All posts by Carlo C. Jaeger

Sustainable Finance

The monetary Three Body Problem

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Over coffee at the workshop this morning I had some interesting conversations about the “three body problem in global finance”. So there is this idea that we are moving from a Dollar based system towards a system based on the triad of Dollar, Euro and “an Asian currency”. There was a time when the latter was likely to be the Yen, but given the long-lasting depression of Japan and the rise of China, it might well be the RMB. This development raises the problem whether such a system is stable, or what it would take to make it stable.

There may be an important relation with the Sonnenschein-Mantel-Debreu theorem in general equilibrium theory: with three or more goods, any kind of chaotic dynamics is possible. What we are to make out of this in view of a multiple reserve currency system, I don’t know, but forgetting about it does not look like a very sound approach.

Experience has shown that in a system with a single reserve currency, markets and central banks dealing with other major currencies tend to focus on the relation between those currencies and the reserve currency. (“Small” currencies may focus on a major currency of particular relevance to them, the way the Swiss Franc is related primarily to the Euro. Exchange rates with the reserve currency then show long swings – typically lasting a couple of years – around the trend of purchasing parity. Between the non-reserve currencies, this then leads to further random fluctuations. The latter are bounded, however, by the “anchor” provided by the reserve currency.

With several reserve currencies of similar weight, the anchor is missing, and the long swings between different currencies can amplify each other, resulting in chaotic dynamics that can include very large and fast swings – leading to major financial crises.

It is interesting to compare the situation with a famous problem of dynamics arising in physics. In the solar system, the sun is much larger than the planets, and these are sufficiently distant from each other not to start to circle around each other, while their moons in turn are small in comparison with the planets and again sufficiently distant from each other. As a result, the solar system is sufficiently stable to allow for life and human cultures to evolve on planet Earth.

Things are very different if one considers the dynamics of bodies of similar size moving through space. With three and more such bodies, chaotic dynamics is the norm. Anything to be learned about currency dynamics from this?

 

1st Open GSS Conference

A Remark on Global Systems

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In the philosophy of science (according to Paul Feyerabend an under-researched form of madness), there is a story of two friends at a party where one says to the other: “Let’s go talk to the lady who is pouring herself a glass of vodka over there!” They approach her and realize it’s a man drinking gin. The morale: we can successfully refer to something by means of erroneous descriptions.

Of course, the description has to contain an element of truth, but to recognize it, one must get more familiar with the object referred to. So let’s start with a very preliminary description of global systems, taken from the invitation to the first open GSS conference. A global system is something like:

  • the energy, water and food supply systems
  • the internet
  • the global financial system
  • the agents, resources and mechanisms involved in climate policy
  • the web of military forces and relations
  • globally spreading diseases
  • the scientific community

In understanding, studying and shaping global systems, computer networks are essential. I was trained to look at computers as Turing machines, and to coupled Turing machines – and therefore at computer networks – as big Turing machines. I am not so sure anymore, for two pretty abstract reasons. First, the work by Dina Goldin and Peter Wegner at Brown university has led me to think about extended Turing machines as devices mediating between unending streams of inputs and outputs (Google has the pdfs). And second, the conversation between Turing and Wittgenstein (documented in C. Diamond, ed., Wittgenstein’s Lectures on the Foundations of Mathematics) has led me to look at computer networks as embedded in human conversations in an inextricable way.

Some philosophers have seen human conversations as embedded in an overarching conversation of humankind. While this was a powerful metaphor in the past, the evolution of global systems is increasingly turning it into a reality. Humankind has begun to engage in a global conversation, be it via the channels of science or of mass media, of social networks or of face-to-face encounters mediated by global travel. Global system science is a reflection on this conversation, while being a part of it.

For the moment, all I am trying to do is to refer to global systems with preliminary descriptions, starting with examples rather than with a definition based on some conceptual frame. To see how important global systems have become, just think about the relation between the global financial crisis and the troubles of the Eurozone, or give a look at http://arxiv.org/abs/1107.5728…

Carlo Jaeger

1st Open GSS Conference, Events

First Open Global Systems Science Conference

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Dear colleagues,

We are pleased to invite you to the First Open Global Systems Science Conference, to be held in Brussels at the Stanhope Hotel, November 8 – 10th 2012. The aim of the Conference is to contribute to the development of Global Systems Science (GSS). The study of problems as diverse as global climate change and global financial crises is currently converging towards a new kind of research – Global Systems Science.

GSS could not emerge without substantial advances in information and communication technology (ICT). The use of computer models, digitized data, and global virtual networks are vital for GSS, and GSS can provide a key domain for socially useful ICT developments.

GSS builds on economics as well as on climatology, on history as well as on geography and on a variety of further disciplines. However, it is no attempt to renew the failed pursuit for a single unified science. It simply integrates insights and methods that are useful in studying global systems and develops them further for that purpose.
Important examples of global systems are:

  • the energy, water and food supply systems
  • the internet
  • the global financial system
  • the agents, resources and mechanisms involved in climate policy
  • the web of military forces and relations
  • globally spreading diseases
  • the scientific community

The conference is organized by the EU project Global Systems Dynamics and Policy (www.gsdp.eu), a project coordinated by the Global Climate Forum (www.globalclimateforum.org), and carried out by a team involving a transdisciplinary group of institutions based in Europe and other parts of the world.

GSS is one of those fields of inquiry where a separation between basic and applied science is misleading. The community of researchers engaged in GSS will evolve in a close dialogue with practitioners, policy-makers and other stakeholders. Therefore, – following the experience of previous successful GSDP meetings (Berlin 2011, Barcelona 2012) – this conference will bring together a unique cohort of researchers and practitioners relevant for GSS.

We look forward to meeting you in Brussels and to engage with you in this challenging and exciting conference.

On behalf of the GSDP steering committee,

Carlo

Further Information:

Global Systems Science, GSDP

Shaping Globalization

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The global financial crisis has made one thing clear: we understand global systems much less than we thought, and if we are to meet the challenges of globalization that will define the 21st century we will need a lot of learning.

The EU has set up an open network of researchers under the title “Global Systems Dynamics and Policy” to foster such learning. Out of this effort the idea of Global Systems Science – GSS for short – has emerged. This blog – currently under construction – shall provide a platform for debate about how a research program for GSS might look like, and how it might be implemented.