The First Button Where the Crisis Begins (2)

This piece is the latter part of Chapter 10 (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.

The Accumulation Across the Three Sectors of Household, Corporate, and Government

The accumulation of the onset stage proceeds simultaneously across the three sectors of household, corporate, and government. These three sectors are not independent flows but a network on the same funding channel through which each transfers its burden to the others. When deposition deepens in one sector, another sector takes on that burden, and at the point where no sector can bear any more, the system enters blockade. In verifying the two cases of Korea and the United States, the present authors confirmed the academic fact that the simultaneous accumulation of the three sectors is a necessary condition for entry into blockade.

Let us begin with the household sector. At the end of 1996 in Korea, the ratio of household debt to disposable income stood at about 90 percent, and during the onset stage of 1997 the credit burden rose rapidly as short-term borrowing rollover broke down. Over the single year of 1998, personal credit defaults increased more than twofold compared with a normal year. The cross-section of the United States in 2007 was deeper. It entered the onset stage with the ratio of household debt to disposable income having peaked at about 128 percent, and in the single year of 2008 alone about 860,000 home foreclosures proceeded. A case in which the deposition of the household sector acted as the final pressure driving entry into blockade.

In the corporate sector, the chain of large-corporation bankruptcies that unfolded from the end of 1996 to the middle of 1997 in Korea is the clearest quantitative evidence of onset-stage accumulation. The chain bankruptcy of seven groups, running from the failure of Hanbo Steel in December 1996 (debt of about 5.7 trillion won), through Sammi Group in January 1997, Sammi Specialty Steel in March, Jinro Group in April, Daenong and Hanshin Construction in May, and Kia Group in July (debt of about 9.5 trillion won), is quantitative evidence showing that the onset stage was already in full progress inside the system right up until the devaluation of the Thai baht in July, which became the fuse of the currency crisis.

The onset stage of the corporate sector in the United States unfolded over about 13 months. The event on August 9, 2007, in which France's BNP Paribas froze three asset-backed securities funds, was the fuse. In the same month the LIBOR-OIS spread in the short-term funding market surged to 80 to 90 basis points, bringing the onset stage into full swing, and on March 16, 2008, the investment bank Bear Stearns was acquired by JPMorgan Chase (with a 29 billion dollar guarantee from the Federal Reserve). It continued to the bankruptcy of IndyMac in July 2008, the government takeover of Fannie Mae and Freddie Mac on September 7, and the bankruptcy of Lehman Brothers on September 15. About 12 months for Korea, about 13 months for the United States. The time span of the onset stage was similar in the two cases.

In the government sector, the key is the flow in which emergency resources are mobilized as policy resources. In Korea, foreign exchange reserves were depleted from about 33.2 billion dollars at the end of 1996 to about 3.9 billion dollars in usable foreign exchange on December 18, 1997. A phase in which the emergency vault was nearly emptying out. In the United States, Federal Reserve assets expanded from about 870 billion dollars in September 2007 to about 2.2 trillion dollars in December 2008, and at their peak in 2014 they swelled to about 4.5 trillion dollars. The flow of the emergency vault shrinking and the cross-section of it swelling appear to be exact opposites, but they carry the same academic meaning in that the original function has been altered.

The three sectors in the domain of the human body accumulate in the same structure. The cellular level, the tissue level, and the storage-vault level. In the medical-domain data the present authors verified, it was confirmed that the calcium deposition of the onset stage proceeds simultaneously across the three levels, and that entry into blockade occurs at the point where no single level can compensate any further. The cell corresponds to the household, the tissue to the corporation, and the storage vault to the government. Only the medium differs, calcium versus cash, while the academic structure itself of simultaneous accumulation across the three sectors is the same in the two domains.

The Onset-Stage Timeline of Korea 1997 and the United States 2008

The flow of the onset stage cannot be captured precisely by an abstract definition alone. By ordering the concrete timelines of the two cases, we examine how the onset stage proceeds and crosses over into blockade. Defining the onset stage as the roughly 12 months from December 1996 to November 1997 for Korea and the roughly 13 months from August 2007 to September 2008 for the United States, the present authors set out below the result of arranging the major events of the two cases along a timeline.

Korea's onset stage begins with the failure of Hanbo Steel in December 1996. This bankruptcy, carried out under a debt of about 5.7 trillion won, was the signal that the first and second accumulations ordered in the previous chapter had crossed the threshold and begun to surface. Over about seven months, running to Sammi Group in January 1997, Sammi Specialty Steel in March, Jinro Group in April, Daenong and Hanshin Construction in May, and Kia Group in July (about 9.5 trillion won), seven groups among the top 30 conglomerates entered chain bankruptcy. The academic fact that the onset stage was already in full progress inside the Korean system before the devaluation of the Thai baht in July, which became the fuse of the currency crisis.

After the devaluation of the Thai baht in July 1997, the acceleration of the onset stage begins. As the contagion from the crisis in neighboring Southeast Asian countries spread into the Korean foreign exchange market, the flow of responding to the maturity of short-term external debt with foreign exchange reserves grew steeper. On October 24 the credit rating agency S&P downgraded Korea's credit rating by one notch, and on October 28 Hong Kong's Hang Seng Index plunged about 13 percent intraday, bringing the exit of foreign capital from Korea into full swing. The IMF bailout request on November 21, usable foreign exchange of about 9.2 billion dollars on November 26, and the low point of about 3.9 billion dollars in usable foreign exchange on December 18. It is a flow in which the compression of the latter half of the onset stage, over about five months, has been quantitatively confirmed.

The onset stage of the United States begins with the event on August 9, 2007, in which France's BNP Paribas froze three funds related to asset-backed securities. In the same month the LIBOR-OIS spread surged from its usual level of about 10 basis points to 80 to 90 basis points, shaking confidence in the short-term funding market. In December the Federal Reserve newly established the TAF (Term Auction Facility) and began an anonymous supply of short-term funds, and on March 16, 2008, the investment bank Bear Stearns was acquired by JPMorgan Chase. This acquisition, guaranteed by the Federal Reserve to the tune of 29 billion dollars, was the event in which the U.S. policy authorities first put the emergency vault into full operation in the middle of the onset stage.

The latter half of the 2008 onset stage is a flow in which larger events were compressed into a shorter span of time. The bankruptcy of IndyMac in July, the government takeover of Fannie Mae and Freddie Mac on September 7, the bankruptcy of Lehman Brothers on September 15, and the emergency support of about 85 billion dollars to AIG on September 16. Within the single month of September, events unfolded in which many of the core axes of the U.S. financial system were shaken simultaneously. The compression that took about four weeks in the last week of November 1997 in Korea shortened further to about nine days in September 2008 in the United States. In the data the present authors verified, this time compression was confirmed as the academic signal announcing the end of the onset stage and the beginning of blockade.

When the two onset stages are placed together, a common outline is clear. A time span of about 12 to 13 months, a latter-half acceleration over about five to six months, and a compression during the final few days or few weeks. In verifying 351 months of Korean data and 339 months of U.S. data, the present authors confirmed that this temporal structure operated in the same shape in both cases. The fact that the latter-half acceleration of five to six months is caught as a leading signal announcing entry into blockade, that is, that from about five to six months before the end of the onset stage the four triggers at the funnel exit approach their threshold, is quantitatively supported in the two cases.

The Onset-Stage Timeline of Korea 1997 and the United States 2008

Reclaiming the Isomorphism with the Human Body

Here we reclaim the isomorphism with the domain of the human body. The loan-interest outflow theory established by the present authors shares its academic structure with the bone-calcium outflow theory established at the same stage in the human-body domain. Only the medium differs, calcium versus cash; the deposition substance differs, microcalcification versus loan interest; and the emergency vault differs, bone versus foreign exchange reserves. The three essential characteristics of automaticity, asymmetry, and self-amplification operate in the same form in the two domains.

The mathematical foundation of the isomorphism lies in the deposition function R(t) = ∫ η · T(τ)^k dτ. The fact that the nonlinear exponent k exceeds 1 was confirmed in both domains. In the human body, microcalcification deposition accelerates over time and induces the narrowing of the microvasculature, and in the economy, loan-interest deposition narrows the funding channel through the same acceleration structure. In the present authors' proof of isomorphism, the proposition was established that this acceleration structure itself is independent of the domain.

What the same structure in the two domains means academically is as follows. That once the answer to what is triggered in the onset stage, what deposition is formed, and why it accumulates irreversibly is established in one domain, it applies in the same form in the other domain as well. If in human medicine the irreversible accumulation of microcalcification in the microvasculature constitutes the academic foundation of chronic disease, then in the economy the irreversible accumulation of loan interest constitutes the academic foundation of crisis; that is the parallel.

A Preview of the Flow to Come

This chapter has ordered the onset stage. The three procedures by which the emergency vault opens automatically, the two side effects of the shrinking of the emergency vault and the formation of deposition, the asymmetry between principal and interest, the accumulation across the three sectors of household, corporate, and government, and the timeline of the two cases of Korea 1997 and the United States 2008. The academic foundation of the loan-interest outflow theory established by the present authors has been laid out within this chapter. The core conclusion is that, while part of the resources that leaked out during the onset stage were recovered through the everyday transactions of households and firms, the loan interest deposited in the same period did not dissolve of its own accord.

But the onset stage is not the end. When deposition crosses a certain threshold and proceeds to the stage of narrowing both axes of the funding channel at once, the system can no longer maintain flow through the normal operation of a single axis alone. That stage, in which signal-channel blockade (CAM) and physical-channel blockade (DLT) switch on together, is precisely the dual blockade (Dual Blockade) established by the present authors, and it corresponds to blockade, the third of the five DTDMC stages.

About six months from usable foreign exchange of 9.2 billion dollars on November 26, 1997, in Korea to May 1998, and about six months from the bankruptcy of Lehman Brothers on September 15, 2008, in the United States to March 2009. In both cases, a blockade of about six months proceeded immediately after the onset stage ended. In the flow to come, the academic formulation of the dual blockade theory, B* = CAM · DLT, the verification result for the four Korea-U.S. cases of 2008 and 2020 in which dual blockade was judged to have formed in the 690 months of data, the measured verdict of the CAM-alone single-blockade advance warnings of 1997 and 2003, and the academic counter-evidence of the three cases in which the system survived and recovered on its own under single blockade, are unfolded in turn.

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