Black Swan

June 9, 2013

Taleb in his book Fooled by Randomness

Model of the ECB's new headquarters, which is ...

Model of the ECB’s new headquarters, which is due to be completed in 2014. (Photo credit: Wikipedia)

“What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

If you try to view the planet saturn in a scope between the hours 12pm and 3am these Summer nights, you can watch its trajectory from south-east to south-west as its trajectory arc lowers to the horizon. As its trajectory falls lower and lower your line of sight needs to travel through more atmosphere/air. This  introduces atmospheric turbulence and distortions in the image that lead to eventual breaking up of optical quality, contrast, coma, etc.

So it is with the Euro. It’s trajectory is arcing lower, more randomness is being introduced, more experimental dabbling in the unknown austerity  lab, an experiment that hasn’t been tried before.Bailouts as in eg Cyprus are becoming increasingly bizarre. It’s now virtuously commonplace compliance to hold up one’s hands and say, “we made a mistake” as IMF recently did regarding Cyprus and Greece.

Distortions in european ideals that set up the euro in the first instance have become commonplace. Less democracy and Angela Merkel cast in the role of authoritarian diva driving the EMU into a dictatorial ‘centre cannot hold’ debate; Germany must not pay for mistakes made by members of the EMU credit union.

EMU is currently adrift hoping austerity will work with evidence mounting it is a catapulting catastrophe for member states. Proponents of austerity such as Enda Kenny in Ireland embarked on a ruinous deflation of our economy through a policy of emigration/export of the young led by the best and the brightest, mass unemployment and dismantling of public services in education and health, are letting go of democracy in their service of the financial industry.

State institutions such as the Junior Cert in education, the Seanad, instead of improvement and reform are wantonly dismembered, broken up as Ireland is looted to fulfill the interest rate obligations of foreign ‘bailout’ loans odious in the extreme.

“However, Ceaușescu‘s regime became increasingly brutal and repressive. By some accounts, his rule was the most rigidly Stalinist in the Soviet bloc.[3] His secret police, the Securitate, maintained strict controls over free speech and the media, and internal dissent was not tolerated. In 1982, with the goal of paying off Romania’s large foreign debt, Ceaușescu ordered the export of much of the country’s agricultural and industrial production. The resulting extreme shortages of food, fuel, energy, medicines, and other basic necessities drastically lowered living standards and intensified unrest. Ceausescu’s regime was also marked by an extensive and ubiquitous personality cult, nationalism, a continuing deterioration in foreign relations with the Soviet Union, and nepotism.”

Such political and economic randomness fed by the propaganda from the financial sector that the people can endure whatever pain imposed by that sector while the financial sector itself is protected in pursuit of a new economic reality, where the people may also reap rewards,  is the people’s money going like smoke up a chimney, democracy with it. The soviet rouble fell under such policies, as will the euro.

But austerity and deflation bring about unpredictable randomness. So, let’s look for Black Swans! Firstly, let’s acknowledge national ruin came about not so much by the extravagant policies of Fianna Fail under the last administration, but more so by the failed policies of austerity embarked upon by the current administration, its solidarity with the banking sector, its compliance in Vichy puppet fashion to a European financial elite that has looted Ireland.

There is intense debate in the EMU as to the future direction of the EMU in the face of growing unemployment, the need to restore competitiveness, how bailouts are to be funded.Lack of appetite for Eurobonds, political remodeling, reducing prices by 20-30% and other austerity measures, mean more austerity is on the cards and more social unrest.

Hans-Werner Sinn, Professor of Economics at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council.


According to Sinn eurobonds are out, austerity is in, bondholders must be made to pay for their mistakes. German taxpayers must not be asked to pay through eurobonds for the debts of others. Sinn ignores the massive purchasing power of German goods given to outer core EMU members and its benefit to Germany.

But austerity does not work and makes a bad situation worse? There is randomness in this debate with much ostriche head in the sand chin wagging, but there is also a possible emerging Black swan on such policy ruminations.

“Crucial hearings on the eurozone’s bail-out policies at Germany’s top court this week could set in motion events that force Germany’s withdrawal from the euro, a leading judge has warned.

…The case stems from legal complaints by 37,000 citizens, including the Left Party, the More Democracy movement, and a core of eurosceptic professors, most arguing that the ECB has overstepped its mandate by financing the deficits of bankrupt states.

Berenberg Bank said the case was now “the most important event risk” looming over the eurozone, with concerns mounting over an “awkward verdict” that may constrain or even block ECB action.

Dr Di Fabio said the court, or Verfassungsgericht, does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.”

Looks like this case has the makings of a random Black Swan event.

If not, expect plenty of others in the continuing lowering arc of euro from initial high expectations to demise.



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