My last post was pretty dramatic, to say the least. I want to briefly discuss an aspect that is not considered by economists nearly at all and really highlights the difficulty in avoiding massive pain.

This video says it all and it’s only a bit over a minute so it is easily digestible:

Yes it’s time that’s not considered and isn’t on our side. My day job is to use nonlinear systems theory to investigate biological timeseries, which is a fancy way of saying that I try and figure out how components interact and how the timings of the interactions affect the output. Almost all our understanding of macroeconomic principles were formed before systems theory was even developed and thus it doesn’t consider some very obvious physical constraints.

In my last post I discussed that major trade imbalances were the root of our problems, and greatly constrain our solutions. We have to re-balance trade, that’s a given, and the only argument is how. I said that I felt the best (or at the very least most likely) was a massive reduction of consumption on our end, but that would surely lead us to a depression like scenario. Some economists are proposing simultaneous worldwide stimulus that would attempt to keep up consumption in the debtor countries while they retool for more export and the creditor countries would try to stimulate internal demand at a greater rate than our consumption.

The problem is that this overlooks that consumption can fall very quickly (as noted by Taleb in the above video) but production infrastructure takes a long time to implement…or in China, et al. building a framework for consumption will take a long time to implement while their production demand will plummet. The same goes for Obama’s works project. I am all for it as I think if done correctly it will provide a good base for the next few decades of economic recovery, but there is no way that it will do much to stop a downturn as it will take years and years to implement all those ideas correctly.

By ignoring time and just moving all the variables in their equations instantaneously, economists are setting us up for a situation where the period of implementation will lead to collapse and we would be in a worse position. For instance, if we start stimulating that means we need to take on more debt, which theoretically can be balanced by our creditors stimulating domestic consumption and needing more stuff from us. But if they fail to do that, then we will just crumble under debt and our currency will collapse, leading to de-facto bankruptcy. On the flip side, if we reduce consumption dramatically we will suffer a Depression but trade will re-balance itself and we should be able to continue to support our debts if we refinance them.

This is why the mantra that a Depression needs to be avoided at all costs isn’t correct, because the policies to try and do it will create a far worse scenario if they fail. Our leaders and policy makers need to do a lot better job accounting for basic principles before they try to intervene, while getting the population at large ready for the possibility of a huge downturn and setting up nets if that happens. So should all of us on a personal level.