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The Financial Meltdown and the 2nd Law – A Thoughtful Examination

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  • Tue, Jan 13, 2009 - 03:49am

    #1

    Mike Pilat

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    The Financial Meltdown and the 2nd Law – A Thoughtful Examination

Don’t know if anyone saw this one, but for the philosophically inclined, this is a great reflection that using a comparison of our chaotic breakdown to the 2nd law of thermodynamics.

http://www.financialsense.com/editorials/petrov/2009/0112.html

I’m still collecting my thoughts on this essay. More later.

Mike

  • Tue, Jan 13, 2009 - 04:55am

    #2

    Mike Pilat

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

There’s an interesting point made in the essay, illustrated here:

"With rising chaos and uncertainty, social systems become resistant to
change. The leaders of North Korea may well understand that their
system is a mess, but little will change until the system reaches total
chaos. Similarly, it would have been quite unrealistic to expect
Brezhnev to initiate transition from a socialist economy to a free
market one during the 1980 Olympic Games – there simply was not enough
systemic instability and chaos at the time."

This points out that as the threat of chaos and confusion become more and more obvious, people demand stability and resist addressing the issues at hand…until the house of cards comes down. This reminds me of some of the language used by Henry Kissinger (he’s high on my list of people the world could do without). Kissinger has said that in times of uncertainty, people will gladly trade liberties for the promise (though perhaps not certainty) of order.

Let us remember the words of Benjamin Franklin: "He who would trade liberty for some temporary security, deserves neither liberty nor security."

So the above quotes basically remind us once again that intense crisis is inevitable in order to "get to the other side" but that we should stick to our principles in the meantime.

One other interesting point that the article hammered repeatedly was the concept of entropy in terms of disorder and complexity. As with heat systems, America is basically having to create a greater amount of disorder elsewhere on the earth in order to maintain a lesser amount of order here at home. Chris always points to the status quo that is so deeply ingrained in America, but this article would argue that we could simply look outside of America and see if there is any spare room for us to dump more disorder. We’re running out of space fast!

The article points out that the entropy level of America right now is getting critically high and if we are to compare America to a thermodynamic system, we can expect that our nation will have a harder and harder time dumping our disorder to other areas outside of our system (like, say, Iraq). 

As an engineer, this fascinated me. It is an excellent analogy and I encourage all to read it.

Thanks,

Mike 

  • Tue, Jan 13, 2009 - 05:44am

    #3

    mainecooncat

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Hey Mike,

Thanks for this article and above post. I haven’t read it yet but can’t wait to do so. However, I just wanted to drop you a quick response — I’ll respond at greater length later — saying thanks for always commenting in thoughtful, articulate, and non-combative ways.

I’ll quickly say this though: Kunstler talks about the entropy issue at length in "The Long Emergency." And I’ve been thinking about it quite a bit recently.

  • Tue, Jan 13, 2009 - 09:53am

    #4

    Damnthematrix

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Great article, thanks Mike…..

This caught my eye:

" The processing of all nonperformingcontracts would have taken the courts hundreds of years. Therefore,the court turned the problem to the parliament; the parliament could not decide, so pushed back the problem to the court system. Soon the problem reached crisis proportions that forced upon the courts a Solomonic decision: all futures transactions were declared null and void."

I believe the same thing will happen to unpayable interest on debts…..

Debts WILL be canceled, one day…..

Mike 

  • Tue, Jan 13, 2009 - 12:32pm

    #5

    Mike Pilat

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Yes, Mike. One day all of this is going to come to pass, there is no other way and there’s no easy solution.

I think we should remind ourselves that simliar things to this crisis have happened before and it is not the end of the world but we have to recalibrate our expectations of what the future holds. For me, the most important thing is keeping honest with the people, which I think will help to keep things from getting out of control. People can handle hardship, but after a while they won’t tolerate lies and the disillusionment that truth later brings.

  • Tue, Jan 13, 2009 - 01:30pm

    #6
    MarkM

    MarkM

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

[quote=Mike Pilat]

People can handle hardship, but after a while they won’t tolerate lies and the disillusionment that truth later brings.

[/quote]

Mike, this really sums it up for me and,I feel, many others.  Until the government and big business changes it’s MO of lying to accomplish their agenda, the chaos will continue to increase.  Disillusionment is growing daily. I think it will become another "condition" that goes vertical at some future point.

  • Tue, Jan 13, 2009 - 02:50pm

    #7
    Doug

    Doug

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Thanks for the article, it makes one stop and think for a while.

The fact that one of the authors is the "founder and Chairman of the Supervisory Board of the TAVEX Group, the largest gold bullion dealer in Northern Europe" certainly suggests a conflict of interest in the thesis of the article.  And, I’m not sure that the 2nd law of thermodynamics is an apt metaphor. 

Nonetheless, the article gives us cause to think about what the consequences of a continued decrease in the value of the USD will be.  IOW, where do we find real value that can insulate us from the possibility that a collapse of the USD will cascade and result in the collapse of all fiat money.  Tamming, of course, would like us to believe that gold is the ultimate currency and will retain value.  But, why would it?  It has no intrinsic value that would be greater than, say, lead.  Only its historic role as the final currency makes it so.  IOW, like all fiat money it has value only so far as people agree that it does.

So, what is real wealth?  I think this gets back to one of the central themes of this website, we are rich only so far as we have the tools to support ourselves and a community to work with for mutual support.  But, unless we go to a strictly barter system, we have to have some medium of exchange, i.e., fiat money.

What then, in the final analysis, are we, who have much of our future security wrapped up in retirement funds invested in some type of fiat money based investments, to do?  There is a lot of talk about getting our money off shore to protect it against devaluation of the USD, but unless there is some other currency that is immune to the collapse of the USD, we are all screwed.

I would appreciate some discussion about how we should insulate ourselves from a collapse of the total system, as suggested in the article.  Thanx.

Doug

  • Tue, Jan 13, 2009 - 04:09pm

    #8
    MarkM

    MarkM

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Doug,

 

The article does not address the societal implications of a monetary collapse.

When you inquire about insulation, is it regarding "real" or "financial" wealth, or both?

  • Tue, Jan 13, 2009 - 04:47pm

    #9
    Doug

    Doug

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Mark,

There are necessarily societal implications to any kind of financial collapse, and I suppose that’s the first thing I think about when any kind of cataclysmic event takes place.  IOW, how do we adapt, survive and possibly thrive?

[quote]When you inquire about insulation, is it regarding "real" or "financial" wealth, or both? [/quote]

Both, I suppose.  Assuming we’re not going to run right out, withdraw all our retirement money, absorb the penalties and tax payments and spend the rest on land, tools, windmills, solar collectors, batteries, generators, gas tanks, guns, stockpile food, etc. (real wealth) we can actually use to survive the storm, what do we do with the money, electronic though it may be?

  • Tue, Jan 13, 2009 - 10:42pm

    #10
    MarkM

    MarkM

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    Re: The Financial Meltdown and the 2nd Law – A Thoughtful …

Financial wealth – most of mine has come from saving a portion of my income.  While I have had some in stocks from time to time, I have always been very conservative.  There have been times that I looked on with envy as equities grew at a much greater rate than my "portfolio".  Now, I just want to protect what I have.  Admittedly, most of my financial wealth is in USD denominated assets – money market, muni bonds, my home. I am fortunate that I have no debt.  I have been buying physical gold over the past year, but it is still small percentage of my overall.  I will continue to buy as the year progresses, I am concerned about the future of the USD.  I have no desire to play markets (futures, commodities, etc) like some of the board members do, it just doesn’t interest me.

Real wealth – Personally, I feel the need to be prepared for some degree of societal dislocation.  My plan for now is to adapt in place.  I live in a major metropolitan suburb, but I have two acres.  I have begun the garden and can expand it as needed.  I have enough food stored that I could go 3 months without leaving the house.  I don’t plan on extended power outages.  I have a small gas generator and the ability to store some amounts of fuel for it and vehicles. I am prepared to defend my location as best as can be given the physical location.  I am new to the "preparedness" idea.  However, my entire adult life (I am 51) I have had this little voice in my head that says,  "This lifestyle is tenuous and could change in short notice."  That voice has been growing louder over the past year.  I do have some mental plans rattling around involving subsistence living in a rural setting and I may ultimately end up there.  However, I am working on what I can accomplish without moving.  The skills, knowledge and implements can be taken with me if I should decide to go.

Noone knows how this "predicament" will play out.  My most likely scenario is one of a slowly declining standard of living with possible intermittent shortages of fuel and food, etc.  If something more dramatic were to happen in the near future, I would have to make it up on the fly.

I have thought about cashing in my tax-deferred monies and paying the taxes and penalties and using the proceeds to purchase rural land.  I don’t trust money markets much today and a hard asset has some appeal.

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