The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, March 18, 2011

Certainty and confidence beget uncertainty and volatility

The VIX index graphically illustrates how multi-year periods of calm, confidence and apparent certainty seem to lead to multi-year periods of extreme shocks, uncertainty and volatility. This is analogous to the problem I (and others) have pointed to with a seemingly successful inflation targeting regime: long periods of superficial price stability beget unwarranted reductions in risk aversion and overconfidence, rising leverage (given low interest rates) and, unknowingly, heightened risks of extreme system instability, which eventually manifests via asset price and real economy shocks.