Financial Reckoning Day: Surviving the Soft Depression of the 21st Century [Hardcover]

This book is a brilliant expose of the "new economy", the irrational behavior of crowds and its malaise of overvalued stock and asset prices that cannot be sustained. Even the Nobel prize winning theory of efficient markets fails to describe the phenomenon in US markets during the last decade of the twentieth century. Irrational exuberance cannot be explained by rational theories. The book opens with an analysis of the new economy driven by Information technology, and blasts the myth of the new found prosperity. The new economy was supposed to signal the end of history by shortsighted economists during the days of irrational exuberance. The internet in fact amplified the behavior of crowds across continents and created bubbles that were larger than ever. Companies without any revenue, leave alone profits, were busy making money through IPOs and engaged in the most innovative forms of financial engineering to drive their stock prices north. Who cares as long as it makes us rich. But then, history has taught us that reality will catch up and so it did.

There was a time in the seventeenth century when the infamous John Law ( he was mostly on the opposite side of his second name) created the concept of paper money and central banking that ultimately brought his country on its knees. Using this example, the book attacks monetarists for the unbridled expansion of liquidity in a system that temporarily believes that paper money is real. Modern day economists tend to treat the economy as a machine that can be manipulated by driving some screws and made to run a little faster. The problem , the authors feel, is that soon they will be left with no screws and also run the risk of tampering with the wrong ones. Printing more money at regular intervals, is considered a panacea for all economic ills by these pundits of prosperity.

Economic lessons from Japan are described in a separate chapter and quoted in most other chapters of the book. The chapter devoted to "The Hard Math of Demography" is excellent and the topic of an aging America and its economic implications is discussed with accurate statistics and analysis to back the conclusions.

Finally one gets the big picture of the big bubble. Americans are spending and the Fed is encouraging them to spend borrowed money. To make things easier, the interest raters are lowered and more money is printed. Savings rates in the US have reached an all time low close to zero while private sector debt is three times the GDP. US is now the biggest borrower and foreigners till now have believed that the paper money printed by Fed is a safe currency. This illusion may not continue. The party will soon be over, and a massive hangover is imminent. Currency that is not backed by gold or equivalent assets is nothing but what it is made of - paper. History tells us that forbearance and thrift and not profligacy lead to prosperity.

Text books on history a few decades from now will probably carry a chapter on what went wrong with the worlds' once most powerful nation.