Wednesday, January 1, 2020

Global Financial System Is A Big Rube Goldberg Machine

Much Of Financial System Is Like This Machine
While pondering the current economy that is becoming more of a conundrum every day, I stumbled upon an analogy I would like to share. The global economy is like a giant "Rube Goldberg" machine. It is a ridiculously complicated contraption built to perform what should normally be a simple task. Rube Goldberg machines often mimic the real world in that they are goal-oriented with many parts coming together to complete a task.

In the real world, things are usually not intentionally designed to be complicated but the reality is that they just are. It is an understatement to say the global financial system is not a well-oiled machine. More often than we would like to admit various systems and parts are thrown or "cobbled together" in a haphazard way to get the job done. We tend to try and explain events in terms of cause and effect but in doing so the bigger picture has a way of getting lost. Often hidden away is the nature of the risk that results from complexity and systems becoming codependent upon others. Bestselling author Nassim Taleb who wrote, "The Black Swan" detailed in his book how when something is highly complicated highly improbable and unpredictable events can and do occur.

Some of this is playing out right now and can be seen in the Fed's key reversal in policy. In an effort to avoid a crisis the Fed has been forced to deal with a liquidity issue in repo rates since a sudden and dramatic surge began in September. While it is difficult to see the difference between QE and an injection aimed at maintaining liquidity, in this case, several reasons exist to believe this is not QE but something far more disturbing. While many of us predicted central banks had painted themselves into a corner and would never be able to bring down their balance sheets this could be considered as proof. Still, how this will play out is yet to be seen.  

History shows we often have no idea what is driving events until long after they have transpired and even then the picture is blurred by interpretation. The lens by which we peer at events is firmly controlled by those with an agenda. Even when control occasionally slips from their grasp such as when Donald J. Trump was elected President of America that does not mean the puppet masters have surrendered power it merely represents a temporary lapse in their dominance. An effort to be realistic brings us back to the fact that government, big business, and mainstream media hold the cards and control. With this in mind, it is disturbing to look at the individuals leading these various factions, such a look gives me little reason for faith or calm.

The Direction In Which Things Fall Does Matter
Returning to the analogy of a giant Rube Goldberg machine it should help us realize the problem with getting a good handle on life is complicated by the massive number of variables built into it. If you take the economy, for example, guessing what a central bank might do is one thing, however, how do you make allowances for the money created to stimulate the nation's economy rushing out of the country at the tap of a button or companies using the money to buy back stock or pursuing a leveraged hostile takeover rather than investing in a new plant and equipment.

The argument could be made that central banks can stack the deck but when it gets too high and begins to fall they may not be able to control the direction or who it will crush. While history is important to remember it does not define the future. Just because a market or investors have reacted in a certain way in the past is no guarantee that faced with a similar situation their response will be the same or that once we hit a tipping point a self-feeding loop will not develop and take control. We have become very complacent and accepted the idea those in power will continue being creative enough to keep the economy moving forward and prolong current trends. 

When building a Rube Goldberg machine the designer takes a great deal of effort to complicate the task in an entertaining way by adding far more steps than are necessary. This creates a machine with many moving parts, the failure of just one piece to perform as expected can alter the way events unfold. History is littered with many caution signs as to just how difficult it is to interpret current events and their possible impact on tomorrow. This makes it clear that looking in the rear-view mirror gives us a better image of events than predictions as to what might happen in the future. My point is, don't have a great deal of faith in our economic system because it is severely flawed and does not even meet the criteria of a well designed Rube Goldberg machine.

Footnote; For a grand display of an incredible and impressive Rude Goldberg machine energize the link below, I don't think you will be disappointed. If nothing else it is proof some people have far to much time on their hands.


  1. Your excellent post reminds me of a book by Joseph Painter called "Collapse of Complex Societies." Our world is both complex and fragile - it has been true in the past and, as your post suggests, it will happen again.

  2. good observations and perspective as usual Bruce.
    In a more general sense, and in keeping with the theme of Rube Goldberg overly complicated systems, I suggest it is a natural human desire to build an understanding of a system, a paradigm, to facilitate our exploitation, use, or protection from the system or phenomena. Imagine an ancient man developing an understanding of when the fruit ripens on various trees in the forest, or the methods by which a tracks its prey and kills it. Observation and consistent logical analysis to develop a predictive model of these two examples would help feed the ancient human, and guide him so he could protect himself from the predator. I suggest that our modern news media's purpose these days is to obfuscate our understanding of how the system works and what is really going on. Most of the news is noise and loaded with obscure events laced with a few true facts so they can claim it is "real" and "news". This leaves most of us confused about the real future, unable to develop an accurate predictive model for our circumstances, and thus unable to predict the impact of events both natural and govt (policy) induced. And more importantly, it leaves govt and the fed free to impose more policy and controls, take further action... all while claiming they are for our benefit while the pontificate on what wonderful things they will do. And thus are led ever further down the path to economic enslavement.