by Charles Hugh Smith, Of Two Minds:
Not only will events outrun Plan B, they’ll also outrun Plans C and D.
We all know what Plan B is: our pre-planned response to the emergence of risk. Plan B is for risks that can be anticipated, regular but unpredictable events such tornadoes, earthquakes, hurricanes, etc. In the human sphere, risks that can be anticipated include temporary loss of a job, stock market down turns, recession, disruption of energy supplies, etc.
Hidden in most Plan B’s are a host of assumptions that all the systems running in the background pf the economy will remain stable. Even if electrical and cell-phone service go down, for example, we assume the outage will be temporary. We assume delivery of energy and food will resume shortly, we assume medical care will be available somewhere nearby, roadways will soon be cleared and so on.
In other words, we assume emergencies will be short-lived and that these non-linear events will leave the rest of our social and economic orders as fully intact linear systems, that is, predictable because the outputs (results) will continue to be proportional to the inputs.
If one road crew can clear five roads of debris, then if ten roads are blocked, we reckon adding another crew will generate a proportional result: two crews will clear all ten blocked roads. This is a linear system and response.
But if for some reason the second crew can’t clear even a single road, and adding a third crew also fails to make progress, the situation becomes non-linear: increasing inputs doesn’t generate proportional outputs.
If the situation goes non-linear, events can quickly outrun Plan B. Consider a restaurant with high fixed costs and high operational costs, i.e. the typical restaurant: fixed costs like rent and liability insurance don’t change as the customer count rises or falls; they stay the same. Operational costs–utilities, wait and kitchen staff hours, etc.–go up and down depending on how many customers come through the door.
Let’s say the owner’s Plan B addresses the risk of a temporary slowdown in business: staff hours and orders for ingredients are trimmed, advertising offers deeper discounts, etc. Plan B is designed to deal with a temporary 10% decline in sales because that’s the worst the owner has seen in ten years.
So what happens when sales decline 30% and continue dropping? Customers don’t respond to discounts as they did in the past, and the business starts hemorrhaging cash as changing the inputs isn’t changing the output (declining sales).
Staffers whose hours have been slashed can’t make a living, so they quit, creating turnover problems. Staff morale plummets. Events have outrun Plan B and the owner has no pre-planned response as the financial situation deteriorates with alarmingly ferocious velocity.
If Plan B assumes modest, temporary, linear disruptions, it will fail if events start following a non-linear dynamic. Recency bias–the natural assumption that the recent past is a reliable guide to the future–leads us to underestimate the risk of non-linear financial-economic dynamics.
Central banks and governments have gone to extreme lengths to maintain the illusion of linearity, the illusion that all is well and the economy will remain firmly expansive because central bank inputs (QE, purchases of assets, lowering interest rates) will reliably yield proportional outputs (low inflation, steady growth, etc.).
Despite the happy PR issued by central bankers and government authorities, these extreme measures have generated emergent properties beyond their control, specifically, soaring wealth and income inequality, fragile financial systems and zombie corporations which only continue operations by borrowing more every year.