Why do models never predict catacylsmic events? you know the ones where everything gets blown up….20 years of making safe returns followed by a complete loss of capital.

After LTCM blew up and was repackaged it seemed like no drama was too big to handle. Just reinflate, repackage, securitise and call in the delivery men. But a look at nature shows us this isn’t always possible.

We have reached tipping points before. Easter Island was a good example of how populations and resources co-exist in relationship which should be predictable but actually isn’t. When do you realise that you have cut down too many trees?

We fished cod merrily out of the Grand Banks, a steady and stable provider of cod still one day they disappeared never to return.

Now we have Peak Oil or do we? When will oil production drop off the cliff and what will that mean. Will we continue to fool ourselves into believing that there is actually an endless supply. Can we predict the outcome? I doubt it. Like the Easter Islanders we will merrily be chugging away until one day it dawns on us that its over.

We will fight it of course. However, nature is alot harder to work with than numbers on a spreadsheet. Boy we can make those up forever even if we can’t magic up fish, trees or oil.

Here’s a nice piece from Taleb, of the Black Swan, talking about our inability to forecast meltdowns. The question we have to ask ourselves is simple. Deep down do we really believe we can continue on in the same over consumptive, debt leveraged manner?

We have a great opportunity to sweep away the excesses of the last 20 years.

But try telling that to the masters of the universe. To them it’s just another hiccup in an new paradigm of economic stability.

Somehow I think they will be proved wrong again.

Tags: black swan, debt, ecosystems, financial crisis, markets, money, taleb