Nassim Taleb: "The Government Debt Is Becoming A Pure Ponzi Scheme"

Tyler Durden's picture

In an interview conducted with Business Week, Nassim Taleb discusses his view of the biggest black swan in the market currently, and isn't shy to call government debt a "Pure Ponzi scheme." - When asked where he the biggest potential source of systemic fragility is, he responds: "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." Alas, Taleb is wrong: Ponzi or not, today's UST auction will likely once again come at a multi year high Bid To Cover as the suckers (especially those who recycle Fed discount window money) just refuse to go away.

Some other excerpts:

Q: The new edition of The Black Swan includes
what you call "10 principles for a Black-Swan robust society." One of
them is: "Citizens should not depend on financial assets as a
repository of value and should not rely on fallible 'expert' advice for
their retirement." Can you explain what you mean?

Taleb:
The problem is that citizens are being led to invest in securities they
don't understand by people who themselves don't quite understand the
risks involved. The stock market is probably the best thing in the
world, but the true risks of the stock market are vastly greater than
the representations. And this leads to extremely strange situations in
which, say, someone has a bakery, is extremely paranoid about
suppliers, very careful about risks, and protects his business with
appropriate insurance. Then, at some point, he puts his $122,000 in
savings in a fund that he knows nothing about, based on risk measures
he knows nothing about, in companies very few people know much about.

People
use "risk measures," but you're really not measuring anything like you
measure temperature or distance. You are making a speculative
assessment of a future event. That's not measuring, that's estimating.
And as we saw with BP, with the banking system, and with Toyota,
companies themselves are hiding risks from the security analysts.
They're cutting corners. Companies have a tendency to hide risks.

So
someone extremely careful and prudent in the management of his own
affairs will be completely careless with the half of his savings
invested in the stock market. I'm saying: Don't use the stock market as
a repository of value. It has vastly more risks than you think.

I
was at an investment conference last week with mutual fund managers and
financial advisers. There were a surprising number of mentions of the
possibility of "Black Swans," and your name came up. Do you think those
people understand the concept?

No, they don't get it.
My Black Swan idea is very different: There are events that you can't
forecast, and you need to be robust to these events. If I think that
someone doesn't understand Black Swans, I'm sure that whatever bad news
happens to him will be Black Swans for him but "white swans" for me.

What should you do with your savings?

We
have this culture of financialization. People think they need to make
money with their savings rather with their own business. So you end up
with dentists who are more traders than dentists. A dentist should
drill teeth and use whatever he does in the stock market for
entertainment.

People should have three sources of variation in
their income. The first one is their own business that they understand
rather well. Focus on that. The second one is their savings. Make sure
you preserve them. The third portion is the speculative portion:
Whatever you are willing to lose, you can invest in whatever you want.

In
the second category—preservation of value—you should have the
consciousness that there is something called inflation. You should
avoid some classes of investments that are very fragile.

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 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.

You're saying that what is supposed to be the safest place to invest, government debt, is in some ways the most dangerous?

Unless
you invest in your own home currency in very short-term Treasury bills.
Because governments can print more of their own currency, the risk
comes from a rise in interest rates rather than a government default.
When you have hyperinflation, deficits, or debt problems, with
short-term bills you can catch higher interest rates to compensate you
for the inflation or whatever return you've missed.

I
think some people get confused about Black Swans and think you're
saying that you can't predict what's going to happen. But you can see
some big consequential events coming down the road.

A
Black Swan for the turkey is not a Black Swan for the butcher. For
someone very naïve, some events may be Black Swans. For someone warned,
they're not going to be Black Swans if you know they can be possible
and you hedge against them.

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

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.

What are you working on now?

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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Misean's picture

"is becoming"  heh!  Like the "current recovery"..."A little bit pregnant"...the "US becoming a police state"...

MarketTruth's picture

100% agree. And the 'becoming' as in the article's title is a joke per se (with all due respect) as Social Security and other line items are PURE PONZI schemes at this point. 

Whizbang's picture

Well, the 'becoming' part refers to the fact that the federal government is now completely funded by debt issuance, the tax reciepts are just a way to remind the tax payer who works for who. The sad thing is that right now they can't stop. They need to keep expanding the money supply to keep the deflationary spiral we are in from turning into a crash. Very sad.

MarketTruth's picture

Agreed, yet as always with such schemes they eventually run out of other people's money. The USA is there now and so the Fed is just massively printing up new money from thin air. Since raising taxes would kill the economy plus never really pay 100% for the government debt, more printing continues unabated and at a higher rate/quantity.

ElvisDog's picture

There is no evidence that the "Fed is just massively printing up new money". What statistics are you looking at? When I look at M2, M3, total credit outstanding, all of these measures are falling. And for the most part the Fed does not "print money". What the Fed mostly does is issue buy and sell debt. They may be issuing a lot of new debt, but it's clear to me anyway that the new debt created is less than the old debt being destroyed.

hedgeless_horseman's picture

Look at M3?  Hah!  Inconceivable, you twit!  The U.S. central bank no longer collects or publishes this most-inclusive measure of the growth of the U.S. money supply, although it will continue to publish narrower measures such as M1 and M2.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/FedKillsAKeyInflationGauge.aspx

aldousd's picture

the federal government is now completely funded by debt issuance, the tax reciepts are just a way to remind the tax payer who works for who.

Very good way to put it.

BlackBeard's picture

Heckler had a damn good voice too.

Pladizow's picture

"The studious examination of the past in the greatest of detail does not teach you much about the mind of history; it only gives you the illusion of understanding it." - Nassim Taleb.

mitack's picture

Hey Pladizow, would you mind changing your avatar ?

I like it so much on a subconscious level, that my eyes

stop on it for just 1 or 2(max) HFT trades time, but then

I have a hard time reading your comments past my erection...

 

 

Oh regional Indian's picture

It's not just a ponzi.

It's a ponzi so big that now it is devouvering itself. When there is no one left, it will eat it's own tail, like it is already doing.

And Naseem, the Black Swan came and went, just that the effects have been supressed. It's been a couple of years actually. Maybe you were asleep. It was quick!

But, now, any moment, thar she blows!!!

ORI

http://aadivaahan.wordpress.com

Cognitive Dissonance's picture

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

Let me make a few changes for you Nassim. There, that's better.

How we are willing suckers and how to live in denial of a world we don't want to understand.

contrabandista13's picture

"I HATE WHAT I FEAR AND I FEAR WHAT I DON'T UNDERSTAND!"


Early Cuyler...  

Squidbillies

Gully Foyle's picture

Secretary of State: We were thinking, what could be a bigger threat than aliens invading from space?
General Panzer: Ooh boy! Scare the shit out of everyone. Even me, sir!
U.S. President: Jesus, is this the best you could come up with? What about, ya know, international terrorism?
General Panzer: Well, sir, we're not going to re-open missile factories just to fight some creeps running around in exploding rental cars, are we, sir?

Whizbang's picture

Climate change is the 'new' war as far as population control and government waste go. It will be the motivation to strip people of their money, rob them of their standard of living, and give more power to the looters that control them.

aheady's picture

I heard somebody the other day call it "Ponzilla" lol

Übermensch's picture

Because governments can print more of their own currency

That is incorrect.

trav7777's picture

I landed a couple hours early once...was a flight from SFO to EWR, we surfed the jetstream.  Ground speed in excess of 700mph

CrockettAlmanac.com's picture

I landed a couple hours early once...

 

Lots of folks have landed early simply by ending their trip in an ocean or on a mountainside rather than at the scheduled destination.

New_Meat's picture

The Zen thing: how can you drop an egg 3 feet and have it not break? - Ned

KevinB's picture

Drop it from four feet.

TooBearish's picture

Tell it to Billy Gross who claims 1Bil a month in in flows and probably controls 1trillion+ of govt debt.....

NumberNone's picture

Are we at a point where Pimco controls so much debt they can start dictating government policy?  Is this why his bitch-boy Neel Trashkari made he statements about entitlements?

Tough shit grandma...Bill Gross says we gotta cut your check.  

RicktheDick's picture

I am a big fan of Nassim, but it is somewhat of a copout to suggest that people should rely on capital markets only for "entertainment value." The general public is beholden to Wall St in some way shape or form. Whether you extract the majority of your wealth from your own business or not, all businesses need to rely on financing from banks at some point. He downplays the inter-connections between entrepreneurship, investment, and financial speculation. I think the average person would love to not to have to rely on Wall St for a return on their savings, but your options are fairly scarce and limited. Whether it's from lack of expertise or barriers to entry, the investment vehicles that are available to him are not the norm for 99.9% of the population. Your only option to completely avoid systemic financial and geo-political market risk is to stuff your money in a mattress and pray that inflation is 0% into perpetuity... Good luck with that.    

umop episdn's picture

I often get things wrong, especially about finances...but if you read this site long enough you will learn how to protect your savings without having to rely on Wall Street, Da Boyz, or The Fed...

Silver, female dogz!

RicktheDick's picture

Like? Enlighten me... Precious metals? Anything that can have short or long term volatile price swings does not constitute wealth preservation. Wealth preservation is a myth in this market. Don't get me wrong, I like gold and other metals over the long term, but don't kid yourself into thinking there isn't inherent risk involved in owning them.   

SilverIsKing's picture

What are the risks in owning them other than someone taking your life to steal them from you?

RicktheDick's picture

Time... Do you think gold can't retrace 50% from where it is and stay there for an extended period of time? If it does, I'll be buying hand over fist don't get me wrong, but I can afford to wait for that snap back. Someone older, approaching retirement can't afford to have a substantial amount of his net worth wiped out and take solace in the fact that on a long enough time line he'll get it all back and then some... And that's to say nothing about what the federal government is capable of as far as legislation against private gold ownership. 

Calculated_Risk's picture

Ideally a 50% retracement would mean a shrink in the money supply. A shrink

in the money supply would mean the $ is more valuable. Which should buy you the same

goods and services as the +50%.

PMs are a buoy in a sea of fiat.

 

RicktheDick's picture

But that would imply a perfect correlation of 1 between the money supply and gold. That's not the case. 

Calculated_Risk's picture

Hence the word "ideally".

Strip out all the paper shorts, leverage, leases, leases on leases derived from leases...

trying to find the "real" price on anything controlled by the banksters

is like looking through a mud prism..

edit: Most gold bugs, including myself enjoy the fact there is no third party

risk of default, little downside risk, and a way to opt out of the bullshit theft

and games.

RockyRacoon's picture

Rick, Rick, Rick, you are fiddling while Rome burns.  Get on board!

Hansel's picture

Anything that can have short or long term volatile price swings does not constitute wealth preservation.

You just described everything.  Good luck finding your holy grail of wealth preservation.

Hansel's picture

I don't think you really have a point.  You think not playing the markets is a copout, gold is risky, and money in a matress, praying for no inflation, is as close to no risk as you can get.  I think you are trying to justify playing the markets, thinking you have no choice.

RicktheDick's picture

I am not trying to justify playing the markets, I am illustrating the point that no one is devoid of the implications of market speculation. The idea that we can completely disassociate ourselves from geo-political and macro-economic risk is a myth. You can lesson the severity of your exposure, but whether its direct or in-direct, the actions and policies of government and the financial markets play a roll in your life and financial well-being. To assume otherwise is to either mis-calculate or altogether ignore risk. So Nassim's point that if "your a dentist, just be a dentist" is a cop out. It's not that simple.    

Sick Boy's picture

+1 

There are no sure fire wealth preservation strategies, there is only impermanence.

PhattyBuoy's picture

What a fucking moron!

How many times do you have to get burned by these Wall St. cocksuckers?

Many should be in jail right now, and you want to give them more of your money ... sheeple led to the slaughter AGAIN!

 

RicktheDick's picture

Who the fuck are you talking to? Who's a moron? No one in this conversation is suggesting giving your money to Wall St, but if you had half a fuckin brain you would have realized that. Go back under your rock unless you have something coherent and credible to say.  

RockyRacoon's picture

price swings

...has nothing to do with value.   Get with the program.

reave the sheeple's picture

Like? Enlighten me... Precious metals? Anything that can have short or long term volatile price swings does not constitute wealth preservation. Wealth preservation is a myth in this market. Don't get me wrong, I like gold and other metals over the long term, but don't kid yourself into thinking there isn't inherent risk involved in owning them.  

Here's a bit of enlightenment: stop thinking in dollar terms, and try thinking in purchasing power terms.  Wealth preservation still exists, but if you insist on looking through dollar-tinted glasses, you are going to just see the volatility of dollars superimposed on everything else.  (hint: read Roy Jastram's The Golden Constant)

There are only two certainties in life, so saying that anything has inherent risk qualifies as a common sense faux pas.

kaiserhoff's picture

Good points all around.  Nassim is an original thinker, but has limited experience in small business and hands on problems.  He doesn't seem to understand how and why businesses are formed and how much employment and productivity depends on confidence in the future.

For those who liked the Black Swan, his first book, Fooled by Randomness is a small masterpiece of philosophy and insight.  One of my all time favorites along with The Territorial Imperative, and Wealth of Nations.  Books everyone talks about but few read. 

 

RicktheDick's picture

+1

I know everyone loves to talk up "The Black Swan," but "Fooled by Randomness" is a much better book. 

DoChenRollingBearing's picture

Rick, both books are indeed fantastic.  The world is truly a very non-linear place.

Normal distributions are for suckers.

...

@ above poster comments on gold.  Yes, there are big price movements, but I think gold and PMs are good for more people than he thinks.  You can pass along your gold to your children, for example.  And buy as prices go down.

Of course, I am no expert, just ask Muir!

RicktheDick's picture

I agree with that. If you put it in the context of inter-generational transfer of wealth, gold is king, as is any other finite commodity. 

Moneygrove's picture

I am buying platinum too !!!!