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November 2, 2019 | Let’s Speculate: What Could Bring Our Digital Economy Crashing Down?

Donald B. Swenson: Born January 24, 1943, Roseau, Minnesota. Graduated H.S. 1961, Moorhead High, Minnesota. Graduated College 1968, Moorhead State University, Minnesota. Designated member of Appraisal Institute (MAI), 1974. Employed with Western Life Insurance Company, 1968 – 71; Iowa Securities Company, 1971 – 73; American Appraisal Company, 1974 – 81. Part-time teacher/valuation consultant/bartender, 1979 – 2008 (taught workshops at Waukesha County Technical Institute, Wi. and Madison Area Technical College, Wi.). Retired 2008 (part time teacher/blogger), AZ. Self educated economist/philosopher/theologian:

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Today, at the clubhouse I talked with a couple of my retired friends on the issue of ‘what could bring our digital economy down’. Some now feel that our economy is so strong that nothing can bring it down. Consumer spending is strong, the dollar is strong, interest rates are low, employment is growing. Political events have not affected our digital markets negatively (so far). Our electronic markets have trended upward for nearly 10.5 years.

So what is the rouge item(s) which could change this favorable situation and create a BEAR economy for 2020? Could a crash of these digital markets occur? Is this possible? Some of my friends view our economy as strong and getting stronger as events move forward. But others also recognize that our situation is rather uncertain. The markets could reverse at a moments notice. Let’s speculate on the question of ‘what could bring these markets crashing down’ (say in 2020)?

There are two concepts which I would like to explore:

1. Fragmentation of our digital networks and our interconnected electronic markets.
2. A rouge algorithm(s) which trades stocks, bonds, derivatives so that a flash crash develops for a select market.

Today’s Wall Street Journal had a great article on our digital networks globally. The article points out that China is creating a firewall digital system (for their people) where most data is not shared with outsiders. Other countries are doing the same. This was called ‘digital nationalism’ and/or ‘digital fragmentation’. I was not aware that Alibaba (this on-line retailer in China) controls some 60% of Chinese on-line spending. China (the government) desires to control this retailer.

In the U.S. Amazon controls some 49% of our retail on-line spending. But Amazon is not making any progress in China. Only some 1% of retail spending accrues to Amazon in China. Why this control by a few huge entities? Is this a new form of Capitalism? Are these huge on-line establishments creating freedom for the people or are they creating fragmentation within these markets? Our world is going digital but it is also becoming fragmented over time.

China also is not allowing Google or Facebook to gain a growing market share within their country. This trend of restricting competition so as to further control of the State over commerce and information is a type of ‘fragmentation’. This situation prevents real globalization of commerce for the planet. Fragmentation or digital nationalism seems to be growing as I write this missive. I witness this same fragmentation within our global currency markets.

The U.S. dollar is currently the strongest currency on the planet. But forces are at work to weaken this currency. China, Russia, and Europe are all creating a form of ‘fragmentation’ within our global markets. Each region desires more hegemony over their respective markets. At some point, our central banks and those who manipulate our electronic markets will discover that ‘fragmentation’ will bring a form of chaos to our global markets. It’s already starting.

My sense is that this ‘fragmentation’ will grow rapidly as our markets become more complex and politically directed. As I write China (under Xi Jinping) is creating a tighter rein on commerce and freedom within Hong Kong. Read the article in today’s Wall Street Journal entitled “Beijing Plans Tighter Rein on Hong Kong”. Will this create unity or more political fragmentation? Will fragmentation and/or nationalism create new problems for global growth and prosperity? I think so!

Our world is now digital and the global internet is changing everything. If a One World System is to emerge, then some country (or leader) must rule over the whole system. This is now unlikely as the global system starts to ‘fragment’ due to a desire of our politicians to control their respective markets. A further item to contemplate is this digital trading system which is now ubiquitous. Did you realize that some 70% of all trades are now done via ‘algorithms’.

One rouge ‘algorithm’ could be coded to crash a particular electronic market (say that of China’s, Russia’s, or Germany’s…you pick the market) in a matter of seconds. Algorithms rule over finance and our digital trading markets and also over our digital internet system. A rouge algorithm (coded with a destructive source code) could crash any electronic market if allowed to trade. Who could prevent a rouge computer algorithm from crashing one of these electronic markets? A huge Hedge Fund (trading with algorithms) could be the culprit.

Our system has become so interconnected and complex that our official compliance people are unable to comprehend what is happening in real-time. Algorithms are coded to act independently of human actions. Robots and automated trading systems rule over our digital markets globally. And Algorithms rule over all trading decisions. Could a rouge algorithm crash our electronic markets? My sense is that this is now possible and rather likely. I could wake-up tomorrow discovering that a rouge algorithm crashed China’s electronic system and/or a similar electronic system in another nation.

Is the USA protected from a rouge algorithm(s) crashing our markets? Probably not! America’s electronic markets are mostly traded via high speed computers using algorithms as their tool of execution. Traders in another country could administer a rouge algorithm(s) within our electronic markets (one possibility). Our central authorities also could choose to use their algorithmic trading (now done behind closed doors) to crash our electronic markets. Or a huge Hedge Fund could administer this type of algorithm.

We live with a machine driven trading system (high frequency computers do most of our trading). The system is very complex and algorithms administer this system (mostly via robots and automated trading platforms). Traders use algorithms and clearing/settlement of trades is now mostly via algorithms. All this is vulnerable to some rouge operation that crashes this interconnect/complex system. Both ‘fragmentation’ and ‘algorithms’ are acting to change our interconnected electronic markets. Give this some thought as you do your own trading in today’s electronic markets.

My next missive will be on the ISM’s (Capitalism, Socialism, Communism, etc.) which have developed over the years. The Economist has the title “Elizabeth Warren’s plan to remake American capitalism”. Why all this change in economic philosophy? Trump says America wants Capitalism but Warren says this system needs to be changed. Why this conflict over the details of our philosophical systems? It’s all coming to a head in 2020! Have a great day! I am:

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November 2nd, 2019

Posted In: Kingdom Economics

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