Critical States – can forestry teach us lessons for the debt crisis?

Oct 31

I spent the day yesterday driving through the mountains of Colorado looking at the beauty of the changing aspens and taking pictures with my daughter. While driving around the mountains I had a lot of time to think about a lot of things but our forests and the debt crisis were two seemingly unrelated topics that floated through my gray matter.

If you’ve read some of my other blog posts you may recall the one where I discussed the pine beetle problem. I didn’t go in to great detail about the forest policy that has been followed for the past 50 years or so that contributed to this problem. Well its that policy that I am going to cover a little bit here because I think it provides a useful lesson to what is currently happening with the debt crisis and economic problems both here and abroad.

A few years ago I read the book Ubiquity – Why Catastrophes Happen by Mark Buchanan. Buchanan is a science writer and in this, his first book, he discussed various disasters such as the Yellowstone Fire, the stock market crash of 1987, and the extinction of dinosaurs and how the critical state is reached in which such a catastrophic event can occur.

One quote from the book in the discussion of the Yellowstone Fire, I find relevant to today’s economic situation is “nothing reaches the critical state all by itself.” In the Yellowstone Fire, US Forest policy played a key role in the forest reaching a critical state in which fire would be catastrophic. From 1890 the US Forest Service has a zero tolerance for any forest fire. So all fires, even small ones were immediately put out. Over many years this caused the forests to become very dense and cluttered with dead wood, grasses, branches and other “fuel”. With each passing year this put the forests in an even more unstable situation eventually resulting in the burning of 1.5 million acres. Allowing small fires to burn is one of the main ways to keep the forest balance at a “balance” rather than “catastrophic/super critical” state. Nature keeps its own balance. When we step in we destroy that balance and allow for the system to reach a super critical state.

Now to my point about the economy. The system of capitalism should provide for “small fires” or business failures that keep the system from reaching a “super critical” state such that if any point in the system fails it will all come crashing down. Over the past decade or so there have been countless instances of governments stepping in to intervene to prevent those “small fires” from happening to alleviate any short term pain the economy might have to go through. What this has done is create a super critical state, what is sometimes referred to in the press as systemic risk. Let’s use the Greek debt crisis as an example.

The Greek’s continued to spend beyond their means for many years, ignoring the membership guidelines in the EU governing debt levels. Propped up by the EU they were allowed to continue to borrow at rates that were not commensurate with the underlying risk of their economic situation. Government interventions in the past and now have continued to allow the debt to balloon larger and larger. Each time making the possibility of a failure that will cause catastrophic economic consequences even greater. Granted nobody wants to go through another economic crisis like what we say in 2008 but I believe that the reason why we are still in this “hyper critical” state is that we didn’t let the fire burn. We jumped to put it out. Unfortunately, now the situation is worse and the longer we put off letting the fire burn the worse it is going to be when it does.

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