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October 29, 2005

Error Messages from the Economy
by Paul Tustain

BullionVault's Paul Tustain examines economic failure - with the help of a broken laptop.

Freefall

Forgive me lapsing into anecdote if I promise it will be instructive - besides it's more entertaining than economics.

When my last laptop stopped behaving itself I called the support hot-line, and spoke to someone much more qualified than me to fix it. He told me how to run some tests and we re-set my 'system configuration', whatever that is. But despite his assurances that the system should now work it did not.

After a week or two of increasing desperation in the end there was only one way I could get my computer back to predictable behaviour. I threw it out of a second floor window, confident it would follow the parabola of any object falling freely under the influence of gravity. And that's exactly what happened. Natural laws had prevailed, and they continued prevailing as the machine redistributed its carefully organized components into disorganised chaos shortly afterwards - as predicted by science's second law of thermodynamics.

(I warmly recommend smashing old computers. Not only is it a delightful and low cost form of revenge but it offers a practical way of denying people cleverer than you the later opportunity of reading your private emails)

Simple science and complex technology

Science is about simple laws. A single scientist explained the motion of the planets and free-falling laptops. Another discovered and explained the process of evolution - again working alone.

In contrast to the simplicity of scientific explanation technology is the work of countless thousands. No-one can point to a single individual and say "that person produced the modern computer". Machines are the result of new designs and solutions stacked one on top of the other - usually until no-one wholly understands how all the pieces work together. They are masterpieces of organized complexity.

Science's second law of thermodynamics - which predicted my chaotic heap of broken computer pieces - also predicts that when a system of any kind gets complicated you have to pour in energy and effort to maintain the complexity. It correctly predicts that all organized systems eventually break down and become disorganized again. Everything from a house to a human body, from a bag of sugar to a spaceship, obeys this law. Time eventually makes organized things turn back into formless mush, and the best we can do is pump in increasing amounts of energy to hold the inevitable decay in check for a while.

And now - sadly - we return to economics.

The 21st century economy is a technical device

The modern western economy is a designed system too, although it used not to be. In the old days nobody seriously tried to organise the forces of economics. Instead everyone just sat out the bad times scratching a living in fields and factories, while natural forces swung the economy to and fro.

Then western economic engineers realized economic forces could be organized and harnessed. They discovered that under the right circumstances if money flows were directed in a clever enough way they could produce an economic system which benefited people. This has had the amazing result that those of us who have lived inside their increasingly complicated economy have become the wealthiest people ever. (So although this article is probably published between diatribes against central bankers it is worth remembering that without them almost none of us would be rich enough to be interested in the debate.)

Nevertheless the natural laws of science and of economics will win out. There is absolutely no doubt that this cleverly organized and beneficial economic system will fail; no doubt whatsoever. The only question is "When?"

The Error Message

My old computer reacted to its increasing complexity by delivering me a series of error messages. It started with 'Disk read checksum error', went through 'please consult your system administrator' (by which I think it was optimistically referring to me), and finally offered what computer people call the 'blue screen of death', just before its short and violent final journey.

In much the same way there are ominous error messages coming out of the western economies - in the form of the twin deficits. Every one of 100 million US families spends $5,000 too much every year. They are allowed to by the US government, which leaves that money in the family's pocket while enthusiastically spending it too.

This money leaves the US, and is then lent back by foreigners to cover the government shortfall. The US will have to pay interest on this borrowed money as well as somehow claw back over the coming years the significant sum of $75,000 from each of 100 million US families. This is the unprecedented extent of the US public debt.

Our central bankers call these "imbalances" in the world economy. They are the error messages - like my computer's checksum - which nobody knows how to fix any more. Perhaps governments could raise an extra $5,000 dollars a year in tax from each family. But that would cause a spiralling implosion of demand. Suddenly millions and millions would be jobless and the diminished tax take from their employers and their salaries would leave the public purse even worse off than it is now. So logic dictates (to the current administration at least) that we must look the other way - to tax cuts which boost the economy and produce higher gross revenues. But although it worked for Reagan no-one really believes this solution either, and it certainly isn't working so far. The truth is that the previous level of taxation was somewhere near optimal. If we got an overspending habit at that rate - which we did - it would be unfixable, and debt would go up and up until something broke.

The second law of thermodynamics has patience. It allows us to expend our energies and break the economic monotony of fields and factories by organizing a perfectly good system with a perfectly useful output; yet there is never a doubt the system will eventually decay. As I was reminded by my failing computer this is no bad time to check your backup strategy.

Regards,
Paul Tustain
BullionVault

Paul Tustain is the founder of BullionVault.com - with 13,000 customers and $600m in gold bars, now the world's largest store of privately-owned investment gold bullion.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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