Nassim Taleb: Government Deficits As The Next Black Swan

Speaking of political incentives Nassim Taleb has one great example, in an interview he says

The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

In other words, the incentive for politicians has been to run up unsustainable deficits through lavish spending.

And he thinks that definancialization should be the way to go

I think we should not need financial reform. What we need is definancialization. What we need to do is break the financial community's grip on society. And you can do it very easily by transformation of debt into equity. Banks have an interest in building debt, but equity in society is vastly more stable than debt.

But in my view, we can’t definancialize without overhauling the political system which has been tied to Central Banking. Therefore, definancialization should mean the end of central banking.