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What we know from percolation theory is that pc depends on the effective dimensionality of the system.

We don't know what the "effective dimensionality" of the network of credit relations in the economy is, and it might even depend on other factors.

What we do know is that for any dimension there is a pc, that is, that regardless of the structure of the financial system, for sufficiently high densities (how high depends on the details of the financial system) of "ponzi-financing economic units" the probability that there is a system-wide cluster of such units linked together by credit relations approaches 1. And then the probability of systemic crises is high since all that needs to happen is for one of the ponzi units in the cluster to go belly up.

That's all. I don't expect that estimating pc is possible given plausibly available information.

But there's more. The system will naturally tend towards a pc density of ponzi units, because at lower densities we have Minsky's natural tendency towards increasing leverage in stable times, and at higher densities crises quickly decompose existing clusters by, through bankruptcy, eliminating ponzi sites.

So after a fairly long period of financial stability one can be pretty confident the economy will be in the critical phase of the percolation system.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue Aug 9th, 2011 at 04:40:57 PM EST
[ Parent ]
What we do know is that for any dimension there is a pc, that is, that regardless of the structure of the financial system, for sufficiently high densities (how high depends on the details of the financial system) of "ponzi-financing economic units" the probability that there is a system-wide cluster of such units linked together by credit relations approaches 1.

HA!  Good job guys.  

I assume you're preparing for publication?


Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Tue Aug 9th, 2011 at 06:49:26 PM EST
[ Parent ]
An on-the-bounce financial regulator would pull the plugs on the Ponzi nodes as they crop up. This will cause a balance sheet deterioration for the remaining nodes in the system, but as long as the Ponzi nodes are pruned regularly, the connected nodes should have sufficient equity cushion to absorb that impact.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:58:16 AM EST
[ Parent ]
If you do that you might find that the relevant percolation for systemic crisis in not that of Ponzi nodes but speculative (non-Ponzi) nodes. In other words, if balance sheet deterioration of a speculative node makes it ponzi, and you force ponzi nodes into bankruptcy which deteriorates the balance sheets of their creditors, then if you have a percolation cluster of speculative nodes and one of them becomes ponzi and you restructure it, you may trigger a cascading collapse of the whole cluster.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Aug 21st, 2011 at 04:59:03 AM EST
[ Parent ]

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