Dobra: Living with black swans
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Dobra: Living with black swans

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In 1697 Dutch explorer Willem de Vlamingh saw a black swan in Australia. Big deal, you say, so what? Europeans had seen black birds before and white swans, but never a black swan. It was an unimaginable event.

Since then, the term “black swan event” has come to denote events that are believed to be completely outside the realm of possibility. It was popularized recently by Nassim Taleb’s 2007 book “The Black Swan,” in which Taleb, a statistically-oriented commodities trader, described black swan events as so improbable that a reasonable person would be called crazy if they suggested it. For example, if on Sept. 10, 2001 I would have told you that terrorists would hijack four airplanes and fly them into buildings you would have told me I was crazy.

I raise the issue because of an article in the Feb. 4, 2020 issue of the Wall Street Journal titled “China is the Real Sick Man of Asia.” In the story Walter Russell Mead suggests that “so far, the 21st century has been an age of black swans. From 9/11 to President Trump’s election and Brexit, low probability, high impact events have reshaped the world order.” And, I would add, during that period of time the price of gold has quintupled. Are these seemingly unrelated events actually unrelated? I’ll come back to that question.

The quintessential nature of a black swan event is that they sneak up on you. As an example, I taught economics at universities for about 40 years, mostly at the University of Nevada. Part and parcel of the curriculum was explaining socialism vs. capitalism, centrally planned economies vs. market economies, with the Soviet Union and the U.S. as prime examples.

A historical fact is that socialist economies fail in numerous ways and every new socialist to come along, like Bernie Sanders and his groupies, says that’s because it’s never been done “right,” i.e., their way. No, I would say, it doesn’t work because it is based on dumb ideas – starting with the notion that you can substitute the dubious “wisdom” of government bureaucrats for millions of producers and consumers and give consumers what they want efficiently. And, along the way I would wonder out loud or at least to myself, how the heck could the Soviet Union keep going?

The Nobel Prize winning economist Herb Stein is famous for the Yogi Berra-ish wisecrack that “if something can’t go on forever, it won’t.” And he was right.

In the 1990s I did a lot of work for a gold mining industry group headquartered in Washington, D.C. and I spent a lot of time at their offices. Their office was on 16th St. NW, about 10 blocks from the White House, and when you walked across the street you could see the White House with the Washington Monument behind it. Directly across the street from their office was the Soviet Embassy and I could see it out the window of the office I used when I was there. Right next door to the Embassy was the University Club, an athletic club with a mediocre restaurant and hotel where I usually stayed when I was there. The University Club also housed a lot of staff from the Embassy who were easy to spot in the halls, lobby and dining room by their bad suits and, of course, they hung out together, spoke Russian and drank lots of vodka.

One morning in August 1991 I went across the street to the office and when I noticed the entry to the Embassy out my window I saw uniformed guards carrying Kalashnikov rifles. I thought that was strange because I’d never seen a guard there, let alone an armed one, but I dismissed it as those wacky Russians – at the office we joked that they must be expecting a vodka shipment.

After work I went back to my hotel room to make calls and change clothes. I met a Russian in the elevator carrying a box. He got confused or something, got off on the wrong floor, and couldn’t push a new button because of the box he was carrying, so I helped him out, held the door and pushed the button for him. In the process I noticed that the box was full of cocktail glasses embossed in gold with the seal of the Soviet Union. Must be having a party in his room, I thought.

I went to dinner with some gold traders and there was talk about strange things going on in Russia. The Russians supposedly had a lot of gold left over from the Czar, gold that they had looted from various places and they produced a few million ounces a year. They also had severe financial problems. If they sold their gold, one analyst suggested, there could be problems. It turned out, years later, that they didn’t have much gold. My theory remains that the kleptocrats in the Kremlin stole it, but that’s an opinion formed years later partially based on what happened after dinner that night.

I went back to my room and met another tipsy Russian in the elevator with yet another box. This guy was carrying a fax machine. And, then it hit me. These guys were looting the Embassy.

I turned on the TV in my room and saw that Russian Army tanks were surrounding the Parliament building in Moscow which they call the “White House” and, just like that, the black swan flew in and, poof, the Soviet Union had collapsed. And it happened like T.S. Elliot predicted the way the world would end: “Not with a bang but a whimper.”

Ever since then I have kicked myself for not offering the first guy in the elevator a few bucks for his cocktail glasses. They would have been great souvenirs.

So, I go back to the article by Walter Russell Mead and our age of black swans. His article does not suggest the collapse of the Chinese communist government. Nobody is going to suggest a black swan event because that would be crazy by definition. But, that’s the quintessential nature of black swan events, they sneak up on you.

Finally, is living in a black swan age responsible for the price of gold quintupling? I don’t know. I’m not going to suggest crazy things, either. But I will suggest that if the Chinese government can’t put a lid on their coronavirus problem it could get really ugly there and a lot of Chinese will be dumping their yuans for gold. I’m not predicting, I’m just saying … black swan events do not announce their arrival in advance and there are a lot of potential dumpster fires out there beside China.

Dr. Dobra is a retired professor of economics at the University of Nevada, Reno; Director of the Natural Resource Industry Institute, and a Senior Fellow at the Fraser Institute.


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