Nassim Taleb says it’s time to do away with debt

This is Marion Maneker channeling Nassim Nicholas Taleb:

We cannot have both debt leverage and a hyper-efficient system—the volatility is just too great. What Taleb explains—which no one else does—is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high-performance aircraft. Each minute of steering input creates a rapid and violent shift of course, speed, or altitude. The system itself is souped up even before you add the debt. Once you do, the pilot is equally jacked up and twitchy, creating an explosive combination. Now imagine that fighter jet trying to fly in a 1,000-plane formation, and you get an idea of the world financial system in the 21^st century.

We can’t erase the technology that created the planes, so we’ll have to make sure we fly sober, maybe even with an onboard computer that dampens the controls. That means getting rid of the debt. It’s that simple.

There’s something to this. The technology stock bubble inflated in the late 1990s and collapsed in the early 2000s without devastating the economy. Why was that? Mainly because there wasn’t much debt involved. Very few people had borrowed money with Pets.com shares as a collateral.

That said, I don’t see how a no-debt capitalist system would really work (although maybe I just need to spend some time studying Islamic banking). But a lot less less debt sounds like a good idea.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

pneogy

“That said, I don’t see how a no-debt capitalist system would really work (although maybe I just need to spend some time studying Islamic banking). But a lot less less debt sounds like a good idea.”
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Surely, a less-leveraged-debt capitalist system would work just fine. I suppose that is what you mean by “a lot less debt.”
mbirchmeier

I was going to say something similar as pneogy, are we talking about a no-debt system, or not using over-leveraged debt?
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-MBirchmeier
http://www.kiwibloke.org Kiwi Bloke

You can look at it another way, and that is artificial inefficiency create buffers that can be added and removed to protect from volatility. European countries have large tax buffers in Gas (Petrol) pricing that can be modified at will.
The idea is that the average consumer is concerned about relative pricing and less concerned about absolute prices. Wide swings in the pricing of inputs creates uncertainty. As you have stated in the pass, people pay a premium for certainty over uncertainty.
qqi239

It seems that there are economists and there is the rest of civilized humanity. I could not stop wondering how many more Nobel prizes in economics will be awarded before economists will recognize a simple truth: we are dealing with something way more fundamental than simple volatility, capital markets are positive feedback systems (e.g. when share price is going up the supply of shares available for sale is going down) as opposed to the most of the other systems surrounding us (courts, democratic system of government, markets of goods services and labor).

Naturally, if economists do not understand the very basic nature of underlying instability they have no chance to figure out what to do about it.
pneogy

@qqi239: Excellent point. Capital markets are systems with positive feedback, and systems with positive feedback are inherently unstable. I think economists realize that, and there is a lot of talk these days about introducing “counter cyclical measures,” which are measures that introduce negative feedback into the system. Regulations that dampen the instability of the system have these negative feedback characteristics. Of course, a lot of money is made through the inherent volatility of the capital markets; and there is a lot of resistance to regulations that would tame this volatility.
tegwar

I’m not eager to mention this, since it signals I am familiar w/ what is considered (rightly or wrongly) to be a lunatic fringe, but there was an equity not debt argument made by a guy named Louis Kelso 50 to 30 years ago. Of course, the only practical impact of his works has been the ESOP which tends to be a debt-driven vehicle (hysterical!). But the core of his argument was that retained earnings and debt financed growth served to enable a closed system wherein the existing owners are the direct beneficiaries whereas equity fueled growth potentially opens up the system. Not that he’s right (far from it), just another angle toward the same basic point.
qqi239

Pneogy – thanks for kind words, however,

“I think economists realize that, and there is a lot of talk these days about introducing “counter cyclical measures,” which are measures that introduce negative feedback into the system. Regulations that dampen the instability of the system have these negative feedback characteristics.”

Actually, it highlights my point of that they do not realize the underlying nature of the instability – one cannot change fundamental laws of nature by a decree and apparently they do not understand that they are dealing with a fundamental issue.

IMHO, all we can (and should) do is to reduce the impact of capital markets on the economy. E.g. abolishing corporate income tax will remove a lot incentives both for going public and for borrowing money to fuel corporate growth in search of huge stock market returns.

BTW, some degree of positive feedback is a good thing because it makes the system way more responsive.

Now, where is my Nobel prize?