A Bug Is Crashing The Financial System And Decentralization Is The Best Way To Fix It


Yes that is a play on words. Software programmers borrowed a medical word – bug – to describe an error that could crash their software systems.

Now a bug from Wuhan is crashing the financial system. Yes global finance is a system and systems are vulnerable to bugs.

For light relief, watch this parody of sounds of silence:

In this post I look at:

  • What happens when the real economy meets the financial system


  • How Bill Gates warned us about this 4 years ago


  • We cannot manage complex non-linear systems with linear thinking


  • This too shall pass

What happens when the real economy meets the financial system

For years we got used to the mantra that the financial system (stock markets etc) was totally disconnected from the real economy (jobs, shops, restaurants etc). The reality of the real economy is now hitting the financial system. Take just two simple examples:

  • Revenue drives the E in Price Earnings (PE). Financial analysts deal with normal recessions by looking at Cyclically Adjusted Price Earnings (CAPE); they look at valuation over a cycle that includes a recession. The problem is that this Coronavirus recession is not a normal recession. Think about the revenue impact of a total lock down. That is not about cutting back. It is about stopping totally.
  • Revenue drives the cash flows that are used to repay Debt. In the past,  company managers could keep bond holders happy by pulling the lever called reduce dividends. That would simply decimate equity prices.However a total lock down, after years of stock buybacks enabled by Debt, creates a more existential threat; there is very little spare cash for emergencies.

Company managers know how to pull cost levers. It is much harder to pull revenue levers -and  almost impossible in a lockdown.

Don’t panic. It does not help. This too shall pass. Before we can get to that, let’s analyse the problem a bit more.

How Bill Gates warned us about this 4 years ago

Bill Gates become the richest man in the world by creating software with a lot of bugs. Then he applied that ferocious intellect and his massive wealth and his humanity to making the lives of billions of people better. So we can forgive him for all those Windows bugs that messed with our productivity. 

So Bill Gates knows what he is talking about and we should have listened when he warned us about this 4 years ago.

Did people in power pay attention? No. The reason people in power did not pay attention is that getting politicians to pay attention to even basic facts and 20th century science is difficult enough as this dark and prescient British humour from the 1970s illustrates so well:

So forget about getting politicians to understand 21st century complexity science to understand that we cannot manage complex non-linear systems with linear thinking

We cannot manage complex non-linear systems with linear thinking

The science of the 21st Century is Complexity Science. Complex systems have many different components that interact with each other in ways that are hard to predict. They are characterized by the phrase “a butterfly flapping its wings in China can create a hurricane in Florida.”. This “butterfly effect” is a bit of popularized science that suggests that minor perturbations can set off a string of escalating events that can lead to something significant.

Understanding one complex system is bad enough. The Coronacrash means also understanding how multiple multiple complex systems interact:

  • the financial system
  • the real global economy
  • the weather system (ahem remember climate change?)
  • our human immune system
  • software with thousands of components
  • social interactions
  • political systems 

Good luck with that. We are in uncharted waters and our compass is broken.

This Too shall pass

The 1918 influenza pandemic commonly called the “Spanish flu” infected 500 million people around the world (about 27% of a global population of less than 1.9 billion at the time) and is estimated to have killed between 17 to 50 million people. Nobody is suggesting COVID 19 will be that bad; health in 1918, after 4 years of war was terrible.

Yet even that passed.

Future posts will focus on the more hopeful scenarios – the good things that can be brought by this very ill wind. My fundamental thesis, explored in earlier posts before the crisis, is that decentralization is better than centralized systems.

Only via decentralized emergent systems can we get to the good combination of hyperlocal and global.

Decentralization is the only long term fix for the bug crashing all our systems.

That does not mean I am suggesting buying Bitcoin. Bitcoin suffers from the same debt (leverage in finance speak) as all other assets traded in the financial system. Using 100x leverage to trade an asset that often moves 10% in a day – what can possibly go wrong?

However Bitcoin is more than just another asset to trade in the financial system.

Bitcoin and other Blockchain based systems illustrate that decentralization is feasible. However decentralization is a much bigger story that will also play out in the social and political spheres.

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