Perspective, not Panic

I am not able to write a lengthy article analyzing everything and justifying my position due to my health problems. However, I do have some thoughts about current events which I wish to share with you. I hope some of my notions will be taken as suggestive, a gestalt of a situation or outlook.

Traffic Jams

I think current world-wide fears about financial institutions are overblown. I think the repeated panics and runs on banks amount to a fad or mass hysteria. I do not think much of what is going on is justified by the facts. I see the present crises in analogy to the frequent tie-ups on the I-80 Causeway between Davis (here) and Sacramento. Those traffic jams almost always have no visible cause: no accident, no stall, no road work. They just happen. But traffic problems on the Causeway can be modeled by the equations of turbulent flow used in fluid dynamics. Please note that turbulent flow is chaotic.

Consider what happens, for example, when one driver erratically speeds up and slows down on the confined Causeway. If the traffic is dense enough, those behind such a driver have nowhere to go; they are forced to put on the brakes to avoid an accident. The slowing down propagates back down the highway: each successive car behind the one ahead must slow down, thus creating a velocity wave. Drivers will experience this as a clumping effect; i.e., the cars behind the erratic one will be forced to bunch up, leaving spaces between the bunches. (This bunching effect was discovered and put to use during World War II by MIT's Lincoln Labs in the magnetrons and klystrons which generate microwaves for RADAR sets.)  The bunching will have a characteristic wave length, depending on traffic density and the size of the highway. Drivers in the Causeway will have to come to abrupt slowdowns or stops at a point just behind an empty space, apparently for no reason. The stopping point will propagate back down the highway. In fact, almost every business day, such bunching behavior happens on I-80 during the morning and afternoon rush hours, starting somewhere in the 3 mile long Causeway and propagating backward up to 5 miles. The effect dissipates where the road widens and near places with many exits.

The same sort of thing is now propagating through international financial markets. Just like the local drivers on I-80, investors feel aggravated and frustrated about the stop and go (sell everything, buy everything) behavior of financial markets. Some investors panic, whether by selling or buying precipitously (as in slamming on the brakes or stepping on the gas). Of course, panic behavior only makes things worse. The solution to these problems is to intervene in the usual behavior. Thus, CALTRANS has installed on-ramp meters at Davis exits to control freeway access during rush hours. Sometimes the Highway Patrol has to control traffic manually to break up congestion, most often after an accident or breakdown. (For unknown reasons, people seem to run out of gas or have flat tires a lot on the Causeway. This probably reflects poor planning or excessive optimism about travel.)

Moral: Likewise, when financial markets seize up, there is no alternative to corrective or manual controls.

Heuristic: Financial markets do not work according to the Capitalist theory popular among Conservatives.

Who's On First?

I think this famous question, asked with great effect by Dustin Hoffman in the film Rainman, is appropriate in our current period of History. History is fundamentally chaotic, because its component activities (such as financial markets) are chaotic. This means we cannot accurately predict the future, even if we have causal theories that explain the past. Nonetheless, as in the baseball game, we can make statistical conjectures based on the known history of the teams and players. It does matter who's on first in the short run, even if the statistically based conjecture (e.g., a bet) turns out to be misguided or wrong.

I think what is happening is the United States is undergoing the process of  empire dissolution. Most likely, the centers of power and influence are moving to Beijing and Delhi. This is analogous to what happened to Great Britain after World War I. It took the first half of the 20^th century to transfer power from the Brits to the Americans. The United States reached its zenith (its Golden Age) in the 1960s, but started to lose its grip on account of the Vietnam war. While the sudden, unexpected collapse of the Soviet Union seemed to make the United States the world's hegemon, in fact that collapse only demonstrated how fast great powers can disappear in the modern world.

It is important to note that neither England nor Russia sank under the waves following collapse of their empires. Both countries became poorer and definitely less influential as international power brokers. Both countries subsequently recovered from their disastrous declines, just as Germany and France rebuilt after World War II. So it can be with the United States.

The sooner Americans come to terms with their actual position in the world, the better it will be for them. A smooth transition to the eventual economic and political (hence power) arrangements of the later 21^st century will preserve more of American perquisites than any any other plan. One of the most common investment mistakes is not closing a losing position. People are extremely adverse to accepting a loss, any loss; but financial experts say players should know when to hold, and when to fold (as in poker). Those who fail to close losing positions or limit aspirations as prudence suggests risk losing everything. (I learned this from personal experience.)

Americans represent just 3% of the world's population, but devour 25% of the world's energy. Americans need not become poor or destitute, but they do need to adjust their lifestyles. After all, what justifies 3% of the human population getting 25% of the resources, especially if those resources come at the expense of the other 97%? We need not become Buddhist monks and retreat to caves (although Buddhism may be a more helpful than Christianity or Islam in leading sane lives). We just need to accept limits, and work to meet our needs and wants in less intrusive and destructive ways.

I believe sensible political-economic and social arrangements can be made. Doing that will not only improve the world, but will make possible satisfactory and fulfilling lives for most Americans. Such arrangements require major cultural changes which, in turn, reflect changes in personal lives. Such changes are difficult, but they can be accomplished by an intelligent and determined population.

So, it is not time to sell everything, and put on sack cloth and ashes. It is time to learn new ways.

Posted 09/29/2008 10:16:30 AM                Last update: 09/29/2008

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