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 summarized below.

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 interactions–as parts are manufactured and put together into bigger parts of even bigger goods and so on–are 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 expansion–new 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 destabilizing.
  
• The stability of the global economy entirely depends on rising energy flows.
• 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 handy.
• Grocery stores, pharmacies, and gas stations would be hit with panic buying.
• Cell phones would stop working as mobile phone credit would get used up.
• Public transport would be restricted as gasoline shortages would arise.
• 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 dry up.
• 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 global trade.

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.