When you have 17 books read and ready for review, you take a step back and say, “Are there any common themes here?”? I have three books that attempt to predict the future, and I play them against themselves here.? They give three different views of the future.? My own view is an amalgam of all of them — optimist, inflationist, and deflationist.? It will be interesting to see which scenario happens, if any.
The Global Debt Trap
This is the inflationist scenario.? Two Austrian School economists, who previously had published only in German, were persuaded by Martin Weiss to publish their next book in English.? Their last book, Das Greenspan Dossier, was a bestseller in Germany.? That book critiqued the easy money policies of Alan Greenspan, and the asset bubbles he was creating.
In this book, they look at the subsequent policy which doubled down on Greenspan’s blunders, where the bubble in private and financial debt is replaced with public debt.? They argue that this is an environment that will eventually result in inflation, and that those that want to preserve their wealth will need to invest in gold and other commodities in order to prosper, assuming the government does not come after you and take your gold from you.? This book takes the view that governments will become dictatorial as they get more desperate.
Quibbles
I enjoyed this book more than the other two, but I found its conclusion and advice to be more severe than is likely to result.? Also, the subtitle of the book overpromises.? If they are right, you won’t make a fortune, you will only preserve purchasing power, which may be better than most.
Who would benefit from this book: Most investors would benefit from this book a little.? It has the best explanations of what went wrong in the past and why.
If you want to, you can buy it here: The Global Debt Trap: How to Escape the Danger and Build a Fortune.
Full disclosure: The publisher sent this to me after asking me if I wanted it.
The Age of Deleveraging
Dr. Gary Shilling was way ahead of most commentators in arguing for a deflationary environment.? Give the man credit, and the erudite folks at Hoisington Investments who are quietly the best bond investment managers over the past 30 years.
But the book is utterly self-congratulatory over past calls.? Other books point at good past calls, but less frequently.? I began to tire of it and entered uh-huh-uh-huh mode, where I scanned the book in two hours.? The book sounded like a compilation of research reports on a wide number of topics reflecting an economy with too many claims on it, so best to grab the claims that are certain to be funded/paid.
Quibbles
The weakest point of the book is arguing why the government would not inflate its way out of the crisis.? Yes, so far there has been deflation, backed by the US government, but why should the US government continue to pay particularly when the costs of Social Security and Medicare become steep?? The book has no answer for that.
Who would benefit from this book: Most investors would benefit from this book a little.? I can’t rule out the deflationary argument, after all, that is what happened in the Great Depression.? But will it happen when there is no link to gold in the currency at all?? I am dubious.
If you want to, you can buy it here: The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.
The Next Boom
Technology and free markets conquer all.? Don’t get me wrong, I love the free market, and wish we had more of it in the US.? This is one of those books that assumes that we will necessarily get progress if we let people pursue their visions for prosperity.
Nice, but what about the present difficulties that have to be worked through in financials companies and the US Government?? How do we work through Social Security and Medicare?? The book says that we will grow our way out of it.? I say that it is difficult to grow when the government is over-regulating, and consumers are still over-indebted.
Look, I can see his arguments in the long run, but in the intermediate term there are big issues to be dealt with that the author gives scant attention to.
I appreciate the long-term arguments.? Many economics books fail to appreciate the degree to which economies can self-heal through growth.? But it takes a lot of time, and there may be significant crises before the greater prosperity.
Quibbles
My quibbles have already been given.
Who would benefit from this book: Most investors would benefit from this book a little. Those that are pessimists would benefit more.? The pessimistic arguments always sell more books, and this book bravely takes up the reasons why technological improvement will better our lives in the future.? Good for all of us that htey wrote this, even if they ignore intermediate-term problems.
If you want to, you can buy it here: The Next Boom: What You Absolutely, Positively Have to Know About the World Between Now and 2025.
Full disclosure: The authors/publishers sent these books to me after asking me if I wanted them.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
Closing
My heart is closest to the Global Debt Trap, but I have some sympathy for both of the other books.? Deflation is a major pressure, and we will have improvements in productivity even in the midst of trouble.? The question is what the US government will do to fund itself as its deficits ascend.? As I have said before, there are three answers: higher taxes, inflation, or default.? At least one of those will visit us in the intermediate-term.
The question is what the US government will do to fund itself as its deficits ascend.? As I have said before, there are three answers: higher taxes, inflation, or default.? At least one of those will visit us in the intermediate-term.
David,
Are you familiar with MMT at all. Cullen Roche of pragcap.com is a huge proponent of it.
http://pragcap.com/resources/understanding-modern-monetary-system
http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon
.
According to MMT, default is impossible because the U.S. Federal Government can simply “spend into existence” whatever money is needed. I’ve read, reread, reread again, and then yet again the MMT stuff from a variety of sources. From a strictly technical, operational sense they seem to be right.
.
Where they lose me, and seem to go off the track completely, is I don’t see how this ultimately could not be very, very inflationary. If the U.S. government simply chooses to “spend into existence” the money to meet all the promised obligations, it seems to me then we really would have “too much money chasing too few goods and services”. Given the underlying demographics at work I don’t see how future productive output can possibly match up with future promised benefits to retired Boomers.
If they are right, you won?t make a fortune, you will only preserve purchasing power, which may be better than most.
It would seem to me that the key point here….not from a moral sense but a practical one…is that we all can’t collectively maintain the purchasing power of our savings in this world of the debt supercycle (I’m working on getting through Mauldin’s book right now). For there to be winners in the future, there have to be losers for whatever that future level of output is relative to the claims on it (via paper money, or government debt, or gold and commodities).
I mean…If ALL ASSETS (paper currency, government debt holdings, gold and hard assets, equities) represent the total claims on society’s economic output then if gold and hard assets rise substantially in terms of purchasing power it means the other ones have to be losing. So really, holding savings in different assets represents a shifting in purchasing power from the “losers” to the “winners”.
Just trying to wrap my head around all this. I just know we aren’t in Kansas anymore, haven’t been since the 2008 meltdown, and probably are never going back. We are stuck in economic Oz and I’m just wondering who the Wizard is, who really has control, and what is just sound and fury of bells and whistle having no real impact.
When I talked with Chris Whalen recently, he expressed disdain for MMT/Chartalism. He said it was a one way road to inflation. I agree, sort of.
Yes, the government can always borrow more in its own currency from a mathematical standpoint. Practically, though, most governments give up borrowing in their local currencies once real interest rates get above a certain level. They know that the game is up, and corporations trying to borrow scream that the government is killing the economy. They have crowded out other borrowers. They may choose to borrow in a hard currency at that point, because it lowers borrowing costs, until that market shuts for them as well, or, they can finally decide to inflate away the debts.
Send the MMT proponents to small foreign governments to test their theories. They will learn that bond markets dry up fast when confronted with a party that does not play by the rules. As a bond manager, I have seen markets back up in response to perceived supply. When the supply is perpetual and growing, markets fall apart.
There’s no such thing as a free lunch. The MMT proponents are little different than those with perpetual motion or antigravity machines. Think about my post Fruits and Vegetables Versus Assets in Demand. Anything where the supply increases aggressively, and at zero marginal cost will find its price fall dramatically, and for a fixed income instrument, its yield rise dramatically.
My summary thought on the MMT folks is that they have not studied economic history, and have not traded bonds for a living. They commit the same errors as the neoclassical economists who use one-period models to demonstrate their theories, and do not grasp the effects from changes in expectations that are common to bond and other asset markets.
David,
First off, I love your work.
As for MMT – allow me to clarify. MMT is not theoretical. It is merely a description of the way a modern monetary system works. A govt with monopoly supply of currency in a floating exchange rate system can never run out of the money that it alone creates. The situation you describe above is the risk in such a monetary system – hyperinflation. And yes, that is a real risk which is why the government must be vigilant in sustaining the right level of deficit spending and taxation.
Many of the modern proponents of MMT use this framework to prescribe policy approaches. Those are purely theoretical and have little to do with the foundation of MMT, which is nothing more than a description of a modern fiat currency system.
Best,
Cullen