Recommended: Taleb: Government Deficits Could Be the Next 'Black Swan'

Those of you who have read Nassim Nicholas Taleb's book The Black Swan (see booklist on the sidebar) will know that his main point is that people, including especially all the financial "experts" in the world, don't really understand risk. We tend to be overly optimistic; we base our risk assessment on what we know, on what has happened before. But the real risk is in what we don't know, what hasn't ever happened before. Hence "the Black Swan". The BP oil spill and the current financial crisis are both examples of "Black Swans" for all of us who didn't expect either (though not for the few thoughtful people who in fact did see the risk, and hedged against it in time). As he points out, a Black Swan for the turkey is not a Black Swan for the butcher.

This interview, Taleb: Government Deficits Could Be the Next 'Black Swan', is interesting because, among other things, he thinks people are crazy to keep their savings in the stock market. Why? Because no one, and especially the small investor, really has any idea what the real risks are. And he thinks government debt could well precipitate yet another "Black Swan" -- an unanticipated fiscal crisis that no one expected and no one planned for. As he argues, persuasively, in essence we have to keep finding suckers to borrow from just to pay off the Federal Treasury notes that are coming due. The treasury calls this "rolling over" the debt when the government does it; when an individual does it prosecutors call it a Ponzi scheme. Someday we will run out of suckers, and THEN we will have a real Black Swan event.

I think Taleb is right. People always expect things to continue the way they always have, but in fact nature doesn't operate that way - there are always unexpected, severe crisis - volcanoes, tsunamis, cancer, wars, pandemics. The same in fiscal matters. We WILL eventually have severe crisis; who knows when, but current policy makes it more and more likely to be sooner rather than later.

This is an important interview to read and think about. And if you haven't read "The Black Swan" yet, it might be a good time to do so.