Trade Off: Financial system supply-chain cross contagion

[GliderGuider]

http://www.feasta.org/2012/06/17/trade-off-financial-system-supply-chain-cross-contagion-a-study-in-global-systemic-collapse/

Trade Off: Financial system supply-chain cross contagion – a study in global systemic collapse

This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supply-chains globally, even where buyers and sellers are linked by solvency, sound money and bank intermediation. The cross-contagion between the financial system and trade/production networks is mutually reinforcing.

It is argued that in order to understand systemic risk in the globalised economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localisation of production and concentration within key pillars of the globalised economy have magnified global vulnerability and opened up the possibility of a rapid and large-scale collapse. ‘Collapse’ in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognised by policy-makers nor are they reflected in economic thinking or modelling.

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy.

The argument that a large-scale and globalised financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a large-scale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

Link to the paper (PDF)

[Warpy]

1. That's what I've said for a very long time about the derivatives crash

The system of trading imaginary securities to reduce risk and generate imaginary money has run its course and is now being held together by imaginary bandaids and a lot of wishful thinking. Eventually, someone with almost as many brains as money is going to realize the jig is up, the game is over, and he's going to pick up his chips and run. That's all it's going to take and the rapidity of the crash will make the stock market rout in 1929 look quaintly slow motion.

When the derivatives casino goes, it's going to take everything with it, just like the stock market did in 1929. People then said money disappeared overnight, whether or not they had savings and had stayed out of the market. With the banking system in disarray, they were left with what they had in the cookie jar.

It will likely be the same this time. There is no way to predict when this is going to happen, only that it will.

I keep hoping I'll croak before it does, been hoping that since the 70s when I first learned about derivatives trading. Unfortunately, it looks like I'll live through at least the beginning of it. I can only hope that this time they take the step they failed to take in the Depression: nationalization of necessary failed institutions.