Tuesday, July 27, 2010

Nassim Taleb on Government Deficits

Some highlights from Taleb's interview with Businessweek on the dangers of government deficits, debt, and complex regulation.

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

Taleb:  "The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, 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 costs 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 Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers."

Businessweek:  Do you have any thoughts on the U.S. financial reform package?

Taleb:  "I don't like complicated regulation. I think we should not need financial reform. What we need is definancialization. What we need to do is break the financial community's grip on society. And you can do it very easily by transformation of debt into equity. Banks have an interest in building debt, but equity in society is vastly more stable than debt.

So the problems have not been addressed. They're making something that was complicated even more complicated. We need some fundamental reforms rather than a very, very precise guideline on how you should behave."

Businessweek:  What are you working on now?

Taleb:  "My next book is about beliefs, mostly. How we are suckers and how to live in a world we don't understand."


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