The world economy is incredibly intertwined.
For example, a butterfly flapped its wings in the Amazon resulting in
typhoon after typhoon hitting the Philippines. This has interrupted the
work flow for RunToGold because one of my wonderful assistants located there
has had his village decimated, been flooded out of his house and therefore
been unable to complete several projects. As a result, thousands of
people are not able to consume information that may affect the decisions they
make. Often when we are in the moment we do not fully comprehend the
gravity of the situation until it is fully upon us.
CHAOS THEORY
Chaos theory is a branch of mathematics which studies the behavior of
certain dynamical systems that may be highly sensitive to initial
conditions. This sensitivity is popularly referred to as the butterfly
effect. As a result of this sensitivity, which manifests itself as an
exponential growth of error, the behavior of chaotic systems appears to
be random. That is, tiny differences in the starting state of the system
can lead to enormous differences in the final state of the system even over
fairly small timescales. This gives the impression that the system is
behaving randomly. This happens even though these systems
are deterministic, meaning that their future dynamics are fully
determined by their initial conditions with no random elements involved. This
behavior is known as deterministic chaos, or simply chaos.
Chaotic behavior is also observed in natural
systems, such as weather with typhoons pummeling the Phillipines. This may be
explained by analysis of a chaotic mathematical model which represents
such a system. Quantum chaos investigates the relationship between
chaos and quantum mechanics.
HUMAN ACTION
While we like to think that human action is largely
individual and unique, and it is, the branch of statistics allows us to make
incredibly accurate predictions regarding populations. In economics
this is perhaps the chief competing premise between the Austrian school of
economics and others: starting with the individual and deriving the
macro or vice versa.
The problem with starting somewhere besides the
individual is that there is always a previous history to that choice; every
individual has their own story. To discount the individual is to
discount their humanity; their ability to choose. And it is that
humanity which will often lead to choices which do not always conform with
game theory or ‘rational behavior’.
That is not to say an individual cannot build mighty
towers with and through other people. The issue is whether he will view
them as bricks or stones (Genesis 11:3). The problem with individuals
as bricks, or in other words human livestock, is that
it is immoral and the immoral policy will always fail. While the
behavior of the chaotic system may appear random it is deterministic.
Mankind will be what he was born to be: free and independent.
FINGERS OF INSTABILITY
John Mauldin wrote a great piece Another Finger Of Instability:
Imagine, Buchanan says, dropping one grain of sand
after another onto a table. A pile soon develops. Eventually, just one grain
starts an avalanche. Most of the time it is a small one, but sometimes it
builds on itself and it seems like one whole side of the pile slides down to
the bottom.
Well, in 1987 three physicists, named Per Bak, Chao
Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at
Brookhaven National Laboratory in New York. Now, actually piling up one grain
of sand at a time is a slow process, so they wrote a computer program to do
it. Not as much fun, but a whole lot faster. Not that they really cared about
sandpiles. They were more interested in what are called nonequilibrium
systems.
They learned some interesting things. What is the
typical size of an avalanche? After a huge number of tests with millions of
grains of sand, they found that there is no typical number. “Some
involved a single grain; others, ten, a hundred or a thousand. Still others
were pile-wide cataclysms involving millions that brought nearly the whole
mountain down. At any time, literally anything, it seemed, might be just
about to occur.”
The piles were indeed completely chaotic in their
unpredictability. Now, let’s read this next paragraph from Buchanan
slowly. It is important, as it creates a mental image that helps me
understand the organization of the financial markets and the world economy.
“To find out why [such unpredictability]
should show up in their sandpile game, Bak and colleagues next played a trick
with their computer. Imagine peering down on the pile from above, and
coloring it in according to its steepness. Where it is relatively flat and
stable, color it green; where steep and, in avalanche terms, ‘ready to
go,’ color it red. What do you see? They found that at the outset the
pile looked mostly green, but that, as the pile grew, the green became
infiltrated with ever more red. With more grains, the scattering of red
danger spots grew until a dense skeleton of instability ran through the
pile. Here then
was a clue to its peculiar behavior: a grain falling on a red spot can, by
domino-like action, cause sliding at other nearby red spots.
If the red network was sparse, and all trouble spots were well isolated one from
the other, then a single grain could have only limited repercussions. But
when the red spots come to riddle the pile, the consequences of the next
grain become fiendishly unpredictable. It might trigger only a few tumblings,
or it might instead set off a cataclysmic chain reaction involving millions.
The sandpile seemed to have configured itself into a hypersensitive and
peculiarly unstable condition in which the next falling grain could trigger a
response of any size whatsoever.”
AVALANCHE
Often I get questions such as when is the dollar
is going to collapse, when
is the DOW going to crash, etc. Now I like to profit from trading just
as much as the next guy and have made a few recommendations that have made
tidy returns for diligent readers. But I try to look at all possible events,
assess the probability
of an outcome occurring and then acting in accordance with that assessment.
Is it possible that a
CIA employee will be charged or indited for detainee abuse charges before December 31, 2010? Yes.
Is it probable? Well, Intrade puts the probability at 25%.
I think it is even lower; criminal gangs costumed in government regalia
do not like to prosecute those in their fraternal brotherhood.
Many people seem to think that the evaporation of
the world’s reserve currency is something that can be played for
profit. When we are in the moment and bursting with confidence of
greenshoots we seem to ignore out better judgment and ski down the slope.
But to the 3rd party observer it looks all too predictable and
probable. This likely will not be a period of history easily played for
profit; at least not for those lacking a costume or cohorts with one.
I recommend being more concerned with principles of
provident living and prepare for survivalism in the suburbs. Will they
be necessary? We hope not but The Black Swan now the norm it is wise
to be prepared.
THE SAFEST HAVEN OF GOLD
While the world is in commotion the bull market for
gold is in forward motion like never before. The 24 day moving average
is above $1,000 per ounce with the 50 day moving average above $970.
The Gold Wars have been waged for centuries.
The latest incarnation is the US government and central banks engaging
in a gold price suppression scheme. The US government has gone ‘all in‘ and
they are losing. And that is primarily driving the demand for the
ancient metal of kings. But this is deterministic of the chaotic system’s
future dynamics. Empires rise; empires fall and always for economic
reasons.
Sure, many think that gold has effectively been
demonetized. But Information Age technologies like GoldMoney allow for gold,
silver and platinum to easily circulate as currency in ordinary daily
transactions. The King is dead! The King is dead! Long live
the King! Gold has only begun to stir from its long slumber. The
prime form of money’s price will only continue to rise as its value
does from increased daily use among individuals as currency.
CONCLUSION
When you own an unencumbered ounce of gold your
wealth is sovereign. Hoard it. Whether buried under an avalanche
or on the bottom of the ocean in one of the most corrosive environments on
earth; gold will have value one, ten or hundreds of years later. Every
empire that has fought gold has lost. Those who own the bullion are
riding in the helicopter safely away from the ruinous effects of the Kondratieff
Winter’s avalanche.
Humanity’s gold lust has been dormant for
nearly a century and when it awakens it will be extremely vehement and go
viral. Those who own gold know of what I speak. The yellow metal seems
to call out to the inner conscience and resonate with our DNA. And that
is perhaps the most bullish aspect of this bull market. Gold has been
the only safe haven and how much of the general public has actually touched a
gold coin let alone owns one? The result will be that the pitiful garrets
of the central banks will be overrun as The Great Credit Contraction continues. These chaotic fingers of instability will shake
these giant welfare states until they implode.
Disclosures: Long physical gold, silver and platinum with no positions in
the problematic GLD or SLV ETFs, S&P 500 or DOW.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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