Taleb: Government Deficits Could Be the Next 'Black Swan'

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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 [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.

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.

Steverman is a reporter in Bloomberg's Chicago bureau.

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