Taleb: Government Deficits Could Be the Next ‘Black Swan’


When is a Black swan not a Black swan???

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NNT tends to be worth listening to even if this conclusion wont surprise too many!

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I was, somewhat, startled when, at a recent meeting, one of the most “in demand” Global financial risk experts, in a very matter of fact manner, said that we are only months away from the first sovereign defaults within the Eurozone. Not one of the more obvious contenders. Perhaps less surprising, is that some US states will also default.

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Taleb has published a new version of his 2007 best seller The Black Swan. The second edition includes a new 73-page essay, “On Robustness and Fragility.” Businessweek.com interviewed Taleb in early July about his views on investing and the dangerous Black Swans—i.e. unpredictable events with big consequences—that could lie in wait for financial markets.

What are are potential sources of fragility or danger that you’re keeping an eye on?

The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanoes, you can land two or three weeks late. How often have you landed two hours early? Never. It’s the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things cost more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

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Please visit Econtalk to listen to the podcast &/or read some of the text and comments: Taleb on Black Swans, Fragility, and Mistakes

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Excerpts from Taleb’s lecture at Oxford
Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions

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