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Hormones and Credit: Are they related?

John Mauldin said, “…the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past…” ( Feb 14, 2010 It seems that there is no escape from the influence of history.

Looking at human body as a biologic model, the dependence on history, our past choices, broadly relates to the second and third phase of life. A schematic model could recognize phase one, over which we actually don’t have that much control, can be called the hormonal phase. It lasts couple of decades and is driven primarily by body’s innate need to grow and reproduce. It is in the second phase, a decision phase, where we actually exercise a great deal of control (positive or negative). The third phase, the phase of consequences, is again slipping out of our direct control because the past decisions can be so influential.

If this analogy seems too distant from a possible sovereign financial default John Mauldin discussed, one only needs to substitute the word “credit” for the word “hormones” to see the pattern. As the above biologic model contemplates, hormones are self-generated within a system through self-organization utilizing feedback loops. Extrapolating into the economic model, the hormones, here termed “credit,” is also self-generated by the market system allowing for healthy expansion, growth, and multiplication. Oscillating between the biologic and economic model, we can see that artificially going beyond the self-organizing/system-optimizing amount of hormones/credit, may temporarily extend the “hormonal/credit” phase but at huge and detrimental cost to the entire system, being it the body or the economy. The correlative examples that can be used here are steroid use in a baseball player and the excessive credit offerings to the economy by the government. The consequences for both models are very clear: health problem for one and economic crises to the other.

Systems science draws strongly from biologic principles fine-tuned through evolution. Healthy economy can greatly benefit from its principles. “Mother Nature” is quite generous and benevolent but it also has its limits. Respect them or your misaligned decisions will follow you into the, inevitably arriving, “phase of consequences.”