Tail Risk Killers: How Math, Indeterminacy, and Hubris Distort Markets

CHAPTER 5The Macreconomics of Decontrol: Multisigma Sovereign Risk

Everyone knows the current global economic order and that the global imbalancing act is unsustainable. So it will change. The most interesting aspect of the coming change is its nature, which is unclear. What can be counted on is that unsustainable phenomena such as current account imbalances, negative savings rates, and seeming infinite asset price appreciation will correct. One way or another, falling savings rates and rising deficits become rising savings and falling deficits.

The tail-risk killers at the Fed and other central banks are conditioned by training and organizational culture to think they are all-powerful. They are not. Nor are they able to influence all economic ...