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Cameron, Nasim Taleb and cutting debt

Nasim Nicholas Taleb, author of the bestselling book The Black Swan, has been a favourite philosopher and financial commentator of ours for some time. He is rumbustious and abrasive, but remarkably difficult to dislike. So it was pleasantly surprising to see David Cameron and him having an intellectual love in during an open debate at the Royal Society in February 2010. Since that time we had heard murmurs that Cameron and Taleb had become close, having significant overlap in their world views.

Nasim Taleb has a deep aversion to excessive amounts of debt and leverage within the financial system, because leverage and debt brings inordinate amounts of risk and exposure to unforeseen events and changes in the markets. Debt and risk are described as synonymous.

Mother nature does not like debt. The opposite of debt is redundancy. I have two lungs… and one spare kidney… That is the opposite of debt; spare parts. If we let economists manage mother nature, they’d give one lung to everyone, and then you’d borrow your time for breathing…it would be ‘optimal’. Why should we have to carry two lungs? …Mother nature can show us how to build a robust system. A system that can withstand huge deviations and stay standing.

You don’t need to be an economist to understand this; anyone with a mortgage or other debts will likely appreciate it all too well. We had hoped that any intellectual alignment between the two might produce positive results in how the British economy is managed given our concerning national debt obligations.

Cameron and Taleb working together

If truth be told we had not appreciated just how close Cameron and Taleb had become, or the fact that the mathematician and philosopher is now a key adviser to 10 Downing Street. In a recent documentary on Radio 4, the Economist’s Political Correspondent, Janan Ganesh, sheds new light on this relationship. Taleb has described David Cameron as ‘extraordinary’ and ‘the best thing we have left on this planet’. He is featured in a scene in the documentary on Hampstead Heath with two of the Prime Minister’s key policy advisers, Steve Hilton and Rohan Silver.

Maybe Britain was alright after all, and David Cameron was a man who appreciated ‘Black Swan’ thinking and would lead us out of our vulnerable debt-laden plight. The last few months of strength in the UK gilt market has been welcome, especially for George Osborne. ‘Risk free’ seemed to still apply to our national debt. But, has Cameron really been getting our economic house in order?

When one really looks at the numbers, this hoped for reality does not seem to be manifesting itself. Recent analysis from Greg Weldon expertly articulates how our national plight is not improving, austerity is far from being implemented, and that our future is being staked on some highly optimistic growth assumptions.

Staking our future on unattainable growth

Not only are there NO spending cuts within the UK Budget projections for the next five years, annually through the year 2017… UK government spending will increase, every year, including an expansion of +2.8% scheduled to be implemented this year.

The UK government is ‘banking on’ growth in Revenue that will exceed the rate of growth in Expenditures, including growth of +3.5% cooked-into-the-books for this year.

But, the margin for error is slim, with year-over-year Revenue forecast to grow by more than the growth in year-over-year Spending, by a mere £1.4 billion.

Over the next five years things get even more interesting.

In order to ‘support’ a sizable EXPANSION in SPENDING over the next five years (pegged at +12.7%), the UK Treasury is RELYING on an astronomical rise in Revenue over that same five year period, pegged at +33.4%.

Revenue is forecast to rise by +£184.2 billion over the next five years, or by nearly +£40 billion per year.

Ahem, excuse me … perhaps the UK Treasury overlooked the FACT that Revenue in Febru­ary, pegged at £38.631 billion was (-) 1.9% BELOW the year-ago February revenue of £39.381 billion.

A decline of nearly £1 billion is FAR from the projections calling for a near +£40 billion per year increase over the next five years.

When Mr Weldon writes that ‘the margin for error is slim’, what he means is that we are unlikely to be doing enough to reduce our accumulation of debt, let alone start cutting our debt. Austerity in any meaningful sense is not being pursued. This does not seem to reflect an appreciation of Black Swan thinking by Dave and George to us. So what is happening?

Recognising the disease but avoiding the cure

If, given his close counsel, we can assume that David Cameron is sufficiently aware of the risks of being overly exposed to the moods and whims of the bond markets, what is he playing at? Are he and George playing a tricksome game; marketing to investors that they abhor debt and plan to cut it, all the while just running Britain as the least worst of the leading Western economies. If this is the case, they are getting away with it… so far.

This would hardly seem be a prudent path though, and certainly not a form of economic management that complies with Nasim Taleb’s school of thought. As Grant Williams regularly muses in his investment newsletter: “none of this matters to anyone until it matters to everyone”. We have probably bored readers to death with this, but it really is the case that debts aren’t a problem, until bond investors suddenly think they are a problem. We saw how this worked for Greece. Nasim, your intellectual lover is cheating on you!

This article was previously published at The Real Asset Company

1 comment to Cameron, Nasim Taleb and cutting debt

  • mrg mrg

    An interesting article. I can’t agree with you on this bit, though:

    “debts aren’t a problem, until bond investors suddenly think they are a problem”

    Government debts are a problem because they prevent honest debate on the appropriate level of government spending. They’re a problem because they are passed on to our children, who have not consented to the burden. They’re a problem because we’re spending an increasing portion of tax revenue on interest payments. They’re a problem because they divert funds from the productive private sector to a wasteful public sector.

    Government ministers might not worry about debt levels until the bond investors do, but the rest of us should be deeply concerned, regardless of what the bond market thinks.

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