All right, so let's talk—what kind of risks are we talking about? And let's talk about these a little bit. First, remember, we're talking about a network of networks. And here we've got shipping, we've got airlines, we've got trade networks, we've got communication networks, we've got the internet, we've got financial networks, and you could create hundreds of these. We, in a sense, have squared or cubed the problem that could occur inside each one of these networks because we need all the networks to be working. But let's take a look at each one of these, at these networks. Let's just take a look at trade. And, again, I've talked a little bit about this. This is the oil transit chokepoints in the globe. And they're the ones that we've talked about before. This is at the end of the Suez Canal, this is the Straits of Hormuz, the Bosporus, the Danish straits, which is also very, very important for Russian oil and gas. The Cape of Good Hope, the Strait of Malacca. All right? So, you know, just, just to give you an idea, the millions of tons of oil that is going through this. And we can take it with other— maize, wheat, rice, soybean. Let's take maize, for example. This is the percentage of the world trade in a particular commodity that is going through these particular chokepoints. So, the Panama Canal, something like 22, 23% of the world's soybean trade is going to go through the Panama Canal. Fifteen percent of the maize trade. Let's look at Dover Strait, that's here, that's going to be less— this basically is the exit into the Atlantic from the North Sea. The Strait of Gibraltar, the entry and the exit into the Mediterranean, the Suez Canal, the Turkish Straits, the Strait of Bab al-Mandab, the Straits of Hormuz, the Strait of Malacca. And just take a look at the Strait of Malacca, for example. Fifteen percent of world's maize, let's say about 7% of the world's wheat, 20% of the world's rice, and almost over 25% of the world's soybean is flowing through the Strait of Malacca on top of the oil, on top of everything else, on top of, by the way, all those intermediate products that we talked about. So, yes, this network, this system is fragile, and it has these particular chokepoints. And if nothing else, we have to worry about the continued sustainability of traffic through these points. And finance—this is a graph of the interconnectivity of 204 financial institutions, insurers. So, here's J.P. Morgan, Bank of China, Lloyd's of London, Wachovia. Well, they no longer exist. Morgan Stanley, Deutsche Bank, Citibank, et cetera, Barclays, Goldman Sachs, et cetera. All these banks, yes, they're huge in and of themselves, but they're also related to each one. So, each one of these banks depends on the functioning of all the other banks, because if something happens to one of these, for example, Northern Trust, something did happen to them, it starts affecting the bottom of every single— of every single one of these banks across foreign exchange agreements, credit default agreements, commodity, derivatives, equity partnerships, et cetera. So, not only do we have these chokepoints, but in a sense we have these chokepoints, these individual banks that serve as the straits or the canals through which money is flowing. Epidemiology—I used to be able to have, I used to have to spend a great deal of time on this. I think in 2020 we can understand how a bug coming from one part of the world can infect the rest of the world. And we have been living through this, and we're going to talk in detail about the Coronavirus later on. So, there is an epidemiological system, which we now—we've created a global one, where before a virus or a disease might stay isolated, now it can spread throughout the world and, again, affect one of the other networks. As we've seen, for example, with COVID, it's affected our transportation network, it's affected our trade network. We have yet to see serious financial repercussions at a macro level. We've seen them for millions and millions of families whose livelihoods have been devastated, but so far, that has not translated up the hierarchy, in a sense, to institutional threats. But we can imagine if enough failures occurred, those institutions might also be in danger. We've got infrastructure. Again, we depend on a physical infrastructure. They're all connected. Let's think about these five aspects of it. We've got electric power, which is at the very heart of the 20th and the 21st century. Without electricity, nothing works. Okay? That electricity is powered by energy. Okay? So, we have to get our energy infrastructure that is flowing into the electricity generating system. That electricity generating system and some of the energy also is fueling transportation. So, without electricity, without this energy, all of a sudden the transportation becomes impossible. Similarly, this electric power and this transportation is helping to operate the world telecom system. Okay? And behind all this, all right, just representing one of the key commodities, if you will, is water. Water that you need for telecom, for cooling, water that you need for production of energy and cooling, water that you need again for cooling of electric power, water that you need for fuel transport and shipping. So, if we just take these five infrastructural domains, you start seeing that not only do we have these very complex systems inside them, but we've combined them in new ways that could, again, potentially be very, very risky. Let me just give you an example with energy. We depend on this move flowing, all this energy, let's just say for now of oil and natural gas. Of course, there is a whole electrical system, through North America, for example, the European one, as well. Throughout the world, there is this electrical system. But let's just think about this, what it takes for this energy to flow from the former Soviet Union, largely Russia, to the rest of Europe. This is in 2007 when Russia accounted for 50% of European energy imports. And what's it going through? It's going through these particular pipelines. Imagine these pipelines being cut off. And, in fact, during the conflict between Ukraine and Russia, Russia has threatened to simply turn off this pipe that goes through the Ukraine. If you do that, it's not just deadly for Ukraine, it's deadly for the rest of Europe, because that pipe is now stopped. Again, think of this as chokepoints, if you will, that could render— that could render the European energy system a failure. And once you have that, once you stop the energy system, what do you have that is left of globalization? You also have a system of food and water. I talked a little bit about water before. China is a major, major import of water. And one of the ways that people analyze this is they convert all sorts of commodities into their water equivalents. So, how much water does it take to produce a kilo of beef? You'd be surprised how much. How much water does it take to produce silicon chips? How much water does it take to produce a car? Okay? And what we see is this flow of water, in a sense, from the Western hemisphere. Okay? Especially from South America. And it's going to the rest of the world. It's going to the Eastern hemisphere. It's going towards Eurasia. Similarly, the role of Australia in producing all of these various goods and sending them across the world. So, we think about, you know, if you stop the flow of water, and, again, water representing this collective unit to which we can translate everything, if we stop that, the world starves. Okay? The world literally starves. Think about how much food there might be in the island of Manhattan on any particular time. If you broke off the bridges and the tunnels into the island of Manhattan, how much food would there be? The case of Puerto Rico is really interesting. Puerto Rico apparently has about one to two weeks' worth of food on an island. Imagine what happens if those flows break down. Or, again, to go back to an earlier lecture, the United Arab Emirates, which imports almost everything except energy. It imports labor, it imports its food. What would happen if all of a sudden those flows start collapsing because of some other system failing? Now, what that means is, how do we govern this? And we're going to deal with it in a little bit more detail. But let me just give you a couple of possible models that have been suggested. And one of the big fights is between microprudential and macroprudential. Microprudential is about the regulation of nodes. This is the classic role of the central bank. It actually makes sure that each node, each bank is safe and sustainable. Okay? So, or an FDA looking after the production of some kind of drug that's coming out of a particular factory or a particular firm. So, you're looking at the very node. But, again, remember, networks are not just nodes, but they're also these links. And here we move to the macroprudential, where we take into account the complexity and endogenous risk in this system. The problem here is, who do you regulate? The way I've explained this in a couple of times, you can regulate your own child's behavior, to an extent. Okay? As someone who's had two children. You know, you can't guarantee it, but you can at least regulate that. Can you regulate the behavior of their friends? Can you regulate the behavior of their friends of their friends? And on and on and on. Well, a macroprudential approach does that. But think about how difficult that would be. Okay? You can enforce, to a certain extent, certain laws or certain rules on your children. Can you enforce those same laws on the whole network of those children? And how do we do this? We are struggling with this macroprudential regulation. How do we manage this process, okay, when looking at each individual unit is not enough? And one of the lessons that we seem to have come up with is that we cannot prevent bad things from happening. If we try to prevent every—you know, every bad thing from happening, we will not be successful. What we really have to do is to mitigate, to come up with policies or govern policies so when these crises do happen, and perhaps they're inevitable, they're like normal accidents, then we can go in and fix the problem rather than always trying to prevent it. And the two key words here, and we're going to come back to this later on in the course, are modularity and resilience. Modularity meaning that each part of the system can survive on its own, that you can cut off a part of a system with perhaps catastrophic consequences for that part. But the other parts of the system can maintain. So, in a sense, you design into the system some level of autonomy or autarky. So, if the links break down, parts of it can still survive. Or another term for it is resilience. Again, the simple capacity not of stopping the blow, but of recuperating from the blow. And we're going to come back to this. But you can see that given all these risks, governance of this is not a simple matter. There's also policy questions. Going back to the structure versus agency. All right? Can we blame individual players? Has complexity become an easy excuse for non-regulation? Oh, well, we can't regulate the whole thing, so never mind. You do whatever you want. The degree of endogeneity. Again, you have to determine how much prevention versus triage. And this is going to be a policy debate. But imagine a politician saying, "by the way, folks, everything could go really, really badly, but we can just get over it." No, that's not how you get elected. You get elected by saying, or you come on top of some political system by saying "I can fix it all, I've got the solutions." You don't get elected, you don't get to power by saying "there's going to be a problem, and I might be able to fix it." But that's exactly what we need to do in light of the possibility of a preservation of catastrophe. And we have to then design. Think about network design. To what extent does our governance really have to be about creating some new order in those networks of people, of firms, of countries, all being linked? There's quarantine possibilities. Can we quarantine a particular sector? There is redundancy. Do we want to create more than one link between any node? This is expensive. Yes, you might always want to have a redundant system, but how much are you willing to pay for it? And, again, modularity, assuring the existence of any particular part should the system as a whole collapse. These are the kinds of questions I want you to be thinking about as we explore some of these domains in more detail. And this is what this course is about. I hope you will go to risk.princeton.edu, where you can see very, very specific examples. There's lots of taped lectures, papers, conferences, workshops, where we try to bring this. And I hope you will go to this, even as you continue the course, because it will give you, in a sense, a more detailed understanding of some of these individual parts. And now what we're going to do is we're going to dig deeper into one of these domains. And we're going to start off with trade.