His presentation regarding the theory of complex systems is very good and convincing, but modeling is truly a science as well as an art. Predictions of the future are possible only within a framework where probability (risk) has to be "quantified". Psychology is important as in herding and feedback, but material conditions are determinant, in my view. Most complex systems are range bound in there evolution. Here, Sornette reaches out for the theory of price formation by Carl Menger (but he does not mention Menger) by which a price is not the crossing of supply and demand at a specific time, i.e., a point of equilibrium, but rather a moving target, i.e., a dynamic system where the price of anything (good or service, interest rates: the price of money) at any precise moment is not determined by something "exact" and "precise" (we don't care anyhow, since the price will change the very next moment, by definition), but by something so complex we cannot get our arms completely around it.

Armed with this concept or framework, shall we say, parametric modeling using LPPL is very attractive but it does not quite resolve the issue of state changes, such as melting ice or market crashes or volcanic explosion. Sornette admits that fact implicitly. These are accidents. Accidents are unpredictable by definition. It allows us to get as near as possible to a black hole or zero degree Kelvin, but how does it feel to get in a black hole? (What brought about the Big Bang?) Current scientific knowledge tells us we will never know. (The Pope tells us we must not look for a scientific answer.) For many years, Dr. Sornette and al made successful predictions of the markets swings, including changes of trends, I agree, but we are near a catastrophic event (state change). What will this step in human evolution bring into realisation? I think the technique of modeling complex systems can be improved like weather forecast has improved but I continue to believe one of the main teachings of the theory of chaos is that everything has a cause (and effect) but it may be too costly to determine the exact cause of everything we observe. It is all in our heads anyway. Nature does not care where the next hurricane will occur. In the grand scheme of things, it does not matter, except for the individuals who may be caught in it.

Einstein taught us that an observer can interpret what he sees depending on where he stands in space and time, that space and time are linked, but what his theory does not stress is that there is only one singular reality (bounded space and time). This absolute truth, if you like, is beyond the reach of human thought. It is useful, inevitable and even imperative for our survival to study the reality around us, but it is beyond our power to understand it fully. That is because we are part of the reality and we interact with it, making it change all the time, among other things. (Let alone those who believe God's will is also involved.)

This is why I disagree with Sornette about Keynes and the possibility that we avoid a collapse of the economy in the near future. I may be wrong. In fact, I hope I am wrong, but unlike Sornette, I am a practitioner of science, not a theorician. I find that reality challenge our thoughts all the time. It is precisely the phenomena of biofeedback, which is responsible for the accumulation of unforeseen factors that bring about a change of state. What am I talking about? Well, everything evolves along a path that appear to repeat itself but it never really curls completely on itself. It is more like a spiral or stair case were every loop or step look alike but they are really different (unique).

I know, I know. I don't differentiate myself from the theory of complex system as of now. The point is Sornette implies that there may be a chance that we avoid a coming depression (deflation or whatever economic catastrophe) in the near future. One of the key element he invokes according to his experience in modeling the economy is that the world is loaded with US dollars and everybody depends on the US for their own economic well-being in the near future. That is an attractive conclusion and a strong argument. Sornette suggest that the herding phenomena may make us unite, in spite of our differences, in the common interest. He suggests that Keynesian economy shows the way and even mentions Adam Smith (division of labour and the "Invisible Hand") as factors in our science to keep ourselves in a range bound by acceptable, but American dominated, economic behaviourism.

I could not disagree more with that, but what I think really does not matter at all. We shall see. For sure, the economy will snap and catastrophic events will occur in the future. When? is the only question. I have to admit Sornette overall model is quite convincing and there are many other market analysis techniques that indicate the "worst is over" in terms of market corrections. I agree with his projection of markets bottoming in 2004. We are theoretically in the small wave phase after the big event (since 2000). But that is only true if the sequence of events, as laid out in our complex system model, is correct. I know that Dr. Sornette is taking into account about everything possible and reasonable. I will not talk about the phenomena of resonance in physics, but you may keep it in the back of your mind. Instead, I would emphasize that the Stock Market should be thought of as just the point of the iceberg and that, as in the case of the Titanic, it is not what we see that matters.

We are living in an era which is closing, the era of capitalism competing against communism and so on. Keynesian economic model and Friedmanlits monetarism is just a defence mechanism against the treat of communism. Take the enemy out and the defensive measure will fall under their own weight. The saying of "An eye for an eye, a tooth for a tooth!" is true in this case. Statist capitalism fought communism with the arms of its enemy: the dictatorship of a few on the masses of workers and so on. Like inflation versus deflation, it is just two sides of the same coin. The point being the unbalanced (structural) money markets. To prove communism wrong, capitalism had to go the same road. Now, it is all over, we have to go to the next step. It is not a matter of choice or will. A catastrophic event will occur soon and it will appear to come from nowhere, as usual (by definition).

Many people are concerned or worried. I am not, but I try my best to predict the future, just like Dr. Sornette. Evolution is natural. You don't fight it. The best is to go with the trend, but herding can bring about disaster. The unwinding of our industrial world with massive burning of oil, arms of massive destruction and so on, will eventually collapse (sigh of relief) into manageable bits and pieces of real estate, where diversity and creativity will be restored. (Hopefully, the theory of complex system will help make it as smooth as possible.) Future reserves of oil will be saved automatically (shut down) while the (costly) world network of oil (actually serving mainly the US and Europe) will be converted to other types of energy. Many people don't realize that a large fraction of the oil we burn is used to move oil around, the compound effect of which is totally inefficient. We have created the most structurally unbalanced economy in the history of man. It is only fair to converge toward a more balanced system.

The US economy does not have to suffer, neither the rest of the world, but history shows that herding has a mind of its own and old habits don't go away by themselves or out of goodwill. Catastrophic events are inevitable. More, they are required to start from a fresh basis. It is necessary for the well being of future generation. Life has no value without death. It is not sad or a contradiction, less a paradox. They are the two side of the same coin.

I have no clear answer myself to the puzzle we are faced with. My guess is we will have the greatest depression ever in the coming years. The event has started and it cannot be stopped. It is too late. Like with a tsunami, the water have recessed. There is only one choice. Run for the high land while there is still time. Not everybody will understand. The explanation for the state of our economy lies in the phenomena called "gold rush". If you can understand why man endeavours in mining activity and, as a result, uses gold as money, then you are on the right track. The rest of the answer lies in the question: "Why and how do gold rush occur?". If you know the answer, then you have made it into the black hole or beyond the Big Bang. The answer lies in part in science, in part in mythology. Joseph Campbell, the world greatest scholar on mythology who inspired the Star War trilogy, said what is missing now is a new myth to drive people in the right direction. Myths and legends are created in catastrophic event such as revolutions and so on. Lets usher the new era with a great big bang in the economy!

17 July 2003

Pierre Jean Lafleur
pj.lafleur@videotron.ca