If you want to better understand the science of how markets behave under stress - and why extreme events happen far more often than one might expect, and why “fat tail” phenomena appear to be everywhere - you will love it.Īs mentioned earlier, inflation can feel mysterious in regard to its origins because inflation is an emergent property, born of a complex adaptive system. Resonating feedback loops in complex adaptive systems are the means by which all manner of extreme events can happen, from market crashes, to world wars, to the rise of dangerous mass movements.įor more on this topic, an excellent book to read is Ubiquity: Why Catastrophes Happen, by Mark Buchanan. If financial contagion occurs, the fear leaps from country to country and goes international. The fear feeds on itself, causing asset reserves to shrink as larger quantities of assets are withdrawn, until the banks face a liquidity crisis, on their way to a solvency crisis.Īt this point, the government is forced to announce some kind of intervention. The banks say reassuring things, but their reassurance that “everything is fine” only frightens people more. With a complex system, everything tends to affect everything, making the linkage pathways hard or impossible to determine.Ī complex system that is also adaptive - making it a complex adaptive system - adds another layer of mystery to the mix.Ī complex adaptive system will actively respond to feedback, and behaves differently in different environments, and may even react to its own reactions and respond to its own responses.Ĭomplex adaptive systems can create positive feedback loops, where a trend becomes self-reinforcing, causing the trend to feed on itself and grow more powerful over timeįor example, think of what happens in the midst of a financial crisis: People get scared and withdraw assets from banks. You can reverse engineer the linkages of a complicated system. That is what it means for a system to be complex, rather than complicated.Ī complicated system may have lots of moving parts, but straightforward transmission mechanisms. We can understand the science of hurricanes, but we can’t predict their formation in real time, because there are too many variables interacting within the weather pattern as it happens. To understand inflation, it helps to understand complexity, because inflation is an emergent property generated by a complex adaptive system.Ī complex system is a thing with multiple components, where the components interact with each other in unpredictable ways.įor instance, a tropical storm that turns into a hurricane is an example of a complex system. This can be especially true with monetary inflation, where the public may not be aware the supply of money and credit is increasing. Rather, when inflation gets going, there isn’t any single cause to point to, and thus no simple way to control it or identify the source. When we say inflation can be mysterious, we don’t mean it’s a literal mystery. Thanks so much for the kind words! As a reminder to all readers, if you have a question, or a comment, or find yourself curious about something, feel free to write in via. I know I am missing something but have no idea what it is. Please consider publishing another article laying out exactly how inflation happens, who does it, why they do it, what is their benefit for doing it, how they sneakily do it, and why does no one stop them? Mysterious didn’t raise prices, everyone, including him, could buy more and have more stuff since there is more money to go around. Who actually sees that the money supply is rising relative to goods and services? Who decides to raise prices as a result? If Mr. The hidden reason is because a greater volume of currency is chasing a relatively smaller volume of goods and services, causing prices to naturally rise.” “If the general supply of money increases, and the money is being lent and spent (as opposed to just sitting in bank vaults), prices can seem to rise mysteriously with no one able to pinpoint why. “A currency can also be degraded by way of hidden inflation, which happens when an increased supply of currency enters the network. Rather, your article discusses what money actually is to real people in real social networks in the real world and it is profound. It describes the actual essence of money, and instead of employing empty phrases like, “Money is a medium of exchange,” which is true, but is obvious and not instructive. Your article, Money is a Social Protocol, Built on a Network, Enabled by Technology, is one of my favorites. A reader asks a great question about inflation.
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