Costing Systemic Risk From Doomsday Machines

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COSTING

SYSTEMIC

RISK

FROM

D O O M S D AY M A C H I N E S

You know that the best you can expect is to avoid the worst1 THE UBIQUIT Y OF DOOMSDAY MACHINES Doomsday machines are always designed with some utility in mind: to protect us from human evil; to make money; to solve a problem. But have these machines become a great evil themselves? Unlike in the 1950’s when the doomsday game strategy of mutual assured destruction (MAD ) was invented, nuclear weapons are just one of today’s doomsday machines. Today, we know about many more machines (made by human hands/ policies/choices) that have been developed: energy (e.g. Peak Oil); food (e.g. GM seed crops, yields dependent on petrochemicals and irrigation) and fresh water availability doomsday machines from climate disruption due to anthropogenic carbon loading of the atmosphere; declining fisheries; ocean acidification; emerging pandemic diseases; increasing antibiotic resistance; are some examples. Throughout history doomsday machines, although attractive in principle, have never worked in practice. Whether the doomsday machine was the wrath of God, some imaginative SciFi invention or the Soviet-era Perimeter system, they fail. The narrative of human history is the collapse of even the best of plans. The story of Genesis in Scripture is just such a story. Are post-modern doomsday machines any different?2 CAN DOOMSDAY MACHINES BE ECONOMICALLY USEFUL? As these are doomsday machines, longer-term economic costs might include global GDP instead of going from $60 to $240 trillion by 2050, declining to $6 trillion. Worst case might eliminate much of the world’s population either directly or indirectly by altering the earth’s biologic capacity to support life (as we know it today). Today fundamental and structural inefficiencies enable global and national markets to misprice inputs and outputs by either: (a) deferring known economic costs to the future or; (b) failing to account for known economic costs and pushing these private costs to public taxpayers. Are these market inefficiencies partially enabled by doomsday machines? A means for establishing rewards and penalties to states based on their proclivity for, or abstinence from, doomsday machines is to think about the systemic risk of these machines. Let’s cost the systemic risk engendered by the doomsday machines owned by individual states. This cost would then be amortized as insurance premiums paid to a global insurance fund. The premiums could be annually recycled to countries without doomsday machines. The premiums could be allocated relatively according Italio Calvino, If on a Winter’s Night a Traveler (1979) in William Poundstone, Prisoner’s Dilemma (New York: Doubleday, 1992), 53. 1

2

See “Negotiating Nonproliferation/Disarmament” http://www.pdfcoke.com/doc/19622983/.

LYLE A. BRECHT 410.963.8680 DRAFT 5.1 CAPITAL MARKETS RESEARCH --- Friday, October 9, 2009

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to a broad-based set of human development indices, from least well-off to more welloff. These premiums, assessed annually over the years, would serve as a large economic incentive to states possessing doomsday machines to divest themselves of these machines and build no other doomsday machines to replace ones scrapped. DOOMSDAY MACHINES EMBODY LARGE SYSTEMIC RISK The economic cost of failure of managing global systemic risk from individual states investing in doomsday machines includes: systemic risk to the global community is not managed adequately by individual states. Today, costs of systemic risk are not included in market transactions. Some states benefit from doomsday machines and other suffer the consequences of these machines outside of their control; National GDP growth is reported even as little collective economic value may be added when the imputed cost of system risk from doomsday machines is included; capital is misallocated to less productive economic activities. Wrong discount rates are chosen that make the value of a project look more attractive than it is. Not pricing the systemic risk of doomsday machines is almost always destructive of capital formation.3 PRICING SYSTEMIC RISK Pricing the systemic risk of anthropogenic CO2 emissions to the atmosphere might produce a cost of $42.00 (U.S.) per tonne, with corresponding prices, based on their reactivity and residence times, for heat-trapping methane, nitrogen compounds, lowlevel ozone and soot emissions responsible for half of the man-made emissions driving climate change. 4 If the systemic risk of nuclear weapons in a nation’s defense arsenal were costed, the per weapon annual insurance premium would average $106 million per weapon.5 If the world presently possesses 8,190 operational strategic and non-strategic nuclear

The most glaring recent instantiation of not pricing systemic risk and its impact of the global economy appeared in costing of the price of insurance premiums for CDOs (collateralized debt obligations) on Wall Street. Premiums for individual tranches of CDO’s were priced at a riskadjusted price that assumed no systemic risk. U.S. taxpayers put up approximately $12,800 billion in reserves (future taxes to make good on underpriced CDO insurance). 3

This price assumes 350 ppm CO2 is tipping point for reaching climate outcomes described in May 2009 MIT climate study http://web.mit.edu/newsoffice/2009/roulette-0519.html. 4

5

Uses $353,500/kiloton annual premium; assumes ~300 kt/nuclear weapon operational yield.

LYLE A. BRECHT 410.963.8680 DRAFT 5.1 CAPITAL MARKETS RESEARCH ---Friday, October 9, 2009

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weapons, nuclear weapons states would collectively owe the global insurance fund $868.55 billion annually to cover the systemic risk of this doomsday machine. 6 To enforce the payment of premiums, one might consider an agreement among the UN Security Council that the WTO will place an export and import tax on goods entering and leaving the country sufficient to cover the payment of the annual premium due. This is lieu of trade sanctions or embargoes. Any premiums not collected will accrue to the state’s debt overhang and be accounted for at the World Bank. Any state threatening to unleash their doomsday machine as blackmail to avoid payment of insurance premiums would be treated as declaring war and subject to full consequences of this bellicose action. The quality of governmental regulations & enforcement may be the single most important forcing function for global economic markets to assess risk and respond to new risks that emerge from doomsday machines. Governmental regulations form the foundation on which the global financial markets’ pyramid of promises rest. Governmental regulations and enforcement must be capable of rapidly adapting and evolving for changing market conditions. DOOMSDAY MACHINES ARE RISKY IN COMPLEX SITUATIONS Many present disarmament and nonproliferation initiatives will not work as they are being built on top of already complex systems of nuclear deterrence and national defense: “While initial investments by a society in growing complexity [as a means to solve societal problems] may be a rational solution to perceived needs, that happy state of affairs cannot last:” 7 Complexity costs, and greater complexity costs more. A society’s investment in complexity to solve its problems eventually produces ‘diminishing marginal returns.’8 The existential problem with doomsday machines is that they may go off. Then where are we? Economically? Physically? Will humans still be one of the species inhabiting the earth? Maybe two percent of all the species that have ever lived on the planet during four billion years of evolution are still alive. That is how evolution works; a pure laissez-faire system. Nuclear weapons could end this evolutionary march in an afternoon. Other doomsday machines might take longer, but have a similar outcome.

6

See “Rethinking Nuclear Deterrence” at http://www.pdfcoke.com/doc/16490356/.

Joseph Tainter, The Collapse of Complex Societies (Cambridge: Cambridge University Press, 1988), 195 quoted in Thomas Homer-Dixon, The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization (Washington, DC, Island Press, 2006), 221. 7

8

Tainter, quoted in Homer-Dixon, 221.

LYLE A. BRECHT 410.963.8680 DRAFT 5.1 CAPITAL MARKETS RESEARCH ---Friday, October 9, 2009

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