Nassim Taleb speaks to the issue I have been addressing here for two years, namely that the problem with our financial system is debt. There is too much of it. And all the stimulus in the world won’t solve that problem. The debtors either have to pay the debt off or default. Until they do, systemic risk heightens economic fragility.
You can use stimulus as a way to control the deflationary impacts of the inevitable defaults, but the stimulus we have seen to date is not designed for that purpose. Rather, we have witnessed a transfer of private sector debts onto the public sector in an attempt to prevent recession and make the debt problem go away. Instead, what has happened is the debt problem has moved from the private to the public sector.
(video embedded below)
Despite what Taleb suggests when talking about sovereign debt auctions, surely being the creator of a fiat currency means government cannot involuntarily face insolvency in its own debt instrument – even in Japan where government debt to GDP is around 200%. As the second guest notes, sovereign government can and will print money. However, a private sector debt jubilee or private sector defaults would have made recovery in Japan much quicker, reduced fragility, reduced the misallocation of resources and increased economic growth.
Lee Quaintance of QB Partners who is an Austrian School proponent recently wrote me that he is arguing for a coordinated and global devaluation. He says:
Total nominal debt will contract shrinking the bounty of the rentiers while a flood of newly-digitized Federal Reserve Notes will enter the economy to boost hiring.
No hyperinflation there since it is global and co-ordinated. You will notice that Taleb inserts the hyperinflation canard into the conversation despite widespread signals of debt deflation and a gaping output gap. I’m not saying hyperinflation can’t happen. I’m saying it is unlikely, especially when we have everyone looking to depreciate their currency at the same time. At a minimum, you need to eliminate the excess labour and capital supply. And were it to occur, deflation would surely come first. That’s why the talk about Treasuries seems misguided.
The video below of Taleb and James Suriowiecki is also interesting. Taleb is right when he says volatility is a contrary indicator; low volatility means higher risk.
Hat tip Paul Kedrosky