By Lowell Ponte, Special for USDR
“On May 6, 2010, the New York Stock Exchange suffered what came to be called “the Flash Crash,” when the Dow Jones Industrial Average plummeted unexpectedly by nearly 1,000 points in only minutes,” Craig R. Smith and I wrote in our book Don’t Bank On It! The Unsafe World of 21st Century Banking.
“A single Sell order valued at approximately $4.1 Billion purportedly set off a cascade of computerized buy-and-sell programs around the world that are designed to respond immediately, and without consulting human beings, to key changes in market prices. As each major trading computer reacted, it could have triggered programmed reactions in similar computers.”
“Some of these systems use High Frequency Trading (HFT) that today can launch trade decisions, buy and sell orders, in mere thousandths of a second or less,” we wrote. “This, according to critics, allows traders who have paid millions for this razor-thin advantage-in-time to detect incoming stock purchases; front-run and automatically buy that stock before the competing slower order gets processed; and sell the stock a fraction of a second later to the slower order at a slightly higher price.”
“Such are the systems, with their risk of triggering buy or sell cascades around the world, that are being used in today’s merging worlds of high-tech investing and high-money banking,” we warned.
Some want to believe that enough circuit breakers have been added to stock trading to prevent an economy-shattering crash like the one that cost traders more than a trillion dollars in only a few minutes five years ago.
But as we continued in Don’t Bank On It!, a “violent sell-off in stocks” on February 29, 2012 was in its own way even more frightening – because evidence suggests that it was driven by a powerful intelligence that was not human.
This plunge appears to have been caused by Artificial Intelligence buy-and-sell programs, by computers making their own split-second decisions rather than acting merely on human pre-set orders.
This 2012 “Flash Crash” may have been our first taste of a coming “A.I.-pocalypse,” we suggested. This possible is far more than science fiction, according to acknowledged geniuses such as Stephen Hawking and Elon Musk.
A key point of our book is that we have made our entire civilization – from power grids to national defense, from our stock exchanges to banking systems in which your accounts are now merely electronic blips – dependent on computers, a technology that has never stood the test of time and may have many Achilles Heels, fatal vulnerabilities we may not recognize until it is too late.
The “Flash Crash” five years ago should have shown us how dangerous it is to put our all eggs in a fragile computerized basket that could be wiped out – and our savings and other investments with it – by a computer glitch, or sophisticated hackers, or the electromagnetic pulse (EMP) of terrorist nuclear devices, or by a very large solar flare as happened to the world’s telegraphs in 1859.
That 1959 “Carrington Event,” as scientists now call such solar flares, did little harm because we were not then dependent on computers for almost every facet of our modern lives.
Such an event today would have the potential to shut off the world’s electricity, computers, and electronic records. It could wipe out your and everybody else’s bank accounts in a heartbeat, plunging the global economy into an instant Great Depression.
Scientists note that on July 23, 2012 another such giant solar flare erupted that, if had happened one week earlier, would have hit the Earth in our annual orbit around the Sun and caused global power and computer blackouts.
One protection against a wide variety of such potential “Flash Crashes” is diversification. The economy was not shaken by the 1859 giant solar flare because money was more than electron ghosts dancing in computer circuits. The American Dollar back then was gold, and its worldwide value, then as now, could survive natural and man-made disasters.
The lesson to learn from this ominous anniversary of the “Flash Crash” is that by diversifying your investments and savings to include tangible assets – not just politically-manipulated dollars or stocks denominated in such paper dollars – can give you the security of financial insurance in an age of growing uncertainty and instability.
This Fifth Anniversary might be an omen that prudent investors should consider moving one-fifth of their bank and stock assets into time-proven assets such as gold.
The peril that computer vulnerabilities pose for our economy is only one of 20 risks we explore in Don’t Bank On It! Reading this book could be a wise investment in protecting your financial health.