This book is loaded with pearls of wisdom. That said, I'm disappointed because the book could have been so much better. This is one of the most disorganized, undisciplined and poorly edited book I've ever read. Essentially, the book needs a careful and final revision.
Authors Peter Tanous and Jeff Cox ("T&C") make their principle points immediately, right in the "Introduction", as follows:
The US is heading towards financial catastrophe that will paralyze the country and lead to severe inflation plus a stock market crash of perhaps 2000 to 3000 points on the Dow. The root causes are debt, deficits, and inflation, specifically the rising and unsustainable debt in Europe, and the rising deficits in the US.
Moreover, according to T&C, it is too late for any practical initiative to prevent this upcoming financial catastrophe.
But, according to T&C, the US never will technically default on its debt, because we always can create new money ("print money"), thereby permitting the debt to be paid in cheaper (inflation ravaged) dollars.
Then, what's all this (as in the book's title) about "Demise of the American Economy"? We've had major stock market crashes before, about 27% on 10/27/87, but we rebounded nicely, and there was no "demise of the American economy". Ditto for severe inflation, which reached 14.76% during the Carter years. But here it is the book's title, not its content, that gets the grade of "F".
The analysis of inflation in chapter 4 is highly informative. Ask your neighbor to define inflation, and he'll say: widespread increases in wages and prices. But actually, increased wages and prices are the effects of inflation, not inflation itself, which is defined as an increase in (ie, inflation of) the money supply. "Pump so much money into the economy that it outstrips an optimal level of goods, and you get inflation" . . . "too much money chases too few goods" and you get higher prices. Later, in chapter 7 (why not in Chapter 4 on inflation, where it belongs), T&C quote the President of the St. Louis Federal Reserve: "The solution to [wage-price] inflation is the elimination of its cause. . . Excessive money growth is the cause of [wage-price] inflation, and a slower rate of money growth is the solution." T&C describe briefly inflation during the Diocletian era of ancient Rome (301-11 AD), the Weimar Republic in post-WWI Germany (1919-33), and current day Zimbabwe, where hyper-inflation roars along at about 98% per day, and a single egg, selling for about 32 cents in US currency, goes for 50 billion Zimbabwe dollars. Most significantly, T&C discuss the Jimmy Carter period in the US (1976-80), which saw inflation at 14.76% (plus interest rates at 18%, and 10 year Treasury Notes at 12.75%). T&C note that Carter's choice for Fed Chair, Paul Volcker, got the inflation rate down to 3.2% in only two years (but too late to save Carter's reelection bid) by shrinking the money supply while retaining high interest rates. Unfortunately, T&C do not tell us how inflation got to 18% in the first place, specifically whether (per the theme of this book) it was the result of debt and deficits. A mind boggler: T&C state that the US money supply is increasing at only 2% per year (p. 61), but then inexplicably conclude that "The US economy is headed for a period of massive inflation." Massive inflation with only 2% growth in the money supply? Maybe T&C have a logical explanation, but they don't articulate it.
Chapters 2 and 5 (why aren't these chapters back-to-back?) both address the debt crisis in Europe, and contain some of the very best material in the book. Chapter 2 contains a good short history of the European Monetary Union (EMU), along with an excellent analysis of the fatal flaw inherent in the Euro, namely that each member state is sovereign in establishing its own budget, but no EMU member has individual power to raise or lower interest rates, or to inflate the money (Euro) supply, so as to stimulate its economy, when necessary, and to more easily pay its debts. Five EMU members - Germany, France, Belgium, Austria and the Netherlands -- are relatively affluent countries with well developed, mature, and stable economies. Five other members - Portugal, Ireland, Italy, Greece & Spain (the so-called PIIGS) - are generally less affluent, and have economies that are much less established and stable. From the outset, the EU seemed a mismatch, but initially, things worked OK. Then in the early and mid 2000's, for a variety of different reasons, all 5 PIIGS sustained severe multi-year budget deficits, with total overall debt rising beyond their ability to repay. Greece was the first of the PIIGS to need a bailout in order to avoid actual default, and in 2010 Greece in fact was bailed out short term by the IMF & the EU. T&C opine that Greece, Ireland & Spain all will actually default before the end of 2012.
Chapter 5 addresses what happens next, after no doubt remains that Greece, Ireland and Spain will not ever (and cannot ever) repay their loans. T&C "see no good solutions" but offer 4 possible scenarios: (1) Maintain the EMU and allow some countries to default; (2) Continue to bail out countries in trouble; (3) Create a 2-Tier Eurozone; or (4) Shrink the Eurozone. T&C conclude that Scenario (4) is the most realistic. Greece and Ireland (and any other member whose default is inevitable) must actually default, either in whole or in part, and then leave the EMU, either voluntarily or involuntarily, returning to their former currencies, ie, Greek drachma, Irish punt, etc. The big losers in any default, full or partial, will be European banks, which hold most of the near worthless paper, and under no circumstances will be able to withstand multiple defaults. T&C opine that ministers of the entire EU, not just the EMU, will arbitrate and eventually dictate the extent to which the departing members will be forgiven their unpaid debts, and the extent the resulting losses will be allocated among the banks and the healthy members of the EU. T&C then opine that after the dust settles on the shrunken EMU, the Euro might well rise against the weakening dollar, and emerge stronger than ever.
I was confused by parts of these chapters. The discussion involving the 5 strong members of the EMU and the 5 weaker PIIGS, plus Figure 2.1 showing expenditures in only 10 EMU members, led me to believe there were only 10 members of the EMU. Then T&C mention that Estonia had joined the Euro in mid-2010, so I checked Wikipedia and learned Estonia was the 17th member. Late in chapter 5, T&C mention the 16 member EMU that might be reduced to 10 or 11. These are not horrendous mistakes, but they exemplify the sloppy editing that pervades the book.
Chapters 6 (Crisis Hits US) and 1 (It's the Deficit, Stupid) both address (with considerable redundancy) the undisputed financial facts, along with projected trends, that are propelling the US towards collapse. T&C cite with approval, and essentially adopt, the work of Reinhart & Rogoff, who analyzed 8 centuries of financial data, and concluded that a "tipping point" occurs when national debt (not including in-house debt, like the US bonds held by Social Security) exceeds 90% of gross domestic product (GDP), at which point the massive debt burden, and interest thereon, stifles economic growth by more than 2% per year, meaning that, as a practical matter, the debtor nation cannot grow its way out of debt. (The US did in fact grow its way out of debt during the Clinton years, but the debt was much lower than 90% of GDP.) The nonpartisan Congressional Budget Office (CBO) estimates that we will hit the 90% "tipping point" in 2020, but T&C believe it will happen much sooner, because they believe CBO estimates of GDP growth in excess of 5% in several future years is wildly optimistic.
Although our national debt is massive, the composite interest rate on it is relatively low. T&C believe that as new bonds are issued to refinance maturing, older bonds -- 40% of outstanding bonds/national debt comes due in 2011, another 30% over the following 5 years -- and as even more new bonds are issued to finance new deficits voted by Congress, the interest rate will increase by as much as 4% over the current rate (presumably to about 7.5% total, which would be in line with historic rates). That would raise interest payments to $1 trillion per year. I can't imagine 1 trillion of anything -- jellybeans, penguins or dollars -- but T&C put it in perspective: 1 trillion dollars equals about 100% of all individual income taxes paid. Imagine that: 100% of personal income taxes would be needed to pay interest (never mind principal) on the national debt, while zero percent - nothing, nada, not a penny - goes for national security, schools, airline safety, FBI, food stamps, or national parks.
With these factors pressuring the economy, T&C speculate that the "trigger" for the stock market collapse might be a failed Treasury auction. T&C scenario: Treasury goes to market with a bond issue, but there are not enough bidders/buyers to take the entire offering. Surprise! This has never happened before; typically there are 2 to 3 times as many bidders as there are available bonds. This loss of confidence in treasury obligations triggers the catastrophe. Interest rates spike to 8%, or 10%, or even higher. Investors begin to pull money out of risk assets. Gold and other commodities soar. Banks and the Federal Reserve fight valiantly to curtail a run on the banks. The stock market crashes. It's the worst financial crisis in US history.
But what then? Can the US bounce back from "the worst financial crisis in US history"? T&C insist that the US never will default, but otherwise, the subject of bounce back is the weakest part of the book.
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