When Black Swans Mate
As almost everybody knows, a black swan is a new term for an unexpected event that has major consequences. Like avian black swans, such events are rare. But when they hit, panic, overreaction, and demands for safety at any price tend to follow. Think of Wall Street in October of 1929.
A number of potential black swans have been circling over the last year or so. One landed: Russia’s invasion of Ukraine. The consequences of that black swan are still unrolling, but they already include recession in Europe, large refugee flows (refugees from Ukraine are people we should welcome in large numbers), a rising risk of nuclear war, and, if Russia loses, a possible break-up of the Russian Federation and the spread of Fourth Generation war in the vast region between Ukraine and Vladivostok.
But what if black swans mate? In Ukraine, imagine the consequences if Russia employs nuclear weapons. What would happen to world markets? The West has been doing its best to destroy Russia’s economy, without much success. But Russia could return the favor, with interest, by popping some nukes. As the possibility of nuclear war, always present in the background since 1950, suddenly became real, it is not hard to imagine a rush for safety in markets of all kinds that would leave only gold and dollars standing, and maybe only gold.
Imagine that happens, and the world’s eyes all turn to the Federal Reserve Bank in Washington. A story in the June 8 Wall Street Journal illustrates the touching faith in the Fed that was once reserved for pieces of the True Cross. The article, “Big Influx of T-Bills Threatens Volatility” by Eric Wallerstein, discusses potential market effects from a deluge of Treasury bills soon to be dumped on the market following the raising of the Federal debt limit. The article states, “But even if banks pull back from short-term funding markets, history suggests Fed officials would quickly extinguish any fires. . . ‘It’s that unintended, unexamined, event that causes a clogging up of the financial plumbing,’ said Joseph Brusuelas, principal and chief economist at RSM US. ‘That doesn’t mean the doomsayers are right – if a hiccup occurs, the Fed will step in.’
Just a few years ago, when inflation had been low and steady for a decade, the Fed could indeed step in and pump out more liquidity. But now inflation is running, not at the Fed’s desired 2%, but between 4% and 5%. If the Fed increases liquidity, it will also increase the rate of inflation. Imagine the effect on, well, everything if the United States faced even a realistic possibility of hyper-inflation. That is exactly what can happen when black swans mate, in this case the two birds labeled “worthless dollars” and “nuclear war.”
The Chinese economy is already dealing with at least a gray swan in the form of a collapse in its property market. Add in the black swan of an attack on Taiwan that fails, coupled with an American distant blockade of raw materials to China. China’s greatest historic weakness is its own centrifugal tendencies. Would several catastrophic policy failures by the Chinese Communist Party lead to another break-up of the Chinese state and the rise of new warlords, some with nuclear weapons?
The consequences of black swans mating are potentially so dire that each Great Powers’ leaders, those of the U.S, Russia, and China, should have a joint policy of stability at any price. Regrettably, at present all three are pursuing adventures at any price. Those adventures are decoys for black swans, drawing them to land and make themselves at home in ways that suggest mating season is at hand. Their progeny will be ugly.