Feedback Loops – I Raise My Hand And Ask, "Is There Homework?"

by John Glynn on October 9, 2008

Scientists must be folding their arms and shaking their heads at the financial industry. The financial media and economic discourse of the day has adopted the term “Negative Feedback Loop”, a term that originated in scientific labs, to describe the downward spiraling momentum of our economy (housing values go down, more people are encouraged to sell, foreclose, etc, and that causes values to go down further, and round and round we go…).

The market action systematically feeds its result back into the force that caused it to do what it just did. A feedback loop. Have you ever stood between two mirrors, and looked at your reflection, and then the infinite reflections of your reflection behind it? Its like that.

Problem is, we’ve got the name wrong. This may sound like I’m picking on a technicality here, but I think it points to a bigger problem.

A “Negative Feedback Loop” sounds like the right way to describe what we are seeing in the economy. But a true Negative Feedback Loop is one where the output of the system works against the system, causing it to lose momentum, and return to equilibrium. What we have here is a Positive Feedback Loop, or one where the output reinforces the input. The result is an increasingly negative impact on our economy, so its easy to understand the confusion. We had another Positive Feedback Loop that fed the mania side of the cycle as well.

A snowball rolling downhill, growing in weight, causing it to keep rolling, is a Positive Feedback Loop.

Why do I split hairs here? The widespread adoption of an erroneously illustrated concept just begs the question of who is doing the thinking out there, and who is doing all the talking. The mainstream media just takes it in on one side, spits it out the other, no regard for accuracy or perspective. All of the talking heads, the so-called experts, the pundits, the authorities, they’re all confused like the rest of us about the big picture.

And it’s a tough issue to figure out, so confusion is understandable. But our electable leaders and policy makers would serve us all well to admit what they don’t know. Seems to me they feel a need to convince us that they do know, and the next thing you know, they’re acting on their contrived and false sense of confidence. And let’s face it, since 8 out of 10 Congressmen have no formal education in economics, most of these folks are expert at one thing, and one thing only: getting votes.

The bomb has gone off in the markets, and there’s a lot of dust flying around. Those of us who slow down and focus while everyone else runs around screaming, are going to be the first to see what the new landscape looks like.

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