Financial Reckoning Day

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Many people have recommended Bill Bonner’s book to me since it was published in 2003, but I never got around to reading it. Recently I noticed that it was listed on the Amazon page for my new book on the economics of the Civil War. Then I noticed it in the Auburn University library. Most books with titles like Financial Reckoning Day: Surviving the Soft Depression of the 21st Century do not make it to the shelves of the research libraries of state universities. So I finally took the plunge and read the book.

I was not disappointed in the least. The book is well written, the analysis is correct, and the subject is of vital importance. I would recommend the book to everyone whether you are interested in the philosophical, theoretical, historical, financial, or just worried about saving your own financial hide. It would be great for home high schoolers or college students. Ladies and gentlemen, we Americans are in hot water and if you want to know what the temperature is, this book is a good place to start.

I would label the author an "Austrian historian." You won’t find much on Mises, Hayek, or Rothbard, but William Bonner has well-developed Austrian instincts and clearly is sympathetic to Austrian analysis. He sets out to establish significant historical lessons and I would describe his major theme as: Whenever you think that things can’t get any better, they are probably going to get a whole lot worse.

The book opens with a delightfully insightful portrait of the stock market bubble. All of the major characters are portrayed, from the hopelessly confused to the criminal. Rather than a "New Era" of technology and information, Bonner shows that it was an episode arrogance and ignorance. He does an excellent job of popping the panacea of "information" and provides a delightful account of new age, high-tech guru George Gilder who went from fabulously wealthy and famous during the bubble to going broke in the bust. Even better he identifies Gilder’s ignorance of "price" as the source of his troubles.

Chapter two reminds us that such folly has been quite common in modern history. Fukuyama’s "end of history" is a good case in point. The communist myth of overtaking the west is another. And we continue to repeat these errors "as soon as the memory of some ancient folly grows moss-covered and forgotten, people trip over it anew." Bonner reminds his readers of the folly of WWI where 30 million people were killed, wounded, or missing. Why such slaughter? Bonner’s answer is technology. The technology to kill and the technology that makes it possible for so many people to believe in the same stupid ideas. Like Napoleon and Hitler, Bonner shows in the case of Long Term Capital Management that "nothing fails like success" — spectacularly!

We then move on to John Law and the Mississippi Bubble. Law is the godfather of paper money and the engineer of the first stock market bubble. He was a murderer, gambler, cheat, and womanizer, but his real crime was on paper in that he tried to save the profligate French monarchy from its runaway debt and deficit spending with a scheme of stocks and manipulation. His papering over of the problem caused the boom and bust and bankrupted the nation and ruined many unwitting investors. The person who is the subject of my research, Richard Cantillon, was also involved in the Mississippi Bubble, but he made a huge fortune and wrote a book exposing the recklessness of government banks and paper money.

Bonner next takes on the Japanese Bubble. I cannot help but recall a colleague of mine in the College of Business at Auburn University who boldly wrote, after the Japanese stock market bubble had already burst, that if we did start following the Japanese model of government running the economy we would have 45% interest rates and 25% unemployment by the mid-1990s. Bonner shows just how wrong the Japanese could be and how well we followed their model.

Three solid chapters on Alan Greenspan, mass psychology, and demographic trends in America follow. The book is long on facts and history and light on prediction, but more insights about the future emerge the closer you get to chapter eight, "Reckoning Day: The Deleveraging of America." Here his themes are further developed to describe credit and financial conditions, the dangerous dollar, and that the US has entered into the "soft depression of the 21st century (the subtitle to the book). I liked the way he captures the entire mainstream of economists and their lack of solutions when he links Milton Friedman and Paul Krugman; both can offer no solution for the Japanese-style structural depression other than to "just print money."

Needless to say, this is not a hopeful book. It presents no obvious solutions. It does however tell the reader that the water is indeed hot and that it might not be a bad idea to jump out of the water before it is too late.

Disclaimer: While water boils at a certain temperature, no one knows how hot or cold an economy will get before moving in the other direction. The peaks of manias and the depths of depressions are impossible to predict, so for now I’m keeping one foot in the pot and one foot in the frying pan. I’m diversified between cash, gold, natural resource stocks, and safe stocks in consumer goods, health care, telecoms (a.k.a. telephones). Out of sympathy for Martha Stewart, I think I’m going to buy a little MSO.

Mark Thornton [send him mail] is an economist who lives in Auburn, Alabama. He is author of The Economics of Prohibition, is a senior fellow with the Ludwig von Mises Institute, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War.

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