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Can quantum computers predict financial crises?

One of the reasons for the excitement around quantum computing is the hope that it will lead to the creation of super-powerful computers capable of seeing far into the future. When or if this will happen is up for debate. Will the necessary technology develop quickly, or – like energy from nuclear fusion – the promise of useful quantum computers will remain very close but just a little out of reach? And even if we could build super-fast machines, would they be any better at prediction?

These are difficult questions, and perhaps to answer them, we need a quantum computer. (This joke is a new version of a comment by Robert Peel during a debate in the House of Commons in 1848 about Charles Babbage’s Analytical Engine, in which he proposed the device to be “set to calculate the time where it’s available.”)

Still, the Bank of Canada is moving forward, and recently hired quantum outfit Multiverse Computing to look into the question of whether a quantum computer could predict a financial crisis in Canada. The only problem, according to Multiverse CTO Samuel Mugel, is that “The Canadian economy, in their view – and I hope it is true – is very stable with a high probability of financial crashes. Basically, they say any financial crash we predict will be wrong.”

In other words, the central bank is smarter than any of these new-fangled quantum devices. But while this sounds like good news for Canadians, you don’t need a quantum computer to know that the Canadian economy is not as strong as the bank thinks. And the reason is related to another quantum technology – our financial system.

A math thing
The word ‘quantum’ comes from the Latin for ‘how much,’ which is what anyone says when they look at the price of a house in Toronto, Vancouver, or anywhere else in Canada these days – even if it usually pronounced “how many?”

The common story about house prices is that they are the inevitable result of supply and demand. Canada has a lot of immigrants, and they don’t build houses easily. As Finance Minister Chrystia Freeland explained in April 2022, “it’s just a matter of math, Canada has the fastest growing population in the G7.” Unfortunately, Freeland uses the wrong kind of math.

Demographics provide only a partial explanation for house price growth. An international study found that “if population growth increases by one percentage point, housing price growth increases by 1.4 percentage points.” In the five years from 2016 to 2021 Canada’s population grew by an impressive 5.2 percent, but house prices rose by almost 10 times than in many cities.

So obviously something else is going on. And that thing is making money in private banks.

As argued in my book Money, Magic, and How to Dismantle a Financial Bomb, which applies the tools of quantum probability to the financial system, money has a dual real/virtual nature, and relies on a fuzzy and weak link between value and price. . In particular, the creation of money through loans is a dynamic process that can lead, through positive feedback, to an increase in asset prices. As the value of a ‘real’ house increases, so does the value of virtual currency, although the two are often linked.

And a property of positive feedback is that it can work in both directions – money (and value) can be destroyed as quickly as it is created.

Because Canadian home prices have been on the rise for nearly three decades, almost unscathed even by the 2007-08 financial crisis, most Canadians have become accustomed to the idea that prices can only to increase. After all, those immigrants had to live somewhere! But what’s less often talked about is that mortgage interest rates have also been on a steady slide over the same period.

This means not only that existing mortgage holders see their payments reduced over time, but that new buyers can pay more for the same home.

As in many countries around the world, house price growth is welcomed by the government and central bankers because it serves as a partial substitute for real income growth. In July 2020, Bank of Canada Governor Tiff Macklem went out of his way to announce that: “Our message to Canadians is that interest rates are very low and they will stay there for a long time.

If you have a loan or if you are thinking of making a big purchase, or a business and you are thinking of making an investment, you can be sure that the rates will be low for a long time.

Unfortunately, inflation – initially dismissed as ‘transitory’ – started to spike in 2021 and then exploded higher, bringing interest rates down.

Real estate bubbles are the financial versions of uncontrolled nuclear devices. We don’t need a quantum computer to tell us that Canada’s economy – like many others around the world – looks less stable than it has long appeared on the surface. But what needs a long overdue update is our financial math.

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