24 May 2010

Black swans are back again

One of the men who predicted the credit crunch is now warning of a potentially 'vicious' debt crisis.

No not yours truly.

Not GMA's John Sheehan.

Not Scott Campbell or Martin Gray but in fact Nassim Taleb, who wrote the books "Black Swan" and "Fooled by Randomness" now believes, as do we, that the world debt problem in total, is worse now than it was at the height of the credit crunch.

Like us he thinks that the time has come to ditch equities and US Treasuries. Taleb is backing hard assets.

Taleb told Bloomberg that governments have failed to learn the lessons of the banking crisis and have allowed the debt problem to morph into a new and more ‘vicious’ sovereign form:

‘I had detected fragility in the banking system and it is still there and we need to do something about it....We have had a couple of years since the meltdown and the risks have increased and taken a much more vicious form.’

Sharing our concerns about the Fed Governors who admit that policy is unproven and that basically policymakers are flying by the seat of their pants, he warns that theories not backed by empirical evidence, such as the pricing of assets and risk, and says the globalisation has made events and outcomes totally unpredictable and he shares our concerns about the extent to which the entire global economy has become more inter-connected.

Taleb brands the government bailouts of the financial system and the transfer of debt from the private to the public sector as 'a fast-track to increasing moral hazard' and like ourselves and critics such as Ron Paul, he is scathing about the profits made by the banks over the past year.

‘Look at all of the money they made with our backing- it is like they spat in our faces....We have a lower tax base than two years ago because less people are in work than two years ago and are now depending on economic forecasting by governments. Obama is forecasting a deficit of $4-7 trillion depending on the parameters you use but a small glitch can mean the deficit for the next 10 years swells to $20 trillion.’

Greece was recently forecasting debt to GDP of 3%, which now stands at 14% and rising - deteriorations can take place very quickly -  ‘The same thing will happen to the US- typical government underestimating.’
 
It's good to have some company once again in the bear pit!