Nassim Nicholas Taleb Says Government Debt Next Black Swan

In an interview with Business Week timed with a release of a new edition of his book, Taleb says government deficits and debt are going to be the source of the next Black Swan.

What are are potential sources of fragility or danger that you're keeping an eye on?

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.

He says that a U.S. sovereign debt crisis will be a Black Swan to those not forewarned. So, his own warning could be seen as an attempt to forestall it. He also said the world has become too financialized, with too little attention paid to ordinary sources of income. A sound financial plan for (say) retirement should be focused on capital preservation.