How much of this doom and gloom is it reasonable to worry about? How much of it is marketing for the kinds of books this guy writes, which seem of the same theme?
I'd say it's pretty reasonable to worry about. In fact I'd say a crisis is an absolute certainty. The question is just how bad it will be. A few things to consider...
Borrowing - When people discuss the Debt (National and Private) they focus on the wrong thing which is "How are we going to pay this back?". That's an issue but the bigger issue is why we needed it. Borrowing is a wealth transfer from the future to the present. You're saying "I'm going to take this money from my future and use it now". So our economic growth in the last decade has been built on taking money from the future and combining it with our present output. So the real debt problem is we need to borrow to maintain the standard of living we've grown accustomed to and we can't borrow forever.
Unrealistic Expectations - One of the results of the above borrowing is we've seen spectacular growth in the stock market. From 1971 to 1986 the Dow increased from 874 to 1912. From 1986 to 2001 the Dow increased from 1912 to 9811 (and that was off a high of over 10,000). Housing prices from 1896 to 1996 remained relatively the same (http://nyti.ms/TxoI4) but then increased 100% between 1996 and 2006. So the asset value increases a whole generation has come to expect aren't normal and were driven by borrowing (look at the national debt increase for these same periods). In other words it isn't realistic to, for example, think a 401k will fully finance your retirement because stock values shouldn't grow that significantly.
Crash Fallout - This is a simple one. As valuations fall so do people's perceived savings. People who thought they had a $300,000 house and $1 million in their 401(k) find they now have a $100,000 house and $200k in their 401(k). So they stop spending on luxuries for a long, long time to restore their savings.
Demographic Shift - If you ever get the chance there's a very short audio book by a guy named Harry Dent called "The Great Debt Crisis" that's worth reading (Its $23 on Audible). He studies spending patterns of people by age. The argument he makes is we're at the end of a spending boom. People spend money from their early 20s until their kids graduate from college. Then they start to save. We're at the point where all the children of the Baby Boomers are graduating or are about to graduate college. At that point the Baby Boomers spending will drop dramatically. This is a problem because the Baby Boomers had far fewer children. So we're going to see a major fall from that.
These four factors (along with other more minor ones) make me think we're going to see a major drop in the next decade.
It's always reasonable to be cautious, even wary. Doubly so these days. Throwing caution to the wind is what got the US economy into this mess. Never stop being cautious when dealing with any sort of market.
That said ever since the end of 2008 you can find a Forbes or WSJ opinion piece not less than once a month about how within the next six months the entire planet is going to fall straight to bits and theres nothing you can really do about it, but heres a few things to do to make you feel better. And those things always happen to conveniently be things that make the problem even worse, basically putting your money into a mattress. Another common theme is that the fact the government is spending a dime at all on anything is whats causing the problem, despite the fact that the US governments deficit problems only play a small part in the overall economy (consumer confidence, lack of hiring, and etc are all more important woes).
This particular article is bad enough that I really wish I could downvote it. It's a scare article marketed as journalism and I think it's pretty insulting.
I'm sorry but you're wrong on just about everything here.
1. While I don't know the articles you speak of you can't blame commentators for being off on predictions if the Government is doing everything it can to goose the economy. You say the national debt is a small amount of total debt and that's true. But the governments of the world have also been taking other steps like printing money and artificially keeping interest rates down (at 0 in fact). These are things that could help the economy recover but they are also things that would put off a crisis if it was coming.
2. No one would suggest putting money in your mattress because money loses value. Take a look at the dollar index: http://bit.ly/qO0F7X So the dollar has lost about 35% of its value since 2001
1. I can and will continue to blame the commentators and the respected publications in the financial world who give them voice for consistently publishing pieces that not only turn out to be wrong but aren't doing anything to help the problem. I really don't care what the government is or isn't doing, it's at best irresponsible to keep on publishing articles that doomsay to no result when investor confidence, employer confidence, and consumer confidence are such important parts of economic recovery.
2. I was using metaphor when talking about stuffing money into mattresses, the point being that most of the time the recommended actions for saving the individuals money do nothing good for the overall economy, instead the actions just provide a potential safety blanket. In terms of talking about economic ups and downs and how to prevent them, these actions have not much more effect than shoving money into a mattress
Article or not, it is always reasonable to worry. In February 2008 business magazines already sported titles like "How low will it go". For people in the know meltdown of august-september 2008 was not a surprise, although hardly anyone could guess timing and specific details.
The guy writes like a typical stock newsletter huckster, and his to-the-month predictions are shysterish at best, but... the problems he addresses are real, not overblown, and we're more likely than not heading for another downturn at best, crash at worst.
Much of the trillions of bad debt that caused the crisis of 2007-2008 was never worked out or resolved, despite the govt and Fed buying a few years to do that (with TARP, stimulus, and QE).
It's still there on balance sheets being marked to model rather than market. We're more or less right back at square one, but with the Fed and Govt having used up much of their ammo this time. Fewer options this time around. Imho best we can hope is a managed decline for a while, no abrupt shocks.
I would take this seriously. The causes of crisis of 2008 were never resolved just addressed with more debt and more money-creation. A financial system collapse like 2008 but without a rescue could happen this fall.
Steps to prepare: think of the power outages of a hurricane, with the rioters of London, with the austerity of the 30's depression. What would you want in advance to prepare for some combination of either or all of those happening in the near future?
it does feel like we are at the frontend of a disaster - its clear the US can't keep spending like this but yet we propose more stimulus.
its the same in Europe. nobody believes that Greece is getting out of this without defaulting. yet they keep sending money. it's crazy.
i suspect its going to end badly - either a major currency devaluation or a major recession as we are forced to balance our budget (and hence pull a lot of government spending out).
It's clear actually, that the US must increase spending, increase taxes. You spend to get out of recession, or you cut and make it worse, as has been demonstrated in every recession since records began. The failure to spend has brought us to a double-dip. For some grounding in economics, try the following: http://www.amazon.com/Macroeconomics-N-Gregory-Mankiw/dp/071....
It is a pretty strange situation, where a bunch of people are somehow fixated on "hyperinflation" and deficits for political reasons, but economists on both sides of the political spectrum are surprisingly in agreement that that's crap. Perhaps they're wrong, but I'm more confident in the predictions of a moderate conservative with solid macroeconomic understanding, like Greg Mankiw, than I am in the predictions of people like Lew Rockwell, who have been consistently wrong for 25 years now with the same, self-serving predictions (http://hyperinflatingyet.com/shame.html).
Maybe this time they're right, even though they were wrong in 1985, 1988, 1993, 1998, 2003, ...; but I doubt it.
The problem here is you rely too much on models. I'm not saying you're wrong but you're certainly too sure of yourself.
Economic Models, by definition, have to make assumptions on psychology. Those assumptions can often be wrong and that invalidates the model.
To put this in real terms lets look at the construction worker. Say the government, as the spender of last resort, starts a bunch of construction projects. The economic theory here is the construction worker will get a job which will put money in his pocket. He will then go out and spend that money which will cause the places where he spends his money to hire more people. That starts a virtuous cycle that gets the economy out of trouble.
The problem with that is, in my experience, the construction worker doesn't think that way. He's been unemployed for a year or more already so instead of spending he takes every spare cent and saves it for a rainy day. Because the construction job is finite. Since he was already getting government subsidized aide as an unemployed person the money he spends on food and other essentials is negligible. So if he saves his extra money then the government spending has no impact on the economy (until he's forced to use that money by a crisis)
Again there are valid arguments on both sides but your certainty that your side is right seems naive (and that's being polite to you)
I am no economist... so this is me trying to understand the situation. Doesn't news of imminent economic failure impact the economy negatively? If enough people are afraid to spend, because they are worried about money, then they slowing the economy. Once the forward economic momentum slows and wallets get thinner, the economic situation degrades further. Am I way off base here? It seems a self-fulfilling prophecy.
Investor confidence and consumer confidence are both very important factors in how well the market does over any given period of time. So yes, these doom and gloom articles tend to be somewhat self-fulfilling a lot of the time.
> "In my Wellington Letter, I have been looking for a serious crisis to start in early September."
So he believes he can predict major market movements months in advance? Why doesn't he use that data to make a billion dollars (as he easily could if he has this remarkable power). Rather, than, say, selling that same 'information' for $500 per year? http://www.dohmencapital.com/wellington.htm
> "Money managers realized during the July-August plunge that they were way overinvested."
Wow, that's a huge claim. All of them did? What about the incompetent ones, they somehow tuned into this realization somehow? Or does he mean that just in general a lot of them 'realized' this? Of course, when he says 'realized' he actually means 'guessed', since you can't realize that you were wrong about a future event that you have no evidence to predict one way or the other. Phrasing it this way is just an attempt to use the unscientifically derived (in this case, assumed) opinion of anonymous or nonexistent experts as evidence. This is the sort of hand waving 'logic' he uses in the entire article.
> "In the meantime, the Pied Pipers will be out in force telling you to buy, so that they have someone to sell to."
If Forbes isn't part of the Pied Pipers, who the fuck is? This is like Fox News talking shit about the 'mainstream media' while being #1 in the ratings.
> "Warren Buffett’s $5 billion investment in Bank of America (BAC) shows that a crisis will not be confined to Europe. I consider this a signal that things are much worse than they are saying."
It is entirely evidence that Warren Buffet thinks the fundamental value of BAC is higher than what he had to pay for it. Generally betting against Warren Buffet won't be profitable. Wait a second! Isn't Warren Buffet a 'Money Manager'??? I thought they were all overinvested and trying to unload. Warren Buffet is by far the largest 'Money Manager' in the world, and yet he's diving in with both feet. For fucks sake!
> "Now that everyone knows there is a crisis in Europe, the one in China will soon be making headlines."
So... They won't sell us stuff anymore? They barely import anything from the west, so if they go into some kind of crisis they still won't, but their exports will get cheaper and demand for oil and natural resources will go down worldwide.
> "For more strategic recommendations, read September 5′s issue of the Wellington Letter."
LOL, this entire article is just an advert.
16 comments
[ 5.7 ms ] story [ 52.8 ms ] threadI'm with him on the gloom and doom, though. I'm in cash.
Borrowing - When people discuss the Debt (National and Private) they focus on the wrong thing which is "How are we going to pay this back?". That's an issue but the bigger issue is why we needed it. Borrowing is a wealth transfer from the future to the present. You're saying "I'm going to take this money from my future and use it now". So our economic growth in the last decade has been built on taking money from the future and combining it with our present output. So the real debt problem is we need to borrow to maintain the standard of living we've grown accustomed to and we can't borrow forever.
Unrealistic Expectations - One of the results of the above borrowing is we've seen spectacular growth in the stock market. From 1971 to 1986 the Dow increased from 874 to 1912. From 1986 to 2001 the Dow increased from 1912 to 9811 (and that was off a high of over 10,000). Housing prices from 1896 to 1996 remained relatively the same (http://nyti.ms/TxoI4) but then increased 100% between 1996 and 2006. So the asset value increases a whole generation has come to expect aren't normal and were driven by borrowing (look at the national debt increase for these same periods). In other words it isn't realistic to, for example, think a 401k will fully finance your retirement because stock values shouldn't grow that significantly.
Crash Fallout - This is a simple one. As valuations fall so do people's perceived savings. People who thought they had a $300,000 house and $1 million in their 401(k) find they now have a $100,000 house and $200k in their 401(k). So they stop spending on luxuries for a long, long time to restore their savings.
Demographic Shift - If you ever get the chance there's a very short audio book by a guy named Harry Dent called "The Great Debt Crisis" that's worth reading (Its $23 on Audible). He studies spending patterns of people by age. The argument he makes is we're at the end of a spending boom. People spend money from their early 20s until their kids graduate from college. Then they start to save. We're at the point where all the children of the Baby Boomers are graduating or are about to graduate college. At that point the Baby Boomers spending will drop dramatically. This is a problem because the Baby Boomers had far fewer children. So we're going to see a major fall from that.
These four factors (along with other more minor ones) make me think we're going to see a major drop in the next decade.
That said ever since the end of 2008 you can find a Forbes or WSJ opinion piece not less than once a month about how within the next six months the entire planet is going to fall straight to bits and theres nothing you can really do about it, but heres a few things to do to make you feel better. And those things always happen to conveniently be things that make the problem even worse, basically putting your money into a mattress. Another common theme is that the fact the government is spending a dime at all on anything is whats causing the problem, despite the fact that the US governments deficit problems only play a small part in the overall economy (consumer confidence, lack of hiring, and etc are all more important woes).
This particular article is bad enough that I really wish I could downvote it. It's a scare article marketed as journalism and I think it's pretty insulting.
1. While I don't know the articles you speak of you can't blame commentators for being off on predictions if the Government is doing everything it can to goose the economy. You say the national debt is a small amount of total debt and that's true. But the governments of the world have also been taking other steps like printing money and artificially keeping interest rates down (at 0 in fact). These are things that could help the economy recover but they are also things that would put off a crisis if it was coming.
2. No one would suggest putting money in your mattress because money loses value. Take a look at the dollar index: http://bit.ly/qO0F7X So the dollar has lost about 35% of its value since 2001
2. I was using metaphor when talking about stuffing money into mattresses, the point being that most of the time the recommended actions for saving the individuals money do nothing good for the overall economy, instead the actions just provide a potential safety blanket. In terms of talking about economic ups and downs and how to prevent them, these actions have not much more effect than shoving money into a mattress
Much of the trillions of bad debt that caused the crisis of 2007-2008 was never worked out or resolved, despite the govt and Fed buying a few years to do that (with TARP, stimulus, and QE).
It's still there on balance sheets being marked to model rather than market. We're more or less right back at square one, but with the Fed and Govt having used up much of their ammo this time. Fewer options this time around. Imho best we can hope is a managed decline for a while, no abrupt shocks.
Steps to prepare: think of the power outages of a hurricane, with the rioters of London, with the austerity of the 30's depression. What would you want in advance to prepare for some combination of either or all of those happening in the near future?
its the same in Europe. nobody believes that Greece is getting out of this without defaulting. yet they keep sending money. it's crazy.
i suspect its going to end badly - either a major currency devaluation or a major recession as we are forced to balance our budget (and hence pull a lot of government spending out).
Update: For a more specific analysis of an analogous situation - the Japanese "lost decade", try: http://www.amazon.com/Holy-Grail-Macroeconomics-Revised-Rece...
Maybe this time they're right, even though they were wrong in 1985, 1988, 1993, 1998, 2003, ...; but I doubt it.
Economic Models, by definition, have to make assumptions on psychology. Those assumptions can often be wrong and that invalidates the model.
To put this in real terms lets look at the construction worker. Say the government, as the spender of last resort, starts a bunch of construction projects. The economic theory here is the construction worker will get a job which will put money in his pocket. He will then go out and spend that money which will cause the places where he spends his money to hire more people. That starts a virtuous cycle that gets the economy out of trouble.
The problem with that is, in my experience, the construction worker doesn't think that way. He's been unemployed for a year or more already so instead of spending he takes every spare cent and saves it for a rainy day. Because the construction job is finite. Since he was already getting government subsidized aide as an unemployed person the money he spends on food and other essentials is negligible. So if he saves his extra money then the government spending has no impact on the economy (until he's forced to use that money by a crisis)
Again there are valid arguments on both sides but your certainty that your side is right seems naive (and that's being polite to you)
> "there will be massive dumping when the support levels are broken" Really? Technical analysis? I wonder if he consulted his tea leaves as well. http://en.wikipedia.org/wiki/Technical_analysis#Empirical_ev...
> "In my Wellington Letter, I have been looking for a serious crisis to start in early September." So he believes he can predict major market movements months in advance? Why doesn't he use that data to make a billion dollars (as he easily could if he has this remarkable power). Rather, than, say, selling that same 'information' for $500 per year? http://www.dohmencapital.com/wellington.htm
> "Money managers realized during the July-August plunge that they were way overinvested." Wow, that's a huge claim. All of them did? What about the incompetent ones, they somehow tuned into this realization somehow? Or does he mean that just in general a lot of them 'realized' this? Of course, when he says 'realized' he actually means 'guessed', since you can't realize that you were wrong about a future event that you have no evidence to predict one way or the other. Phrasing it this way is just an attempt to use the unscientifically derived (in this case, assumed) opinion of anonymous or nonexistent experts as evidence. This is the sort of hand waving 'logic' he uses in the entire article.
> "In the meantime, the Pied Pipers will be out in force telling you to buy, so that they have someone to sell to." If Forbes isn't part of the Pied Pipers, who the fuck is? This is like Fox News talking shit about the 'mainstream media' while being #1 in the ratings.
> "Warren Buffett’s $5 billion investment in Bank of America (BAC) shows that a crisis will not be confined to Europe. I consider this a signal that things are much worse than they are saying." It is entirely evidence that Warren Buffet thinks the fundamental value of BAC is higher than what he had to pay for it. Generally betting against Warren Buffet won't be profitable. Wait a second! Isn't Warren Buffet a 'Money Manager'??? I thought they were all overinvested and trying to unload. Warren Buffet is by far the largest 'Money Manager' in the world, and yet he's diving in with both feet. For fucks sake!
> "Now that everyone knows there is a crisis in Europe, the one in China will soon be making headlines." So... They won't sell us stuff anymore? They barely import anything from the west, so if they go into some kind of crisis they still won't, but their exports will get cheaper and demand for oil and natural resources will go down worldwide.
> "For more strategic recommendations, read September 5′s issue of the Wellington Letter." LOL, this entire article is just an advert.
This author is just full of shit on every point.