/Black Swan Event

Black Swan Event

“History repeats itself, first as tragedy and second as farce.”

The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001, and later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable.

Introduction – Black swan event

A black swan is a rare, unpredictable event with the potential to have a huge impact on the world. These events are extremely rare and outside the realm of regular expectations, yet have a severe impact after they hit, and seem probable in hindsight when plausible explanations appear. Furthermore, the following term appeared when Europeans believed all swans to be white until 1967, when a Dutch explorer spotted the first black swan in Australia. Hence, the metaphor “black swan event” is derived from this unprecedented spotting in the 17th century, and how it upended the West’s understanding of Swans.

Past Examples of Black swan events that have changed the financial world:

1.  Asian Financial Crisis, 1997: The financial crisis came at the end of staggering growths of Asian Tigers including countries like South Korea. The exploding of the asset bubbles resulted in losses of over 70% in the currencies & stock markets of these countries. The growth in the export-oriented economies of the region resulted in a great influx of Foreign Direct Investment. Furthermore, with the investment inflow, the Governments & Corporations began to accumulate large public debt from the banks with ambitious infrastructure projects & bold spending plans respectively. The unsustainable property market of Thailand proved to be the tipping point as it collapsed after Somprasong Land’s default and Finance One’s bankruptcy in early 1997. The impacts of these events were later subsidized with the help of IMF.

2.  Fukushima Nuclear Disaster, 2001: The Fukushima Nuclear Disaster caused a massive loss of life and a major financial headache specially for Japan & the neighbouring region. Furthermore, the 8.9 magnitude earthquake & the 100ft Tsunami hit the Northeast shoreline of the island nation on March 11, 2011, causing the death of 28,000 people. The corresponding natural disaster severely impacted the economy of Japan along with the radioactive leak which affected the social health of the nation. Furthermore, 11 of the 50 nuclear reactors were shut down after the disaster by reducing the country’s electric generation capacity by 40%. Likewise, Japan had to import oil to replace generation capacity, which caused a further burden on a highly indebted economy. Not only did this lead to more deflationary pressures & stagnating growths but impacted the population rates of the nation as well.

Predicted Black Swan Event of 2022:

Reserve bank of India (RBI), Deputy governor Micheal Debabrata Patra in his latest article ‘Capital Flows at Risk: India’s Experience’ has warned about some eventful global development which might trigger an outflow of about $100 billion or INR 7,80,000 crore from India.

How the government plans to handle this recession:

The government is creating debt strategies to overcome this recession. Furthermore, the nation is creating an emergency corpus. The mechanism will be inbuilt, and the corpus will be capable of funding at least six-month expenses. Moreover, the citizens are recommended to consider earnings, expenses, and family structure to bear the inflation which will come along with the recession.

To conclude, financial markets have a mind of their own & there are times when a certain event or occurrence takes place which is beyond anyone’s control. At the end of day, life is unpredictable, therefore, it’s highly essential to be prepared for such events in advance and go with the flow.

“No number of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”

Written By Taneesha Arora (MYP 5C)