Just like LTCM

I wanted to follow up yesterday's post on the myriad of challenges that, if understood, would dissuade us of the notion that we are going back to the economic conditions of 2005 anytime soon. Yesterday President Obama released his budget for the upcoming year. It contains enormous deficits today with projections for lowering it in the future.

We don't want to get bogged down in the present discussion over taxes and spending, but I do want to point out one of the core assumptions of the budget. To reduce the deficit in future years, it is assumed that the economy will recover to an annual growth rate of 3%. The idea is that we spend and/or cut taxes today, that gets the economy moving again and then the growth puts us on a more stable financial footing.

Incidentally, this is essentially the plan of the majority of Republicans as well, with more emphasis on tax cuts over spending. In other words, the bi-partisan approach of the governing establishment of the United States is that growth will ultimately free us from the constraints we find ourselves in.

But what if it doesn't? What is Plan B if growth fails to materialize as projected?

I'm going to share another video of Nassim Taleb. For all of you hyper-partisans out there that will be bothered by the headline, try and listen to what he says. He's essentially arguing that we are doubling down on a strategy that has not worked, ignoring the core problems in our system, rewarding the elites that caused these problems, and that the people that will pay the price are the poor and elderly. Taleb is not politically partisan.

He also compares the current cadre of economists and financial advisors running the country to Long Term Capital Management (LTCM), which is a brilliant analogy. I should write a longer post someday about LTCM, but in brief, they were a notorious hedge fund that famously blew up, losing billions, forcing a huge bailout and almost sinking the entire market. The insight of Taleb's is based on the knowledge that it was a bunch of extraordinarily smart, highly educated people that founded LTCM. The best and the brightest, so to speak. And they were so confident in their collective ability to predict the unpredictable, that they made huge, highly-leveraged bets on the future that ultimately went bad. Their own hubris, their belief in their significant, collective intelligence, sunk them.

Today we are making enormous bets that the future is going to be a much-improved version of the present, looking a lot like the pre-correction past. That it would all come to pass as these cheerful economic models predict seems beyond wishful thinking, approaching fantasy.

So what is our Plan B? The answer freaks Taleb out. Me too. There is no Plan B.

This means that, at the local level, our Plan A has to be to make our places more resilient. We have to understand all of this chatter in Washington and the state capitals for what it is. Our focus today must be on how to make our own towns and neighborhoods strong. That's the message of yesterday's post, this post and everything we do here at Strong Towns.

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