top of page


Electricians have found a solution. They introduced another type of electrical element into the circuit, fuses FS.


There are two roles for fuse: first, pass all the current through itself under normal conditions, and second, break the circuit if an overload or short circuit occurs. For example, burn out so that the entire circuit does not burn out. Nowadays the reusable fuses are more popular, but their purposes remain the same. Pass all current while everything is in order and break the circuit as soon as a short circuit occurs.


History of fuses evolution shows that their improvement has always followed one trend: a decrease in stability. The less stable the fuse is, the faster it responds to excessive surge of current and the better it protects the entire electrical circuit from overload and destruction.


Well, when the circuit is open, one could search for a short circuit and eliminate it. It is important to understand that when the short circuit is removed, the new circuit is different, not the same as it was before. If one restores the circuit in its previous form, a short circuit could happen again. Therefore, the circuit must be changed so as to no longer allow the connection of two non-connected points of the circuit.


From point of view of suggested hypothesis, the financial crisis is not the cause of the general crisis, but rather its consequence. The financial system turns out, as always, to be the weakest link in the general mechanism of human activity. It collapses first as soon as a substantial crisis arises. It seems that financial system is a kind of “fuse” that burns out first and thus tells us that there is a short circuit.


The real crisis is approaching imperceptibly, quiet as a cat, and some mouse should be the first to sound the alarm. The finances are screaming their lungs out with their collapse that it is time to start repairing the system...


What is the bright side of financial crisis? It stops the flow of resources to the area-in-crisis. It stops the production of unnecessary goods, reduces the damage caused by crisis-caused overproduction.


The financial crisis stops the movement of resources not only to the damaged part of the economic circuit, but also to other areas not directly affected by the “short circuit.” This is very painful, but, from the point of view of the electric model, it is completely justified. While it is not clear where the short circuit occurred and where the useless leak of resources (electrons) occurs, what overloads all circuits connected to the damaged one, it is better to stop this leak altogether than to repair many circuits later.


The financial crisis is the most visible part of the events. Sure, it is! Several industries or even countries suffer and lack resources at once. Moreover, a real crisis (“short circuit”) happens only in a limited “economic territory”, most often in a "local" industry. But many areas remain without money and resources. Therefore, the financial crisis and its "direct culprits" immediately grab attention, and then nobody really is interested in its real culprits.


This is the hypothesis. It is impossible to prove it yet. There is no obvious correlation between systemic and financial crises, except perhaps a coincidence in time. These crises occur in completely different areas of human activity and their apparent causes cannot be linked.


Where have this hypothesis come from? From the assumption that everything in this world is arranged wisely so as to protect humanity and prevent catastrophe that could happen because people cannot notice and overcome systemic crises in a timely manner. This assumption led to the idea of ​​a “fuse”, and the search for candidates for this role brought me to the financial system.


Is it possible to prove the hypothesis that the financial crisis is a fuse that prevents unnecessary destruction and overconsumption of resources caused by systemic crises? The hypothesis arose in 2009, during a detailed analysis of the crisis that happened then. It arose while I was comparing facts that contradict the generally accepted understanding: the crisis is purely financial and is associated with problems in the mortgage market.


First, then it was clear to me that the American automotive industry was in an aggravated systemic crisis. Second, several more systemic crises were revealed at the same time in other sectors of American industry. Third, the financial crisis began in Michigan where the American automobile industry is concentrated. It began in 2004-2005, long before then the "mortgage" financial crisis started. There were other facts pointing to the non-financial nature of that crisis. The search for alternative mechanisms has led to the hypothesis that the financial system serves as a safeguard that mitigates crisis-caused overproduction and its consequences.


Since then, a lot of knowledge has accumulated about that crisis. If one deliberately looks for a connection between these crises, it is quite possible that evidence will be found. In the meantime, we could only take this hypothesis on faith and examine it.


Similar hypotheses have arisen in recent decades. For example, the hypothesis that huge financial crises that have arisen in the last 100 years were not of a financial nature:


[Quoted from: V.M. Polterovich, The mechanism of the global economic crisis and the problems of technological modernization (in Russian), ANO "Center for Interdisciplinary Research" (CMI),]


It is hypothesized that the crises of 2008 and of 1929 were not of a financial nature, but rather were caused by a significant reduction in the influx of technological innovations (“innovation pause”) and overly optimistic expectations generated by a long preceding period of rapid growth.


Why did not the expectations relying on the long-term crisis-free growth of the Western economy and, in particular, on the rapid development of the high-tech sector come true? The answer to this question is offered by the theory of economic development, originating from Joseph Schumpeter, Nikolai Kondratiev and Simon Kuznets. Among the many works that continued their ideas we mention Mensh (1978) and Helpman (1998).


According to this branch of economic theory, basic innovation ("basic innovations" according to Mensch or "general purpose technologies", if you follow the Helpman (1998)) is the engine of economic growth in developed countries. They differ from ordinary innovations due to the fact that they have a very wide scope and therefore, with appropriate modification, they generate a whole tree of new technologies and influence many sectors of the national economy. An electric motor or computer are examples of such innovations. However, the scope of each basic innovation is limited, and the effectiveness of subsequent innovations decreases over time. If the flow of innovation is intense enough, the economy is growing rapidly. But this stream is random. If its intensity decreases, stagnation may occur.


The described concept makes it possible to formulate the following hypothesis about the mechanism of the financial crisis.


The mortgage crisis in the United States triggered the global crisis. Its true nature is a combination of two interrelated circumstances. The first of these is the “innovation pause”, a significant decrease in the intensity of the flow of technological innovations, the true sources of economic growth. The second is the formation of a reckless faith in continuous technological progress supported by many years of experience and stock-market mechanisms.


Belief in the forthcoming crisis-free development and, therefore, expectations of a rapid increase in household incomes may turn out to be a “bubble” in any market. But the features of the housing market such as its scale, long-term borrowing and multi-stage financing through derivative securities make it in this situation the most likely candidate for the formation of the pyramid.


The innovation pause arises due to the fact that the intensity of the stream of subsequent (“improving,” according to Mensh) innovations generated by the current basic innovations has significantly decreased while the new basic innovation has not yet “matured”.


If the suggested hypothesis is true, it is likely that the Western world faces a long period of stagnation until new basic innovations (biotechnology? Nanotechnology? Solar energy?) create the preconditions for an economic recovery. At the same time, “Keynesian” methods of stimulating demand, i.e. large-scale injections of financial resources, as in the days of F.D. Roosevelt, might only help mitigate the effects of recession and stabilization, but couldn't prevent a decrease in growth rates. To exit the recession, a new science and technology policy is needed. The growing role of the state is inevitable. An intuitive understanding of this fact, apparently, is the basis for changes in the Western leaders' worldview: they are increasingly emphasizing the role of the state.


The financial market is the basis for financing and selecting relatively small, subsequent innovations. Basic innovations are created by the state in collaboration with large companies. Therefore, the “folding” of stock markets and partial nationalization can be considered as elements of preparation of the Western economies to a new innovative breakthrough. It is important to realize that demand reduction is only the superficial cause of the crisis. Recent high demand has been the result of a bubble. You can restore it by pumping money into the economy, but then, under conditions of moderate unemployment, a new “bubble” arises and then inevitably bursts over time. While overcoming the recession the governments should stimulate large-scale innovative projects that, if they succeed, could initiate a new wave of growth.


It should be noted that, within the framework of the stated concept, a deep analogy of the current crisis with the Great Recession is revealed. Before Black Tuesday, as you know, US industry grew at an incredibly fast pace. The growth at that time was based on new management methods (Taylorism), mass production of radio receivers, household appliances and cars. Roosevelt managed to stabilize the economy, but stagnation continued until the Second World War.


The current crisis also contains completely new elements related to the organization of the stock market. As noted by many experts, a change in the basic principles of its functioning are required, not just strengthening the control over financial transactions.


“Basic innovations”, in our opinion, do not arise by chance, but as a response to the challenges of systemic crises. The “stream of innovations” and its intensity is also not a random process; it follows the certain laws. The intensity of the flow of innovation falls during the periods of systemic crisis. The market (consumers) is waiting for further improvements in the means of needs satisfaction. However, improvements to these means (those same “small, subsequent innovations”) in the usual (generally accepted) ways run into the obstacle raised by the systemic crisis. Until there is a “basic innovation” that can circumvent this obstacle the intensity of the flow of innovation is reduced to almost zero.


Everything that is written further is based on faith in the proposed hypothesis.

Systemic Crisis as a Short Circuit | Financial and Systemic Crises | Should the Financial Crises Be Avoided?

bottom of page