Financial System Supply-Chain Cross Contagion and Zombies

Many critics of today's economic policies of heavy indebtedness and unfunded future liabilities are in effect stating that there is a cascading risk due to increasing government debt burden. Tea partyers recognize the risk and call on government to end the binge because a bill will come due some day, and the collapse will be ugly. We foresee a situation such as San Bernadino writ large, where entire state governments and even the federal government is unable to keep its legal obligations.

The global economy is also showing signs of cascading risk related to Financial System Supply-Chain Cross-Contagion (H/T ZeroHedge). The study is a bit long to digest for one blog article, and I admit to not having read even half of it. However, I believe I understand the key concepts presented and they do not paint a pretty picture. The central theme is that a global supply chain, with Just-in-Time logistics presents an unstable system that a financial crisis could cause to collapse. Given such a collapse, even if the financial crisis were resolved, it would be difficult to quickly restart manufacturing. Further, the collapse in the global supply chain would have a feedback effect that would exacerbate the crisis. From the overview:

As the globalised economy has become more complex and ever faster (for example,
Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centering on some of the most complex and trade central parts of the globalised economy.

The argument that a large-scale and globalised financial-banking-monetary crisis is likely arises from two sources. Firstly, from the outcome and management of credit over-expansion and global imbalances and the growing stresses in the Eurozone and global banking system. Secondly, from the manifest risk that we are at a peak in global oil production, and that affordable, real-time production will begin to decline in the next few years. In the latter case, the credit backing of fractional reserve banks, monetary systems and financial assets are fundamentally incompatible with energy constraints. It is argued that in the coming years there are multiple routes to a large-scale breakdown in the global financial system, comprising systemic banking collapses, monetary system failure, credit and financial asset vaporization. This breakdown, however and whenever it comes, is likely to be fast and disorderly and could overwhelm society’s ability to respond.

This scenario looks eerily like the Lockdown scenario in the Federal government's Project Horizon strategic planning documents. In that case terrorism causes a global collapse of trade that has predictable effects of decades long drop in living standards. In such an environment, we might see a flight to stability and an attempt to move source selection and end item manufacture close to consumer markets. I surmise that some part of the recent increase in U.S. manufacturing output is related to risk aversion by business leaders. Airbus has selected Mobile, AL as a new manufacturing site. Less well publicized, Apple is increasing its reliance on U.S. manufacturing.

I have no data to suggest that manufacturers are becoming more risk averse by laying in larger inventories to support potential interruptions of supplies. If we had the kind of crisis envisioned above, such a strategy might be seen as a worthwhile hedge, even though costly. But all hedges against risk carry some cost. Today, the potential cost of a rapid world-wide financial and supply chain contagion appears to be vastly underestimated, so the cost-benefit trade off of maintaining high inventories is skewed.

At a personal level, we joke about preparing for a zombie apocalypse; but much of the thinking that goes into disaster planning could serve one well if there was even a temporary collapse in global trade. Carrying high personal inventories of spare food stuffs, water, gasoline, generators and other means of preparedness has a cost. Given the current fragility of the global economy, with its high levels of debt and tight integration, personal preparedness is needed.