deMarigny: Taleb Almost Has Solution Right
Posted By Peter J. de Marigny, July 14th, 2009 : PermalinkIn today’s article: “Taleb offers a universal solution to our ills” (Published July 14, 2009 at 10:46 AM “THE DEAL”) Prof. Taleb, author of “The Black Swan,” a book about the likelihood of outlier events otherwise believed to be improbable, profers a solution to the current debt and liquidity malaise. He says to make a mandatory conversion of all public and bank debt to equity for what I infer solves an “agency” dilemma or moral hazard.
First, I perceived back in Summer 2007 in articles posted on Albourne Village that the growth of the C.O. market with its corresponding fraudalent price discovery structure and boundless creation of synthetics already doomed the banks and would result in money center bank nationalization and subsequently result in the creation of a world currency displacing the USD and the Fed.
Taleb has his own views of predicting Black Swans, but as a student of Financial Risk (GARP) I recognize two things:
- Risk itself is PATH DEPENDENT
- Parametric measures are useless in predicting Black Swans
Parametrics use third and fourth moments to evaluate the multitude and magnitude of outliers (i.e. Kurtosis and Skew) and many use other measures like VaR and multiples of maximum drawdown, but it all relies on a respresentation from a data series. That is like using Carbon Dating to date something from the geological record – “That dog just don’t hunt.” Alternatively, non-parametrics may better model for “Black Swans.”
To get back to the point of today’s Taleb article posted on “TheDeal.com” about forcing a conversion of all debt to equity: Taleb is ABSOLUTELY CORRECT about forced conversion out of the debt. That IS the only answer. However, the forced conversion cannot be to EQUITY, as equity is just structured form of debt, and vica versa. The answer is a FORCED CONVERSION of the USD to a World Currency that is not under the auspices of a sovereign government’s congress or monetary policy – rather put under an independent Basel-headed consortium of Central Bankers and Risk Managers that supersedes sovereign central banks to oversee a new World Currency Unit (WCU).
This is the solution Taleb would eventually get to using his reasoning, and it is a better alternative than to empower the Fed as the super-regulator integrated in Treasury. I believe there will be a forced conversion of the USD into a World Currency possibly as early as latter 2011 using Taylor’s laws. I do not believe there will be massive inflation nor deflation to that time, but that the USD will simply be displaced in one fell swoop by design.
In the meantime, U.S. growth is being sacrificed at the cost of stability (and sovereignty) so sideways strategies will continue to be in vogue. For institutions, they should look to managers who can execute equity “OVERLAY” strategies as the move away from CTAs commences from lack of direction and volatility.
Tags: Bank, Black Swan, Business, Central bank, Finance, Inflation, Monetary policy, World Currency Unit
