Avalanches rarely occur. When they do they are impossible to miss.
Avalanches are easily forecast. Even after the fact, it is impossible to tell which snowflake triggered the process. Does one snowflake cause the reaction? Does one snowflake make the pile unstable, resulting in complex reactions amongst snowflakes? If so, how long does this preliminary activity take?
Some process takes place. Is it going on all the time? Or, does it just happen when an avalanche occurs?
Economies are like large piles of snow. They are made up of trillions of snowflakes (individuals, companies, transactions) all of which have roles and interactions with other snowflakes. When something goes awry, it is impossible to pinpoint the snowflake that started the process. Oh, the financial media will point to some tangible event but that is because they must provide an explanation. What they identify in no way represents “the cause.” The intial cause(s) is(are) unknowable and likely produced by thousands if not millions of unseen interactions that produced a tangible event.
Most economists, especially macroeconomists, focus on tangible events. They measure movement (GDP), but do not and cannot measure the factors causing it other than in meaningless aggregates like Consumption, Investment, Government Spending and Net Exports. The “snowflakes” and their effects are unseen and unknown.
The implosion of a complex economy does not occur just because item A (whatever that may be) happens. Movements in economies are discrete but not apparent for quite some time. In that sense, they are like an avalanche. No one knows which snowflake provided the catalyst. Nor can we discern the process that a snowflake may have catalyzed.
Measure economic change is slow, but change is always occurring below the surface. This change is similar to the unseen interactions amongst snowflakes.
Could we have an economic avalanche? Sure. In fact, my judgment is that one is likely.
Will we know what triggered it? No.
Could the following be one of the critical snowflakes?
If you have it, the BoJ will buy it
by Peter BoockvarIf you have it, the Bank of Japan will buy it. The BoJ cut interest rates from .1% to a range of zero to .1% and announced a 5T yen fund to buy not just JGB’s but corporate debt, commercial paper, ETF’s and Japanese REIT’s. If you live in Japan and thought about selling stuff in the closet on EBAY, hawk it to the BoJ instead. Bernanke in the Q&A of a speech on Fiscal Sustainability last night responded to a question about QE and said “I do think that the additional purchases…have the ability to ease financial conditions.” Another round of QE seems inevitable with the size and pace being the only question. It’s no wonder that gold is rising to another record high. Gold is not in a bubble, money printing is. Emerging economies however are not happy with the rise in their currencies. Brazil doubled the tax on foreign purchases of fixed income and South Korea said banks who do FX trades will face audits.
