Waiting For The Black Swan


by Chris Martenson, Peak Prosperity:

War with Iran would be the beginning of the end

Two more tankers were attacked near the Strait of Hormuz on Thursday morning  (6/13/19) in the Gulf of Oman, and if hostilities advance we could be facing a ‘black swan’ event. One that changes everything, and divides the world into ‘before’ and ‘after’ periods.

A lot of us are waiting for ‘something’ to happen. We know that there are too many unsustainable trends and practices running and we fall into the “let’s just rip the Band-Aid off” camp.   Some, like myself, have lost faith in the political leadership and institutions and doubt they retain any capacity to attend to anything more than their own selfish interests, let alone manage the difficult tasks ahead rooted as they are in systems theory and managing complexity.

So, let’s get on with it already.  Bring it on.  Black swans are welcome to those who feel a swift kick to the behind is sometimes needed to begin setting things straight.

Like many, I am also conflicted because I also know that getting onto a new path will be disruptive and probably quite economically and financially painful for everyone, myself included.  Hoping for ‘something to break’ and hoping nothing breaks hang in an uneasy balance.

Luckily, my hopes and wishes have nothing to do with what’s going to happen, or when.  I might as well be performing a secret hand ritual before the TV in my living room to ensure that my team’s basketball free-throw goes in.  The dry tinder of the next bonfire was laid down over many years and decades and it will catch fire when it does, no matter how much denial or how many superstitious practices we employ.

When this current period of insane monetary policy, polarizing politics, and ecological destruction suddenly breaks for the worse is unknowable.  It’s going to break when it does.    I hope that’s not for ten years, and I hope that’s tomorrow.  True ambivalence.

Black Swans

A ‘black swan’ event is a term coined by Nassim Taleb which has three characteristics:

  1. It’s unpredictable
  2. It has a massive impact
  3. Afterwards, everyone comes up with an explanation for it

There’s an honorary fourth characteristic which is that virtually no ‘experts’ saw it coming.

Black swan events can be positive or negative.  Here’s an example of an “expert” missing something positive:

I think it’s safe to say that Paul Krugman got that one a tiny bit wrong.

The genesis of the term black swan comes from the (former) western belief that all swans were white.  100% of their experience with swans confirmed that they were all white in color.  However, in 1697 the Dutch explorer Willem de Vlamingh made it to Australia and discovered black swans.

Once a black swan is seen, or a black swan event occurs, everything falls into a before vs after category.

When it comes to massive, history altering events, while they may be explained in retrospect by earnest historians as having been due to some specific thing, they usually had plenty of dry tinder lying about waiting for a spark.

Many of us learned that WW I was ‘caused’ by an Archduke being shot.  In truth if there hadn’t been many prior years of feuding, bad politics, terrible economic policies, and worse communications absolutely nothing more than an elaborate state funeral would have resulted from the Archduke being shot.  Afterwards everyone assigned a simple explanation to a complex situation because that’s what people do.

Today there’s a similar pile of dry tinder laying about waiting for a spark. There’s too much debt, worsening geopolitics, terrible press and social media stripping away necessary context as a matter of habitual practice, stovepiped information and expertise, and increasingly alarming (if not terrifying) signals from the natural world that the sort of economic growth upon which everything is based cannot continue.

It seems as if the world is waiting for something, a black swan, carrying a bright coal in its beak.

When that time comes virtually none of the experts on TV or at the think tanks will have seen it coming, nearly everyone will be surprised at the impact, and few will grasp the complexities surrounding how all that dry tinder came to be laying about in the first place.

We will all suffer the consequences to varying degrees depending on our financial, physical and emotional preparations, as well as due to luck and random misfortune.

The Strait of Hormuz and Global Debts

So let’s connect a couple of dots which I think have the potential to be the black swan event that changes everything.

The first is the massive pile of debt and impossible-to-meet IOUs that the world’s central banks have enabled.

The more debt you are carrying as a nation, company or individual, the better things have to go for you financially and/or economically.  Debt makes you more vulnerable to shocks.

The world has never been more deeply in debt, nor has it ever had more deeply un(der)funded IOUs in the form of pension and entitlement promises.

This is the financial tinder waiting for a spark:

The nearly $100 trillion increase in global debt since the beginning of the Great Financial Crisis is an unprecedented act.  It was also an act of faith.  One rooted in the idea that global GDP growth would come along and save the day, or at least rationalize if not justify the new massive piles of debt.  In truth, this love affair with debt can be traced back to August 15th 1971 when the world abandoned the gold standard in favor of the idea that debts themselves could be the backing for debt.

It should be noted, that virtually zero “expert economists” are publicly worried about the enormous rise in debts.  If they were, they wouldn’t be publicly known “experts” because nobody would invite them to speak about their ideas.

As bad as the debts are, the unfunded liabilities – the IOU’s in this story – are 2x to 4x larger than the debts themselves, depending on the country.

In the US, the entire collective pile – debts plus IOU’s – worked out to a staggering 1100% of GDP in 2017. That’s ~300% for debt and 800% for the underfunded liabilities.

Notice that the debt part of the above chart (circled in orange) is actually the minor part of this story, even though that smaller portion usually receives most of the press.

The only way to make rationalize or justify such a pile of IOUs and debts is rapid economic growth.  And the only way to get that?  Cheap and plentiful oil.  Which brings us back to the recent spate of tanker attacks near the Strait of Hormuz through which some 30% of all exported oil flows on a daily basis.

Oil’s role in our economic engine is enormously underappreciated by the usual economic ‘experts’ out there.  To them, energy is this substance that shows up whenever needed.  they have no deeper understanding than that.  To me energy is THE master resource without which no other activities are even possible.  You show me anything that you can buy, do, or consume and I’ll show you how oil was an essential precursor.

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