How The Next Shock Will Shatter
The Global Economy
David Korowicz, a physicist and human-systems ecologist, recently authored
a lengthy 78-page white paper titled: "Trade-Off:
Financial System Supply-Chain Cross-Contagion: a study in global systemic
collapse." It explores the increasing systemic risk brewing
in the global financial and trade systems. Using complex systems analysis,
he explains how within weeks of the next major economic shock, like
a major bank failure or a country exiting the eurozone, contagion would
quickly spread through global supply chains, causing an "irreversible
global economic collapse." The key points to his white paper are
Conditions for the crisis:
- The number of connections in the global economy is skyrocketing.
In 2005, there were 2 billion connected devices. Five years later,
that number had tripled to 6 billion, and it's expected that by 2015
the number will be 16 billion. Supply chain interactionsas parts
are manufactured and put together into bigger parts of even bigger
goods and so onare in the tens of billions.
- Financial shocks can spread across the world in seconds.
- Cities don't keep emergency stockpiles of food and other goods
anymore. Modern cities only keep around three days worth of food
for its population on hand.
- Sovereign nations and banking systems are hot-wired for rapid
contagion. Spain is a good example. The country bails out its
banks, but in the process increases its own debt. This, in turn, causes
concern over the fiscal health of the country, which causes its bonds
to sell off.
- The global economic environment can no longer support the weak
links in the chain. The world economy is no longer healthy and
stable. Another default would not be absorbed so easily.
- Economic contraction is fundamentally incompatible with the international
financial and monetary systems. The global economy is based upon
credit expansionnew debt must be issued to service the interest
on old debts. When the economy is contracting, as it is in Europe,
the ability to service old debts disappears and debtors become insolvent.
This changes the dynamics of the financial system, introducing the
possibility of defaults and haircuts on debt, which can be highly
- The stability of the global economy entirely depends on rising
- The idea that we are behind the wheel of a complex economy is
a myth. The tens of billions of supply chain interactions that
happen all around us, for example, are too numerous and complex for
anyone to fully see and understand.
- The structure of the global economy is contingent on historical
conditions continuing. For example, failing to isolate the effects
of a bank failure can lead to a cascading wave of failures throughout
a financial system as it departs too far from the stable domain in
which it must operate.
- Positive feedback loops mean infrastructure declines at an accelerating
pace in a contraction. Economic contraction feeds on itself.
- Economic crisis causes social fragmentation and spreads fear.
Korowicz writes that "A suspicion of outsiders and
increasing nationalism are common features of an economic crisis."
This is rapidly occurring in Europe as the crisis grows. Germans point
fingers at the Greeks, while Greeks point fingers back at the Germans.
Indeed, they do not identify as fellow Europeans but as nationalist
entities. When the economy is contracting, it decreases the incentive
for relative strangers to keep their word to others. Greece has less
incentive now to make good on its debts than it did when times were
good because they no longer benefit like they once did.
- The banking system is insanely concentrated.
- The world is running out of cheap energy sources.
- Food constraints are causing severe social and behavioral stress.
Global food supplies are facing increasingly severe constraints. Major
droughts in producing regions like the U.S. and India don't help matters.
Neither do estimates that, according to Korowicz, "between six
and ten fossil fuel calories are used to produce every calorie of
food," which due to increasing energy constraints is a cause
for concern. Korowicz writes that "no society wants to test the
veracity of the old adage that we are only nine meals from anarchy."
- Whenever the next crisis comes, it will be massive and the world
won't be prepared.
Hers is what the collapse could look like:
- If a country like Greece went into disorderly default...
- Insolvent banks in that country would shut their doors.
- People and businesses would be limited to the cash they have
- Grocery stores, pharmacies, and gas stations would be hit with
- Cell phones would stop working as mobile phone credit would get
- Public transport would be restricted as gasoline shortages would
- Imports would collapse as credit would dry up.
- Contagion would spread to the next weakest countries.
- In these countries, fear of insolvency would cause credit to
- Then, supply chain linkages would start to fail as companies
would have trouble financing production of new goods.
- Banks in developed countries furthest away from the epicenter
would have to be bailed out.
- Critical infrastructure would be affected as supply chains deteriorated,
which would accelerate the contagion.
- Businesses would shut down production as critical inputs would
become increasingly unavailable.
- The cascading effect through global supply chains would shatter
We are locked into an unimaginably complex predicament and a system
of dependency whose future seems at growing risk. To avoid catastrophe
we must prepare for failure.