A Crisis Is Cut Off from Outside or Blocked from Within (3)

This piece is the latter part of Chapter 21 (3) 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.

The 7M Manifestation Pattern of the Micro Flow Crisis (14 Months in Both Countries During the Global Financial Crisis)

Comparing Table 21-6 and Table 21-7 brings the temporal structure of 7M manifestation in the two types into view at a glance. The macro crisis is a simple structure in which 1M and 6M manifest simultaneously with the external shock and then those manifestations resolve quickly, while the micro crisis is a complex structure in which 1M begins first and 6M, 2M, and 3M manifest in sequence, with a different policy prescription at each stage producing or failing to produce an effect, so that resolution proceeds slowly over 5 to 6 months. The difference in 7M manifestation between the two types becomes yet another classification signal in the diagnostic report. By looking at whether 1M and 6M manifested simultaneously right after the crisis broke out, or whether 1M manifested first and 6M followed a month or two later, one can classify the crisis type in a supplementary way, and such an assessment is possible.

The Divergence of Prescription: The Different Prescription Principles the Two Types Demand

The proposition that a different crisis type must call for a different prescription is the fifth verification of the two-type classification. A macro crisis and a micro crisis output the same diagnostic result (dual blockade), but the kind of prescription needed for recovery and the path by which it reaches its target differ. The result, output consistently across the four dual-blockade cases in the two countries, that prescription differences and recovery-speed differences appear together is the direct verification of the divergence in prescription principles.

The prescription principle of the macro crisis is a direct injection into the microvasculature. In a macro crisis the V-Series is sending an undetected or very low output, so the microvasculature itself is in a clean state. When new funds are deposited directly into households, those funds are absorbed into the microvasculature without obstruction, and the consumption channel of households recovers immediately. In the COVID cases of both countries, the immediate effect of this direct-injection prescription was measured as recovery within 1 month. In Korea, the emergency disaster relief payments of 14.3 trillion won from the first supplementary budget passed the National Assembly on April 30 and began to be paid out from May 4 at up to 1 million won per household, and by mid-May more than 90% had reached households. In the United States, the 2.2 trillion dollars of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) began being deposited by the Internal Revenue Service from April 11, and by the end of April roughly 88 million households had received 1,200 dollars per person. In addition, supplementary unemployment benefits of 600 dollars per week were paid to about 40 million people over four months from April 4, and the first round of the Paycheck Protection Program (PPP), 349 billion dollars, began accepting applications from April 3 and was supplied as unsecured loans averaging 210 thousand dollars each to about 1.6 million small and medium-sized businesses.

The core design of the prescription lies in the simplicity of its delivery path. The absence of an intermediate stage such as a large financial institution along the delivery path from the government to households is the characteristic of the macro prescription. In Korea, the emergency disaster relief of up to 1 million won per household was deposited directly to households in the form of credit card points or local currency issued by local governments, and in the United States, 1,200 dollars per person was deposited directly into household accounts through the Internal Revenue Service system. The fact that no roundabout path such as quantitative easing or the capital reinforcement of large financial institutions, where it is unknown where the funds will flow, was used became the first condition of the 1-month recovery. In both countries the time for the funds to reach the microvasculature was only about three weeks, and the blockade was lifted right after they arrived.

The prescription principle of the micro crisis is a combination of structural cleaning and direct injection into the microvasculature. In a micro crisis the V-Series is sending a high output, so the microvasculature itself is in a narrowed state. Even if new funds are sent into a microvasculature where microcalcification has thickly accumulated, those funds cannot pass through the microvasculature and remain in the aorta. For the funds to reach the microvasculature, the work of cleaning the microcalcification must proceed first, and that work must be combined with direct injection. The fact that in the Global Financial Crisis both countries at first applied only the macro prescription and the blockade did not lift for 5 months is the negative verification of the divergence in prescription principles.

Tracing the 5-month period of policy non-response in the U.S. Global Financial Crisis reveals the limits of the macro prescription. The 700 billion dollars of the Troubled Asset Relief Program (TARP) was, right after its approval by Congress on October 3, 2008, injected into the purchase of preferred stock of 9 large financial institutions. But the funds remained at the large financial institutions and did not reach households and small and medium-sized businesses. During the same period the Federal Reserve carried out cumulative cuts of 525bp in the benchmark rate from September 2007 to December 2008, but with the credit market frozen, the rate-cut signal did not carry through to households' mortgage rates. Programs such as the Commercial Paper Funding Facility (CPFF) and the Money Market Mutual Fund Liquidity Facility (MMLF), meant to secure liquidity in the short-term funding market, operated, but no direct channel reaching the microvasculature was created. The outcome that the blockade did not lift for 5 months is the direct result of the funds remaining in the aorta and failing to reach the microvasculature.

The turning point is February 2009. As the 787 billion dollars of the American Recovery and Reinvestment Act (ARRA) was signed on February 17, the way policy reached its target changed. The package included direct household support (accelerated income tax refunds, temporary extension of unemployment benefits), fiscal support for state governments (an increase in the federal Medicaid matching rate), infrastructure investment (roads, bridges, high-speed rail), and jobs programs, and about 35% of the funds were designed as a channel reaching households and local governments directly. During the same period, in Korea as well, a 28.4 trillion won supplementary budget began reaching households and small and medium-sized businesses directly, and the timing of the funds' arrival in the two countries coincided almost exactly. Right after the S&P 500 recorded its absolute trough of 676.53 on March 9, the blockades in the two countries were lifted simultaneously in April. The fact that the very moment the delivery path of the prescription was changed in the micro crisis was directly tied to the moment the blockade was lifted is the direct evidence of the micro prescription principle.

Comparison of the Prescription Principles and Recovery Times of the Two Types

The 6-times difference in recovery time that this table shows is the weightiest verification of the divergence in prescription principles. The result that the same direct-injection-into-microvasculature prescription lifted the blockade within 1 month in the macro crisis, while in the micro crisis the same prescription failed to produce an effect for 5 months, points to the fact that even when the kind of prescription is identical, if the state of the microvasculature differs, the speed at which the effect reaches its target differs. That the effect of a prescription is governed not only by the prescription itself but also by the state of the microvasculature the prescription will reach is the policy implication of the two-type classification. This leads to the conclusion that the work of maintaining the state of the microvasculature, which the V-Series measures, before a crisis strikes becomes the variable that decides the effect of the prescription during the crisis.

Single-Blockade Self-Recovery and the Completion of the Three-Category Crisis Classification System

The conclusion that the two types, the macro crisis and the micro crisis, explain every dual-blockade case within the 690 months of data from both countries was laid out in the preceding 7 sections. But within the two-country data there are also periods in which the dual blockade did not ignite and the system recovered on its own. Those three periods are the 2001 dot-com shock, the 2011 downgrade of the U.S. Treasury credit rating, and the 2022 period of surging U.S. interest rates. The fact that in both countries a single blockade was partially activated in the same three periods but, rather than progressing to a dual blockade, recovered on its own is the final piece of data for the crisis classification system.

If one asks whether these three periods can be classified as macro crises, the answer is no. This is because the establishment of the dual blockade, the core condition of a macro crisis, did not occur. Then to the question of whether they can be classified as micro crises, the answer is likewise no. This is because the roughly 6-month lead detection and the establishment of the dual blockade, the core conditions of a micro crisis, did not occur. The three periods belong to a third category that is neither macro nor micro. The reason the dual blockade did not ignite is the result of only one of signal blockade and channel blockade being partially activated while the other did not hold. Since the multiplicative-structure proposition of signal blockade and channel blockade leads to the conclusion that when the product of the two blockades is close to 0 the system recovers on its own, the three periods are classified not as a crisis type but as a category of crisis ignition falling short.

Examining the 2001 dot-com shock reveals the mechanism of single-blockade self-recovery. After the U.S. NASDAQ Composite Index peaked at 5,048.62 on March 10, 2000, a decline began, and it fell to 1,114.11 on October 9, 2002, a drop of about 78% from the peak. During the same period, real activity contracted to the point that in the nighttime light data of the U.S. Defense Meteorological Satellite Program (DMSP), the U.S. nighttime activity index recorded a cumulative decline of 20.4%, from 3.83 in 2000 to 3.05 in 2003. Large-scale layoffs occurred in California's Silicon Valley, Seattle, and Boston, where the information technology industry was concentrated. But in the blockade diagnosis of both countries the dual blockade did not ignite. Channel blockade (DLT) was partially activated, and the wage decline in the information technology sector affected household consumption, but signal blockade (CAM) did not hold. The fact that the U.S. Federal Reserve carried out cumulative cuts of 475bp in the benchmark rate from January to December 2001 was the decisive variable that kept the signal channel intact. The systems of both countries recovered on their own, and from the latter half of 2002 they entered a recovery phase.

The 2011 downgrade of the U.S. Treasury credit rating was a single blockade in the opposite direction. On August 5, 2011, the international credit rating agency Standard & Poor's (S&P) downgraded the credit rating of U.S. Treasuries from AAA to AA+, the first such event in history, and on August 8, the first trading day right after the downgrade announcement, the Dow index fell 5.5%. As the status of U.S. Treasuries, which had been regarded as a safe asset, was shaken, the signal was briefly blocked in the global funding market. In the blockade diagnosis of both countries, signal blockade (CAM) was partially activated, and stress was detected simultaneously on the circulatory and immune axes. But channel blockade (DLT) did not hold. The consumption channel of households in both countries had room to absorb the shock. The share of income that U.S. households spent each month on repaying debt had, through deleveraging after the Global Financial Crisis, fallen to around 11.5%, and Korean households were at a similar stage of stability. The signal was briefly cut off but the channel remained alive, so the product was close to 0, and the systems of both countries recovered on their own in about 2 months.

The 2022 period of surging U.S. interest rates was again a case of partial activation of channel blockade. From March 2022 the Federal Reserve rapidly raised the benchmark rate in response to inflation, raising it by 425bp over the course of 2022 to the range of 4.25% to 4.50%. Household mortgage rates rose to the 7% range on a 30-year fixed basis, and households' interest burden surged. As the U.S. household debt service ratio rose into the 11.3% range, channel blockade was partially activated, and in Korea as well, during the same period, the household interest burden surged and partial activation of channel blockade was detected. But signal blockade did not hold. The household labor markets of both countries were strong, and wage increases offset part of the interest burden. The product in both countries was close to 0, and the systems recovered on their own again.

The result that all three periods occurred at the same time in both countries is another verification of single-blockade self-recovery. Even though Korea and the United States were exposed to different kinds of shocks in the same periods, the same multiplicative structure operated identically in both countries and output the same pattern of self-recovery after partial activation of a single blockade. These 3 cases of single-blockade self-recovery in the three periods prove the universal operation of the multiplicative-structure proposition. This is the result that the mathematical proposition, that the multiplicative structure ignites a crisis only when both signal blockade and channel blockade are activated and, when only one side is activated, makes the system recover on its own, was consistently verified in the cases of both countries.

The 690-Month Two-Country Completion Mapping of the Three-Category Crisis Classification System (12 Periods)

The three-category mapping of the 12 periods that this table shows proves the completeness of the crisis classification system. Every blockade-activation period within the 690 months, combining Korea's 351 months and the United States' 339 months, falls into one of the three categories of macro flow crisis, micro flow crisis, and single-blockade self-recovery, and there is no case outside the classification. The 678 months other than these 12 periods are periods of silence in which the blockade diagnosis maintained the normal stage, and that silence too is explained by the same multiplicative-structure principle as single-blockade self-recovery. The proposition that in periods when neither signal blockade nor channel blockade is activated the product becomes 0 and the system operates normally without blockade is the data that explains the silence of the 678 months.

The policy implications the three-category crisis classification system points to come out in two branches. The first branch is the differentiation of crisis-response prescriptions. For a macro crisis, applying the direct-injection-into-microvasculature prescription immediately allows recovery within 1 month, and for a micro crisis, the combined prescription of structural cleaning and direct injection must be applied in stages over 5 to 6 months for recovery to be possible. The second branch is the structural maintenance of crisis prevention. The reason the product was close to 0 in the single-blockade self-recovery cases is that when the portion corresponding to one blockade was exposed to a shock, the portion on the other side had the capacity to absorb the shock, and this capacity is the depth of the structure measured by the V-Series. The work of maintaining the depth of the structure that the V-Series measures before a crisis strikes is the condition for single-blockade self-recovery, and as a result it becomes a policy direction that prevents the very ignition of the dual blockade.

The design principle of the diagnostic system that the three-category system points to is also organized together. The triple diagnostic system of V-Series structural diagnosis, blockade diagnosis, and satellite measurement does not correspond one-to-one with the three-category system of crisis classification, but the fact that the three-layer design of the diagnostic system all contributes to crisis-type classification is confirmed in the two-country data. The V-Series serves as the first-stage classifier of the crisis type, the blockade diagnosis outputs a second-stage classification signal through detection time and manifestation pattern, and satellite measurement provides independent verification of the first-stage and second-stage classifications. An assessment that the reliability of the classification is secured when all three layers of diagnosis converge on the same classification result is possible, and this convergence structure is the data that decides the robustness of the diagnostic system.

The 13 academic propositions that the 690-month two-country verification proved operate together within the two-type classification system. Automatic classification of crisis type, the independence of microcalcification and inflation, the order of the five-stage collapse pathway law, the multiplicative structure of signal blockade and channel blockade, the effect of the direct-injection-into-microvasculature prescription, the correspondence between blockade duration and structural depth, the operation of the same engine in both countries, the compatibility of gauge national specificity and universality, the value of stand-alone satellite verification, the simultaneous peak vulnerability of both countries in 2025, the asymmetry of detection time, the two-type divergence of prescription principles, and the third category of single-blockade self-recovery. The fact that the 13 propositions operate coherently within the three-category system of macro, micro, and single-blockade self-recovery is the data that decides the academic weight of physical economics theory.

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