I have been reading John’s newsletter for over 5 years now, and have rarely been disappointed with it, or disagreed with his ideas about where the US and world economy are headed. So when I saw this book, I picked it up expecting the same in-depth analysis and succinct conclusions.
Let me start by saying that I am completely on board with their basic premise of the book – ‘It is the end of the line for debt fueled economic expansion. Western governments will run into the limits of their ability to borrow money at today’s low rates. This will result in the Endgame, where all the debt will finally unravel’. The endgame has come about due to the unchecked rise in private sector debt over the last 60+ years. After the crisis, governments have stepped in and have increased public debt at rates never seen before except during a war.
I fully agree with the conclusions reached by the authors and their analysis of the problems being faced by all the large and small, developed and developing economies of the world. Also, I like the fact that these is a small section where they present us with ideas of what to invest in, based on our views about which direction the world economy will take.
I do have to say that I was a bit disappointed with this book, and for the first half had no idea why I was continuing to read it. It felt like attending an introductory economics class all over again. Page after page talked about the basic economic relationships, without almost any reference to the crisis at hand. I really believe that too much space has been devoted to explaining these concepts, and I could have done with a lot less of it. However, after reading the whole book, I realise that I might not be the target audience for this. As John says, “When we started writing this book, we purposefully set out to write so simply that even a politician could understand the nature of our problems.”
The first section of the book also felt like a repetition for us, the newsletter readers as we have read most of these thoughts earlier before. Also, John posted extracts from the book as part of the newsletter, so I had to skip over entire chapters, breaking the continuation which should persist throughout the book.
Throughout the book we hear from a really large number of experts about why the crisis happened and how it will further unfold. For example, an entire chapter is dedicated to the findings of Reinhart and Rogoff in their book ‘This Time is Different’. It is assumed that these are self-explanatory and John refrains from giving any significant amount of explanations or interpreting what these experts are saying for the layman (considering that he is trying to make this easy for everyone).
The second section of the book is much more interesting, where John talks about the problems facing the world, and I’d say that he does not hold back at all. He speaks the unspeakable, something which no politician wants to even contemplate, let alone talk about. It comes out clearly that the developed world is now left with bad or worse choices. There is no way for them to not do anything and muddle through, the markets will not let that happen for long.
The book talks about three options these countries have to make things ‘better’:
1. Default on the debts
2. Devalue the currency and hurt foreign bond holders
3. Inflate the debt away
None of these options are without their costs, and countries choosing either will have to go through a lot of pain. Regardless of what the policymakers do, we are looking at a decade of slow growth, high unemployment, more frequent recessions and rising taxes.
The authors go around the world and clearly present the problems facing various nations and possible solutions which the politicians will need to pursue in order to make things better over the long term.
In the USA, the balance sheets of businesses and individuals have been badly damaged and will require efforts to repair. The government has been running huge deficits to somehow boost economic growth, without much success. Over the medium term, the government needs to have a credible plan for reducing deficits and reforming Social Security and Medicare.
Europe is plagued by very large imbalances, where Germany exports to other countries in the EU and runs a current account surplus and other countries are net importers and have deficits. This needs to be corrected, but none of the countries are willing to make adjustments. The reduced interest rates after joining the EU provided economies such as Greece, Italy and Spain to borrow indiscriminately and increase consumption and government expenditures. A number of countries will not be able to get out from under their pile of debt without defaulting in some form.
UK, with its heavy reliance on the financial sector was badly hit in the crisis. They have had to step in and nationalize a number of banks. They have however started moving in the right direction as the government pulls back fiscal stimulus, and the Bank of England running a massive QE program. This has resulted in higher than average inflation, and will reduce the debt burden for individuals and businesses.
Japan’s huge deficits have been funded internally through the large savings of individuals. This is now coming to an end with the population aging and drawing down their assets. With this, Japan will have to look elsewhere for its funding requirements, which means a rise in interest rates and a major debt and currency crisis.
Australia has had a huge real estate run up with no significant reduction in prices during the crisis. This has left it quite vulnerable. Their economy has been supported by the ties to China’s commodity imports. However, as China looks to cool down its economy, it could have significant impact on Australia.
For emerging markets, the flood of liquidity will prove difficult to handle, as the excess liquidity looks for returns globally. This will lead to significant bubbles in asset markets in these economies if the governments do not look to restrict such inflows in some manner. Also, as everyone looks to devalue their currencies, the developing economies with currency pegs will be under immense pressure to let their currencies rise or accumulate huge amounts pf foreign exchange reserves.
The second section redeemed the book for me, and I would have been happy to have that as a separate book. I give this book, four stars for its clear and simple explanations of all the issues facing the world economy today. I deducted the one star for the extended economics ‘tutorial’ at the start of the book.