Newspaper article Sarasota Herald Tribune

A Good Idea to Go Shopping When a Butterfly Causes Panic; There Is a Bit of Chaos Theory, Often Quoted, about [Derived Headline]

Newspaper article Sarasota Herald Tribune

A Good Idea to Go Shopping When a Butterfly Causes Panic; There Is a Bit of Chaos Theory, Often Quoted, about [Derived Headline]

Article excerpt

There is a bit of chaos theory, often quoted, about a butterfly flapping its wings in one part of the world affecting the weather a thousand miles away.

The term "butterfly effect" was coined by meteorologist Edward Lorenz. In 1961, while an assistant professor at MIT, Lorenz created an early computer program to simulate weather. One day he changed one of a dozen numbers representing atmospheric conditions, from .506127 to .506.

That tiny alteration utterly transformed his long-term forecast, a point Lorenz wrote about in his 1972 paper, "Predictability: Does the Flap of a Butterfly's Wings in Brazil Set Off a Tornado in Texas?"

Lorenz's butterfly effect was merely intended to illustrate the concept that small events can have large, widespread consequences. As such, the butterfly effect has become a metaphor for the existence of seemingly insignificant moments in time that alter history and shape destinies.

Fast-forward to the recent decline of the S&P 500 index after the parliament of Cyprus was subjected to, and subsequently rejected, a proposed tax on bank deposits.

Cyprus is in difficult position, having been a major Greek bondholder. When the second Greek bailout package torpedoed Greek bonds, it caused a 4.5 billion euro ($5.9 billion) hole in the Cypriot budget. The tax is a condition of a European bailout.

At the same time, Cyprus is a known haven for the wealthy, in particular the wealthy of Russia, who take advantage of its low corporate taxes and a financial environment light on regulation. In 2011, Russians "invested" $119.7 billion in Cyprus, nearly five times the island's GDP, according to the money-laundering watch dog group, Global Financial Integrity. Today, Russian deposits are probably in the neighborhood of 20 billion to 25 billion euros ($25.9 billion to $32.4 billion), nearly a third of all Cypriot deposits.

It seems the butterfly flapped its wings: The market cap of some of our nation's largest corporations dropped, all because Cyprus might levy a tax of 7.5 billion Euros ($10 billion) on bank deposits there. In contrast, Wall Street rallied despite fears over the U.S. sequester cuts and the resulting $81 billion reduction in federal spending. …

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