I just finished reading, Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown by David Wiedemer, Robert Wiedemer and Cindy Spitzer. As you can imagine by the title of the book, the authors are not too bullish about our future. Let me restate that: they are down right pessimistic about our chances of correcting our economic ship. As far as they’re concerned it’s not going to happen. We’re going down in flames and we’re going to pull down the rest of the world with us.
Now before you go and find a bridge to jump off of, the world will go on, a new economic order will eventually emerge from the ashes and the U.S. will likely lead the way again, this time a whole lot wiser as we learn from the mistakes of the past 30 years that set us on this course in the first place. That’s the gist of the book.
The question that we need to ask ourselves is: How true are the premises presented in the book that lead to this conclusion? Are these authors a bunch of nut jobs or do they have valid points? While I don’t agree with some of their conclusions, I believe the overall framework that they present is both logical and intuitive. Let’s see what you think as I outline the basic premises of their book.
The authors believe that beginning in the early 1980s, with the decision to run large government deficits, six co-linked bubbles have been growing bigger and bigger, each working to lift the others, all booming and supporting the U.S. economy. A bubble is defined as an asset value that temporarily booms and eventually busts, based on changing investor psychology rather than underlying, fundamental economic drivers that are sustainable over time. The six bubbles are:
- The real estate bubble
- The stock market bubble
- The private debt bubble
- The discretionary spending bubble
- The dollar bubble
- The government debt bubble
The first four of these bubbles began to burst in late 2008 and 2009 which rocked the U.S. and world economies. It’s kind of difficult to disagree with this premise with maybe the exception of the stock market. Was the stock market crash of 2008 as a result of a bubble? The authors make a compelling case (which you’ll have to read) that the stock market crash of 2008 was in fact a bubble that was not supportable by sound economics.
The second major premise of the book is that while most people think the worst is over, the coming Aftershock will bring down all six bubbles in the next two to five years. Whoa! So what’s the evidence to support their view.
The authors go on to explain that money, like all assets, is also affected by the law of supply and demand. If there are too many dollars available their value falls. In the past four years The Federal Reserve, in order to avoid a collapse of our economy, has increased the money supply through Quantitative Easing from $800 billion to $2.6 trillion. This is an unprecedented increase in the money supply. The final bubble to pop is the government debt bubble. Our national debt in that last four years has increased from $10 trillion to $16 trillion! Both the dollar bubble and the U.S. government debt bubble have been pumped up to offset the other popping bubbles. Both are on unsustainable paths and they too will pop bursting America’s and the world’s economy.
As I mentioned earlier I don’t agree with everything they say in this book. My fundamental disagreement is in the inevitability of the last two bubbles popping. If present trends continue, i.e., we continue to avoid making difficult decisions, then I absolutely agree that the dollar and government debt bubbles will pop as predicted. I also believe that nothing will get done to solve our economic problems until there is a crisis.
The good news is there is a crisis looming which should get our politicians’ attention: Europe. There is no solution to Europe’s debt crisis. None. Anyone who thinks otherwise is living in “la la land.” Europe’s days are numbered. When they falter, and they will, this catastrophic event should give our political leaders the impetus to make the necessary, painful decisions to keep us from following Europe over the precipice. Just like the days immediately after 9/11 both political parties will come together for a short period of time. As Rahm Immanuel once said, “You never want a serious crisis to go to waste.” Let’s hope they take advantage of the collapse of Europe to right our economic ship so we can avoid following in their footsteps.