Sunday, December 04, 2005

Catastrophe Theory and Snipits and Tidbits

It appears that catastrophe theory can be applied to financial markets and economics.

Rene Thom (1923- ) and Catastrophe Theory
"Originated by Rene Thom, catastrophe theory, a special branch of dynamical systems theory, studies and classifies phenomena characterized by a surprising production of big changes in behavior from small changes in circumstances."

Excerpt from Friday's LeMetropoleCafe's market wrapup:

"I wrote an article about Catastrophe Theory on the café along time ago. This is a well established but quite modern branch of mathematics. You can model catastrophes. If you imagine a surface that has a two levels which are connected by a gentle sloping ramp and also an overhanging cliff. You can travel between the two different levels by going up and down the ramp and nothing extraordinary happens. You can even go from the lower level to the upper level by climbing up the cliff. If, however, you go from the upper level to the lower level over the cliff you have a catastrophic drop. You can see this in many things where seemingly the same thing happens again and again but then almost the same thing happens again but with catastrophic results. Imagine approaching a dog sitting in the middle of a yard. You can probably approach him many times and stroke him and nothing happens. Now if that same dog is in the corner of the yard closed in by a wall when you approach him he suddenly bites you. The event was only slightly different but that makes the transition over the cliff instead of down the ramp.

Many market changes can be modeled by catastrophe theory. The discussion of high dollar reserves have been going on for years. It could be that they will descend down the ramp very gently and diversify very slowly and all will be fine. However, it only takes a slightly different route to make the change go over the cliff and become catastrophic. The elitist know this and this is why Greenspan is always talking about "potential problems" like today he is talking about reducing the deficits. Their hope is that nothing will then seem like an unplanned event that creates a sudden rush away from the planned smooth market trajectory to an over-the-cliff route. They are always talking about "expectations" and managing expectations. Surprises will trigger catastrophes."


Knowledgable smart cookies on the future of the US economy:

Peter Schiff, President/Chief Global Strategist, Euro Pacific Capital, Inc.
"Nowhere will the fallout [from higher long-term interest rates & the average maturity of the eight trillion dollar national debt is now under three years] be greater than in the United States, where the economy is more vulnerable than any other to the crippling effect of higher interest rates. As the world's biggest debtor, America will be forced to pay higher interest rates to creditor nations. The resulting drain on America's national income and strain on consumer spending will plunge its economy into a severe recession."

Bill Buckler of The Privateer
"In realistic practical terms, there is no way that the US economy can deliver these sums [enormous US federal debt and unfunded liabilities in the tens of trillions of US dollars] to the US Treasury so that it can, in turn, deliver them to the American public. If done through a direct increase in taxation, the result would be a public rebellion and an enormous economic depression. If done through direct inflation of the quantity of US Dollars in circulation, it would be a version of what the Weimar Republic did in the early 1920s. And the end result would be the same. ... Being unsustainable, exponential rates of change in economics are self-correcting. They correct with an enormous change of direction - always out of the blue. This is what now is on the horizon for the US."

John Williams' Shadow Government Statistics www.shadowstats.com/
"Risks of the current circumstance evolving eventually into a hyperinflationary
depression remain extraordinarily high."

Axel Weber, Chief of the Bundesbank and also ECB council member
"The current trend of the US current account deficit is unsustainable, ... An abrupt unwinding of the current imbalances could mean - massive exchange rate and interest rate movements - and, of course, a shake-up of the global economy"

Antal E. Fekete, Professor Emeritus, Memorial University of Newfoundland
"For over sixty years after the Green Silver Act [1943], America has been fortunate enough to escape that fate. This should not give it comfort. America has never been closer to fully-fledged financial bankruptcy than it is right now, an event for which the banks, businesses, and the people at large are ill prepared, making the coming shock even more devastating. The economists’ and financial journalists’ profession bears responsibility for failure to forewarn and forearm the public. Short of a miracle, America cannot avoid its fate: credit collapse, the vanishing of the value of dollar and all dollar-denominated assets such as bank notes, deposits, bonds, insurance policies, and pension rights."

Peter Warburton, in 2001, Author of Debt & Delusion
“What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.”

Paul A. Volcker, chairman of the Federal Reserve from 1979 to 1987
An Economy on Thin Ice
Article is adapted from a speech in February, 2005 at an economic summit sponsored by the Stanford Institute for Economic Policy Research
"Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
...
I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand now, it is more likely than not that it will be a financial crises rather than a policy foresight that will force the change."

David Jenson, principle of Jensen Strategic
"To be clear: we face the possibility of an epic economic correction."
This quote is from DECEPTIVE WARNINGS, Nearing Economic Disruption, the Fed Distorts Perception which can be read here:
http://www.financialsense.com/fsu/editorials/2005/1208b.html#_ednref3



The USD:

One reason that has been put forth for the dollar rally is that US entities are in trouble at home and are cashing in foreign investments and repatriating the proceeds (converting their cash foreign fiat token proceeds to [buying] USD tokens).

Another reason put forth is the Homeland Investment Act which started at the beginning of 2005. It allows US companies with foreign earnings to repatiate them at a tax rate of 5.25% versus the normal tax rate of 35%. It is due to expire at the end of December, 2005.

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