Taleb's antifragility and pseudostability
Nassim Nicholas Taleb, most famous for his bestselling brilliant book "The Black Swan", published a new book last year - "Antifragile: Things That Gain from Disorder", where he presents a rather interesting argument. I haven't read the new book yet (I intend to), but I came across two interviews he did for Financial Times presenting his argument.
His main point is on political volatility. If I were to ask you a question: "Which country is going to be better of in the future - the one characterized by more political volatility or the one with more political stability?", what would you answer? The first though that comes to mind is that stability is inherently good. But according to Taleb this need not always be the case.
If one approaches this question through the democracy vs autocracy debate, where democracies will always carry more political volatility than autocracies, then the argument makes much more sense. A democratic system, with all its flaws, always comes superior to an autocracy particularly because of its volatility and accountability. Due to its economic and political inclusivness it ensures persistent innovation and technological progress and it is a system of everlasting change. On the other hand, an autocracy is an overstabilized system where the rule of one dynasty or party for decades makes the system too fragile. A closed system with limited, state-driven innovation can never hold on for too long (the Soviet Union is a perfect example, but so are many other modern dictatorships, particularly those destabilized by the Arab Spring).
Taleb's intuitive point is that autocracies (overstabilized systems) in times of systemic collapse have no idea what to do or how to react. Its people cannot anticipate the consequences as they've never experienced such a situation. This in turn leads to a perpetuating crises of consolidation. The most recent example he cites is Syria, but predicts the same thing happening to Saudi Arabia, which tends to keep smoothing out their real problems instead of dealing with them, and is thus only achieving "pseudostability".
Speaking of pseudostability and artificial smoothing, China tends to fit the framework quite similarly to Saudi Arabia. However, I don't think the reaction in China will be a complete regime collapse after the inevitable bubble burst. Why? The mere size of the economy and the composition of savings. If the Chinese start spending money and consuming, they are likely to be pulled out of an AD crisis much faster than the West. The difference is that unlike the Americans and the Europeans, the Chinese save a lot (savings rate of 50% compared to the global average of 20%). They are a traditionalist, savings society, unlike a consumerist society of the West. When an AD shock hits the US, one cannot expect consumption to pull it out on its own, as most of US consumption is based on credit. In China, high savings already imply that consumption is low (investments are the biggest contributor to Chinese GDP growth), so during a strong AD shock all the government needs to do is convince people to start spending. With a one party rule, I assume this wouldn't be too hard. However, there is still reason to be worried, as Japan had almost all the similar characteristics to China at the time of its biggest rise, only to see it all fade away during a 20-year-long stagnation.
Systemic fragility solved by more decentralization
Going back to Taleb after this brief digression, in the first video he touches upon the legacy of the crisis. He claims that the system is much more fragile today than it was before. Why? A healthy system allows for fluctuations and improves upon the errors made. When the policymakers in the US and Europe decided to bail out the "too big to fail" banks, they failed to punish those who made mistakes. The socialization of investment banking mistakes sent the wrong signals to the market, making the whole system more prone to failure in times to come. The moral hazard implication is huge, as there is nothing to prevent the bankers from making the same mistakes in a few years time. Particularly as many of the big banks became even larger. Their failure will always threaten the stability of the system which is why their collapse will continue to be avoided by pumping in the taxpayer's money.
The consequence is huge public debt. Taleb rightfully recognizes that the large post-crisis debt came as a result of massive bank bailouts. And according to him high debt makes the system more fragile and unstable than ever.
His solution to make the system more robust to fat tail (black swan) events is more decentralization. Mistakes should, according to Taleb, be made locally, rather than nationally. Their cross-country distribution makes sure that they stay constrained within the local community and thus never threaten the overall systemic stability.
Debt should be managed the same way - locally rather than nationally. He cites Switzerland as an example of such a system, claiming that the people tend to be more responsible with local debt and local public finances than national ones. However this operates under the assumption that political variation is higher in local politics than on the national level. I disagree, as many local areas are characterized by a long-lasting one-party rule. Such communities are perfect examples of the aforementioned pseudostability. There is something appealing in Taleb's decentralization argument, but I wouldn't hold on to it as the key to solving the debt problem.
I guess I have to read the book now.