Taleb: Debt Problems Are Worse Now Than in 2008

Nassim Taleb speaks to the issue I have been addressing here for two years, namely that the problem with our financial system is debt.  There is too much of it. And all the stimulus in the world won’t solve that problem.  The debtors either have to pay the debt off or default. Until they do, systemic risk heightens economic fragility.

You can use stimulus as a way to control the deflationary impacts of the inevitable defaults, but the stimulus we have seen to date is not designed for that purpose. Rather, we have witnessed a transfer of private sector debts onto the public sector in an attempt to prevent recession and make the debt problem go away.  Instead, what has happened is the debt problem has moved from the private to the public sector.

(video embedded below)


Despite what Taleb suggests when talking about sovereign debt auctions, surely being the creator of a fiat currency means government cannot involuntarily face insolvency in its own debt instrument – even in Japan where government debt to GDP is around 200%. As the second guest notes, sovereign government can and will print money. However, a private sector debt jubilee or private sector defaults would have made recovery in Japan much quicker, reduced fragility, reduced the misallocation of resources and increased economic growth.

Lee Quaintance of QB Partners who is an Austrian School proponent recently wrote me that he is arguing for a coordinated and global devaluation. He says:

Total nominal debt will contract shrinking the bounty of the rentiers while a flood of newly-digitized Federal Reserve Notes will enter the economy to boost hiring.

No hyperinflation there since it is global and co-ordinated.  You will notice that Taleb inserts the hyperinflation canard into the conversation despite widespread signals of debt deflation and a gaping output gap. I’m not saying hyperinflation can’t happen. I’m saying it is unlikely, especially when we have everyone looking to depreciate their currency at the same time. At a minimum, you need to eliminate the excess labour and capital supply. And were it to occur, deflation would surely come first.  That’s why the talk about Treasuries seems misguided.

The video below of Taleb and James Suriowiecki is also interesting. Taleb is right when he says volatility is a contrary indicator; low volatility means higher risk.

Hat tip Paul Kedrosky

39 Comments
  1. J. Powers says

    Is it low price volatility that’s the indicator of lower risk, or lower trade volume? The recent volatility in the stock markets seems to be driven in large part by low volume–which I read as many more players sitting on the sidelines.

    1. Edward Harrison says

      It’s the price volatility because lower trade volumes are consistent with market bearishness (bull markets and panics are characterized by high volume).

  2. Bob_in_MA says

    “Lee Quaintance of QB Partners who is an Austrian School proponent recently wrote me that he is arguing for a coordinated and global devaluation…”

    Isn’t that nonsensical? Currencies are only really valued in relation to each other. Let’s say at 9PM this evening every currency devalued by exactly 25%. What would be different? Every price, every wage, every debt, every asset, all would be the same relative to each other.

    Or is he saying devalue ONLY debt? I think that’s known as defaulting.

    The problem is that devalues all the other sides of that debt. All the banks, the insurance companies, pension funds, 401ks, endowments, etc.

    To paraphrase a classic: I met the rentiers, and they is us….

    1. Edward Harrison says

      Bob, it’s a one-time increase in the price level across the board. Here’s the thinking behind it as written in Forbes:

      http://www.forbes.com/2009/12/11/gold-dollar-commodities-personal-finance-financial-advisor-network-hard-assets.html

      The idea was that if you devalue a currency by 30%, you will increase prices of homes, stocks, gold, autos and most other assets by 43% (a dollar devalued by 30% is then worth just 70 cents. It takes 1.43 70-cent dollars to equal 100 cents).

    2. Guest says

      ” I met the rentiers, and they is us…. ”

      No, “they” aren’t us. They are a very small sliver of the population, say the top 0.1%, to which pretty much the totality of economic growth has accrued since the 70s to the complete exclusion of the middle class. You could add a few other entities, like the Chinese oligarchy, which has acted as an accomplice to those domestic “elites” through “globalization”, to enforce wage deflation and spoliation of the middle class, and has been richly rewarded for that role.

      “They” are definitively not us. To paraphrase, let me tell you about Them. They are different from you and me.

  3. Gbgasser says

    I think a credible scenario for hyperinflation is a supply destruction through over zealous austerity measures. There is a point where workers will say screw it we aint coming to work for this anymore which could have an acute supply affect driving up prices.

    Of course the mainstream narrative will still be “See, the massive govt spending increased the money supply too much and CAUSED this hyperinflation!”

    I of course, dont know what the point is where we see the worker walk out or IF we will reach it. I simply want to suggest this as a possible mechanism of hyperinflation.

  4. Guest says

    Edward, You write:

    “However, a private sector debt jubilee or private sector defaults would have made recovery in Japan much quicker, reduced fragility, reduced the misallocation of resources and increased economic growth.”

    What is your current position on MMT? Are you coming around to the view that it is deeply flawed? If so, where’s the Mea Maxima Culpa? If not, how can you explain this comment?

    1. Edward Harrison says

      MMT is very good in demonstrating how modern money works in a fiat currency system. The approach that Wynne Godley takes on financial sectoral balances is invaluable. So I really like a lot of what MMT does.

      Where I differ from the MMT’ers is in conclusions, which I have always said are political and philosophical. The MMT’ers are most concerned with full employment. I am more concerned with liberty ie limiting government’s potential controlling influence. These are philosophical differences which will lead to differing conclusions even based on the same economic model.

      1. Guest says

        Got it. So you are then opposed to “debt jubilees” because, as MMT professes, sovereign nations can never default. Or are you?

        And if you reject MMTs conclusions on “PPE” grounds (in honor of the late Mr. Godley), then what about its premises?

        Where precisely does MMT go astray?

        1. Edward Harrison says

          Where I differ with MMT is in regards to the ability of stimulus or tax cuts ie deficit spending to rebuild private sector balance sheets in a leveraged world dominated by special interests.

          Looking at Japan gives you the main difference in thinking. Richard Koo for example (non-MMT by the way) says that the balance sheet recession necessitates government spending. I say no, the government spending or tax cuts are only necessary to promote full employment and prevent recession in a world of debt deleveraging because the private sector won’t hire.

          But, I would rather see a debt jubilee and more defaults because it prevents the moral hazard associated with government’s capture by special interests. You saw how deficit spending was used this go round: to prop up the banks and to reward other special interests (auto unions) where they could. That furthers malinvestment and keeps the source of slow growth alive and well. Moreover, it doesn’t really aid the deleveraging of households.

          Where MMT’ers and I agree is that the government does need to implement a jobs program and that across the board tax cuts (ie a payroll tax holiday) would work with less political interference than full-bore stimulus.

          1. Guest says

            My understanding of MMT is that they assume that governmental debt of unconstrained nations equates to private sector wealth. They maintain that ever larger fiscal debts is THE WAY that the private sector balance sheets can be repaired.

            Koo focuses on the balance sheets of the private sector more than employment. As a Normura economist, he pays close attention to the domestic bond markets. But his balance sheet recession theory is essentially a close cousin to MMT. Read his latest note this week. He calls for ever more fiscal spending, and seems (inexplicably to me) to believe that Japan is “at the end” of its balance sheet recession. (Hello, excess capacity,….but I digress).

            A debt jubilee would be profoundly debt/deflationary. It would likely affect the rest of the developed world, and would potentially create GDII. It would certainly lead to the destruction of millions of jobs.

            So, do I understand you as saying that you are in favor of having the Japanese government voluntarily repudiate its debt and then spend massive amounts of incremental money on a CCC-like jobs program?

            How will the DPJ finance this? Will they simply attempt to convince the proudly independent BoJ to allow them to credit reseves? A default on JGBS will, of course, entail the temporary closure of yen based capital markets.

            Just wondering.

          2. Edward Harrison says

            No, I am not talking about public sector debt but private sector debt. The Lee Quantaince is similar ie a massive 30% across the board devaluation. The purpose is to reduce the real value of debt without distorting the allocation of real resources. This is not deflationary because it allows investment to be allocated to real resources rather than in financing past malinvestment.

        2. Marshall Auerback says

          Let me try to add something in here. I think it’s fair to say we in the
          MMT camp start from a very different premise. The question is: for the ‘
          right’ amount of government spending which we presume is necessary to run the
          nation the way we would like to see it run, how high should taxes be?

          The reason we look at it this way is because the ‘right amount of
          government spending’ is an economic and political decision that, properly
          understood, has nothing to do with government finances or public debt, as Taleb
          seems to think. The real ‘costs’ of running the government are the real goods
          and services it consumes- all the labor hours, fuel, electricity, steel,
          carbon fiber, hard drives, etc. etc. etc. The real cost of the government
          using all these real goods and services is that those resources would other
          wise be available for the private sector. So when they government takes
          those real resources for its own purposes, there are that many fewer real
          resources left for private sector activity.

          So, for example, the real cost of the ‘right size’ army with enough
          soldiers to defend ourselves is that there are fewer workers left in the private
          sector to grow the food, build the cars, do the doctoring and nursing and
          administrative tasks, sell us stocks and real estate, paint our houses, mow
          our lawns, etc. etc. etc.

          Therefore, we first set the size of government at the ‘right’ level,
          based on real benefits and real costs, and not the ‘financial’ considerations.
          Of course, we don’t do that today, which is part of the problem. The
          monetary system is the tool we use to achieve our real economic and political
          objectives, not the source of information as to what those objectives are.
          And after deciding what we need to spend to the ‘right sized’ government,
          we adjust taxes so that we all have enough spending power to buy what’s
          still for sale in the ‘store’ after the government is done with its shopping.
          In general, I’d expect taxes to be quite a bit lower than government
          spending. In fact, a budget deficit of perhaps 5% of our gross domestic product
          might turn out to be the norm, which in today’s economy is about $750
          billion annually, as that’s probably the amount (IN A NORMAL ECONOMY) which
          helps to accommodate private sector savings desires.. However, that number
          per se is of no particular economic consequence. What matters is that taxes
          are set to balance the economy and make sure it’s not too hot or not too
          cold. And government spending is set at the ‘right amount’ given the size
          and scope of government we want.

          That means just because we are in a slow down, we should not necessarily
          add to the size of government to help the economy. We should already be at
          the ‘right’ size for government, and therefore not add to it every time the
          economy slows down and grow it to the ‘wrong’ size. So while during a
          slowdown increasing government spending will indeed make the numbers work,
          and will indeed end the recession, for me that is far less desirable than
          accomplishing the same thing with the ‘right’ tax cuts in sufficient size to
          restore spending to the desired amounts.

          Even worse is increasing the size of government just because the
          government might find itself in surplus. Again, government finances tell us nothing
          about how large government should be. That decision is rightly and
          totally independent of government finances. The right amount of government
          spending has nothing to do with tax revenues or the ability to borrow, as both
          of those are but tools for implementing policy, and not reasons for spending
          or not spending, and not sources of revenue needed for actual government
          spending.

          Hope this helps.

          In a message dated 6/11/2010 6:40:29 A.M. Mountain Daylight Time,
          writes:

          Guest (unregistered) wrote, in response to Edward Harrison:

          Got it. So you are then opposed to “debt jubilees” because, as MMT
          professes, sovereign nations can never default. Or are you?

          And if you reject MMTs conclusions on “PPE” grounds (in honor of the late
          Mr. Godley), then what about its premises?

          Where precisely does MMT go astray?

          Link to comment: http://disq.us/duxnk

      2. Gbgasser says

        Dont you think not having a job limits your liberty Edward?

        I cant see why ANYONE would object to offering a job to EVERYONE who wishes to have one. This doesn’t mean a $50,000/yr job but a minimum wage job. Something to keep some amount of consumption going.

        The truth is the private sector is unlikely to ever be able to fund work for all who want it. The govt can and should step in and either supplement some jobs or directly hire, depending on the work to be done.

        1. Edward Harrison says

          gpbgasser, you should read through my comments. I have already said I support a jobs program.

          “Where MMT’ers and I agree is that the government does need to implement a jobs program and that across the board tax cuts (ie a payroll tax holiday) would work with less political interference than full-bore stimulus.”

          1. Gbgasser says

            Sorry Edward. I was responding to this part of on earlier comment.

            “Where I differ from the MMT’ers is in conclusions, which I have always said are political and philosophical. The MMT’ers are most concerned with full employment. I am more concerned with liberty ie limiting government’s potential controlling influence. These are philosophical differences which will lead to differing conclusions even based on the same economic model.”

            I got the impression you didnt think full employment models and liberty were compatible.

  5. gnk says

    Edward,

    Regarding the MMT school of thought – didin’t central planning by the Federal Reserve – thru interest rate manipulation, distort the economy and cause this mess?

    That’s my problem with MMT’ers. They think that the solution is more central planning is needed, and if only they get their hands on the controls, it will be done properly. I see a MMT solution, over the long run, distorting an economy to the point of collapse. Similar to the USSR command economy. Labor and Capital would be misallocated to unproductive endeavors, thereby creating a sustainability issue.

    1. Edward Harrison says

      If you listen to randy Wray the dean of the Modern Money part of the MMT economic modelling, he sounds pretty libertarian in orientation. The difference between what he says and what I am saying has to do with the policy goal of full employment which I believe he says is paramount under his agenda items.

      But when it comes to the Fed, he too thinks the Fed is a problem. He would get the Federal Reserve out of manipulating rates like a central planner and have them set the rate at a low level in perpetuity. Of course, I think low rates promote the accumulation of debt, but the point is the MMT’ers are not for central planning, they are for full employment.

      1. gnk says

        Thanks – I’ll read up on Wray. My confusion is as to who does the hiring in a full employment policy scenario. I was under the impression that much would be gov’tl.

        Sorry for the double post, I had an error messg, and didn’t realize the first post went thru.

        1. Edward Harrison says

          No problem about the double. I’ll delete the second. I’ll see if I can get Randy to comment directly. But my understanding is that the government provides the money but the actual hiring can be done locally and not necessarily by government. The key is to provide the job rather to have government control the process. It is the same sort of debate we had in health care by the way.

          Opposition to this idea is ideological in that it revolves around a distrust of government (which I share). But this distrust is so great that people will look to limit government even if it means perpetuating an output gap.

          1. Marshall Auerback says

            Well, the hiring is done by the government, but it can be ADMINISTERED at
            the local or state level. But it has to be funded at the Federal level.
            The point is that it acts as a counter cyclical stabilising tool. A rate of
            wages and benefits are set by the government (which by definition becomes
            the new minimum wage), but the government does not outbid the private
            sector. It merely sets a floor on wages and employment. As and when private
            sector demand revives, it can outbid the government for these same workers.
            The point is that you will be paying the workers anyway via unemployment
            insurance or social welfare benefits. Why not provide a job? Then the social
            pathologies are considerably reduced and the private sector can draw onf a
            “shovel ready” pool of EMPLOYED labour.

            You should look at the Argentinean experience with the Jefes program in
            the early 2000s.

            In a message dated 6/11/2010 7:04:42 A.M. Mountain Daylight Time,
            writes:

            Edward Harrison wrote, in response to gnk:

            No problem about the double. I’ll delete the second. I’ll see if I can
            get Randy to comment directly. But my understanding is that the government
            provides the money but the actual hiring can be done locally and not
            necessarily by government. The key is to provide the job rather to have
            government control the process. It is the same sort of debate we had in health care
            by the way.

            Opposition to this idea is ideological in that it revolves around a
            distrust of government (which I share). But this distrust is so great that people
            will look to limit government even if it means perpetuating an output gap.

            Link to comment: http://disq.us/duzfi

        2. Marshall Auerback says

          The government would be there as a counter-cyclical force to offset rising
          unemployment in the private sector. But it would not be introducing
          another element of intrusive bureaucracy into our economy, but simply better
          utilizing the existing stock of unemployed, now dependent on the public purse –
          especially the chronically long term unemployed. The current system we
          have relies on unemployed labor and excess capacity to try to dampen wage and
          price increases; however, it pays unemployed labor for not working and
          allows that labor to depreciate and develop behaviors that act as a barrier to
          future private sector employment. Social spending on the unemployed
          prevents aggregate demand from collapsing into a depression-like state, but
          little is done to enhance future growth and demand, which can be done via the
          ELR by providing them with employment, greater education and higher skill
          levels.
          The ELR program would allow for the elimination of many existing
          government welfare payments for anyone not specifically targeted for exemption, and
          would command greater political legitimacy, as society places a high value
          on work as the means through which individuals earn a livelihood. Minimum
          wage legislation would no longer be needed as it would be established via
          the ELR. Labor would welcome the safety net of a guaranteed job, and business
          would recognize the benefit of a pool of available labor it could draw
          from at some spread to the government wage paid to ELR employees.
          Additionally, the guaranteed public service job would be a counter- cyclical influence,
          automatically increasing government employment and spending as jobs were
          lost in the private sector, and decreasing government jobs and spending as
          the private sector expanded. It would therefore remain a permanent feature
          of our economy, in effect acting as a buffer stock to put a floor under
          unemployment, whilst maintaining price stability whereby government offers a
          fixed wage which does not “outbid” the private sector, but simply creates a
          stabilizing floor and thereby prevents deflation.

          In a message dated 6/11/2010 7:00:16 A.M. Mountain Daylight Time,
          writes:

          gnk wrote, in response to Edward Harrison:

          Thanks – I’ll read up on Wray. My confusion is as to who does the hiring
          in a full employment policy scenario. I was under the impression that much
          would be gov’tl.

          Sorry for the double post, I had an error messg, and didn’t realize the
          first post went thru.

          Link to comment: http://disq.us/duz5g

        3. Edward Harrison says

          Marshall’s comment here is spot on:

          “The point is that you will be paying the workers anyway via unemployment insurance or social welfare benefits. Why not provide a job? Then the social pathologies are considerably reduced”

          What we want is to prevent long-term unemployment and have the economy operating at full capacity. Giving people unemployment benefits and then waiting for the private sector to hire them as they stay out of work for a year makes no sense. Anti-government rhetoric would say cut benefits off and they will find a job. I say the private sector isn’t hiring.

          1. Marshall Auerback says

            That’s right. The private sector isn’t hiring and because we are not
            socialists, we can’t force the private sector to take on more employees. And
            the notion that somehow only the lazy and unmotivated can’t find jobs is
            contrary to all evidence. You’ve got a classic problem of lack of aggregate
            demand. Job sharing won’t change that dynamic. It just cuts up the existing
            pie into more slices and you therefore make all people a bit poorer.
            That’s not good social or economic policy.

            In a message dated 6/11/2010 8:14:42 A.M. Mountain Daylight Time,
            writes:

            Edward Harrison wrote, in response to gnk:

            Marshall’s comment here is spot on:

            “The point is that you will be paying the workers anyway via unemployment
            insurance or social welfare benefits. Why not provide a job? Then the
            social pathologies are considerably reduced”

            What we want is to prevent long-term unemployment and have the economy
            operating at full capacity. Giving people unemployment benefits and then
            waiting for the private sector to hire them as they stay out of work for a year
            makes no sense. Anti-government rhetoric would say cut benefits off and
            they will find a job. I say the private sector isn’t hiring.

            Link to comment: http://disq.us/dv56k

  6. gnk says

    Edward,

    Regarding the MMT school of thought – didin’t central planning by the Federal Reserve – thru interest rate manipulation, distort the economy and cause this mess?

    That’s my problem with MMT’ers. They think that the solution is more central planning is needed, and if only they get their hands on the controls, it will be done properly. I see a MMT solution, over the long run, distorting an economy to the point of collapse. Similar to the USSR command economy. Labor and Capital would be misallocated to unproductive endeavors, thereby creating a sustainability issue.

  7. L. Randall Wray says

    Hi Edward, Marshall, and all: OK to be clear.
    1. MMT is consistent with any size of gov’t. It can be a small libertarian govt if you like. But it issues a sovereign floating currency. It supports the currency by imposing a tax payable in that currency.
    2. Job Guarantee/Employer of Last Resort is also consistent with any size of gov’t. If you want a big private sector and small govt sector, keep taxes and govt spending low.
    3. JG/ELR can be as decentralized as you want. I think there are massive incentive problems if you have federal govt pay wages of for-profit firms. So I would have fedgovt pay the wages in the program but have the jobs actually created and mngd by: not-for-profits, local govt, maybe state govt, maybe federal govt. Argentina experimented with cooperatives and it looked to me to be highly successful.
    4. The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes create unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemp problem created by the govt’s tax. Private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment.
    5. How can the belief that all ought to work, contribute to society, rather than lay about and collect welfare be called socialism?
    6. Ed: I guess I’ve been called worse things than Libertarian! But as you know, I strongly disagree with much of what our govt does. The Fed is a case in point. I would abolish it. Move essential operations into the Treasury. And stop monkeying around with interest rates, inflation targets, money targets, etc. Set overnight (fed funds/discount rate) at 25 basis points and leave it there forever.
    LR Wray

  8. Olivier Travers says

    This thread sounds like progress thanks to shifting the focus away from the “governments can run any deficits they want unless inflation starts to increase”, moving instead to job creation – which I agree is fundamental. This is getting much closer to the “real” economy, feels less like a justification for huge government spending and more like trying to solve real root problems.

    Now, as this thread discussed, what we need is *real* productive jobs, or else it’s like unemployment benefits compounded by a drag on employers having to manage dead wood. It’s not easy to get the incentives right so that these government-funded jobs (even if administered by local government or the private sector) end up being productive. If the government gives me money as a private employer to hire people, I have less incentive to make these “free” hires work out well and increase income, vs. when the money comes from my customers. France has a long history of subsidized jobs (typically some sort of social worker in a municipality). The people getting these “jobs” have as much trouble finding a private job later on as when they were unemployed. In other words they remain as unproductive and unqualified. They might has well have stayed home, from the perspective of raising aggregate output, and the service they provide has little actual value, social or otherwise.

    Taking a step back, I still haven’t seen an explanation for the supposed need of the private sector to have net savings *as a whole*. Why can’t private actors just lend/save among each other? Those who want to save, do, funding those who want to borrow. As I said in another thread, the desire for “net private savings” looks more like what the government needs to fund its deficits. And fiat money was not introduced in a vacuum on day zero of world history, there was already plenty of assets and money to put to work in the private sector by 1971.

    I see other problems with MMT as it’s been recently presented here and in other places, from the heavy focus on top-level aggregates such as GDP (I’ll spare the Austrian lecture on their dubious value for now) to the position that there’s not going to be inflation in the absence of full employment (send that memo to the OPEC – obviously you can have inflation even if there’s an output gap). Maybe we can address these points in future threads. Right now I would love to understand better what seems like a core assumption of MMT: “the private sector *as an aggregate* needs/wants to have net savings.” The discussions I’ve seen on vertical vs. horizontal money creation tend to obfuscate more than they illuminate. I guess I’d like to see a convincing chartalist answer to circuitism.

    1. Edward Harrison says

      Olivier, I think we are making some progress here because you and I come at this from an Austrian perspective and I am trying to figure out where there is intellectual agreement. Jobs seems to be where we can get some traction.

      If I could vent for a second, what Keynesians like Krugman fail to understand is that crony capitalism is always a problem. It is especially problematic in deep recessions as the economic policy which favours special interests and actually helps create malinvestment and eventual depression means stimulus goes to those favoured sectors. That’s why stimulus alone can never work. Look at what happened in the US (and elsewhere) with the bank bailouts, auto bailouts, airline bailout in Japan.

      You have to have deal with the private sector debt problem head on. And that leads into your comments about aggregates. The private sector is comprised of both businesses and households. What we have seen to date is a record cash holdings of business, scared to death of the credit crunch. Hoeseholds are not saving – which is what we want. So, again, it demonstrates that deficit spending does not axiomatically help de-leverage.

      But, I like MMT’s sectoral balances framework. Very important and helpful.

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