by Dirk Ehnts, Econoblog101
I was going through Taleb’s book on anti-fragility last weekend, noting that he doesn’t understand money/sovereign debt. His main idea that there are things which benefit from volatility is interesting. However, the way he writes about sovereign debt implies that he does not understand it. Since I have only been reading the German version I will have to translate the quote. Page numbers will be those of the German version as well. Let us start with the table on p. 52. Sovereign debt is listed as fragile, unsecured private debts as robust, and convertible bonds as antifragile. That is not how things played out in the crisis. Except for those countries using foreign currencies (like euro zone countries), sovereign bonds did exceptionally well:
Note that bond prices are the inverse of interest rates. Falling interest rates thus cause bond prices to rise. So, in what sense are sovereign bonds fragile here? I can’t see how they are affected by recessions, financial crisis, etc. worse than private sector debt. Given that the central bank controls the short-term interest rate, in how far are sovereign bonds fragile? Japan is able to carry a debt load of way above 200% of GDP, apparently without the bond market breaking down.
Taleb continues on p. 63:
“budget deficits have been one of the main causes of fragility in social and economic systems.”
Come again? Was the sub-prime crisis caused by private or public debt? Did public debt cause the dot-com boom and crash? What about the savings and loan (S&L) crisis in the early 1990s? It seems like Taleb is “in the loop”, hanging out with what Krugman calls VSPs (very serious people) and just repeats what he heard. Where is the evidence? How do countries do that do not emit much sovereign debt? North Korea? Cuba? Haiti?
On p. 72, Taleb writes:
“we [the world] have never been richer, we have never been more into debt, never been more dependent on borrowed money.”
Well, the first two parts belong together: financial wealth is financial debt. If you have more of the first you’ve gotta have more of the second! Then, about being dependent on borrowed money, I agree with Taleb. However, where is the theory? He continues in his book saying that the richer we are the harder it is for us to live within our means. On an aggregated level that is hardly the problem. So, where is the monetary theory?
On p. 86, Taleb admits he is against sovereign debt. What is missing is why exactly that is so? Sure, if you are in debt, you might not be as free as someone who is not into debt. But whom is the government indebted to? In what sense is it controlled by those who are holding today’s and supposedly the future sovereign bonds? If the central bank controls the interest rate, can it not force the interest rate down to zero so that the free lunch of interest on an asset with no risk evaporates? Can not government force the central bank to intervene so that it secures that it never runs out of cash?
While I agree that the idea of anti-fragility is attractive, the treatment of sovereign debt is short and misleading at best. Many investor types fail to aggregate the individual perspectives into one whole, so it does not surprise that Taleb seems to belong to that category. Marrying the idea of anti-fragility with modern monetary theory holds some potential, if there is someone out there with time at her/his hands.