Musings Report #21 05-21-12 Punctuated Equilibrium and Wealth
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Punctuated Equilibrium and Wealth
I last discussed the evolutionary model of Punctuated Equilibrium in Musings#15 (04-09-12), and I have been thinking about the model's application to the upheavals in Europe and the destabilizing of the financial Status Quo we are witnessing in slow-motion.
For perfectly understandable evolutionary reasons, we strive to understand tumultous change so that we can either hold on to whatever wealth and security we have, or perhaps improve our position via forethought and decisive action at critical junctures. Understanding the process of crisis and adaptation (i.e. experimentation, failure and learning) helps.
Though we know life and human society are constantly changing, periods of rapid, potentially catastrophic transformation/destruction are relatively rare, occurring only a few times in a long human lifespan. As I have often mentioned, the "4th turning" scenario suggests America faces a systemically disruptive period every 80 years: the end of the Revolutionary war (1781), the Civil War (1861), World War II (1941), and presumably 2021 if the scenario holds.
People in Asia experienced the fall of the old regime (Meiji Japan, 1868, and China's Republic, 1912) and the consequences of World war II that ushered in new forms of finance, culture and society (1945-1950).
In this "long view," Europe's failed experiment with a single currency (the euro) can be viewed as part of an evolution toward a more integrated continent in an increasingly integrated world economy. That all experiments do not succeed should not be held against those making the experiment. Perhaps expectations of permanent success were too high or were misplaced.
Europe's deeper problems have little to do with the euro currency: the mix of demographics, productivity, cheap energy and rising debt that enabled the Welfare State is changing: printing or borrowing money does not mean one worker can support one retiree drawing generous pension and healthcare benefits. The belief that Europe--yes, even Germany--can do so for another decade is based on the illusion that debt and the temporary bubble created by China's built-out are permanent features of the global economy. They are not.
Europe's fumbling attempts to sustain an unsustainable model will likely follow a stairstep decline of punctuated equilibrium: previous fixes will fail to fix what fundamentally ails Europe, a new crisis will emerge, and another "fix" will be hastily imposed. A new equilibrium will be established, albeit a brief one, until the artifice and money-printing unleashed another crisis/failure.
Just as with species, if a regime or social order fails to adapt with sufficient speed and vigor, it destablizes and dissolves.
What does this have to do with wealth? Famously, sources of wealth also change. Great fortunes were made in railroads in the early 20th century, but capital left in railroad companies declined in value as other industries generated relatively greater wealth and productivity.
Those in Europe who look ahead and foresee the euro drifting down to parity (1 to 1) with the US dollar will effectively earn 25% by switching their capital into non-euro currencies. Though the US dollar has been "written off" as doomed by many, in the current scheme of things it might well rise in value relative to the euro for many years, as the equilibrium of the 2000-2010 era is punctuated by crisis and either successful adaptation or disastrous attempts to sustain the unsustainable.
The loss of equilibrium in Europe is one reason the US stock market might not collapse as many anticipate, as global capital flows to the relative safety of the dollar and US equities and bonds. We should keep in mind that wealth is as ephemeral as life itself, and all that appears solid can evaporate in crisis or slowly crumble over a generation.
From Left Field
VJ Day, Honolulu, Hawaii, August 14, 1945: a 3-minute color film shot with a handheld camera in Waikiki. Look at the joy on everyone's faces--the horrific war had ended. Look at all the cars, trucks and jeeps: America was the Saudi Arabia of the world. "My Dad shot this film along Kalakaua Avenue in Waikiki capturing spontaneous celebrations that broke out upon first hearing news of the Japanese surrender." Thopse who have visited Honolulu will find the street scenes distant in terms of the autos and fashions and yet familiar in terms of Diamond Head and Waikiki beach. How much has really changed? This short film really highlighted the brevity of human life and raised the question in my mind if we are still living in the era of cheap oil that so obviously powered World war II. (via Michael H.)
A letter from Dad on the eve of his son's marriage. If you disliked Ronald Reagan, ignore that he is the writer of the letter, and ponder how difficult it is to address marriage and fidelity from the imperfection of middle age (and yes, divorce).
"Few men have virtue to withstand the highest bidder." George Washington
Thanks for reading--
charles
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