In Praise of Flexibility (September 12, 2011)
This time may well be different, but not in a positive way.
Despite the unprecedented nature of the current financial/fiscal/debt crises globally, a remarkable number of observers evince great confidence in their diagnoses and predictions. Given the unpredictability of the many colliding dynamics, one has to wonder if their confidence is misplaced, or perhaps unduly derived from the intrinsically false precision of their models.
To mention just one example of dozens, if not hundreds, John Mauldin quoted London-based UBS analysts in his weekly E-Letter (free, and always interesting). The analysts peg the risk of a breakup of the European Union as "close to zero probability."
In my view, presented here many times, most recently in Why the Eurozone and the Euro Are Both Doomed (June 23, 2011), their "zero probability" is awfully confident about a complex situation that has no recent precedent--the Eurozone's inherent contradictions and the immensity of its debt and political black holes are truly unprecedented.
The analysts go on to estimate the potential losses per person in a breakup:
We estimate that a weak Euro country leaving the Euro would incur a cost of around €9,500 to €11,500 per person in the exiting country during the first year. That cost would then probably amount to €3,000 to €4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.
The number of assumptions behind this analytic exercise is as remarkable as the false precision of its predictions. What if the "weak" nation (their phrase, not mine) exiting the Union chose to assert its sovereignty and renounce the debts owed to the big European banks? What if its imports were aligned (by broad-based national consensus) with its exports? What if the people of that "weak" nation peacefully retired their parasitic financial Elites and bankers from power?
Even assuming their prepostrous estimates of losses were even close to reality, did they factor into their model the "value" to the "weak" nation's citizenry of freeing themselves from the jackboot of E.U. "integration," the code-word for the sacrifice of national autonomy and permanent servitude to the big European banks? Perhaps the citizens would gladly choose the "payment" of 10,000 euros in the present rather than pay 10,000 euros over time to the "too big to fail" German and French banks--a payment for which they receive nothing.
At least with a voluntary impoverishment, they win their freedom. The UBS analysts place zero value on autonomy and freedom, and a very high (and unstated) value on impoverishing the "weak" nations to preserve the financial Status Quo--what Zero Hedge rightly labels "Prevention of Harm to The Status Quo (TM)."
Meanwhile, to strengthen their implicit case for gradual impoverishment of "weak" nations via permanent servitude to German and French bankers (and a few Americans of course), the UBS analysts peg the cost of being bailed out to a modest 1,000 euros:
In comparison, the cost of bailing out Greece, Ireland and Portugal entirely in the wake of the default of those countries would be a little over €1,000 per person, in a single hit.
Notice how the UBS analysts carefully limited their calculations to the small economies. What are the costs to bailing out Italy and Spain? We can guess the number would be considerably higher, and thus less favorable to the "bail out the banks is the solution" scenario outlined by the UBS analysts.
Rather than strike a confident pose supported by estimates plucked from the air, we would be better served by a humility based on appreciation of ambiguity, contingency and the unknowable. What we do know is that assets have been misallocated on a grand, unprecedented scale globally, and that "moral hazard" has been introduced on an equally grand scale by Central Bank and Central State backstops, bailouts and guarantees of limitless liquidity.
We also know that the euro experiment is unsustainable, and the two choices universally offered by financial pundits--further integration (i.e. sacrifice of sovereignty), where officials from Brussels or elsewhere would assume collection of Greek property taxes, etc., in order to more effectviely stripmine the "weak" nations to serve the bondholders and masters of the big banks, or dissolution.
Perhaps there are future possibilities we cannot yet imagine. If so, it would be wise to not overestimate what is predictable, and wise not to evince a level of certitude that is impossible in a rapidly evolving, highly dynamic cauldron of festering risk and bubbling volatility.
In other words, let us speak in praise of flexibility, and avoid the siren songs of false precision and certitude. Let us confess that the situation globally and in Europe is unprecedented and thus intrinsically unpredictable; predictions based on the past or models plucked from the ether may prove to be not just inaccurate, but disastrously misleading to all those who put store in them.
A flexible outlook avoids the temptations of zealotry, which in these times often takes the form of stating what is "impossible" (i.e. near-zero probability) and what cannot possibly happen--even if it has already happened.
The only realistic prediction that can be made about the next few months is that
events will be unpredictable. What we see, think and believe as near-certainties now
may be undermined by events and new data. The greatest assets going forward may well prove to
be flexibility, adaptability, humility and openness to low probability events suddenly
transpiring despite previous estimates of their relative impossibility.
If this recession strikes you as different from previous downturns, you might
be interested in my new book An Unconventional Guide to Investing in Troubled Times,
now available in Kindle ebook format. You can read the ebook on any
computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.
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