Home > Facts and Figures, Human Limits > Nassim Taleb Part 2: “What broke Madoff is going to break governments”

Nassim Taleb Part 2: “What broke Madoff is going to break governments”

I can’t seem to stay away from Nassim Taleb.  As much as I liked his take on “definancialization” (and all of its wonderful public choice economics implications) in my last post, I think I might like another nugget in the profile even better.  Unlike someone with a vested interest in the status quo of politics or capital markets, Taleb tells it like it is.  (Although  I will say that the math is incredibly easy if you don’t have your political blinders on.)

First this gem:

The massive (source of danger) is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos (sic), 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.

This is true almost all of the time.  Take a look at this graphic from the Washington Post:

This is fine and all, for as far as it goes, but if you separate the gray lines from the red/pink ones, and call them “Bush” and “Obama,” respectively, remember that just a few years ago official projections had those gray lines eventually going into positive territory.  In other words, the George W. Bush administration would have had you believe that, if there were no changes in the law, the budget would have been operating on surpluses within a few years and for the foreseeable future.  If you’ve been paying attention, I’m sure you realize how little credibility that has.  Note, however, that Obama doesn’t even try to pretend that each and every one of his deficits will be worse than anything from the Bush administration, even though the numbers he’s attempting to pass off as real are nothing if not the rosiest of projections.

I agree with Mr. Taleb that deficits are a “massive” source of danger.  But it’s clear that he isn’t using that word lightly:

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.

In a refreshing dose of reality, Mr. Taleb explicitly acknowledges that our government is not infallible, unbreakable, or at all financially invincible.  We’re bankrupt by any honest measure of the term, and the only thing keeping us from complete financial collapse, default, and economic armageddon is our government’s ability to roll over its debt.  Unlike, Mr. Taleb, however, I think it’s clear that world has not run out of suckers at the present time.  If, however, he means that it will soon, and in the grand scheme of things a few years here and there won’t matter a whit, well, then he might be right.

But with somewhere between $120 and $150 trillion worth of government debt extant (including both the balance sheet and unfunded off-the-books liabilities), it is clear that the judgment cometh, and that right soon.

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