Fed.


Everything I can think of to say about that turns into a treatise. Which I should write someday, no doubt. If only for my own use. Consider it a favor not to have to read SDB's whole post (though I liked it, that's why I'm advertising it).

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