“Government Deficits Could Be the Next ‘Black Swan’” – Taleb, 2010


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

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Please don’t think ill of me for re-reading one of my own blogs from 2010 because I think this quote justifies it in its own:

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.

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

Interestingly our own, unique, Ontonix analysis measures the fragility of the structure of the individual economies of EU member states as well as of the “EU system”. The updated report for Q4 2009 is available for FREE DOWNLOAD on our website. Q1 2010 EU Structural Fragility Report. NOW AVAILABLE for €199.

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 the 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

2 Responses to “Government Deficits Could Be the Next ‘Black Swan’” – Taleb, 2010

  1. gearywsikich says:

    How are government deficits a “Black Swan?” They are not extremely rare events; rather they are quite commonplace. They do carry an impact, but generally not significant outside of the country that incurs the debt. I do agree with Taleb that after the fact that explanations are concocted to rationalize them. Perhaps it is the combined debt of all the nations of the world that is creating the next “Black Swan?” Then again, it has happened before in history. Read “This Time is Different.”

    • Hi Geary and thanks for your comment.

      I agree that the “Black Swan” tag was an initial surprise. Right or wrong I wanted to share the article at the time and to reprise it now. My thought at the time was, a priori that, the answer may lie in the timeline?

      The difference this time (as last) is that the market is GLOBAL! It is the digital conduit that ensures that, like never before in our history, we are inter-connected on many levels and, increasingly, in fate. Woodrow Wilson told the world where the power lay in 1913. He also warned of its pervasive nature. Nationality or nationhood are not relevant. The currency may vary but a commodity is a commodity and a debt a burden upon future production to satisfy global demand.

      Global financial fragility is such that – as seen in the “Arab Spring” or Japanese tsunami, etc. – the “Butterfly Effect” of “failure” at micro or macro levels can disrupt Geo-Political, economic, political and social systems across national boundaries: the pace, spread and impact cannot be predicted or quantified. HOWEVER, ONTONIX TECHNOLOGY CAN WARN OF IMPENDING ENDOGENOUS CRISES AND PROVIDE INSIGHT INTO THE STRUCTURE OF THE SYSTEM TO DETERMINE WHERE “REDUNDANCY” IS REQUIRED TO IMPROVE RESILIENCE.

      David

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