Sunday, April 28, 2013

Nassim Taleb - How Debt Ruins Systems

click above

Nassim, by far, is the smartest, brightest and most scientific thinker in the fields of finance and economics. Leagues above of any of those who profess to have either aquired knowledge, recognition or academic accreditation. He gets it, all the others are pretty hopeless.

His best selling book; The Black Swan (listed and linked under our top recommended readings) came out in 2007, about the same time that First Financial Insight's (FFI), now famous, "Eye of the Storm" presentation was released. Both forecasted that a huge credit crunch, economic upheaval and a market meltdown was coming soon. Over a year before other top pundits, economists or regulators had any sense of the pending avalanche that was going to soon beset financial history.

Albeit for different reasons, these works saw the proverbial writing on the wall. Taleb was, by nature, much more empirical, while FFI's stressed the glaring weaknesses in banking, credit and other economic fundamentals. To this day, both Taleb and FFI do not believe that we are out of the woods - a 2008 hangover persists, as many of the underlying reasons behind the meltdown have not been addressed. Continuing crisis after crisis in Europe, demonstrates we still have not learnt key lessons from the 2008 Meltdown about leverage, oversight, economics, transparency, cronyism and so forth; thereby, dooming the global system to make the same mistakes time and time again. Concluding that we are not that bright, as a species, hard to refute.

Back to Nassim's latest book, we can only comment based on the excerpts that convey an organic hypothesis that systems are self-corrective, but that leverage increases its fragility making the corrective process much more devastating. You could almost call it an ant-chaos theory. However, one salient point that Nassim seems to miss is that  the growth of the abstract financial systems will also be limited by the hard constraints imposed by physics. Limits of a finite planet, that make it absolutely impossible to physically grow wealth forever.

Nauru and Easter Island were microcosms of the larger world, but recent events on other island nations such as Iceland, Ireland and Cyprus prove that there is much more to be heeded and learnt from the economic and social demises of these island examples. For starters, the same physical economic disease, caused by input shortages, is clearly spreading inland to countries like Greece, Egypt, Portugal and Slovenia, amoung others. Leverage in the financial system premised on archaic Keynesian theory is exacerbating their illnesses - missing also the real overshoot problems their populations now face relative to geographic resources they control.

Notwithstanding this fundamental flaw, we believe his new book should provide other useful insights to readers, considering the  thoughtful and argument is his earlier works.

Dr Peter G Kinesa
April 28, 2013  

"You really think leverge leads to geo-economic conflicts?"  


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