Black Swans: Few Things Are Impossible

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Buffett supposedly once said something like, “We’re paid to think about things that can’t happen.”  What would be examples of this?

  • The Housing Bust, and the ensuing funk with banks.
  • Hurricane Katrina, and the flood that it helped create.
  • The Tohoku Earthquake, with the surprising damage to the nuclear reactor
  • Four hurricanes hitting Florida in 2004.
  • The Fall of the Soviet Union
  • The Murderous effect of forced collectivization in the Ukraine, China, Cambodia, and other places.
  • The rise of Hitler
  • Chernobyl
  • Long US interest rates would fall below 5%.

This will be a short piece, but what I want to stress is that things that pundits say can’t happen sometimes do happen.  The application is that it is not impossible that the US Government defaults for political reasons.  Brinksmanship is a tough and heady thing, and it is possible for all parties to miscalculate and be intransigent.  Pride brings out the worst in mankind.

I’m not saying a default will happen, or that it is more likely to happen than not.  I am only saying the probability is non-zero, like rolling boxcars or snake-eyes at the craps table.  Thus credit default swaps [CDS] on a US default have risen considerably, because a few are hedging the possibility.

Personally, I think it would be interesting to see what would happen in a default, because we don’t have a lot of data points there, even for a short default.  That said, vain curiosity of mine should not be satisfied to the harm of many, so would prefer that the GOP and Dems would agree to a short-term extension of the debt ceiling combined with spending reductions.

But nothing is impossible among men.  Pride has often driven the otherwise sane to take courses of action that harm their enemies more, even as their friends are harmed also.

The Bible says, “An eye for an eye, and a tooth for a tooth.”  People look upon it as cruel, but it was meant as a limit.  You can’t force suffering at a greater level than you were harmed, and the threat of equal suffering would lead offenders to negotiate a monetary settlement to protect their eyes and teeth.

But when men will not restrain themselves, and seek to gain revenge, all manner of bad consequences occur.   There is something to having limits on political processes.  There is something to having manners in society.  There is something to having personal self-control.

We have lost a lot as a society as the Greatest Generation has handed power over to the Baby Boomers.  We agree far less on what society ought to pursue, and what is right and wrong.

That is why the fights in DC are so bare-knuckled.  Gerrymandered districts send ideologues to Congress, which have very different views on policy and ethics.

Back to the main point — when the two or three sides of the debate have widely different views should it be surprising that it is possible that we may end up with a stalemate leading to a temporary default?  A permanent default is another matter — I don’t think the politicians are that stupid, at least not yet.

By David Merkel, CFA of Aleph Blog

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