Survival of the fattest...

And so the financial world ticks on. Stock-markets continue to move up the world over and there are shoots of confidence re-appearing. The FT this weekend headlined that London has seen sales of £1mm properties back to the record pre-recession days, and investment banker's wallets are looking as good as ever. As regular readers will have noted, I'm pretty cynical about all this and think there is plenty more to play out. What I believe has happened is that the financial world has been prescribed some antibiotics that are starting to have an effect on the areas that were "credit infected", but in the background the weaknesses that existed within the framework of the world's financial system have only been masked by the medicine.

At a very basic level, there has been a systematic transfer of the losses within the global economy from private to public sector, and a systematic postponement of the ramifications of a faulty system from this generation to the next. Current public debt levels aren't sustainable in places like the UK or Ireland, without taxes increasing significantly or growth rates increasingly dramatically in the coming years. Fundamentally, modern society is not very good at confronting things head on. Most of the time this is because we don't have to - it's very often possible to take the antibiotics to address a short term problem, even if the longer term consequences are likely to be even worse.

This problem doesn't just apply to the economic world. It applies to the whole nature of the way in which modern societies operate now and into the future. We are creating "super-bubbles" as George Soros would call them, by putting bandages over wounds that need major surgery. This idea has been prevalent in the medical world for some time, where the discussion about whether Darwinism is relevant anymore is widespread. The progress of modern medicine has thrown Darwin's concept of "natural selection" into disarray - the selection process in the world of people is less about Nature taking its effect on who will thrive or survive, and more about which humans have access to the best medical treatments.

In a way the Darwinian process has mutated itself - Warren Buffett has said a few times that his ability to thrive in the current society is because the skills he has are highly valued, yet if he was born 3,000 years ago he would have been at the back of the herd when it came to outrunning the chasing lion. His limited physical prowess would have seen him naturally de-selected in those times, but in current society his mental faculties have allowed him to afford the best healthcare and consequently to thrive. In the same way, Stephen Hawking's capacity to interpret the inner workings of the universe, whilst immensely physically disabled, have allowed him to thrive. And no offense to Mr. Hawking, but I suspect he's better at understanding black holes than he is at throwing spears at wild animals.

As much as the mentally gifted like Buffett and Hawking have a firm foothold in our society, at the other end of the spectrum the "deselection" process may have stopped in certain societies altogether. While the wealthy have more comfortable beds and more attentive nurses in their private hospitals, the universal nature of healthcare in the western world has almost meant that there is no selection process, Natural or otherwise. We have effectively stopped the process of the "survival of the fittest" which as a consequence may ultimately contribute to a form of super bubble in the future. Nature will find a way to restart the natural regeneration process, but because we are postponing that process currently, when the "forest fire" comes it may well be of super-sized proportions. We will have taken so many antibiotics to ward off short-term issues that there is a significant risk of being blindsided by some form of natural disaster. Swine flu, for example, is apparently less likely to affect older members of society notably because when they were young they tended to have far less access to antibiotics than the current baby boomer generation and consequently have more antibodies to fend off mutated viruses like H1N1.

In my view, the way governments and regulators have addressed the current financial crisis is merely symptomatic of a wider bandaging that is prevailing in the Western world. We are becoming less resilient to future problems, whether they be economic, social or health related.

The recent bushfires in Australia, are a fitting metaphor. Small bushfires are part of Nature's process - they happen naturally and they play an important role in the regeneration of the land. It's perfectly understandable that humans would interfere in order to prevent those small bushfires. In the bushfire sense, however, by preventing the small fires that naturally occur over many years, a very large area of land has not been "regenerated" and consequently the scope for a one-off massive fire is increased. The pictures from around Melbourne earlier this year were the manifestation of years of human interference, which in the short-term, had previously looked extremely positive.

In a similar vein, there are those who bravely suggest that the significant aid flows into Ethiopia in the late 1980s to address the impact of famine and widespread starvation, may have only solved part of the problem - and in doing so created an even bigger risk for the future. Aid flows may have soothed the hunger of many for a time, but without a systematic change in the way in which the at risk people in Ethiopia address farming and how famine conditions arise, then the survivors of the last famine and their offspring may be victims of an even bigger catastrophe. As un-PC as it is, those voices quietly suggest that more people may end up dying in Ethiopia as a consequence of the massive influx of aid - on the basis that the real issues that caused famines there have never really been addressed.

On a more positive note there are examples of natural regeneration being harnessed effectively, in a way that has long-term sustainability. "Farmer Managed Natural Regeneration" is a reforestation technique developed in West Africa in the 1980s and 1990s, now practiced on 30,000 square-kms of land in the Niger Republic as well as Chad, Burkina Faso, parts of Ethiopia and Mali. Natural Regeneration refers to the natural process by which plants replace or re-establish themselves. FMNR relies on the presence of remaining live tree roots - reproduction comes from self-sown seeds or by vegetative recovery (sprouting from stumps, lignotubes, rhizomes or roots) after the tops of the plants have been killed (by fire, cutting, browsing, etc.).

In an economic sense this process is not dissimilar to what the 1940s Austrian economist Joseph Schumpeter called "creative destruction". Many businesses around the world have proverbially had their heads chopped off, particularly if the assumptions upon which their business plans were based included: cheap debt, regular and predictable demand growth, asset prices continually rising, and the adding of capacity being low risk.

In the Schumpeter world, these businesses would be forced to adapt or die, and therefore would leave only the "fit" survivors, who would be better prepared for the trials of the next generation. There would be a regeneration process where old ideas are adapted or cast aside and new ideas and processes are creatively implemented. Unfortunately, as with many aspects of modern society the response to this financial crisis has not been to accept change head on, but to bandage up the old system and postpone the real Reckoning. There aren't too many obvious lessons to be taken from the farmlands of Chad, but accepting some destruction and the ensuing natural regeneration may well be one. For the long term it's the only approach that will be sustainable.