Fronteza

The Chain Effect

Today we will discuss the matter which plays key role in the success or failure of any enterprise, no matter what type of enterprise it is about. The matter is relevant to all aspects of the life and business, or it would be better to say – the business of life. I will start from the general principles of the matter in order for us to comprehend the general idea (the “abstract” side) and conclude with the specific example of the financial world – the matter of financial system and derivatives (the “logical” side). We must learn to see and apply both sides in order to create successful enterprises.

By the very nature, all things are well chained. Everything relies and depends on something. Such the dependence chains create the complete turnover circles. We know about the natural turnover circles: physical circles, nutrition circles and energy circles. They are based on the three components of the nature: the spiritual component, the physical component and the mental component. In the customary environment we know them as the spirit, the body and the mind.

Every component must be treated carefully and they must be developed organically. The coherent development of these components determines the successful person development. These components are present in any living entity and in order to understand the dependence chain it is important to understand the role of each of the components first of all. Every component is vital to form the complete turnover circle and when one of them is absent or underdeveloped, the circle breaks and its entities go down gradually or immediately.

The balance in the chain is maintained by its strict hierarchy, rules and principles. The hierarchy defines the place of every entity in the turnover circle and what role every entity plays in the circle. When one entity degrades or malfunctions, the entire circle is in danger. The important thing to comprehend is that the place of every entity in the circle, in the chain, in the hierarchy, is determined by the development of the three foregoing components. Also it is important to say that the complete turnover circle is always present. If we do not observe them in some ecosystem, it only means that we observe only some part of the ecosystem and do not see the entire picture.

In order to preserve the integrity of the turnover circle, the relevant rules and principles are enforced strictly. The rules play vital role in the maintenance of balance in the turnover circle. When a rule has been broken, the chain’s integrity is in danger. Thus two key elements that preserve the chain’s integrity and the balance of entities are the strict rules and hierarchy. The scientific and religion realms define the two elements in their own ways. Basically, the balance rules are a kind of caps, restrictions, limitations and constraints imposed on the turnover circle, the ecosystem, to preserve its completeness, self-sufficiency and recoverability.

The vital characteristic of the turnover circle is its completeness. Simply speaking, nothing is consumed in vain (the purpose), nothing disappears completely (the shape), everything consumed gets back to the circle and originated gaps are filled in to maintain the balance (the self-sufficiency and recoverability). It is important to emphasize the properties of self-sufficiency and recoverability. If the chain is a sort of straightforward pipe which consumes at the near leg and unreasonably throws away and stockpiles at the far leg without filling in the formed in-between gaps, ignoring the balance rules, it can ultimately cause different collapses and disasters – natural, industrial, financial, etc.

Any chain, any turnover circle, must follow the balance rules to preserve its integrity, self-sufficiency and recoverability. The turnover circle is self-sufficient and balanced, until an external force makes it scarce. If the applied external force, the irritant, is strong enough and exceeds the ultimate resistance strength (the recoverability threshold), the turnover circle disorders and the existence of the ecosystem is in danger. If the applied external force is not strong enough, the turnover circle can preserve its integrity and the ecosystem will start recovering once the external force subsides.

To finalize our abstract part of the discussion, let’s derive the idea:

1. Everything must be well chained in order to form the complete turnover circles in the ecosystem. The ecosystem itself can be defined as the set of well-chained, complete, self-sufficient and recoverable chains that follow the strict rules and hierarchy to maintain the balance in the ecosystem;
2. Every living entity has three key components that must be developed: the spiritual component, the physical component and the mental component. The coherent development of these components predetermines the successful person development;
3. Key elements that preserve the chain’s and turnover circle’s integrity and maintain the balance of entities are the strict rules (caps, limitations, constraints, boundaries, etc.) and hierarchy;
4. Nothing must be consumed in vain (the purpose), nothing must disappear completely (the shape), everything consumed must get back to the turnover circle and gaps must be filled in to maintain the balance (the self-sufficiency and recoverability);
5. The turnover circle is self-sufficient and balanced, until an external force makes it scarce. Whether the turnover circle will recover depends on the strength and durability of the applied external force and ultimate resistance strength of its chains, which is predetermined by the strength of individual entities (ecosystem-circle-chain-entity);
6. Avoid the creation of disintegrated chains – the set of unchained pipelines, where every chain consumes at the near leg and unreasonably throws away or stockpiles at the far leg, does not follow the strict rules and hierarchy to maintain the balance and does not fill in the in-between gaps. Such underdeveloped chains lead to disasters and crises and ultimately destroy the social and natural ecosystem.

Once we made make the acquaintance of the abstract part of the chain effect, let’s consider the matter of the financial system and derivatives. First of all, the financial system, as any other governance and man-made ecosystem, must be subdued to the social ecosystem, which is not true nowadays and it takes the side effect on lives of people, the society as a whole. It is expressed in the dominance of material benefits over the social and person benefits.

Nowadays the social and natural ecosystem is subdued to the financial system that has the only one rule – to get bargains, as I said more than once in my articles about the fiscal system complexity. The financial system is ruling the game – it is the governor, when its actual place is underneath as the servant. I do not try to belittle the importance of the sound fiscal system for the developed social and natural ecosystem, as the toolset to account, to transfer and transform the material wealth. But I do belittle its dominance in the economic game and designate it as the toolset to serve the person, the society and the real economy, not to dominate them or self-serve.

By the very nature the fiscal system is a set of financial service pipelines, and if it dominates the social and natural ecosystem it creates a sort of lop-sided circles, or disintegrated chains (see rule no. 6 above). And when the high pressure is applied to such the pipeline, the entire ecosystem is in the danger. The high pressure is created by speculations and the desire of high-speed enrichment and enormous material wealth, which stems from the underdeveloped person’s mind, its mental and spiritual weaknesses, and the solely goals of stockpiling the material wealth and patching holes in financial statements by ignoring the balance rules of and disordering the social and natural ecosystem. Such ignorance does not pass without leaving a trace – sooner or later someone will have to pay the ultimate price.

When the material value dominates the social value the result is the only one and it is what we have now. The material wealth is good when it is wisely integrated to the social and natural ecosystem and used as the servant, not as the governor, to stimulate the social, natural and person development. The material wealth will rule the game and ultimately destroy the natural and social ecosystem, until we change our perception of it and enforce the efficient balance rules.

It is possible only by the coherent development of the three components that I mentioned in the “abstract” part of the discussion. Only then it is possible to achieve the coherent, valuable, reasonable and well-chained natural, social, economic and technological development. Only then it is possible to create the complete and sound man-made ecosystems, which will not violate the natural and social laws and principles of the natural ecosystem.

With regard to the derivatives, I think, after the foregoing discussion you should be able to comprehend why thinking of derivatives as the instrument to mitigate risks by spreading them among multiple players is nothing but the verbal bubble, which materializes only as financial crises. If there are no complete and well-chained turnover circles, which is true for the present fiscal system, none of talks about the mitigation of risks can be conducted. Only talks about the concentration of risk at the far legs of the pipeline must be conducted. Basically, we must consider derivatives as another financial instrument to speculate, whatever you say about hedging, etc. Ultimately, it is the product of crowded financial market, where other financial sectors are overcrowded already and does not supply enough bargains.

When the high pressure is applied to the near leg of the fiscal chain created by derivatives, it is amplified and spread by the pipeline. Ultimately, the shock force smashes up entities along the chain. Taking into account that the chain was not properly governed, dismissed the balance rules and the common sense, we have landed the current place. None of the derivates creates the complete circle. They create the straightforward chain that connects two entities and has one or more in-betweens. There is no complete turnover circle, because the financial system does not assume the creation of complete turnover circles. It is the integral part of the developed social and natural ecosystem. It is a man-made toolset that must be used to support the creation of the complete turnover circles in the social and natural ecosystems.

Ultimately, what we have to comprehend is that the solely goal of stockpiling the material wealth destroys the social and natural wealth and ultimately leads to the collapse and annihilation of the social and natural ecosystem. When the material wealth crowns the social pyramid, we start seeing only resources around us. We start creating consumption chains to get instantaneous bargains, without filling in the gaps and polluting the environment. We start ignoring the true wealth around us. We stop seeing the entire picture – we become short-sighted. The true wealth and prosperity is not measured by the material value. And we must remember this when creating a new business, a new turnover chain and a new man-made ecosystem. Everything must be subdued to the social and natural ecosystem and must not ignore its balance rules.

Everything must be well chained. The best way to test yourself is by asking these simple questions: “what then?”, “what next?” and “where gaps?” If you stall at some point or end up with the pipeline – it is the dead end, the lop-sided chain. Omit it. If the ends of your thought chain ultimately meet each other and you fill in all in-between gaps, then you have the complete turnover circle. All you have to do now is to double-check yourself and impose the balance rules and constraints.