The black swan sequester

By Zachary Karabell
March 1, 2013

Everyday, we are treated to a new peril: Today we have sequestration, a word not much in anyone’s lexicon until recently. The mandated cuts to the federal budget, $85 billion by last count, will further stunt anemic economic growth, or so economists and the Congressional Budget Office guesstimate. The prognostications surrounding the sequester have been grim, with White House Chief of Staff Denis McDonough warning of a “devastating list of horribles,” ranging from severe travel snafus to the end of vital education programs.

In the political media, in Washington, and in the defense industry (which will see especially draconian cuts), all of this is Big News. But after months of buildup, the end-of-days drama is ending with a resounding thud. The meh reaction of financial markets of late is particularly telling (the Dow flirted with its all-time high this week). Markets are mood rings, and the mood now is one of boredom and fatigue. Even the New York Times led page 1 not with the sequester but with a studied picture of a nun saying goodbye to the retiring pope.

This is a good thing. Since the housing market imploded six years ago, we’ve been suffering from black swan fever. When Nicholas Taleb penned his passionate polemic about the inability of financial markets to allow for unanticipated and rare events (“black swans”), he did us all a great service in highlighting the narrow-mindedness that can have dire consequences.

Then the pendulum swung too far. Instead of complacency about rare, destabilizing events, the markets, the media and the politicians developed a fixation: Find the next black swan. That has led to a belief that any sign of stability, any indication that the worst may have passed is simply a false dawn. Luckily, that skittishness has passed.

Yes, financial markets have been in a holding pattern of late. But if what is happening now had happened in the past few years, the markets would have been roiling. Flat markets now are a good sign.

This week alone, Italy’s elections did not go as many outside of Italy would have hoped, but the markets shrugged. Instead of ushering in a center-left coalition committed to austerity and labor market reform, there was an indecisive result whose main winner was a professional comic whose message is throw-the-bums-out. Later in the week, the official Italian unemployment figure was announced as close to 12 percent and economic activity contracted more than expected.

With the week bookended by renewed concerns about the eurozone and the sequester, you would have thought markets would easily slip into a panic that has been all too familiar of late. They have not.

In fact, during the past three years of rolling crises, equities and bonds have been on a quiet tear. Since May of 2010, the S&P 500 is up nearly 40 percent, and there has been a boom market in bonds as yields have fallen globally. That has not helped people who put their retirement income in government bonds or money markets, at least not directly, but it still demonstrates the disconnect between the climate of fear that has suffused our economy and political life and the relatively stable bull market that has been chugging along at the same time.

Markets, of course, are easily mistrusted. The frequent response if and when the strength of financial markets is noted is to dismiss them as a) irrelevant to the real economic lives of most people and b) artificially and hence temporarily inflated by central banks around the world pumping easy money.

These rejoinders reflect both long-standing and sometimes justified anger at the way financial markets have imperiled global prosperity repeatedly over the past century. But they also reflect a black swan culture that has rejected any metric that doesn’t reflect crisis, and thankfully, that culture appears to be waning. Each new crisis in the last few years – Greece will leave the eurozone; China will implode; the U.S. will default; debt will destroy us – has fueled panic. But the whole point of black swans was that they are rare and unforeseen, not that they are common, frequent and easy to identify. Markets, media, politics, the blogosphere, etc. have been so gripped by that fever that each new challenge is perceived not as an issue to confront but as a crisis about to derail us.

The end of crisis culture doesn’t mean we should cease being vigilant about risks, but it is a needed and healthy shift. Crisis and panic are not optimal states for addressing problems, which may be why Washington remains incapable of actually addressing problems. Washington, however, is not the end all and be all of American life, especially not of economic life. There is life outside the Beltway, not just in the United States but in thriving economies around the globe, that do not revolve around the desiderata of the beltway. The dynamism that abounds – whether in Silicon Valley or São Paolo, whether in Hong Kong or Austin – is one reason so many companies have been faring so well, and in part why financial markets have been quietly booming.

You can object to that rationale, as many certainly will. You can claim the game is rigged, that the few are benefitting to the exclusion of the many. Some of that is true, but only some. We’ve been stuck in a time when the only story told or deemed credible is the anxious one. We’ve been gripped by black swan fever. At last, perhaps, the fever has broken.

PHOTO: A black swan and flamingos are seen in their snow-covered enclosure in Jerusalem’s Biblical Zoo January 10, 2013. REUTERS/Ronen Zvulun

12 comments

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People simply cannot argue at the same time that the 85 billion cut will not solve anything and that it will cause a catastrophe. If it really has no effect, then it also won’t cause a catastrophe. Let’s be realistic, what is an 85 billion cut compared to a 15 trillion economy?

Posted by pbgd | Report as abusive

“You can object to that rationale, as many certainly will.”

I wouldn’t call it a rationale, but rather a belief, or an attitude.
Looks like the author is yet another follower of the new ‘optimistic economics’.

Posted by reality-again | Report as abusive

The simple truth is that once again, “we, the people” have been lied to. Both the Republicans and Democrats claim to understand that America CAN’T keep “doing what we’re doing” financially. They even agree in rough terms of how much in cuts is necessary. Why is there no building on this “common ground”?

Grade school math tells anyone serious that the “amount at issue” in the Sequester is less that necessary to have a meaningful, long term effect on our current and anticipated deficit “forward” And yet BOTH sides have their “the sky is falling” message that ONLY THEY have a single approach that will “save the day”. Balderdash!

I think we have a Sequester today because BOTH sides know we need it as an excuse to work together. Don’t ask me WHY they NEED a “crisis” to do that…they have it. But this “crisis” ISN’T over the actual “dollar value” of Sequester cuts, but the blind “meat ax” impersonality with which they are to fall and where. Fine.

So let our Republican and Democrat wizards meet and work it out. After all, the “issue” of additional taxes is no longer “on the table”. It’s DONE, separately. No one that understands good faith negotiation would try to get another bite at that cookie. Unfortunately this “new administration” seems blind, deaf and dumb in that regard. It’s time for them to “suck it up” and accept that.

There is one, and ONLY one reason the two sides will not be able to structure the amount of cuts so that the loss of these dollars remove fat and not muscle. They don’t want to. I believe the unfortunate truth is that BOTH parties WANT the size and power of our federal government to continue to grow. If the Sequester cuts actually are not painful to taxpayers, they may yell for more. End of gravy train. So, in my opinion, their worst nightmare is that the Sequester WORKS.

I genuinely believe just about every elected individual today in Washington is more a representative of those whose money keeps them in office than of “we, the people”. Again and again both parties give us choices at election time of “bad” and “worse”.

We need new parties, new ideas, new people if ever Americans are to stop doing the same thing and expecting different results. In short, we need to be more demanding and less easily satisfied or distracted. How about an “Accountability” party? You’re OUT after your first term if you don’t “get the job at hand done”!

The people we send to Washington today have amazing power, shovel out incomprehensible amounts of money, and yet achieve just about zero in terms of effectiveness or efficiency in addressing and resolving problems (which is their JOB). Why do we not hold them accountable for demonstrated, ongoing failure? Why do we keep re-hiring them?

Posted by OneOfTheSheep | Report as abusive

With certainty the obama team will deliberately create a crisis to cause pain to the people and the economy and then put the entire blame on the GOP. This is how politic works in the US when the government is so corrupt that they don’t even know the meaning of corruption. Obama mean strategy is to tax everybody and give it to his crony supporters who will pay for his campaign and democrat politicians, so tax 99% to pay the 1%.. his strategy is exposed and people will rise up against him. Never in history have people seen such an incompetent and corrupt administration at work

Posted by btttan | Report as abusive

@ OneOfTheSheep –

Your seriously deluded “personal observations” (i.e. biases) are more than a “brick-load short of reality”.

I suggest you read my comments to you in the article “Can diplomacy prevail with Iran”, in which I answer your latest rant completely and fully.

You state, “The simple truth is that once again, “we, the people” have been lied to”, but, in fact, there is no “we the people”. There is no “common cause”, which you claim exists between the wealthy and the 99% that we should/could use to save this nation.

The government does not run in some nebulous vacuum by nebulous beaurocrats. It is run by the wealthy elite, and what we see is the disastrous result of that happening (again).

We don’t need “new parties, new ideas, new people”.

What we NEED is the wealthy forced out of power.

http://blogs.reuters.com/great-debate/20 13/03/01/can-diplomacy-prevail-with-iran  /

Posted by PseudoTurtle | Report as abusive

Think of it terms of lost capital, lost GDP, and future liability, and you will get a sense of why the markets are an actual drain on the economy.
I use the word economy to reflect, not just financial and corporate profit, but essential jobs and commerce that create and replenish the wealth effect.
The instances of financial fraud and chicanery, you somehow managed to marginalize, are a feature, not a bug. You only have to visit Reuters homepage for a glimpse of this.
Sheldon Adelson – I know, i get it, he creeps me out also – is being investigated for a – get this – $100,000 bribe. So??
Jon Corzine wiped out $1.6 billion in customer account, and you can’t even get this guy’s name mentioned in print.
And that is just the simplest of glimpses into what comprises our financial system.

You won’t arrive at a healthy economy with the various forms of financial practice.
The financial sector now creates more long term problems in the name of short term profit then is sustainable.

Posted by Laster | Report as abusive

@PseudoTurtle,

If you check my latest comment under the article “Can diplomacy prevail with Iran”, you’ll find that “the ball” has been “back in your court” for some time now.

And I do appreciate your earlier post in that thread with such specific details of the ever-bubbling hatred you hold inside you towards America. That insight into your mind was nothing short of amazing. You have my condolences.

Posted by OneOfTheSheep | Report as abusive

I think Zack makes a good point. How long is a crisis, a crisis, before it becomes just another day?

The world economy is not going to shutdown. People still need stuff and there are more people everyday. Get over it.

A couple of resets and this is all a distant memory.

Posted by unobtr | Report as abusive

I’ve written in other posts that I think this is just another game of political chicken. Not being an economist, lobbyist or Congressman – the last two being the only two who know the truth – how can Congress have not seen this coming? They did of course, and they planned the national drama around it.

Also I’ve asked the (rhetorical of course) question of how these spending cuts are going to wound the economy to hemorrhaging when a) they’re over 10 years and b) they’re only a small amount compared to what the Republicans are screaming for.

Why are we getting so worked up? As unobtr wrote, “a couple of resets and this is all a distant memory” and this crisis will be over in oh, about 30 days, and the next one will be served up for our American dinner – like the next debt ceiling. Remember that one?

When that national disaster passed, the Republicans were front and center within 24 hours threatening the next one. Yawn.

Posted by JL4 | Report as abusive

I get it, this is all about a crisis of confidence and nothing very real is involved. Some more taxes and a few cuts in spending and the problems of our imagination are over. The only trouble with that idea is that there is real money involved and real productivity along with real social and trade dynamics.

Money keeps being spent that we do not have an ability to offset through productivity gains preventing real progress concerning our wealth. The Fed uses smoke and mirrors to create an inflated stock market and a reflating property market to make us all feel better and less concerned because – our wealth is back.

Well the reason we had the crisis is because that wealth was never really there. It was a creation of phony expectations. Expectations brought on by building things because the money to build them was there – but the earnings to pay for them never were. It was just recirculation of leveraged bets using free money stolen from those who are unable to defend against it. The Fed works overtime restarting that wheel.

The reason the top percent earners gain is because the game is rigged for them to gain. The reason the remainder of the economic classes fall behind is because the game is rigged against them. So where does this spinning wheel stop? It’s anybody’s bet, but it is sad to think that rigged bets are the reality. So far all the bets the Fed and the Federal Government have made to aid the common man have come up snake eyes.

Maybe they should keep their sticky fingers out of the economy’s money pie and allow it to become bigger in its own way? Maybe they think and behave like communists due to becoming entranced by what communist China has done recently? If so they need to gain a longer term perspective.

Posted by keebo | Report as abusive

The political aristocracy firmly believes they can manage a $15 trillion economy across eight different regions of the country. This is much the same “elitist” thinking of the old Soviet Union’s “five year plans” (that were modified every two years because they were incapable of predicting the future. Imagine that.)

Those that do not know history are condemned to repeat it. In the meantime, the working American suffers the incompetency and economic illiteracy of those we have elected to do the nation’s business.

Posted by COindependent | Report as abusive

PseudoTurtle
Your response to the perceived delusion comment is delusion. The 99% reference gives you away.

Posted by Crash866 | Report as abusive