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Flight of the black swan

The political philosopher Nassim Taleb has words of warning for the Prime Minister

11 February 2012

3:00 PM

11 February 2012

3:00 PM

Nassim Taleb is banging a glass against a table to demonstrate his notion of ‘anti-fragility’. ‘This glass is fragile,’ he says. ‘Vulnerable to nasty surprises.’ The glass survives his test. ‘Now, what’s the opposite of fragile? Not “robust”, because robust things don’t respond to any surprise, nasty or pleasant. To survive shocks and be adaptable means being “anti-fragile”.’ He believes that David Cameron should remake the British economy with this idea in mind. Economists come up with such theories and soundbites all the time, but with Taleb there is a crucial difference. When he speaks, the Prime Minister listens.

Since Taleb published his bestselling Black Swan five years ago, Cameron has been fascinated. A former derivatives trader turned New York University professor, Taleb emphasises the dangers of certainty — how economists, with all their computer models, get it so wrong. No matter how clever the plan, something unexpected — what Taleb calls a ‘black swan’ — can fly on to the scene and upset everything. The higher their debt, he says, the more companies are vulnerable to shocks. Taleb’s admirers saw the crash of 2008 as a staggering validation of his theory.

When Taleb held a public discussion with Cameron about debt two years ago, the admiration was mutual. Taleb described the then opposition leader as ‘the best thing we have left on this planet’. Even now he stands by that assessment. ‘I saw in him, then, someone who wants to rebuild society along the right model. Cameron was the first leader to grasp that deficits are dangerous.’ But this was two years ago. Our conversation moves on to what has happened since.

British economic output is forecast to grow by £100 billion over the next four years, I put it to him, but with a corresponding increase in the national debt of £360 billion. The analogy Taleb reaches for is not flattering. ‘In any Ponzi scheme, there is great growth initially,’ he says. ‘Then you have to pay it back.’

But he’s quick to add that Cameron had limited choices. ‘Debt may be necessary for a while, you don’t want to create great social disruption.’ He can talk about the economic danger of high debt, but recognises there is also political danger in austerity. ‘I try to stay outside immediate debates. I talk about structure that we should arrive at, not what should be done tomorrow morning.’


This is just as well, because Cameron’s government appears to be following his recipe for ruin. For example, George Osborne recently published spending plans until April 2017 — using the promise of austerity later to justify higher debt now. What should we make, in general, of such long-term budget plans? ‘Bullshit,’ he says, with a smile. ‘Look at past five-year plans, how many have worked? It’s like someone getting married eight times, each time thinking “this time it’s for love.”’ So how long should governments draw their budgets? ‘One year at a time,’ he says. ‘The error margin for five years is monstrous.’

Taleb is famous for blunt talking. He spent long enough in Wall Street to be appalled by its hubris, especially the way the banks convinced themselves and their investors that computer programmers had found a way to eliminate risk. He loathes what he calls ‘big data’, companies that purport to let firms hedge against every conceivable risk and make banks indestructible. During the boom years, he said the banks were ‘sitting on dynamite’. For this, his critics dismissed him as a crank — until the detonation.

Today, he sees the same mistakes being repeated in finance and in government: debt, risk and a reliance on long-term forecasts. Osborne has already delayed his deficit reduction plan by two years (he now hopes to balance the books by 2018). But his economic agenda is based around what he calls ‘monetary activism’ — that is, quantitative easing (QE), or printing money on a colossal scale. The Bank of England is expected to print some £600 billion, almost enough to finance the government’s annual budget. This digitally created money is lent to the government, artificially lowering the interest rate paid by the Exchequer (thus saving Osborne billions). Taleb is clear about who ultimately pays the price.

‘Quantitative easing is a transfer of wealth from the poor to the rich,’ he says. ‘It floods banks with money, which they use to pay themselves bonuses. The banks have money, and assets, so they can borrow easily. The poor guy, who is unemployed and can’t borrow, is not going to benefit from it.’ The QE process pushes asset prices up, he says, which is great for those who own stocks, shares and expensive houses. ‘But the state is subsidising the rich. It is the top 1 per cent who benefit from quantitative easing, not the 99 per cent.’

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The basis of Sir Mervyn King’s plan for printing money on this scale is that the effects of QE can be carefully controlled. But this, says Taleb, is the biggest mistake of all. ‘It’s like a ketchup bottle. You try to pour money out of the ketchup bottle: nothing comes out, nothing comes out — and then everything splashes. This is how it works. Inflation doesn’t arrive in a nice, manageable way, so don’t mess with it. Every single person who has tried QE, or a form of printing money, has effectively lost the argument. Turkey had it, Brazil had it, Argentina had it, Italy had it when they debased the lira. Even Weimar Germany claimed that QE made the government rich. There’s always an argument to print money.’

But is it really fair, I ask, to compare the notorious history of Weimar Germany with today’s very different form of QE? ‘Anyone printing money is trying a kind of stimulus with money they don’t have. You have this illusion that it is going to create growth.’ His point is not that destruction is guaranteed, but that it can’t be ruled out. ‘We have a 90 per cent chance of seeing nothing and 10 per cent of having an explosion.’

And what might that QE explosion involve? ‘Runaway prices. It has happened a lot in history. If you think you’re creating employment, you’re not.’

I ask if he has put all this to David Cameron. He pauses. Cameron, he says, had no choice. ‘Look, I don’t want to enter into a political debate,’ he says. ‘I am talking about an ideal society. I consider myself a risk-based political philosopher, not a short-term policy-maker.’ He offers advice on the destination, not the journey — which is just as well. Because a government wary of debt has ended up bingeing on it, and a Prime Minister who was well aware of Taleb’s black swan seems to trying to ride the beast.


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