Friday, February 18, 2011
Many years ago I read Fooled By Randomness, by Nassim Taleb - it was an instant classic in my library. I was excited when his next book Black Swan came out, it too was amazing. Both books seemed to predict in some way the financial crisis that eventually unfolded in 2008. If you haven't read either of these books it is my suggestion you pick them up and read and re-read them.
Needless to say, I'm a fan of Taleb. Yet Taleb has made some comments recently that can only be explained as mainstream and wrong - two things that he is rarely accused of.
At a forum in which he spoke recently he commented that "The United States is just like Greece, only without the International Monetary Fund (IMF) to enforce discipline". He goes on to say "The only happy thing that can happen in the U.S. is a bond riot".
Pretty much every mainstream economist, political commentator and politician (from left, right and center) has at some point expressed a similar refrain about the U.S. being Greece.
The reference is to the massive debt problem facing Greece and the dramatic events that led up to massive government (read Euro/IMF) intervention last year.
With the United States National Debt approaching $14 trillion, the comparison would seem to make sense on some level - but the fact is that it is wrong. The U.S. is not Greece and is not like Greece.
The big flaw in Taleb's arguement is a misunderstanding of the monetary system under which each country operates. Greece is a member of the European Union and borrows in Euro's, a currency in which it has no control and little influence. Greece must acquire Euro's by selling something in order to pay their debts, they can't print the Euro. The United States on the other hand issues debt in their own non-convertible currency, they are the monopoly issuer and can print dollars. The U.S. cannot default (ok, they could, but it would be a political decision, not a revenue constraint) as they owe dollars of which they control the printing press.
A more apt, but still not a good comparison would be California and Greece. California spends and borrows in dollars, the state must receive tax revenue or issue debt in dollars. California cannot print dollars, thus they are revenue constrained and could default (note: States cannot currently go bankrupt, nor do I believe that any states will....at this point).
The common belief is that the Federal Reserve is "printing money" via their Quantitative Easing programs, this is not true - they are changing the duration of government liabilities - essentially engaging in Open Market Operations. It is the Federal Government (Both Houses of Congress and the Presidency) that actually print money (out of thin air) when they deficit spend.
When one of the greatest thinkers in the financial markets doesn't understand the global monetary systems, it makes one wonder what hope there is for our financial systems.
Please note I am not saying Taleb is not smart, I think he is a genius, but he has this wrong - as do most mainstream economists.
Scott Dauenhauer CFP, MSFP, AIF