Debt Spreading 'Like a Cancer': Black Swan Author
Associate Editor, CNBC
The economic situation today is drastically worse than a couple years ago, and the euro is doomed as a concept, Nassim Taleb, professor and author of the bestselling book "The Black Swan," told CNBC on Thursday.
"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said.
"Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added.
The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relived that public attention has shifted to debt, instead of growth.
The world needs to prepare itself for austerity, he warned. "We need to slash debt. Unfortunately, that's the only solution," Taleb said.
Other analysts warned about austerity programs spreading from the euro zone to the US where the growth in debt will become unsustainable over the longer term.
Obama administration's efforts to pull the US out of recession haven't succeeded, according to Taleb. "It's not that they make mistakes, it's that they almost get nothing right." Moreover, a second major stimulus package may be futile, he warned.
"Obama promised us 8 percent unemployment through stimulus. It hasn't worked." There are significantly more liabilities in the US than in other countries around the world, he said.
"Don't give a junkie more drugs, don't give a debt junkie more debt."
- Watch the first section of the Nassim Taleb interview above and the second section here >>>
Hedge Against Inflation
Investors should avoid Treasurys and other bonds and place their money in instruments that will hedge them against looming inflation.
Commodities are one place where a bull market may form over the coming years, as people try to protect their cash from price rises, famous investor Jim Rogers told CNBC earlier Thursday.
The "Black Swan" metaphor is used to describe those rare, unexpected but consequential events that people cannot predict because they view the world through a sort of tunnel vision - as something structured, ordinary, and comprehensible.
"I want to live in a society that is robust to adverse events. We don't live in that world," Taleb said.
"A bridge that's very poorly constructed will eventually break. A white swan for the butcher is a black swan for the turkey," he added. The "Black Swan" reference has become ubiquitous within popular and business culture over the past couple of years.
As recently as Wednesday, a top authority on oil reservoir management and upstream technology called the BPoil spill in the Gulf of Mexico a "Black Swan" event that, however catastrophic, has the potential to improve drilling practices in particular and the industry in general.
Taleb expressed reservations about the future of BP, given the catastrophic fall in its market capitalization since the oil spill on April 20th.
He suggested that incentives in corporate culture are inherently flawed.
"Size is bad for companies," he said. "We shouldn't give a manager of a nuclear plant an incentive bonus. People are given bonuses to hide risk, to cut corners. The same thing happens with every large corporation. It permeates the entire economic system."