JASON & THE BLACK SWAN PROBABILITY
MARCH 19, 2015 By JC Collins
Now that current events are confirming the analysis which has been developed here over the last year and 2 months, it’s time to move forward and understand the broader ramifications of what these changes will mean for the monetary world.
There have been numerous proclamations over the last few years in regards to the irrelevance of the International Monetary Fund and the SDR – Special Drawing Right.
Now that it has been officially announced by both China and the IMF that the yuan will be added to the SDR composition by the end of this year (stating that they are in discussions is tantamount to a confirmation of such), the conspiracy theories and faulted analysis of the BRICS countries overthrowing the IMF and World Bank, and by default America, should be tossed in the trash bin where they belong.
It has been repeatedly stated here that neither China, nor the United States, want the added domestic pressure of using their respective currencies as the global reserve unit of account.
Yet, the US Congress has failed to ratify the 2010 IMF Quota and Governance Reforms.
Reforms, which will restructure the IMF Executive Board and quota system, leading into the systemic framework changes to the international monetary system.
Treasury Secretary Jack Lew stated yesterday that America is beginning to lose influence in the world, along with veto control in the global institutions which it has dominated since the end of WW2.
The Plan B reforms which the G20 and IMF announced earlier in the year are now materializing in the form of the exodus by European countries to the Asian Infrastructure Investment Bank, and the ongoing discussions between Ukraine and Greece with the eastern powers of Russia and China.
The SDRM – Sovereign Debt Restructuring Mechanism, meme and media representation is beginning to pick up momentum. As each region and country falls further into economic deflation, and as the world enters the final stages of deleveraging from the expansion of debt which culminated in the financial crisis of 2008, the obvious nature of the multilateral architecture will become more clear.
The statistical research which has concluded, and been pompously presented as the collapse of the USD and the rise of a new gold standard, or trade system, is inherently flawed in that it’s analytical baseline is positioned upon past economic data.
This is the same data which has led most analysts off track from the slowly rising framework of the multilateral SDR system.
Whether it’s QE policies, ZIRP, NIRP, or the migration of gold, no economic model has accurately predicted the full transition because the transition segments, such as the QE deleveraging, can not be referenced and understood on old economic data and models.
The Group of Thirty is a non-profit organization which is mandated with restructuring the international monetary system, and it’s members are a list of the top central bankers and economists in the world. These are the people making the decisions and engineering the multilateral framework. America, China, Russia, Europe, and all other prominent country’s and regions are represented on its board.
Occasional Paper 87 from the Group of Thirty (G30), published in May, 2013, titled Debt, Money, and Mephistopheles, makes clear plans for the “redesign of financial regulation and macroprudential policy” to prevent another crisis like the one in 2007.
The paper goes on to describe how a “combination of macroeconomic and macroprudential policies are needed to navigate against the deflationary headwinds created by post-crisis deleveraging“.
From this policy paper the purpose and intent of the QE strategy is clear. Presenting QE as leading to the collapse of the monetary system is not representative of its purpose and design.
When we extrapolate this knowledge into the vast amount of analysis and predictions which have been offered up over the last few years, we begin to realize the error in relying on old economic data and models in attempts to determine future outcomes.
This is why most analytical predictions will not be realized.
In addition, analytical outcomes with an agenda use active deceptions as methods of persuasion. These active deceptions:
There is much talk of a Black Swan Event in the economic and geopolitical worlds. This concept has been used by endless analysts and columnists as the emotional content in essays and blog posts. The Black Swan Event, we are told, will lay waste to any plans which may be in the works, and lead the world into years and decades of depression, and/or war.
But lets take a closer look at this concept, and the probability of something of this caliber actually taking place.
JASON, a study group division of the MITRE Corporation, completed a Rare Event study in October, 2009. This study analyzed and measured the probabilities of 9/11 magnitude events.
Based on the methodologies used in the study, it was concluded that between the years 1968 and 2006, there was a 23% probability of a 9/11 magnitude event. Obviously there was such an event, and the probability was still less than 50%.
Based on the same baseline data, the group determined that the probability of such an event between 2009 and 2019 is 7%.
What is interesting is that the study referenced the term Black Swan Event. Here is what it had to say:
We frequently encountered references to “Black Swans” in our study. The Black Swan metaphor was popularized by a recent book The Black Swan: The Impact of the Highly Improbable by Nassim Taleb . The metaphor has clearly had great impact on how people are thinking about rare events, so we considered Taleb’s argument carefully.
Taleb’s argument is that many high-magnitude rare events (Black Swans) are fundamentally unpredictable, and that efforts to predict them are futile, dangerous, and even intellectually fraudulent – particularly when using statistical models based on past observations, and especially if the statistical model assumes Gaussian variance around some mean event size.
His term “Black Swan” is a reference to a (supposed) European belief that all swans were white until black swans were discovered in Western Australia in the 1700’s.
Black swans came to be used in philosophy as an example of a logical failure of inductive reasoning – that is, just because all previously observed swans are white does not necessarily mean that the next swan will be white.
Taleb makes important points but carries his argument too far. It isunfortunately true that some mathematical models for risk forecasting assume Gaussian variance despite substantial countervailing real-world evidence.
Taleb’s criticism of economic risk models (such as the Black-Scholes-Merton options pricing model, which assumes that market prices make Gaussian-distributed moves) is particularly poignant given the world’s current economic situation.
But though this is damning criticism of specific models’ faulty assumptions, it is not a damning general criticism of the careful use of modeling to help predict risk.
What we can take from all of this is that the probability of a 9/11 magnitude event is marginal at best, and the probability of a Black Swan Event is even less so.
The use of the term is out of proportion to the realities taking place in the monetary infrastructure. The analytical conclusions which call for such an event, along with the collapse of the dollar, and global depression, are inaccurate because they are based on old economic models which haven’t accurately considered the changing dynamics and architecture of the emerging multilateral, such as the designed deleveraging purpose of QE policies.
Though the USD will adjust to find a new position within the multilateral system, it will not collapse.
The stock markets will be the last to deleverage, but that is an adjustment which is required to bring back balance to the system. The world will not end and the lights will come on tomorrow.
The transition away from the USD as the primary unit of account is taking place piecemeal and with intent. The real world applications of this transition model are not yet clear, but this is more a time of opportunity as opposed to the fear which is being promoted based on old economic modeling. – JC