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The Bear's Lair: Dinosaur tail risks

January 27, 2014

The World Economic Forum last week issued its "Global Risks 2014" annual report, supposedly outlining the risks that could cause real trouble in the next decade.
A lot of it was fashionable pap—for example, even if global warming is real, it doesn't have time to get up much momentum or do much real damage in the next decade. Still, the report highlighted some risks that, while unlikely, are nevertheless real, and there appear to be more such "tail risks" than 50 or 100 years ago. So I thought it worth examining the question: is our civilization now so complex that it accumulates tail risks as an overly complex computer program does bugs? And are we therefore destined to succumb to one within the next few decades, causing a very unpleasant and unexpected collapse?

The Global Risks Report highlights and ranks the risks thought to be most critical over the next decade. In practice this process produces a mixture of serious possible problems, such as mismanaged urbanization, that have only moderate downside, fashionable worries, such as global warming, that will have little effect in the next decade and true global-scale civilizational risks. Such risks are low-probability but sufficiently catastrophic to destroy our civilization's coping mechanisms. An extreme example is impact by a jumbo meteorite, which has very low but not zero probability and is probably one of the few tail risks that hasn't increased in probability/damage over the last 200 years.

The key to whether disasters matter is their ability to overwhelm our coping mechanisms. An ordinary flood, earthquake or epidemic is very tragic if it kills many people, but we have mechanisms to cope with its effects, so that even if civilization is overwhelmed locally, it can quickly be rebuilt and life in the rest of the world is little affected. Sufficiently large disasters, or disasters of a nature we haven't learned to deal with, can overwhelm our coping mechanisms and cause our complex global economic system to fall apart. Even a major catastrophe such as the 1348-49 Black Death, which probably killed about a quarter of the population of Europe, caused only a moderate disruption of the simple mediaeval economy. Indeed it resulted in a century-long rise in living standards as labor became scarce. An equivalent disaster today, killing say 2 billion people, would do much more long-term damage both directly and indirectly. We simply do not have the mechanisms to handle such an event.

The report groups risks into five categories, technological, societal, geopolitical, environmental and economic. Of the five categories, environmental risks are the least worrying on a 10-year view. Global warming isn't going to happen before 2024 (and probably isn't going to happen at all to more than a modest extent that we can easily cope with.) There seems to me no reason why extreme weather should become any more extreme, or why we should expect an above-normal incidence of such natural disasters as earthquakes, volcanoes and tsunamis.  I think water is an increasingly worrying resource problem, largely because of the inexorable increase in population. It raises the salience of all resource limitations, but it probably won't become critical in the next decade, except possibly in a few areas.

The one environmental problem we should probably worry about is not global warming but global cooling, for two reasons. First, a natural Ice Age, reducing the temperature of the globe by 6 degrees Celsius or so, appears to be overdue, while a volcano of sufficient size could easily produce a more severe version of the 1816 "Year Without a Summer" that followed the 1815 Mount Tambora eruption. Second, global population is fairly close to the sustainable limit and a sudden reduction in crop yields by perhaps three-quarters would produce famine at a level beyond our capabilities to cope with.

The biggest societal risk listed by the report is the possible evolution of antibiotic-resistant bacteria. If this was combined with a major new epidemic, it could easily cause a Black Death-like effect on global population, although only if the world's healthcare systems were overwhelmed would the danger to civilization become truly critical. Fortunately the combination needed of extreme virulence, molecular novelty and resistance to all antibiotics appears very unlikely indeed, although a less extreme version killing maybe 100 million people before it is brought under control but not destroying our civilization must be reckoned a significant probability risk.

Most global geopolitical risks are really no more than problems; they could worsen and cause major economic damage, but without destroying our civilization. However, on the centenary of 1914 we cannot entirely rule out a full-scale global conflict involving the world's most powerful states in an all-out effort. Diplomatically, as I have discussed, the defenses against this appear no solider than they were in 1914, and less solid than they were in 1975, when the dangerous duopoly of the 1950s had settled down into senescence. Technically, of course, such a war could wipe out almost all human life. Even if all-out conflict was limited to cyber-war, it could still prove devastating.

The report identifies cyber collapse or global identify theft as potential problems. The extreme example of these, a successful EMP attack or solar flare wiping out the world's data storage would deprive finance and commerce of the means of operation, at least temporarily. The Carrington Event solar flare of 1859 set several telegraph stations on fire. We have been very lucky not to experience another solar flare of that severity in the subsequent 155 years, as our electronic technology has grown more complex. Without the accumulated data of the last 20 years, much of which is not duplicated in "hard copy," the world economy cannot function. Rebuilding it would be a slow and painful process. The principal obstacle would probably be the U.S. legal profession suing everybody when mistakes were made.

Finally, there are the potential economic disasters, about which this column has written several times. The report identifies fiscal crisis as the most dangerous current risk, and discusses the austerity needed if bond markets refused to finance a major government. However the downside here is not merely austerity, it is outright default on Treasuries, Gilts and JGBs, collapsing the global banking system and sending us financially back to the thirteenth century without either government bond markets or banks. The result would replace the 1930s as the true Great Depression.

Another possibility, missed by the report, is that of hyperinflation caused by the last half-decade of extreme monetary policies. Unlike the Weimar Republic episode of 1923, this would affect nearly all currencies simultaneously. It would deprive the world of a reliable store of value, sending it back at least temporarily to complex barter arrangements.

The above listing is probably not exhaustive, but it should demonstrate that the number and diversity of risks we face has increased markedly in the last half century. A devastating war is not on the horizon currently, but you could argue that it's more likely than at any time since the 1962 Cuban Missile Crisis, the resolution of which reduced the Cold War duopoly to stability, with adequate communication between the two sides. Global warming is unlikely in the short-term, but a sudden global cooling would have a far greater effect today than 50 years ago, because we are closer to the planet's population-carrying capacity. Antibiotic-resistant bacteria are more likely to appear now than in the half-century after 1950, when we were continually inventing new antibiotics, while the resultant epidemic would be spread worldwide instantaneously by the airline network. Cyber collapse is an entirely new problem, one that would not have been anything as serious before 1995 or so. And finally, the two most-likely forms of economic collapse, mass government default and hyperinflation, were unthinkable before the crazed monetary and fiscal policies of the last five years.

It would certainly be possible to run the world in such a way as to minimize the chance of a disruption that would break through the constraints of our ability to manage it. We could run sober fiscal and monetary policies. We could ensure that the world's data storage was backed up in a facility impenetrable to EMP fields. We could devise systems of national or regional quarantine so that a new antibiotic-proof epidemic was contained in a single subset of the world's population. We could run our foreign policies in a more risk-avoiding manner, with less global intervention. Finally, we could ensure that large institutions—financial, corporate and governmental—were broken up, with control being decentralized as far as possible. This would reverse the institutional globalization that has made too many of our problems "too big to solve."

There is, however, no evidence that we will pursue such avenues in the near future. Indeed, the existence of arrogant globalist institutions such as the World Economic Forum, seeking to impose a single set of mistaken policies on the world as a whole, is in itself a major factor taking us away from a fail-safe system and increasing the risk of a civilization-ending disaster.

Going forward, if our policies and governance don't change, the tail risks of life can only multiply. For example, once we have robotized our existence—industrial, commercial and domestic—we will have to cope with the possibility of a global robot revolt. It is a rule obvious to anyone who has dealt with complex engineering systems that every increase in the complexity of our civilization makes it more prone to collapse.

Small is beautiful. So is underpopulated. So is locally managed. The sooner we learn this, the better. 

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.


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