This piece is the middle portion of Chapter 21 (2) of The Declaration of the Age of Physical Economics (Yoon Jong-won, Yoon So-ri, Yoon Jun). It is an academic exposition presenting the authors' physical economics hypothesis, and the body, figures, and citations follow the manuscript as written.
Four Verified Cases of Micro-Flow Crisis (3 in Korea, 1 in the United States)
| Case | Internal Accumulation Period | Main Accumulation Indicators | External Trigger Event | Advance Detection | Blockade Period (1997 and 2003 are CAM single blockade) |
|---|---|---|---|---|---|
| Korea IMF 1997 | 1994-1996 (about 3 years) | Short-term external debt ratio 40% to 58%, corporate debt 387%, current account deficit increased 5-fold | 1997.7 Thai baht collapse to 11.21 IMF bailout | 1997.5 CAM ignition (about 6 months) | 1997.11 onward, recovery in progress |
| Korea Card 2003 | 2001-2002 (about 2 years) | 104.8 million credit cards, 4.6 per person, household credit 444 trillion won (+28% year on year) | 2003.11 LG Card default moratorium | 2003.5 CAM ignition (about 6 months) | Manifestation stage in progress |
| Korea GFC 2008 | 2005-2007 (about 3 years) | Household Gini 0.340 rising, cumulative household interest burden, deepening export-dependent structure | 2008.9.15 Lehman bankruptcy | 2008.3 crossing threshold breach (about 6 months) | 2008.9-2009.4 (6 months) |
| U.S. GFC 2008 | 2005-2007 (about 3 years) | Household debt service ratio 13.2% (2006), house price 5.1 times (2006), savings rate 2.6% (2005) | 2008.9.15 Lehman bankruptcy | 2008.3 warning signal (about 6 months) | 2008.9-2009.4 (6 months) |
The common pattern of the four cases shown in this table is the verification of the micro-crisis classification. The historical backdrops differ, the direct causes differ, and the surfaces of the crises differ, but the operating structures are identical. A four-stage structure of internal accumulation over 2 to 3 years, ignition by an external trigger, advance detection of about 6 months, and a blockade lasting 5 to 6 months is present in all four cases. The result that the crisis surfaces are all different while the internal structure is one and the same proves that a micro-crisis is one type of crisis rather than each crisis being its own separate thing.
Another commonality that the four micro-crises show is the measurability of microcalcification. In Korea in 1997, the short-term external debt ratio and the corporate debt ratio were the measurement indicators of microcalcification; in Korea in 2003, the household credit balance and the number of credit cards issued were the measurement indicators; and in Korea and the United States in 2008, the household debt service ratio and the house price ratio were the measurement indicators. The measurement indicators changed from era to era, but the fact that the object of measurement was in every case the microcalcification accumulated in the microvasculature is consistent. This connects to the reason the V-Series gauge configuration is 9 in Korea and 11 in the United States. It is the result of measuring the same microcalcification with different gauges tailored to the institutions and eras of the two countries. The measurement tools reflect national particularity, but the object of measurement is universal.
Meanwhile, the seven surfacing patterns of a micro-crisis show a different aspect from those of a macro-crisis. 1M (acute infarction) manifests first, and after it 6M (supply chain disconnection), 2M (economic slowdown), and 3M (exhaustion, policy non-response) manifest sequentially or in combination at intervals of time. This sequential manifestation is clearly revealed in the 14-month time series of the U.S. global financial crisis. Right after the Lehman bankruptcy in September 2008, the S&P 500 plunged and 1M manifested; in November, the AIG bailout and the collapse of the auto industry brought about the manifestation of the supply chain 6M; and in December, as the crisis stage reached its peak, 2M (economic slowdown) and 3M (policy non-response) manifested together. In Korea as well, 1M, 6M, 2M, and 3M manifested in the same temporal order. Unlike a macro-crisis, which manifests 1M and 6M immediately and simultaneously, a micro-crisis has a temporal structure that starts from 1M with the other M's following in sequence, and this fact shows the essential difference between the two types from yet another angle.
Automatic Classification of Crisis Types as Seen through V-Series Output
The tool that discriminates crisis types is V-Series structural diagnosis. V-Series is a set of gauges that measure structural variables such as the amount of microcalcification accumulated in the household microvasculature, the funds remaining in the emergency vault, the number of people able to work, and the balance of income distribution. Depending on what output this tool produces in the period just before a crisis, the crisis type is automatically classified. The result that this automatic classification operated consistently across the 6 crises within 690 months of data for the two countries proves the classifier function of V-Series.
The result that V-Series outputs just before a macro-crisis is low or undetected. Because a macro-crisis is of the external-shock type, the internal structure can be clean right before the crisis ignites, and the fact that the internal structure is clean is measured by the fact that the V-Series gauges remain at the stage below the risk threshold. Just before Korea's COVID crisis in 2020, V-Series was at the undetected stage. In 2019, Korea's working-age population growth rate held at a positive +0.20%, the Gini coefficient was 0.345, a level similar to that just before the global financial crisis, and the household debt burden had not yet reached the critical point. The fact that none of the 9 gauges entered the severe stage is the data basis of the V-Series undetected output.
Just before the U.S. COVID crisis in 2020, V-Series was also at the very low stage. The share of income that households spent each month on paying off debt was 9.7%, the lowest level since the 1980s; the savings rate had recovered to 7.5%; and house prices were at 4.2 times household annual income, in a stable stage. This was the result of household deleveraging over roughly 10 years after the global financial crisis cleanly restoring the household microvasculature. None of the 11 gauges had reached the risk threshold, and the chronic crack in income distribution (Gini coefficient 0.42) was the only cautionary signal. The very low stage V-Series output was the result of measuring the healthy state of the U.S. household microvasculature, and this healthy state became the first condition for a 1-month recovery.
The result that V-Series outputs just before a micro-crisis is high or medium. Because a micro-crisis is of the internal-structure-accumulation type, the internal structure is already close to the critical point right before the crisis ignites, and that near-critical state is measured as a risk signal in the V-Series gauges. Just before the U.S. global financial crisis, V-Series was at the high stage. The fact that the household debt service ratio was severe at 13.2% in 2006, the house price ratio was severe at 5.1 times, the savings rate was severe at 2.6% (2005), and 3 gauges entered the severe stage simultaneously is the data basis of the V-Series high output. In addition, the Gini coefficient at 0.470 meant that the chronic distribution crack was at its peak, and the current account deficit at -5.8% of GDP meant the chronic deficit was deep. The result that the external trigger of the Lehman bankruptcy was applied in a state where 5 gauges were sending risk signals simultaneously led to a deep blockade of 6 months.
The V-Series output for Korea's IMF crisis of 1997 was low. This is the same result as the V-Series output of a macro-crisis, but the meaning of the internal structure is different. The reason Korea's domestic V-Series was low in 1997 is that the domestic household microvasculature was relatively healthy. The working-age population growth rate was sound at +0.72%, the Gini coefficient was 0.298, below the OECD average, and household debt had not reached the risk threshold. Yet the crisis came. The V-Series low output did not mean there was no crisis but was the precise classification that the crisis had not come from the domestic household microvasculature. The 1997 currency crisis was a micro-crisis that ignited in a separate dimension called the external debt structure, and because V-Series was a tool that measured the domestic microvasculature, the external debt structure lay outside the measurement range of V-Series.
This 1997 case shows the precision of V-Series classification. The reason the V-Series low output appears in both a macro-crisis and an external-debt-type micro-crisis is that in both cases the domestic household microvasculature is not the ignition point of the crisis. The difference between the two cases is discriminated by blockade diagnosis and satellite measurement. In a macro-crisis, blockade diagnosis outputs a dual blockade simultaneously with the external event, and in an external-debt-type micro-crisis, blockade diagnosis outputs a first signal about 6 months before the external event. The result that a two-stage classification system, in which V-Series classifies the family of the crisis and blockade diagnosis classifies the specific kind within that family, operated consistently in the data of the two countries.
Automatic Classification of Crisis Types as Seen through V-Series Output (6 Cases across the Two Countries)
| Crisis Case | V-Series Output | Data Basis of Output | Classification Result | Verified Proposition |
|---|---|---|---|---|
| Korea IMF 1997 | Low (domestic structure healthy) | Gini 0.298, population +0.72%, household debt stable | External-debt-type micro (outside V-Series measurement range) | Automatic classification of crisis type |
| Korea Card 2003 | Medium (household accumulation measured) | 104.8 million credit cards, household credit 444 trillion +28% | Endogenous micro | Distribution gauge directly measures household accumulation |
| Korea GFC 2008 | Medium (Gini rising, household pressure) | Gini 0.340, cumulative household interest burden, deepening export dependence | Contagion-type micro | Global crisis contagion is also classified as micro |
| U.S. GFC 2008 | High (3 gauges simultaneously severe) | DSR 13.2%, house price 5.1 times, savings rate 2.6%, all severe | Structural micro (clearest) | V-Series high = deep blockade |
| Korea COVID 2020 | Undetected (structure healthy) | Gini 0.345, population +0.20%, household debt stable | Macro | Macro with no underlying disease |
| U.S. COVID 2020 | Very low (structure very healthy) | DSR 9.7%, savings rate 7.5%, house price 4.2 times, all stable | Macro (clearest) | Macro prescription takes effect immediately |
The consistency of classification shown by the 6 cases in this table is a direct verification of the V-Series classifier function. The 2 macro-crises both show a V-Series undetected or very low output, and the 4 micro-crises all show a V-Series medium or higher output. The number of classification errors is 0. The result that the accuracy with which V-Series automatically classified crisis types within a long time series of 690 months is 100% points to the fact that V-Series is not a mere auxiliary tool but a core tool built into the classification foundation of the diagnostic system. The point that, even if the V-Series gauges increase from 9 to 11 or new gauges are added, the classification principle itself operates universally is material that shows the robustness of the system design.
Why Detection Times Differ, an Essential Asymmetry
The same diagnostic tool outputs same-month detection for a macro-crisis and outputs about 6-month advance detection for a micro-crisis. The result that the same tool shows different detection times for the two types reflects not a limitation of the tool but a difference in the essence of the crisis. This detection-time asymmetry is the second academic proposition of the classification of the two types.
The reason about 6-month advance detection is possible in a micro-crisis lies within the operating mechanism of the crisis itself. A micro-crisis is a crisis in which internal accumulation takes several years to reach the critical point. In the final stage of accumulation, when the pressure inside the microvasculature approaches the critical point, that pressure appears as faint signals in household consumption, employment, and fund flows. The microvasculature flow indicators (consumption, employment, liquidity, debt) that 59 gauges measure each month catch these faint signals. The roughly 6 months just before crossing the critical point is the time range in which the faint signals become measurable. The result that about 6-month advance detection was output consistently across the 4 micro-crises of the two countries proves the universality of this time range.
The reason only same-month detection is possible in a macro-crisis also lies within the operating mechanism of the crisis. A macro-crisis is a crisis in which the shock arrives the moment an external event occurs. Before the external event occurs, there is no accumulation signal in the internal microvasculature. Because one cannot catch a signal of accumulation in a state where there is no accumulation, no macro-crisis signal is measured at any point before the external event occurs. The result that blockade diagnosis outputs a dual blockade in the very month the external event occurs is the fastest output the tool can give for a macro-crisis. The result that blockade diagnosis output a dual blockade in April 2020 in the COVID cases of both countries is because the external shock arrived in earnest in April, and to demand detection faster than that is, transferred to the human body, like demanding that an accident be predicted the day before the accident.
The fact that a weak advance signal was caught in November 2019 in Korea's COVID crisis is not an exception to the detection-time asymmetry. At that time the Korean economy was seeing exports slow because of the aftermath of the U.S.-China trade dispute and the fall in semiconductor unit prices, and faint stress was being detected in some gauges. This was the result of the signal intensity growing rapidly as the macro shock of COVID was applied on top of this faint stress. Korea's 5-month advance signal was not a detection of the macro shock of COVID itself but a detection of the micro-level weakening that had been under way since before COVID. In the case of U.S. COVID, because V-Series was very low in 2019 there was no such advance signal, and the same-month detection in April 2020 came out as the standard result of a macro-crisis.
The constancy of the lead time is another piece of verification material. The fact that the lead time was almost the same across the 4 micro-crises of the two countries is no coincidence. Korea IMF about 6 months, Korea Card about 6 months, Korea GFC about 6 months, U.S. GFC about 6 months. The result that the lead time is constant across 4 micro-crises whose kinds, eras, and countries are all different points to the fact that the physical time over which pressure accumulates inside the microvasculature until a dual blockade is established is similar regardless of the kind of crisis. It is possible to assess that, while the same kind of pressure accumulation occurs in the same microvasculature structure, the critical point is reached at similar time intervals. This constancy is also direct evidence of the fact that blockade diagnosis is not a tool that estimates probability but a tool that measures the physical time of accumulation.
Contrast with existing crisis prediction tools makes the meaning of the detection-time asymmetry even clearer. The Bank for International Settlements (BIS) credit-to-GDP gap is a representative indicator used as a crisis signal, but it does not distinguish between a macro-crisis and a micro-crisis. The reason lies in its applying the same threshold to all crises. Bloomberg's U.S. recession probability model is the same. It output a 100% U.S. recession probability in October 2022, but over the following 2 years the U.S. economy maintained growth. This was a result that occurred because both tools handle a macro-crisis and a micro-crisis with the same model without distinguishing between them. Blockade diagnosis handles the two types in different ways from the start, outputting same-month detection for a macro-crisis and about 6-month advance detection for a micro-crisis. This asymmetric output becomes the basis for the assessment that it is not a defect of the tool but that the tool is accurately capturing the essence of the crisis.
Detection Time and Crisis Type (6 Cases across the Two Countries)
| Crisis Case | External Trigger Event | First Signal before Trigger | Lead Time | Crisis Type |
|---|---|---|---|---|
| Korea IMF 1997 | 1997.7 Thai baht collapse | 1997.5 CAM ignition | About 2-6 months | Micro |
| Korea Card 2003 | 2003.11 LG Card default moratorium | 2003.5 CAM ignition | About 6 months | Micro |
| Korea GFC 2008 | 2008.9.15 Lehman bankruptcy | 2008.3 crossing threshold breach | About 6 months | Micro |
| U.S. GFC 2008 | 2008.9.15 Lehman bankruptcy | 2008.3 warning threshold breach | About 6 months | Micro |
| Korea COVID 2020 | 2020.3 social distancing | 2019.11 weak signal (export slowdown) | About 4 months (heterogeneous signal) | Macro |
| U.S. COVID 2020 | 2020.3.13 national emergency | 2020.4 dual blockade | Same month (0 months) | Macro |
The bifurcated structure of detection time shown by this table is the third verification of the classification of the two types. The 4 micro-crises are all about 6 months in advance; of the 2 macro-crises, the United States is same-month detection and Korea is 4 months in advance, but the nature of that advance signal was not a direct detection of the macro shock but a detection of the faint micro-level weakening that had been under way from before. It is possible to assess that detection time itself serves as a classifier that indicates the crisis type. The fact that the two groupings of same-month detection for a macro-crisis and about 6-month advance detection for a micro-crisis are output consistently in 690 months of data leads to the conclusion that the detection-time asymmetry is not a limitation of the system but a direct reflection of the essence of the crisis.
The Difference between the Two Types in the Seven Surfacing Patterns
The statement that the way microcalcification crosses the critical point and surfaces appears in seven forms is the 7M proposition. 1M is acute infarction of the capital market, 2M is a slowdown of the real economy, 3M is exhaustion caused by policy non-response, 4M is the explosion of an asset bubble, 5M is an exchange rate shock, 6M is the disconnection of supply chains and trade, and 7M is the contraction of society as a whole. Although all seven forms arise from the same microcalcification accumulation, which form manifests first and which form follows differs according to the type of crisis. The fact that a macro-crisis and a micro-crisis show different orders of manifestation and different combinations of manifestation within the same 7M proposition is the fourth verification of the classification of the two types.
The 7M manifestation pattern of a macro-crisis is the immediate simultaneous manifestation of 1M and 6M. In a macro-crisis, because the external shock immediately blocks the large arteries, the capital market (one part of the large arteries) and the supply chain (another part of the large arteries) stop at the same time. The result that 1M and 6M manifested simultaneously in the same month in Korea's April 2020 COVID data is a direct measured value of the macro-crisis manifestation pattern. In the same month, 1M (acute infarction) manifested as the KOSPI fell to a trough of 1,439.43 on March 19, about 33% below its peak, and in the same period 6M (supply chain disconnection) manifested as Korea's exports plunged 24.3% year on year in April. The same pattern operated in U.S. COVID as well. 1M, in which the S&P 500 fell 33.9% in a single month from a peak of 3,386.15 on February 19 to a trough of 2,237.40 on March 23, and 6M, in which U.S. manufacturing production fell 12.7% in the same period, manifested simultaneously.
The reason manifestation is concentrated in 1M and 6M lies in the path along which the shock arrives. Because the external shock is applied to the large arteries, the capital market, the supply chain, and the exchange rate, which belong to the large arteries, are immediately affected. But the household consumption patterns and labor market structure, which belong to the microvasculature, are not immediately affected. Consumption was temporarily halted by the lockdown, but the average propensity to consume of households and the income distribution structure remained as they were, and temporary layoffs occurred, but the fundamental structure of the labor market did not collapse. 2M (economic slowdown) and 3M (policy non-response), the 7M forms corresponding to the microvasculature, either do not manifest strongly in a macro-crisis or are resolved quickly right after the prescription arrives. It is possible to assess that the reason the blockade was lifted after just 1 month in both countries in COVID is also that the manifestation corresponding to the microvasculature was not deep.
The 7M Manifestation Pattern of a Macro-Flow Crisis (COVID in the Two Countries)
| 7M Form | Korea COVID 2020 | U.S. COVID 2020 | Common Pattern |
|---|---|---|---|
| 1M Acute infarction | KOSPI 3.19 trough 1,439.43 (-33%) | S&P 500 3.23 trough 2,237.40 (-33.9%) | Immediate simultaneous manifestation, peak within about 1 month |
| 6M Supply chain disconnection | Exports April -24.3%, aviation and tourism paralyzed | Manufacturing production -12.7%, lockdown halts supply chain | Immediate simultaneous manifestation, simultaneous with external shock |
| 2M Economic slowdown | Q2 GDP -3.2% | Q2 GDP -31.4% (annualized) | Concentrated in one quarter right after external shock, quick recovery |
| 3M Policy non-response | Does not manifest (direct injection takes effect immediately) | Does not manifest (CARES Act takes effect immediately) | Macro prescription reaches microvasculature directly, non-response 0 |
| 4M Asset bubble explosion | Does not manifest (short-term shock, quick recovery) | Does not manifest (short-term shock, quick recovery) | Does not manifest in a macro-crisis |
| 5M Exchange rate shock | Won/dollar rises temporarily then stabilizes | Dollar index rises temporarily then stabilizes | External shock dispersed, exchange rate impact limited because it is simultaneous globally |
| 7M Social contraction | Temporary due to social distancing, phased easing in May | Temporary due to state-by-state lockdown, phased reopening in May | The lockdown itself, not cumulative contraction |
The 7M manifestation pattern of a micro-crisis is multi-stage sequential manifestation. A temporal structure in which 1M manifests first, 6M follows behind it, then 2M and 3M manifest together, and, depending on the case, 4M (asset bubble explosion) and 5M (exchange rate shock) manifest additionally is the characteristic of a micro-crisis. This multi-stage sequential manifestation is clearly revealed in the 14-month time series of the U.S. global financial crisis. Right after the Lehman bankruptcy in September 2008, 1M manifested in the capital market, and a credit freeze occurred in which short-term fund transactions in the credit market virtually stopped. On October 3, the Troubled Asset Relief Program (TARP) of 700 billion dollars was approved by Congress, but the funds did not reach the microvasculature and the blockade was not lifted.
In November, 6M manifested. American International Group (AIG) received a cumulative bailout package of 150 billion dollars on November 10, and the auto industry began to collapse at the same time. In November, GM and Chrysler requested government support, and on December 19 the Bush administration approved 17.4 billion dollars in emergency auto industry loans. As U.S. imports plunged in the global supply chain, the exports of Korea, Japan, and Germany collapsed simultaneously, and the result that Korea's exports fell 18.3% in November was the direct contagion of the U.S. 6M manifestation. In December, 2M and 3M reached their peak together. On December 1, the NBER officially declared the U.S. recession, achieving the academic confirmation of 2M, and in the same month the Federal Reserve cut the benchmark interest rate to a level close to 0%, but 3M, the policy non-response in which that signal did not reach households, was measured together. In December, the crisis-stage signal of Korea's blockade diagnosis also reached its peak, and simultaneous warnings were output on multiple axes.
The difference between the two types is also revealed in the temporal structure of the recovery stage. On February 17, 2009, the signing of the U.S. American Recovery and Reinvestment Act (ARRA) of 787 billion dollars changed the way policy arrived. About 35% of the package was designed as a channel that reached households and local governments directly, and right after the funds began to reach the microvasculature, a blockade-lifting signal was output. In the same period, in Korea too, a 28.4 trillion won supplementary budget reached households and small and medium-sized enterprises directly, and in April the blockades of the two countries were lifted simultaneously. The 5 to 6 months it took to recover in a micro-crisis is the temporal structure of the manifestation stages itself, and the fact that a different 7M form manifested at each stage is the essence of the micro-crisis manifestation pattern.