Fractals, Chaos Theory and Black Swans

In Jurassic Park (the book), Michael Crichton introduced us to fractals and Chaos Theory through the character of Dr. Ian Malcolm, a mathematician and self-professed "chaotician," a title which he used to describe his work in applying Chaos Theory to practical real-life scenarios. Malcolm was played by Jeff Goldblum in the movies. His character explained, through fractals and Chaos Theory, how the "meddling" created such disastrous results.

In the video link at the bottom, you will meet a real life "Dr. Malcolm" in Benoit Mandelbrot. His Jurassic Park is today's economic crisis...

Start with this post today from Michael Kosares, the owner of USAGold, CPM (Centennial Precious Metals) and host of Another/FOA from 1998 until 2001:

MK (usagold.com 24October2008; 10:06)
Why gold ownership is so important. . .

“The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire.” — William Strauss and Neil Howe, The Fourth Turning, 1997

“We are in the midst of a once in a century credit tsunami. . .Those of who have looked to the self interest of lending institutions to protect share holders’ equity, myself especially, are in a state of shocked disbelief.” — Alan Greenspan, 10/23/08, Congressional testimony

“I don’t know… if we’re entering the most difficult period since, not since the Great Depression — since the American Revolution. . .Never in the history of the world have we faced so much complexity combined with so much incompetence and understanding its properties. Now you understand why I’m worried. I hope I’m wrong. I wake up every morning - actually I don’t wake every morning now, I start to wake up at night the past couple weeks hoping I’m wrong. Begging to be wrong. I think that we may be experiencing something that is vastly worse than we think it is.” — Nicholas Taleb, author, The Black Swan, PBS interview, 10/21/08

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Taken together, these three quotes summarize the current situation, not just as an assessment, but as a call to action. Those of you who have read my writings over the years know that I put stock in the idea of fractals and chaos theory, though I think “chaos theory” a misnomer. There is a great deal of structure to the chaos Mandelbrot and Taleb describe. Thus, I was very interested in the interview linked here by gLod (Thanks, sir!).

In this context, an event like the Iceland breakdown, for example, is important not so much in that it will cause further, knock-on problems in the financial system. It is important because it is the result of circumstances which exist everywhere, i.e., provocative circumstances in place system-wide. Iceland becomes a template, by this this way of thinking, for what might occur elsewhere, and thus, not an isolated event. In essence, Iceland might be seen as a fractal. It follows then that Icelands may exist everywhere because of the global spread of fiat money systems — economies prone to stagflationary breakdown.

As I have said before, the first stagflationary breakdown of this type was the United States in the 1970s. The same sort of breakdown occurred in Asia in the 1990s, as well as in Mexico, Argentina and a host of others thereafter — same symptoms, same disease. And now — some 35 years later — we have come full circle back to the United States. In this wave, the number of state participants has risen, i.e., the nature of the crisis as Mandelbrot and Taleb point out has become global with global consequences.

I can see why Taleb is having trouble sleeping nights. He is not the only one. Individual investors/citizens should take note. In the same way, what is happening in the gold market is not an isolated event. Gold could be a fractal in its own right signaling what might happen in other commodities, most notably, oil, natural gas and foodstuffs if collapsing prices cause shortages. Be aware. This is not a time to beg off as a casual observer.

Here is glOd's post referenced by MK which contains audio and transcript links:

gl0d (usagold.com 23October2008; 19:21)
Black Swans & Mandelbrots

A short interview with Nicholas Taleb and Benoit Mandelbrot on NPR [mp3] [some transcripts]

Taleb: “I don’t know… if we’re entering the most difficult period since, not since the Great Depression — since the American Revolution”.

g.