Financial Reckoning Day Fallout E-Book

Addison Wiggin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Agora Series
• Sprache: Englisch

Seitenzahl: 809

Veröffentlichungsjahr: 2009

Beschreibung

How to harness inspiration for successful, long-terminnovation Why does real innovation elude so many companies, including thebiggest corporations with top resources? The problem, in all cases,is that they are lacking inspiration. In Look At More, AndyStefanovich outlines inspiration as a discipline and a systematicapproach for innovation that when applied consistently, bringslong-term, sustainable results. It is about learning to thinkdifferently and getting others to do the same. By focusing on thefront end of the Inspiration?Creativity?Innovation continuum, Lookat More brings a fresh perspective to a popular conversation thatis experiencing fatigue. Inspiration is the most effective way ofunleashing innovation and this book shows you how. * Introduces Play's LAMSTAIH process, which stands for Look AtMore Stuff; Think About It Harder, a systematic approach forharnessing inspiration * Outlines the five key drivers for finding new ideas that leadto innovation--Mood, Mindset, Mechanisms, Measurement,Momentum * Filled with strategies, tactics, insights, and cases that showhow to instill inspiration at all levels CEOs, managers and entrepreneurs alike will find Look At More aninvaluable tool for navigating the ever-hungry innovation mandateand turning inspiration into a strategic competitive advantage.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Foreword

PREFACE TO THE 2009 EDITION: CONFESSIONS OF A NEWSLETTER MAN

Y2K AND OTHER TRAGEDIES NARROWLY AVERTED

THE TROUBLE WITH TROUBLE

BASIC TRUTHS ABOUT THE STOCK MARKET, HOUSING, AND THE ECONOMY

Acknowledgements

Introduction

CHAPTER 1 - THE GILDERED AGE

GURUS OF THE NEW ERA

DREAMERS AND SCHEMERS

THE VALUE OF INFORMATION

GRAFFITI ON THE INTERNET

REFILLING THE PUNCH BOWL

THE ETERNAL PROMISE OF A NEW ERA

CHAPTER 2 - PROGRESS, PERFECTIBILITY, AND THE END OF HISTORY

MAKING HISTORY

MYTHS OF PROGRESS

MILLENNIAL OPTIMISTS

LA DÉBÂCLE DE 1940

THE SMART MONEY

VALE OF TEARS

WHEN GENIUS FAILS . . . AND FAILS . . . AND FAILS . . .

BEAR STEARNS: PRELUDE TO A PANIC

THE FALL OF THE DARK TWINS

RICH MAN’S MARXISM

CHAPTER 3 - JOHN LAW AND THE ORIGINS OF A BAD IDEA

MURDER ON THE RUE QUINCAMPOIX

MISSISSIPPI MANIA

GENTLEMAN GAMBLER WITH A PAST

A SHOT AT THE BIG TIME

OUT OF THIN AIR

END OF THE ILLUSION

TODAY, THE POTOMAC

HELL TO PAY

FIN DE BUBBLE EPOQUE

COME WHAT MAY

CHAPTER 4 - THE ERA OF CROWDS

WHEN A CROWD TURNS INTO A MOB

THE MADNESS OF CROWDS

WISDOM AND TRADITION

MASS COMMUNICATIONS

BEYOND NIETZSCHE

GROSS LUMPEN DENKEN

ABSTRACTIONS AS PUBLIC KNOWLEDGE

A FACT IS A FACT, AND YET . . .

EVEN THE PROS GUESS WRONG

CROWD CONTROL

LONG SLOW MARCH OF HISTORY

“CAPITALISM” SUFFOCATED

THE MYTH OF DEMOCRACY

“LIBERTY” REGULATED

HIGH-MINDED CHUTZPAH

THE LAND OF THE FREE

A TIME FOR EVERY PURPOSE

HEADING FOR THE EXITS

LE BON’S “GENERAL BELIEF”

THE AMERICAN CENTURY

DEMOCRATIC CONSUMER CAPITALISM

COME THE REVOLUTION

ASSAULT ON TRADITION

THE LONG, SLOW, SOFT DEPRESSIONS OF THE MODERN AGE

COLLECTIVIZED RISKS

THE GREAT BARGAIN

SHAREHOLDER NATION: FOR BETTER . . . OR WORSE

CHAPTER 5 - TURNING JAPANESE

THE JAPANESE ARE DIFFERENT

JAPAN INC.

THE INVISIBLE HAND

EXPECTING A MIRACLE . . .

. . . AND GETTING ONE

THE NEW RACE

A WORLD-CLASS, CREDIT-GOOSED SPENDING BINGE

DISSAVERS, DEBTORS, AND OTHER MALCONTENTS

COLLAPSE OF THE MIRACLE ECONOMY

RATES RISE, STOCKS FALL, AND LOANS GO BAD

THE LOST DECADE

“OUR WEALTH IS SLIPPING AWAY”

THE ONOUE AFFAIR

OBVIOUS PARALLELS

PLUS ÇA CHANGE, PLUS C’EST LA MÊME CHOSE

LACK OF IMAGINATION

COLLECTIVE HALLUCINATIONS

JAPANESE INVENT MANDATORY BORROWING

FAILURE OF CENTRAL BANKING

FED GETS WORRIED

WE SMELL SUSHI

DR. GONO OR: HOW I LEARNED TO STOP WORRYING AND LOVE INFLATION

THE LONG, SOFT, SLOW SLUMP . . .

CHAPTER 6 - THE FABULOUS DESTINY OF ALAN GREENSPAN

GOLD’S GOOD-BYE

LINCOLN’S GREENBACK

FROM DECADENCE TO DEPRESSION

THE MOST RATIONAL WOMAN IN THE WORLD

GOLD AND ECONOMIC FREEDOM

THE TEMPTATION OF ALAN

THE MAESTRO

IRRATIONAL EXUBERANCE

THE MYTH OF PRODUCTIVITY

FOR THE WRONG REASONS

JUNK BONDS AND BAD BETS

THE VIRTUE OF INSCRUTABILITY

AMID THE BUBBLES

GREENSPAN’S PUT IS SHOT

MAXIMUS GREENSPAN

THE LAST MAN STANDING

GREENSPAN’S OPUS

THE MESS THE MAESTRO MADE

BE CAREFUL WHO YOU STIMULATE

WILL THE FEDS SUCCEED?

THE SAVINGS GLUT

THE BURDEN OF LOSSES

QUANTITATIVE EASING

CHAPTER 7 - RECKONING DAY: THE DELEVERAGING OF AMERICA

IN THE MOOD

“LET’S ALL JOIN HANDS AND BUY AN SUV!”

CONFIDENT TO A FAULT

A DANGEROUS DOLLAR

NOT YOUR GARDEN-VARIETY DOWNTURN

JAPAN’S LONG, SLOW-MOTION DEPRESSION

REAL WEALTH AND POVERTY

CELEBRATING PERVERSITY

FUNNY MONEY

ECONOMIC DEAD END

JUST IN TIME

IMPERIAL OVERSTRETCH MARKS

FIRST PANACEA

GIVE WAR A CHANCE

THE BALANCE SHEET RECESSION

THE LAND OF THE FREE LUNCH

BASEBALL, HOT DOGS, APPLE PIE, AND CHEVROLET

CHAPTER 8 - THE HARD MATH OF DEMOGRAPHY

BIG POPULATION SHIFTS DISRUPT POLITICS

THE AGING OF THE WEST

YOUTH AND ISLAMIC FUNDAMENTALISM

THE SETTING SUN AND THE INFLUENCE OF THE AGED

THE RISE OF CONSUMER SOCIETY

PENSION PLAN POISON

SOCIAL SECURITY? NOT EXACTLY

THE PANIC OF 2008

CROWDING OUT

WHAT ABOUT AUSTERITY?

CHAPTER 9 - MORAL HAZARDS

THE AGE OF UNCERTAINTY

THE SCHOOL OF “OUGHT”

THE TRIUMPH OF MORAL HAZARD

BOOM, BUBBLE, BUST . . . AND BEYOND

THE U.S. DOLLAR AS RESERVE CURRENCY

PERILS OF SUCCESS

A CLASSIC SUCKER’S RALLY

HEARTS AND MINDS

HEGEMONY IN QUESTION

THE TRADE OF THE DECADE(S)

HOW TO RELAX AND ENJOY THE END OF THE WORLD

AN AVALANCHE OF CLAPTRAP

ADVICE TO THE CLASS OF 2009

NOTES

BIBLIOGRAPHY

INDEX

Additional Praise for the First Edition

The authors have crammed so much thought-power into the pages of this book it’s a challenge to describe or summarize. . . . They explain how the world doesn’t work, quite remarkably, which helps us see how it does work, perhaps. Markets are judgmental, they say, not mechanis tic. Amen! They say Japan’s decades-long bust proves both the major economic theories are wrong and that the West is destined to follow. They rightly, in my view, claim this is a crisis point in modern history. This book just might help us cope with it. Worth a try!

—Harry D. Schultzeditor of the InternationalHarry Schultz Letter

Bonner sometimes makes me feel like a house painter staring at a Rembrandt. He is that good. Financial Reckoning Day is guaranteed to make you think. It will help you understand why we go from boom to bust and how you can profit from that change. It will open your eyes to a new way of seeing the world and make you a better inves tor. And it will be one of the most pleasurable reads you have had in a long time.

—John MauldinMillennium WaveAdvisors, editor of Thoughtsfrom the Frontline

Forward and backward in time, up the alleyways of one theory and down another, often soiled by the sorry sludge of historical missteps . . . the often-disastrous results of the hopes and dreams, needs and wants of all the people in all of history coalesce into a Grand Unified Theory that one cannot adequately define or explain, but by the end of the last sentence, on the last page, of the last chapter, one knows that, surely, this book is something to behold.

—Richard Daughtyeditor of the Mogambo GuruEconomic Newsletter

Copyright © 2009 by William Bonner and Addison Wiggin. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

A previous edition of this book, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, by William Bonner and Addison Wiggin, was published in 2003 by John Wiley & Sons.

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eISBN : 978-0-470-56434-9

FOREWORD

Some people want to buy baseball teams or chase women, but I’m told the number one dream that comes to mind when young people are asked is: “I want to see the world.”

I’ve been around the world twice now: Once on a motorcycle. Once in a Mercedes. So I guess that means I’m crazier than most people.

The reason that I love doing it, other than the sense of adventure, and I certainly love the adventure, is that it’s the only way I can figure out what’s going on in the world. I don’t trust the newspapers, TV stations, or government pronouncements. That’s what everyone else knows. I want to see it for myself, close to the ground.

You learn much more about a society by crossing a remote border, finding the black market, and changing money or talking to the local madam than by talking to bureaucrats or economists at the IMF and the World Bank . . . or by watching CNBC.

By the time I cross the border in the jungle, I know 25 percent to 30 percent of what I need to know about a country. I know the bureaucracy. I know the infrastructure. I know the corruption. I know the status of the economy and its currency. And I know whether I stand to make money investing there or not.

The only other way to know what’s going on is to study history. When I teach or speak at universities, young people always ask me: “I want to be successful and travel around the world; what should I study?”

I always tell them the same thing: “Study history.”

And they always look at me very perplexed and say, “What are you talking about . . . what about economics, what about marketing?”

“If you want to be successful,” I always say, “you’ve got to understand history. You’ll see how the world is always changing. You’ll see how a lot of the things we see today have happened before. Believe it or not, the stock market didn’t begin the day you graduated from school. The stock market’s been around for centuries. All markets have. These things have happened before. And will happen again.”

Alan Greenspan went on record before he left his post at the Federal Reserve saying he had never seen a bubble before. I know in his lifetime, in his adult lifetime, there have been several bubbles. There was a bubble in the late 1960s in the U.S. stock market. There was the oil bubble. The gold bubble. The bubble in Kuwait. The bubble in Japan. The bubble in real estate in Texas. So what is he talking about? Had he not seen those things, he could have at least read some histories . . . all these things and others have been written about repeatedly.

Alan Greenspan continues to embody the economic mindset of today’s policy makers. They have the lunatic idea that a nation can consume its way to prosperity although it has never been done in history.

In the United States, if you have a job, you pay taxes. If you save some money, you pay taxes on the interest. If you buy a stock and you get a dividend, you pay taxes. If you have a capital gain, you pay taxes again. And when you die, your estate pays taxes. If you live long enough to get social security, they tax your social security income. Remember: You paid taxes on all this money when you earned it originally yet they tax it again and again.

These policies are not very conducive to encouraging saving or investing. They promote consumption.

By contrast, the countries that have been doing well the last 30 or 40 years are the countries that encourage saving and investing. Singapore is one of the most astonishing cities in the whole world. Forty years ago it was a slum. Now, in terms of per capita reserves, it’s one of the richest countries in the world.

One of the reasons Singapore was so successful is that its dictator, Lee Kwan Yu, insisted that everyone save and invest a large part of their income. There are many other dictators or politicians you can condemn, but they have nothing to show for it, and, in fact, they’ve been worse. Whatever Lee’s policies toward personal freedom, at least he forced people to save and invest.

History shows that people who save and invest grow and prosper, and the others deteriorate and collapse.

As the book you hold in your hands demonstrates, artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks of the late 1990s. Policies then pursued at the Fed made the bubble worse. They changed it from a stock market bubble to a consumption and housing bubble.

And when that bubble burst, it was far worse than the stock market bubble, because there are many more people who are involved in consumption and housing. Millions of people found out the hard way that house prices don’t go up forever. Now there are a lot of angry people.

No one, of course, wanted to hear it when the original edition of this book was published. They wanted the quick fix. They still want to buy a stock and watch it go up 25 percent because that’s what happened a few years ago, and that’s what they say on TV. They want yet another interest rate cut, because they’ve heard that that’s what will make the economy boom.

Bill Bonner and Addison Wiggin wrote me early on to tell me that “a lot of the stuff you write about in Adventure Capitalist (Random House) is in our book—except for the travel in the international countries.”

I’d go a step further and say it’s almost as though they wrote parts of my book and I wrote some of theirs—approaching the same subject from two completely different angles . . . and arriving at the same place. From the lack of government policies encouraging saving and investing to the dramatic effect demography will have on the global economy in the twenty-first century, I kept coming across things in this book that I had seen in my travels. He discovered them by reading history books and studying economics. I saw them up close, on the ground.

“Needless to say, your ideas are genius,” I wrote back, “You think like I do, which means we’re going to go broke together.”

JIM ROGERS

PREFACE TO THE 2009 EDITION: CONFESSIONS OF A NEWSLETTER MAN

We begin with a question: Was ever there a fairer métier than ours?

The poor carpenter risks cutting his fingers or banging his knee. The used car salesman’s hearing goes bad as soon as he takes up his job: “No, I don’t hear any rattle,” says he. The foot-soldier gets sent to a Godforsaken hole like Afghanistan, where the women are covered up and the liquor stashed away.

But in our trade as newsletter publishers, hardly a day passes without a good laugh. Our only occupational hazard is a rupture of the midriff.

Most people, after all, read the news pages for information. They lack the proper training and perspective to fully enjoy them. The consequence is that they are always in danger of taking the humbug seriously, or worse, finding the people who populate the headlines important.

If you really want to appreciate the media you have to get close enough to see how it works—like a prairie dog peering into a hay bailer—but not so close that you get caught up in it yourself. The investment newsletter business is perfect; it is part of the media, but it wouldn’t be mistaken for a reputable part.

More than 30 years ago, we began our career publishing newsletters. Those were the days! They were even more fun than today. Years of television, heavy-handed regulation, and waiting in line for airport security have taken much of the lightheartedness out of American life. In its place, a kind of earnest timidity has settled over the 50 states. Everything is forbidden, or else it is compulsory—especially in the financial markets. You can barely talk about an honest investment without some ambitious prosecutor wanting to make a federal case out of it.

But back in the 1970s, the folks you met in the newsletter trade were even wilder and more disreputable than those who are in it today. At one investment conference, we remember an investment advisor from East Germany. He had escaped the Soviets’ grip by stealing a small plane and flying to the west. This alone made him a bit of a hero back in the 1970s. But his talk to investors endeared him further. He gave the following discourse:

“Take a look a zis chart,” he would begin, pointing to the bottom of what appeared to be a wave pattern. “Investing is reeelly very simple. You just buy at zee bottom. Heere! Zen, ven ze stock goes up, vat do ve do? Ve sell. Heere! [Pointing to the top of the wave pattern.] It is reeelly verrry simple.”

“Well, what if the stock doesn’t go up,” asked an investor, fresh off the Great Plains and not prepared for patterns or people that weren’t perfectly straight.

“Ya . . . ve just keep our eyes on ze chart. If it doesn’t go up, ve don’t buy it.”

We don’t recall the man’s name. It was something like Dr. Friederich Hasselbauer. We were always a bit suspicious of financial advisors who used the “Dr.” title, though many did. Especially when they spoke with thick German accents. We imagined that they had been conducting experiments on Jews before they entered the financial markets.

And then there was the Quack man. His name was “Red Robin.” As near as we could figure, he liked ducks. So he called his financial analysis “The Quack Report.” He had once made his money paving airport runways. Then, in his fifties or sixties, he decided to devote himself to financial analysis and to save the world from a small group of criminal conspirators known as the Bilderburgers, who were in cahoots with the English government. Once, flying on the Concorde across the Atlantic, Ol’ “Red” saw the U.K. Chancellor of the Exchequer, it must have been Lord Barber, on the same flight. He told us that he decided to confront his lordship right then and there, when he had the chance.

“I just went up to him and I said, ‘I’m on to you . . . ol’ buddy . . . ”

It must have been quite a scene. Red Robin was a funny-looking fellow with a paunchy stomach who always dressed in orange coveralls, which made him look a little like a red-breasted sapsucker. Why he wore orange overalls, we don’t know; perhaps they were a holdover from his days working on airport runways when he didn’t want the cement trucks to run him down.

Red also had funny ideas about publishing investment advice. He offered readers a Lifetime Guarantee—they could have their money back anytime. But then, he added a caveat: “My life, not yours.” As it turned out, the guarantee was less valuable than readers imagined—or Red himself had hoped. He was gunned down on a beach in Costa Rica, we were told.

But that was the strange milieu in which we decided to make our career. What was delightful about it were the nuts and kooks, the charlatans and dreamers, the brazen hucksters and earnest geniuses who made up the industry. Here were thinkers whose thoughts were untainted by any trace of advanced doctrinaire theory, let alone rudimentary training of any sort. Here were mountebanks and scalawags galore . . . along with a few saints . . . dispensing market wisdom, stock recommendations, and macro-analysis so far reaching you needed a Hubble telescope to see where it came from.

And here, too, were the sort of men whom rich widows were warned about. And the sort of theorists who made you wonder about the limits of human reason itself.

Y2K AND OTHER TRAGEDIES NARROWLY AVERTED

Our friend, Gary North, somewhat of a legend in the business, began studying the possible consequences of the Y2K computer problem in the late 1990s. The more closely he looked, the more alarmed he became. He began writing about the subject, and the more he explored it . . . the more he thought about it . . . the more convinced he became that it would lead to a complete meltdown of modern society. He looked and he saw commerce coming to a stop. He saw trains that couldn’t run without electronic instruction. He saw cash machines frozen up. He saw power plants idled by their computer brains. And what would happen to all that electronic information—bank accounts, trading records, inventories—on which the whole financial world depended? He saw millions of people with no money . . . and then no food. He saw riots in the streets . . . and worse.

Then, he looked around and saw that he and his family were as exposed to the menace as everyone else. He decided to take precautions, moving his family to an isolated rural area where they would be safe from the apocalypse he saw coming.

Maybe he would be wrong, he reasoned. But what if he were right? The cost of being right—and failing to protect himself—could be catastrophic. He moved to a mountain hollow, buried provisions, and began the countdown to the year 2000.

Of course, when the big day came . . . nothing happened. The clocks worked. The trains ran. The power was still on. Apparently, not a single cash machine failed.

People pointed and laughed. But was he wrong? What if the odds of a meltdown had been only 1 in 100 or 1 in a 1,000? Was he not right to give a warning in the strongest possible terms? And wasn’t it partly because of him and others like him that billions were spent to correct the problem before January 2000?

Colorful eccentrics, careful analysts, cheerful con men, and self-assured delusionals trying to figure out how things are put together—this is the world of investment gurus.

But guess what? The gurus are often right. True, some financial gurus have gone broke following their own advice. But many have gotten rich.

In the late 1970s, we undertook a study—with Mark Hulbert, who is still at it—of how well these financial gurus actually perform. We wouldn’t presume to summarize Mark Hulbert’s nearly 30 years of work; we will just tell you what we took from it: There is no right way to invest.

Investment gurus are an original bunch. They come up with all sorts of systems, ideas, and approaches. Almost all of them are successful—sometimes. There are a lot of different ways to invest and to make money. And often one that works spectacularly well in one period may collapse completely when the market changes course. So, too, an approach that often works poorly under certain market conditions will work poorly in other conditions.

But, generally, an investment advisor who works hard to develop and refine a system and who sticks with it can do reasonably well, sometimes. He can be a technical analyst, a chartist, a Graham and Dodd follower, even an astrologer. Almost any disciplined approach, pursued intelligently and steadily, can pay off.

We have a theory that explains why this is so. Investing is, when you get down to the basement of it, a competitive undertaking. If you do what everyone else does, you will get the same returns as everyone else. In order to get better returns, you have to do things differently.

Investment gurus seem to be favored, in this regard, by their own originality and quirky self-reliance.

“Sometimes right, sometimes wrong,” they say. “But never in doubt.”

Taken together, they are probably the most independent and contrary professional class in the world. And this contrariness, alone, seems to put them at odds with the great mass of lumpen investors, allowing them to make more—or, often less—than the common results.

By contrast, what seems to doom the average investor is the same mushy quality that seems to be ruining the whole country. He will wait in line—without a word of protest—while guards frisk girl scouts and old ladies for dangerous weapons. If the mob is large enough, he can’t wait to be a part of it and fears being isolated from it. And he will believe any line of guff—no matter how fantastic—as long as everyone else falls for it, too. Dow 36,000? House prices always go up? Interest-only negative amortization mortgage?

A man who follows a newsletter guru has no guarantee of making money . . . but a man who follows the great mass of conventional wisdom is practically guaranteed that he will not.

THE TROUBLE WITH TROUBLE

The trouble with the modern world is that there isn’t enough trouble in it. Back when we began in the business, people had real trouble and they really appreciated it. Now, they just toss it off. They’re not worried about it because they don’t know what it really is.

When we were young, we fully expected that we would never be old. Nuclear war was a very real threat. “We will bury you,” said the leader of the Soviet Union, while addressing Western ambassadors at a reception at the Polish embassy in Moscow on November 18, 1956. We thought he meant it. And during the Cuban Missile Crisis, the world was probably only an upset stomach away from annihilation. If either Kennedy or Khrushchev had been in a bad mood, we might never have lived long enough to enjoy the greatest economic boom in human history.

There was also the danger of too many people; India could never feed herself, the experts said. Food production worldwide couldn’t keep up with population growth. Hundreds of millions would starve; it was only a matter of time.

As to financial matters, the average family was only a paycheck or two from total disaster. Losing a job could be catastrophic. No one had credit cards. There was no EZ mortgage finance available. Besides, adults back in the 1950s and 1960s were deeply suspicious of debt. It was the lesson they had learned during the Great Depression. That generation knew trouble . . . real trouble.

In the 1930s, one out of every four U.S. workers lost his job—with no unemployment insurance and no welfare system to fall back on. The elder Mr. Bonner had a knack for being in the wrong place at the wrong time. He tried to escape the poverty of his family by joining the army . . . in 1939. Then, he thought he had gotten extremely lucky when he drew the best assignment in the army; they sent him to Hawaii. He said he was recovering from a hangover on the base when Japanese airplanes appeared overhead in December, 1941. They tried to kill him for the next three years.

But Americans had it easy during the war, compared to others. Britain was bombed for months. France was occupied. Italy and France were both battlefields. There were severe financial shocks, too. Britain went broke. France had to form two new governments and replace its currency twice.

But, imagine the time your parents and grandparents would have had, had they lived in Russia, China, India, Germany, Argentina, or Japan: War. Hyperinflation. Starvation. Police repression. Mass arrests. Occupation. Bolshevism. You name it; they lived it.

As long as the generation that had lived through the Depression and WWII were in charge of things, the United States was in pretty good shape. The United States emerged the world’s biggest, strongest, most innovative and dynamic economy after WWII.

But, in the 1980s, a new generation took over. It was “morning again in America.” During that period, three key events caused trouble—as we had known it—to take a holiday.

First, there was the Crash of 1987. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. As a result, people began to think that crashes were no trouble. Even if stocks fell, they’d soon be on an upswing again. Books began to appear such as Stocks for the Long Run. People began to believe you couldn’t go wrong in stocks, no matter how much you paid for them.

Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren’t going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Third, the neocons transformed the Republican Party. “Deficits don’t matter,” said Dick Cheney. They never seemed to matter to Democrats. Now they no longer matter to Republicans either. After the 1980s there was no longer any organized political party in favor of fiscal and monetary conservatism.

Like their federal government, Americans borrowed. And so, their debt increased. Having been the world’s leading creditors in the 1950s and 1960s, they became the world’s leading debtors in the 1980s and 1990s. Gradually, the consumer economy required more and more debt to produce an extra unit of output. Debtors had to borrow not only to buy . . . but also to pay back, or pay the interest on, previous borrowings. The financial sector boomed by supplying the credit.

America’s most profitable businesses shifted from making things to shuffling little pieces of paper back and forth. That’s why GM created GMAC and why GE staked its future on GE Finance. And it’s why the center of U.S. economic power moved from the manufacturing hinterlands of Detroit and Cleveland to the financial centers on the coast . . . notably the big one in Lower Manhattan.

The Bubble Epoque

By the late 1990s and early twenty-first century, the American economy had entered the bubble epoque. The financial industry—aided and abetted by the Federal Reserve—was providing so much “liquidity” it was causing asset prices to bubble up everywhere. Since then, every warning turned out to be a false alarm. The dot-coms busted and it didn’t really matter. The recession of 2001-2002 was so mild few people even noticed. Even terrorists disappeared from North America after the stunning attack in 2001.

Of course, bubbles always blow up—without exception. And when the dot-com bubble exploded in 2000, at first we thought that was the end of the bubble era. But the biggest bubbles were still to come. The bubbles in housing, art, emerging markets, oil, and commodities—all blew up. Then the biggest bubble of all—the bubble in credit—blew up, too, bringing the bubble epoque to a close.

We are now in the post-bubble era. The financial industry has been bombed out. It can no longer create bubbles. Governments all over the world are propping up the walls and shoring up the foundations.

Toward the end of last year, the days were getting shorter and shorter. Darkness covered the land—especially in Iceland, where even in the best of times, late December offers barely enough daylight to smoke a cigarette.

The authorities have gone back to their usual antics. They’ve bailed out some companies, lowered interest rates to zero, and shored up the financial sector—which just happened to have good representation in the government and its central bank—and saved the bondholders from getting what they had coming.

They’ve made sacrifices to the market gods, too. Unable to find any virgins in the financial sector, they threw the taxpayers down the well.

And then they went after the savers (admittedly, there weren’t many of them) and the next generation, too.

At first, it seemed as if the “stimulus” had failed. Then, gradually, the light increased and the days grew longer. As we write this preface in the spring of 2009, after nine weeks of rising prices, people are beginning to see the world differently, again. To simplify: It doesn’t seem nearly as bad a place as it did a few months ago. Even house prices—ground zero of the financial crisis—although not actually rising, they’re not falling as fast as they were before. And although people are still losing their jobs, not as many of them are losing their jobs each month as did earlier in the year. This has led many commentators to believe that government’s expensive bailout/stimulus efforts are finally working.

And now, the mob screams: “The worst is over!” “We’ve seen the bottom.” “Hoorah for the feds!”

But it is not likely to be so. The bubble epoque cannot be revived.

BASIC TRUTHS ABOUT THE STOCK MARKET, HOUSING, AND THE ECONOMY

So what should you do?

After nearly three decades in the business and writing our daily chronicle of the stock market and economy, The Daily Reckoning, for 10 years, we have distilled our advice down to four dicta, a few basic truths to guide you as you navigate your way through the financial news:

DictumNumber 1: People do not get what they want orwhatthey expect from the markets; they get what they deserve.

Of course, people would like the downturn to be over. Many are counting on it. But the market doesn’t give a hoot. He’s got a “Capitalism at Work” T-shirt on and a sledgehammer in his hand.

What’s he up to? He’s demolishing a quarter century’s worth of mistakes. There are always mistakes made. Investments go bad. Businesses go under. People go broke. When many mistakes are corrected at once, it’s called a “recession.” And when an entire economic model goes bad, it’s called a “depression.”

The economic model of the last quarter century caused more mistakes than usual. It encouraged people to spend, borrow, and speculate. And each time the market tried to make some corrections, the authorities came along with more money and easier credit. Businesses that should have gone under years ago kept digging themselves in deeper. Homeowners kept running up more debt. Speculators kept taking bigger and bigger gambles.

Fish gotta swim, birds gotta fly, and bubbles gotta blow. The bubble in the financial sector—including subprime debt, housing prices, bonuses on Wall Street, and derivatives—hit the fan in 2007. And what a mess!

And why shouldn’t it be?

Which brings us to the second of our dicta:

DictumNumber 2: The force of a correction is equal andoppositeto the deception that preceded it.

The delusions and absurdities of the bubble epoque were monstrous. Naturally, the correction must be huge, too. World stock markets were nearly cut in half. Property prices, too, have been knocked down almost everywhere. The total loss of nominal wealth has been estimated as high as $50 trillion.

In the first quarter of 2009, Warren Buffett’s company, Berkshire Hathaway, booked its first loss since 2001. Fifty-nine banks have been shut down over the past 18 months. The United States’ leading banks say they need another $75 billion to keep their doors open. And Fannie Mae said it lost $23 billion; it will need $19 billion more to continue jiving the housing market.

Could these losses have been prevented?

Certainly many of them could. If the U.S. Congress had never created Fannie Mae, for example, it never would have distorted the mortgage market as much as it did. And if the feds hadn’t created the Federal Reserve Bank, it couldn’t have provided so much ready money for so many speculators and borrowers. And if the Fed under Alan Greenspan had done what it was supposed to do—that is, to “take away the punch bowl” before the party got out of control—the bubble in the financial sector probably would have been much more modest.

Of course, people drew all the wrong conclusions. They thought “capitalism failed.” They saw the car drive off the cliff . . . but didn’t notice how government had twisted the road signs. Instead of warning investors of the dangerous curve ahead, the Fed’s low lending rates said: “Step on the gas!” Congress, despite their recent collective cry of disbelief, helped push down the pedal.

DictumNumber 3: Capitalismdoesn’talways take an econ-omywhere it wants to go; but it always takes an economywhereit ought to be.

Whoever was responsible for the mistakes, capitalism went about correcting them with its customary élan. It hit imprudent investors with trillions in losses. It knocked down mismanaged corporations. It whacked homeowners . . . and pounded housing-based derivatives to dust.

Capitalism operates by a process that the great economist Joseph Schumpeter called “creative destruction.” It destroys mistakes to make room for new innovations and new businesses. Unfortunately, this puts it at odds with government and what most people want. When people make mistakes, they maintain that they are blameless. “Who could have seen this crisis coming?” they ask. “And,” they say, “someone else should pay for the loss.”

So today the feds, who mismanaged their regulatory responsibilities during the bubble epoque are bailing out mismanaged corporations to protect lenders who mismanaged their money. They are determined to prevent capitalism from making major changes—in the worst possible way.

What’s the worst possible way? Simple. Leave the mismanagers in place. Keep the brain-dead companies alive—along with the zombie banks. Let the government take ownership of major sectors of the economy. And stick a debt-ridden society with even more debt!

The federal government is expected to borrow $2 trillion this year alone. From whom? And who will repay it?

DictumNumber 4: The severity of a depression is inverselycorrelatedwithgovernment’sefforts to stop it.

The more the feds try to delay and distract the process of creative destruction, the longer it takes to get the job done. And the higher the eventual bill.

There are only two fairly clear examples in modern history. After the crash of 1929, the Hoover and Roosevelt administrations tried desperately to stop the correction. They could not make bad debts disappear, or turn bad decisions into good ones. All they could do was to retard the necessary corrections—and cause new mistakes! It wasn’t until after WWII, 15 years later, when the New Deal was largely forgotten, that the United States got back to work.

Similarly, when Japan was confronted with a major correction in 1990, its politicians followed the Hoover/Roosevelt model. Over the years, an amount equivalent to almost an entire year’s output was applied to recovery efforts. But all they did was to prevent and forestall the needed changes. Now, 19 years later, the Japanese economy is still in corrective mode . . . still fighting deflation.

Is that the end of the story? Not at all. The feds’ efforts to stop the progress of capitalism will have some spectacular consequences. The fireworks will start when the bond market cracks sending yields through the roof, for a nation addicted to debt cannot sustain a credit crisis for long. And that is where today’s story begins . . .

WILLIAM BONNER June 2009

ACKNOWLEDGMENTS

We would like to say a few words to thank the many people whose ideas, insights, and dedication helped contribute to the 10th Anniversary edition of this book.

Our thanks go to Kate Incontrera, who in addition to her daily duties as the managing editor of the Daily Reckoning, pulled together the research, assembled, and edited many of the ideas you read within. Thanks to Rick Barnard for researching and updating the charts in this edition . . . and to Mark O’Dell, Susanne Clark, and Andrew Ascosi for producing them. Thanks to Joseph Schriefer, Greg Grillot, Ian Mathias, Greg Kadajski, Rocky Vega, Michelle Nickels, Bruce Robertson, Chad Barret, Mike Pizzo, Andrea Michinski, and all the faithful at Agora Financial who keep the lights on while we ruminate.

Thanks again to Rebecca Kramer, without whose persistence this project would never have gotten off the ground in 2002. The first edition of Financial Reckoning Day launched a multitome collaboration with John Wiley & Sons. Thank you to Theron Raines for aiding and abetting said collaboration. And special thanks go to Debra Englander, Kelly O’Connor, and Joan O’Neil at John Wiley & Sons for believing in us once again . . . and letting us crash another set of deadlines.

Jennifer Westerfield and Philippa Michel-Finch helped research, write, and edit the original manuscript of Financial Reckoning Day. Among other things, they helped us understand the causes and consequences of Japan’s boom, bust, and persisting economic malaise. They also waded through the minutiae of details that comprise the area of demographic and aging studies, providing a fertile foundation for our work over the next decade.

Finally, we would like to thank the late Kurt Richebächer, Gary North, James Grant, Marc Faber, Richard Russell, David Tice, Frank Shostak, Richard Daughty, John Mauldin, Doug Casey, James Davidson, Uncle Harry Schultz, George Gilder, Francis Fukuyama, Robert Prechter, Martin Weiss, Porter Stansberry, Patrick Cox, Rob Parenteau, Byron King, Eric Fry, John Forde, Chris Mayer, and Dan Denning for their helpful and entertaining insights; and Thom Hickling for his fine guitar work, may he rest in peace.

WILLIAM BONNERADDISON WIGGIN

INTRODUCTION

It had all seemed so logical, obvious, and agreeable in the last five years of the 20th century. Stocks went up year after year. The Cold War had been won. There was a new Information Age making everything and everybody so much smarter—and richer, too. The world was a happy place and Americans were its happiest people. U.S. consumer capitalism was the envy of all mankind. The United States guaranteed the peace and freedom of the entire species, if not with goodness, intelligence, and foresight—at least with its military arsenal, which could blow any adversary to kingdom come. People believed that Francis Fukuyama’s The End of History had indeed arrived, for it scarcely seemed possible that there could be any major improvement.

But “it’s a funny old world,” as Maggie Thatcher once remarked. She might have meant “funny” in the sense that it is amusing; more likely, she meant that it is peculiar. In both senses, she was right. What makes the world funny is that it refuses to cooperate; it seldom does what people want or expect it to do. In fact, it often does the exact opposite.

People do not always act as they should. Other people seem irrational to us—especially those with whom we disagree. Nor do we always follow a logical and reasonable course of action. Instead, we are all swayed by tides of emotion . . . and occasionally swamped by them.

This book was written to underline the point that the world is funnier than you think. And the more you think about it, the funnier it gets. Close inspection reveals the ironies, contradictions, and confusions that make life interesting, but also frustrating. A rational person could do rational things all day long, but then how boring life would be. Fortunately, real people are only rational about things that do not matter.

People of action despise thinking of any sort, and rightly so, because the more they think, the more their actions are beset by doubts and arrière-pensées. The more man thinks, the slower he moves. Thought uncovers the limitations of his plans. Exploring the possibilities, he sees yet more potential outcomes, a greater number of problems . . . and he increasingly recognizes how little he actually knows. If he keeps thinking long and hard enough, he is practically paralyzed . . . a person of action no more.

Will the stock market rise?

“I don’t know,” replies the thinking fund manager.

Can we win the war?

“It depends on what you mean by ‘win,’ ” answers the thoughtful general.

Will house values continue to go up?

“Your guess is as good as mine,” responds the honest real estate broker.

This book has been written in a spirit of runaway modesty. The more we think, the more we realize how little we know. In fact, it is a good thing that the book came to an end when it did . . . or we would know nothing at all, or less than nothing.

We are, frankly, in far too much awe of the world, and too deeply entertained by it, to think that we can understand it today or foretell tomorrow. Life’s most attractive components—love and money—are far too complex for reliable soothsaying. Still, we can’t resist taking a guess.

We may not know how the world works, but we are immodest enough to think we can know how it does not work. The stock market is not, for example, a simple mechanism like an ATM machine, where you merely tap in the right numbers to get cash out when you need it. Instead, the investment markets—like life itself—are always complicated, often perverse, and occasionally absurd. But that does not mean that they are completely random; though unexpected, life’s surprises may not always be undeserved. Delusions have consequences. And, sooner or later, the reckoning day comes and the bills must be paid.

In this sense, the investment markets are not mechanistic at all, but judgmental. As we will see, they reward virtue and punish sin.

Our approach in this book is a little different from that of the typical economics tome or investment advisory. Instead, it is an exercise in what is known, derisively, as “literary economics.” Although you will find statistics and facts, the metaphors and the principles that we provide are more important. Facts have a way of yielding to nuance like a jury to a trial lawyer. Under the right influence, they will go along with anything. But the metaphors remain . . . and continue to give useful service long after the facts have changed.

What’s more, metaphors help people understand the world and its workings. As Norman Mailer put it, “There is much more truth in a metaphor than in a fact.” But the trouble with metaphors is that no matter how true they may be when they are fresh and clever, when the multitudes pick them up, they almost immediately become worn out and false. For the whole truth is always complex to the point of being unknowable, even to the world’s greatest geniuses.

The world never works the way people think it does. That is not to say that every idea about how the world works is wrong, but that often particular ideas about how it works will prove to be wrong if they are held in common. For only simple ideas can be held by large groups of people. Commonly held ideas are almost always dumbed down until they are practically lies . . . and often dangerous ones. Once vast numbers of people have come to believe the lie, they adjust their own behavior to bring themselves into sync with it, and thereby change the world itself. The world, then, no longer resembles the one that gave rise to the original insight. Soon, a person’s situation is so at odds with the world as it really is that a crisis develops, and he or she must seek a new metaphor for explanation and guidance.

Thus, the authors of the present work cannot help but notice an insidious and entertaining dynamic . . . a dialectic of the heart, where greed and fear, confidence and desperation confront each other with the subtle elegance of women mudwrestlers.

In the financial markets, this pattern is well-known and frequently described.

In the late 1990s, those who were sure that stocks would always go up, despite having already reached absurd levels, gave countless explanations for their belief, but the main reason was simply that it was just the way the world worked. But after investors had moved their money into stocks, to take advantage of the insight, few buyers were left and prices had risen so high that neither profits nor growth could support them.

Investors were deeply disappointed in the early 2000s when stocks fell three years in a row. How could this be, they asked themselves? What is going on, they wanted to know?

The answer eluded us when we wrote the first edition of this book in the summer of 2003. And as we write the second edition of this book in the spring of 2009, we still do not know. And even mainstream economists find it difficult to come up with an answer. Paul Samuelson, popularizer of the economic profession for Newsweek, admitted that he and his colleagues do not even have words to describe this “baffling economy.”

Those who should know the answer to these problems have not been much help. In the late summer of 2002, the most celebrated economist in the world addressed an audience in Jackson Hole, Wyoming. Alan Greenspan explained that he did not know what had gone wrong. He would not know a bubble if it blew up right in front of him; he would have to wait, he told his fellow economists and check the mirror for bruise marks—for only after the event could a bubble be detected.

Almost seven years later, Ben Bernanke and the Obama administration still don’t understand where bubbles come from, and what difference would it make anyway? The United States’ favorite bureaucrat had explained while occupying the chair at the Federal Reserve that it made none: Even if he [Greenspan] had known where bubbles come from, he said, he could not have done anything about them.

But we did not write this book to carp or complain. Instead, we offer it in the spirit of constructive criticism, or at least in the spirit of benign mischief. We do not know any better than Alan Greenspan or Ben Bernanke or Timothy Geithner or Barack Obama what the future holds. We only guess that we are at one of history’s epic crisis points—one of its drawn out reckoning days—where the metaphors of yesterday no longer seem to describe the way the world works today. The financial markets are not the congenial ATM machines of investors’ fantasies, after all. Nor is the political world as safe and as comfortable as people had come to believe.

That is another aspect of our book that readers may find unusual. We dip into military history and market history as if passing from a hot tub to a pool. Both illustrate the lively influence of group dynamics ; the currents of mass sentiment are similar. Readers will note, however, that political episodes tend to have tragic endings . . . whereas markets typically end in farce. Readers may also be curious as to our focus on European history. We make no excuses or apologies for it. Our office in Paris is surrounded by reminders of Europe’s past. Can we not help but learn from it?

Many things have changed, too, since the first edition of this book was published in 2003. Although sales were decent, the book having reached #1 on the New York Times Business Bestseller list, we were still considered “mavericks” for pointing out what seemed to us to be painfully obvious: You cannot live beyond your means forever. Policy makers did their best to postpone the inevitable, even driving the stock market to its all-time high in the fall of 2007. But it was a phony prosperity and unsustainable at best, that much is clear to many who were skeptical in the years between our first publication date and today. We provide this updated edition to show that the stock market bubble and the housing bubble were two sides of the same flawed coin.

Not that this edition was easy to get a handle on. The reckoning is still underway as we write. During the final weeks of the update, General Motors, the bellwether of American manufacturing, finally declared bankruptcy; California, the trendsetter state, misread revenues derived from the housing bubble and came up more than $42 billion short; David Walker, the former comptroller general of the country and the protagonist of our film and book, I.O.U.S.A., warned that the United States was in danger of having its Treasury bonds downgraded from AAA status; Rob Parenteau, our chief economist, warned, too, that the United States would likely consider a dual currency regime in order to protect its debt . . . not a good position for the nation that sponsors the reserve currency of the world to find itself in. We point to all these events merely as a way to say we’ve done our best to stay on top of things, but the story continues . . . wildness lies in wait.

As with the first edition, we have not included the typical formulas or recommendations of an investment book, or the detailed expositions of a book on economics. Instead, we offer only a few simple ideas—including an update of our Trade of the Decade—that readers may well find helpful in the years ahead. Readers who wish to keep up with the progress of the Trade of the Decade or get our most recent commentary are invited to visit us at www.dailyreckoning.com and sign up for free.

CHAPTER 1

THE GILDERED AGE

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

—G.K. Chesterton

Sometime in the late 1990s, Gary Winnick—chairman of the then $47 billion enterprise, Global Crossing (GC)—did something unusual. He decided to take time off from touring art galleries with David Rockefeller, playing golf with Bill Clinton, and enjoying the Malibu beach to learn a little about the business he was in: He bought a video describing how undersea cable was laid. The video was all Winnick needed to know about laying cable. For he understood what business he was really in, and it had nothing to do with ships or optic fiber. Winnick was doing nature’s work: separating fools from their money. And he was good at it.

Supposedly, Winnick knew the undersea cable business well. Likewise, the people from whom he raised money were the “best pros” on Wall Street and were supposed to be capable of managing big bucks. After all, if they did not know how to place money to get a decent return, what did they know? And those who provided these “best pros” with money were also supposed to know what they were doing. As it turned out, no one had a clue.

One of the great marvels of life is not that fools and their money are soon parted, but that they ever get together in the first place. Life goes on, we note, for no particular reason other than the vanity of it all. One lie replaces another like cars along a Paris street (where a parking spot rarely remains vacant for long).

Not only does life imitate art, but it slavishly tries to model itself on science, too. Over the course of the twentieth century, a simple idea had become stuck in investors’ minds. Everything worked like a machine, they thought, especially the economy. If the economy was growing too fast, Alan Greenspan would “put on the brakes” by raising interest rates. If it was growing too slowly, he would “open up the throttle” by lowering interest rates. It was so simple. The mechanical image seemed to describe perfectly how the Fed worked. There was no experience in the last two decades to contradict it. It had worked so well for so long: It was almost as if it were true.

In his book, A Random Walk Down Wall Street, Burton Malkiel popularized the efficient market hypothesis, claiming that stock prices moved in a random fashion. The best you can do, he proposed, was to buy the indexes and stay in the market. Over time, the market goes up . . . and you get rich. According to this view, the market is a benign, mechanistic instrument that merely distributes wealth evenly to those who participate: As long as you are “in the market,” all the riches of capitalism will flow in your direction.

The trouble is that the market may look mechanistic, but it is not. The market is an unbounded, organic system; mastering it is a human science, not a hard science. The financial markets reflect the activity of the human economy; they are unbounded chaotic systems. The best metaphor for understanding such a system is the nature of which they are a part—infinitely complex and ultimately uncontrollable. Markets are neither kind nor forgiving. If markets do the work of God, as has been suggested, it is the God of the Old Testament, not the New.

But in the late 1990s, we lived in a wonderful world. It was rich and lush . . . the sun shone every day. Progress seemed inevitable and unstoppable, and compiling information in digital form was thought to hold the secret to an ever-increasing abundance of resources for mankind. It seemed so simple: Computers and telecommunications would provide people with increasing amounts of information, and this in turn would allow goods to be produced faster and at lower costs. Humans, hitherto Neanderthals in a low cave hunched in ignorance and darkness, would now be able to stand upright and edge a little closer to perfection every day. There was no chance that they would slip up, as they had always done in the past, we were told, for this was a more fully evolved species, better adapted to the Information Age. This really was a “New Era,” we were assured.

At the dawn of the twenty-first century, a half-century of progress and a 25-year-long bull market had created a race of geniuses. Americans were on top of the world. Their armies were unbeatable. Their currency was accepted everywhere as though it had real value. Dollars were the United States’ most successful export, with a net outflow of nearly $1.5 billion per day. And dollars were the product on which the nation enjoyed its biggest profit margin. It cost less than a cent to produce one, and each one was valued at par.

But America’s greatest strength was its economy. It was not only the strongest in the world, but the strongest the world had ever seen. The United States had increased its economic lead over the competition in the 10 years running up to the end of the century. In the minds of many, the U.S. economy was unstoppable, and its continued success inevitable. They believed that the nation’s leadership position was not merely cyclical, but eternal. It had achieved a state so nearly perfect that improvement was hardly imaginable. American music, art, films, democracy, and American-style market capitalism were everywhere triumphant.

“America is the world’s only surviving model of human progress,” President George W. Bush told the graduating class of West Point in June 2002. America has its faults, wrote Thomas L. Friedman in the New York Times at about the same time, but without it, “nothing good happens.”