'Black Swan' author Taleb sees government debt as 'pure Ponzi scheme'

A “black swan” event, as made indelible in popular culture by scholar and former Wall Street traderNassim Taleb, is an extraordinarily rare occurrence of massive magnitude and consequence.

That made Taleb’s 2007 book, “The Black Swan: The Impact of the Highly Improbable,” the perfect set-up for the financial-system crash of 2008.

Except that Taleb has said repeatedly that the crash was not a black swan, because extreme risk-taking in the banking system had made a crisis “unavoidable . . . just as a drunk and incompetent pilot would eventually crash the plane.”  See this rant on his blog.

Now, in an interview with Bloomberg Businessweek, Taleb sees the same pattern in soaring government debt levels.

By now, we’ve all heard countless warnings about ballooning government debt, so it’s hard to imagine how a crisis there could qualify as an unexpected black swan. We’ve already lived through at least the first phase of Europe’s sovereign-debt mess.

But Taleb implies the same inevitability of disaster. From theBloomberg interview:

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

A. 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.

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.

Well, not quite in the case of the U.S. Treasury: For the moment there is no shortage of demand for Uncle Sam’s debt, which is why long-term Treasury yields are near 15-month lows.

In any case, Taleb doesn't offer any novel advice to investors who fear a government-debt crisis. He recommends keeping cash in 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,” he notes. “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.”

Taleb, who says on his blog that he now is “bored with finance,” tells Bloomberg his next book will be “about beliefs, mostly. How we are suckers and how to live in a world we don't understand.”

Along those lines, he says most people have no business investing in the stock market except with money they're willing to lose.

"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," he says. "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."

-- Tom Petruno