Blowing Up: The Italian Debt Crisis, The Experts That Missed It – And What’s Next

With the crisis unfolding in Italy, I can’t help but remember the lessons from the underrated book – Fat Tail by Ian Bremmer.

This book is an excellent read and explains how political risks can lead to severe economic and social risks.

But first, what exactly is risk? I sum it up into three things...

1. Probability – how likely is the risk to happen

2. Impact – if it does happen, how big will the loss be

3. Consequences – what is exposed to the impact, what are the second order effects (basically what’s the chain reaction from it)

Once we know the three parts of risk, we can start to understand how it works and what will be affected.

Bremmer’s book shows that throughout history, the government’s political risks – caused by their near-sighted policies – can lead to unknown monumental shifts and catastrophes. . .

“What do we mean by a ‘fat tail’? Fat tails are the unexpectedly thick ‘tails’ – or bulges – that we find on the tail ends of distribution curves that measure risks and their impact. They represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it… – Ian Bremmer, Fat Tail.

For instance, in the mid-1700’s, England’s King George was facing severe financial problems. Because of the costly French and Indian War, the British Empire was deep in debt. They needed to generate revenue – and quickly.

The Empire’s solution was to pass a series of new taxes designed to profit from the colonies in the 1760’s – the infamous ‘stamp act’ and ‘tea tax’. But these were wildly unpopular. And led to the colonies fighting for their independence in the American Revolution.

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Disclaimer: The piece is from my original write-up @ Palisade-Research.com - all ideas expressed and charts are my own. Sources and quotes are credited. 

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