Submitted by Taps Coogan on the 5th of November 2018 to The Sounding Line.
Legendary trader, risk analyst, and author, Nassim Taleb, recently spoke with Bloomberg to warn about the fragility of today’s global economy. Having accurately warned of the risks building in the financial system before the 2008 Housing Crisis, Nassim is now warning that today’s risks are even worse than during that crisis.
“We have absolutely the same disease (as in 2008). If you put Novocaine on cancer, and what happens? The patient isn’t going to get better. He is going to feel better, look better maybe for a while, and at some point you have a higher price. Think about it. What was 2007? It was a crisis of debt. We have a lot more debt today.”
As to why he feels that it doesn’t matter that today’s debt is in different parts of the economy:
“You don’t get a free lunch. In other words, difference places doesn’t make a difference. Now where is it? It moved to governments from… households, and (to) corporate balance sheets. And corporate balance sheets, of course, did fuel the stock market rally with corporations either investing their cash with zero interest rates in their own stock or borrowing in many cases… Governments, they think they borrow for free until… they need to borrow a lot. So either they’ve got to print money, or borrow at higher rates… This year have had to borrow more than $1.2 trillion, that’s trillion dollars… If you think about it, we are incurring higher and higher borrowing costs… We are paying some $300 billion or so of interest. Higher rates, more interest, higher rates. You may enter a spiral… It is like a Madoff scheme, when you have to pay more and more to pay interest. A Madoff scheme, or Ponzi scheme…, is when you have to borrow to pay off creditors and that’s what we are doing. As soon as you enter that stage, there is nothing healthy about it from an economic standpoint.”
“You remember years ago, we had crises… and it started in countries like Argentina. In ’82 it started in Latin American countries. Today this is hitting the core. It’s not the periphery. You have a country like Italy, and it’s getting close to (the US)… We have to borrow a lot. I am not (predicting a sovereign debt crisis). This thing will translate itself into some other measures. Like for example, in the US what do you usually do to get rid of debt? In the past the normal solution is inflation. But the minute you start creating a little bit of inflation, it is so uncontrollable. It’s an animal that we have learned from the ’70s is not easy to tame. So if you try to increase the base inflation, hopefully to work yourself out of the debt, price stability will not be there and traditionally has been non-controllable. So, I think we are hitting a point where you need buyers for your debt. The Chinese and the oil producing states were regular customers. Maybe they’re not going to be there. Plus you need more and more… So don’t tell me its healthy. It’s not going to be healthy.”
As to where the next crisis will start:
“2008 we transferred the debt from individuals to the States… So you had at least a way to do things, and we could lower rates, as monetary policy, to zero, which of course didn’t help because you don’t cure a structural problem with monetary policy. (Monetary policy) should be there only as emergency measures. Now, ten years later, we are starting to raise rates because we have to raise rates. You can’t keep them at low levels. It’s unhealthy… Someone’s got to pay the price. Who is going to pay the price of high rates? A lot of people who benefited from that free money, namely corporations and especially real-estate. The first shoe to drop will probably be real-estate… because real-estate is very sensitive and the higher end real-estate has already gone down worldwide…”
As to the outlook for stocks:
“You can’t maintain a high valuation in the stock market in the presence of high interest rates… So, with higher interest rates we are going to see some volatility.”
“The thing that would save us, miraculously, is either growth without debt. What we are seeing here now is 4.2% growth with debt. It doesn’t work. Real growth maybe miraculously will take us out. Or maybe some kind of inflation that would not cause to much price instability and we’ve never seen that… Unless we have these two, we’re doomed.”
There is much more to the interview, so enjoy it above.
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