{"id":13375,"date":"2015-10-14T06:37:50","date_gmt":"2015-10-14T11:37:50","guid":{"rendered":"http:\/\/olduvai.ca\/?p=13375"},"modified":"2015-10-14T06:37:50","modified_gmt":"2015-10-14T11:37:50","slug":"the-paradox-of-risk-central-planning-is-linear-reality-is-non-linear","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=13375","title":{"rendered":"The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear"},"content":{"rendered":"

The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear<\/a><\/h3>\n

You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash.<\/i><\/p>\n

I first discussed\u00a0the Paradox of Risk<\/i>\u00a0in August, 2008, just before the stock market melted down:<\/b>\u00a0The Unintended (Risky) Consequences of “Backstopping” Risk<\/a>(August 12, 2008)<\/p>\n

This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept.<\/i><\/p>\n

I recently covered a related topic,\u00a0The Dangerous Illusion That Risk Can Be Offloaded Onto Others<\/a>\u00a0(October 2, 2015).<\/p>\n

The paradox is that believing risk has been eliminated leads us to take on insane levels of risk<\/b>–levels that we would never have accepted before, levels that essentially guarantee our financial destruction.<\/p>\n

I recently had the opportunity to discuss these topics with Max Keiser:\u00a0Keiser Report: Global Paradox of Risk<\/a><\/b>\u00a0(25:40 — I join Max and Stacy in the 2nd half)<\/p>\n

There are a variety of sources of the belief that risk has been lessened or eliminated:<\/b><\/p>\n

1. The Fed Put, the belief that the Federal Reserve will never let stocks decline by more than a few percentage points before it steps in and saves the market from any further decline.<\/p>\n

2. The belief that hedges dependent on counterparties paying off when the market craters have effectively transferred risk to others.<\/p>\n

3. The belief in Modern Portfolio Management, i.e. that risk can be hedged or reduced to near-zero by diversifying one’s portfolio, investing in assets with low correlation, etc.<\/p>\n

All of this is nice, but fatally flawed.<\/b>\u00a0Max and I discuss the reality that markets are not linear, they are fractal.<\/p>\n

Central planning is linear, but reality is non-linear.<\/b>\u00a0The net result is the Fed can do whatever it wants, whenever it wants, and markets will still crash from time to time.<\/p>\n

…click on the above link to read the rest of the article…<\/p>\n","protected":false},"excerpt":{"rendered":"

The Paradox of Risk: Central Planning Is Linear, Reality Is Non-Linear You thought it was safe to drive 90 miles an hour on a rain-slicked narrow road while you were tipsy because the airbag would save you, but it still hurts when you crash. I first discussed\u00a0the Paradox of Risk\u00a0in August, 2008, just before the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[125,127,303,305,9855,9854,4924,690,778,3067],"class_list":["post-13375","post","type-post","status-publish","format-standard","hentry","category-economics","tag-central-planning","tag-charles-hugh-smith","tag-fed","tag-federal-reserve","tag-linear-system","tag-non-linear-system","tag-oftwominds","tag-risk","tag-systems-thinking","tag-unintended-consequences"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13375","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13375"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13375\/revisions"}],"predecessor-version":[{"id":13376,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/13375\/revisions\/13376"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13375"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13375"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13375"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}