Network Effects
The Credit Strategist - April 2026
Conditions leading to a financial crises are intensifying, but they were accelerated, not caused, by the war (just as they were intensified by the pandemic). Higher commodity prices (not just oil and gas but fertilizers, hydrogen and other key products) trade in a networked global economy susceptible to stresses that spread quickly and unpredictably. Today’s global economy is the type of complex adaptive system described by John H. Holland in his seminal 1992 article (“Complex Adaptive Systems,” Daedalus, Vol. 121, No. 1 (Winter, 1991), pp. 17-30):
“Because the individual parts of a complex adaptive system are continually revising their (“conditioned”) rules for interaction, each part is embedded in perpetually novel surroundings (the changing behavior of the other parts). As a result, the aggregate behavior of the system is usually far from optimal, if indeed optimality can even be defined for the system as a whole. For this reason, standard theories in physics, economics, and elsewhere, are of little help because they concentrate on optimal end-points, whereas complex adaptive systems ‘never get there.’ They continue to evolve, and they steadily exhibit new forms of emergent behavior. History and context play a critical role, further complicating the task for theory and experiment…It is the process of becoming, rather than the never-reached end points, that we must study if we are to gain insight.”
Even with the development of computer technology that Professor Holland predicted (“massively powerful computers should produce a revolution in the investigation of complex adaptive systems”), it remains extremely difficult to forecast the path of the global economy today. The serious stresses manifesting themselves as the war continues reflect conditions building up over decades including the massive growth of global indebtedness, increased interconnectivity among global markets, changing market structures including growth in derivatives, passive investment products, and computer trading, the shift from analogue to digital to tokenized finance, and other conditions that amplify and accelerate market moves. All of these changes significantly increase complexity which in turn renders the ability to forecast outcomes much more difficult.
In The Seventh Sense: Power, Fortune, and Survival in the Age of Networks (2016), Kissinger Associates’ Joshua Cooper Ramo describes how today’s world is dominated by networks. The digital and networked economy is brilliantly examined by my friend Professor Mark Taylor in his seminal book, Confidence Games: Money and Markets in a World Without Redemption (2004), where he identifies and explicates the philosophical/scientific/intellectual origins of our interconnected world. Both books are essential reading for understanding how transformations in technology affected economies and markets in ways that were expected to improve humanity but also destabilized the world. Improving man’s technological capabilities empowered not only his best but his worst instincts, lifting many out of poverty and ignorance while exacerbating wealth inequality, the spread of noxious ideologies, and corruption and violence. This double phenomenon is almost certain to repeat itself with artificial intelligence. In an ironic Hegelian twist, technology simultaneously makes us smarter and dumber, richer and poorer, saner and crazier by tapping more of man’s darkness and light.
In a networked world, everything is connected to everything else. The meaning of every event and the value of every asset is affected by its connection to everything else. Nothing can be understood or valued in isolation. And connections are almost always multiple, not singular. We must think about markets in a holistic way; talking about “small caps” or “large caps” or “investment grade bonds” or “high yield bonds” or “private credit” or “commodities” may be necessary for media or institutional presentations but is otherwise fails to capture the complex array of forces affecting asset values and investment prospects. The silos in which we divide different subjects does them a disservice because they all interact with each other and thereby affect each other’s value. The walls between different things are broken down in a networked world.
Most people are still catching up to this new reality. This is especially true of our political and business leaders who either willfully or ignorantly cling to old ways of thinking. Mr. Ramo wrote in 2016: “our world [is] led into the future by a class of old leaders who don’t understand networks, and a collection of new technologists who don’t understand the world.” Little has changed over the last decade. With octogenarians running Congress, and tech leaders drawn from the Asperger’s spectrum (or just acting like it) running the most valuable companies in the world, we lack leaders capable of effectively managing a networked world (and those who can are demonized by those threatened by change). As Mr. Ramo wrote: “we find our future not in our own hands but instead in the grip of two groups, one ignorant of networks, the other ignorant of humanity.” The incompetence of our political system and the obliquity of our business culture derive from either a refusal (in the case of corrupt politicians) or a failure (in the case of narrow-minded technologists) to understand not simply that everything is connected but how everything is connected and the human consequences of that reality. The “how” requires understanding that the world is constantly changing in ways that place networks and their connections at the center of all things. We need men and women who understand that truth to lead us and leave behind the silos in which we used to operate.
