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J Rickards Economics and Financial Attacks

J Rickards Economics and Financial Attacks

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Published by: aynoneemouse on Feb 27, 2011
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10/28/2012

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77 
InTRodUCTIon
National security has never been more captive to economicsecurity than it is today. By economic security, we do not refer
principally to the usual uctuations in GDP, employment, produc
-tivity, and other metrics that have been the focus of macroecono-mists for decades and that still predominate in academic studies.Analysis of trends in GDP such as the rise of China, decline orinstability in Russia, and the outlook for the U.S., while important,do not by themselves pose immediate challenges to U.S. national
security. We refer instead to global capital ows and the capitaland commodities markets that accommodate those ows. It isthrough these channels that currencies can be destroyed, ina
-
tion can be transmitted, reserves can be depleted, and nancial
institutions can be destabilized. In the extreme, entire sections of global capital markets can be frozen and debilitated to the detri-ment of those who rely on them the most; in particular, the U.S.
1.4 EConoMiCS AnD FinAnCiAl AttACKS
James Rickards
Mr. James G. Rickards is Senior Managing Director at Omnis, Inc.
and Co-Head of the rm’s practice in Threat Finance & Market 
Intelligence. Mr. Rickards previously held senior executive positionsat Citibank and RBS Greenwich Capital Markets as well as Long-TermCapital Management and Caxton Associates. Mr. Rickards has directly 
participated in signicant nancial events such as the 1981 release of U.S. hostages in Iran and the LTCM nancial crisis of 1998 in which
he was the principal negotiator of the government-sponsored rescue.Mr. Rickards holds an LL.M. (Taxation) from the New York University School of Law; a J.D. from the University of Pennsylvania Law School;an M.A. in International Economics from the JHU/SAIS, and a bachelor’sdegree with honors from The Johns Hopkins University.
 
78
Unrestricted Warfare Symposium Proceedings 2009
Central Bankers and Finance Ministers and Treasury Secretariesspeak glibly about systemic risk while rarely stopping to thinkabout what they mean by the word “system,” which is at the root osystemic. They have a concept of the system of money and bank-ing (and the institutions that conduct those operations that createmoney and extend credit) that connects directly to macroeco-nomic theories expressed variously as Keynesian or Monetarist.This understanding translates into misnamed stimulus packages,
which are, in fact, redistributionist ination packages to be car
-ried out by Treasury borrowing and Federal Reserve monetizationof the resulting debt (Cogan et al., 2009 [2]). The circularity of 
this supercial understanding of system and the ineffectuality of 
macroeconomics in a systemic crisis is thus complete.
“National Security has never been more captive toeconomic security than it is today... [Through] global capital ows and the capital and commodities markets that accommodate those ows, . . . currencies can be destroyed,ination can be transmitted, reserves can be depleted, and nancial institutions can be destabilized.”
Instead, we propose an analysis of the economic systemthrough the binocular lenses of physics and engineering with anapproach called econophysics. This approach studies the follow-ing questions: Are global capital markets a system? If yes, is it astatic or dynamic system? If dynamic, is it a linear or nonlineardynamic? If a nonlinear dynamic, what are the emergent proper-ties of nonlinearity? Is the system scale-invariant? What are theappropriate metrics for normalizing and parameterizing scale?Does it represent an example of self-organized criticality? Whatare the boundaries of systemic phase transitions? The studies of these and other questions are the keys to understanding expectedbehavior and appropriate public policy in the face of the ongoing
global nancial collapse. A proper understanding of the behavior
of global capital markets is furthermore the key to understand-ing the vulnerabilities of the U.S. and other national participants,which allows both for defensive and counterintelligence measures
 
79
Chapter 1 Featured Papers
and offensive capability where necessary, all under the heading of weaponized money.
CAPITAL MARkETS AS CoMPLEx dynAMICALSySTEMS – EConoPhySICS
Financial economics has, over the past 50 years, specialized inquantitative analysis of problems of asset pricing, asset allocation,and risk management. Its contributions have been voluminous,leading to the creation of derivative products and the enormousexpansion of the markets in which those products are traded. Keycontributions have included the Black-Scholes options pricingformula and the Capital Asset Pricing Model. Underlying thesedevelopments are two hypotheses:
The Efcient Market Hypothesis (EMH), which states that
all available information is fully and rationally incorporatedinto market prices that move from one level to anotherbased on new information without reference to the past,and therefore no individual analysis can outperform themarket because all insights are effectively “priced in.”A Gaussian or normal distribution of price movements
(sometimes called the “random walk” model, i.e., eachprice move is independent of any prior price move, etc.)
such that small uctuations are common and extreme
events are proportionately rare with the overall degreedistribution of such events falling in the familiar bell curveshape associated with random phenomena.These hypotheses were combined in a General EquilibriumParadigm based upon mean reversion.Beginning in the late 1980s, substantial doubt emerged with
respect to this intellectual edice. These doubts arose both deduc
-tively as the result of the new science of nonlinear physics, andinductively as the result of numerous empirical observations that
failed to conrm either EMH or the Gaussian degree distribution.In effect, a paradigm shift was underway in which the inuence
of behavioral economics, fractal geometry, complexity theory,
heuristics, network science, and related elds converged to

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