A Few Boo-Boos
As much as I like this book and recommend it, there are a few things that I think miss the mark. Some are comments made in passing and others concepts the authors developed in at least a little detail. A few examples:
p. 60: The authors argue that stimulating consumption in a balance sheet recession is useless yet they never discuss whether stimulating private balance sheets would be a good or bad idea.
p. 111: Government debt is compared to mortgage debt, a bad analogy since no mortgagor can legally coin or print money.
p. 122: The authors state that government debt and spending do not increase productivity. This is not really true in all cases and that is not recognized in the book. To be true we would have to accept that government built infrastructure (highways, airports, etc.) do not increase productivity. And what about the government expenditures to start the internet? The internet is probably one of the greatest productivity improvement vehicles of all time, with the interstate highway system not too far down that same list.
p. 131: The authors indicate that monetizing the debt of a monetarily sovereign country (i.e. creating more money to cover growing economic needs) results in inflation. The fact that this is a theory accepted by a large majority of economists does not make it true. There are economists who argue that no such result (inflation) is a given with proper monetary and fiscal policy management. This possibility is not mentioned in the book.
p. 148: The authors repeat a statement that is found in almost every basic economic textbook: “Government debt crowds out savings and investments.” The fact that this fallacious statement is repeated by so many textbook authors still does not make it true. This is demonstrated in a recent article by German economist Dirk Ehnts, entitled “The Picture That Quashes 50 Years of Economic Malarky”, which contains the following graph:
Click on graph to enlarge.
There is a clear correlation with increases in government debt corresponding to increases in private investment and vice versa. The accounting system for money balances called Modern Monetary Theory has at its core the accounting relationship showing increases in public debt correspond directly to increases in private savings. The authors do discuss money velocity relationships (p. 140-144), but that discussion does not cover the explosive increase in both public debt and private investment since the peak in the velocity of money in 1997.
Reality Check
Now, a reality check is in order. The authors were not attempting an economic textbook; they were not producing their own economic research. Their purpose was to report on the thinking prevailing in the world within the political and economic community. The authors are reporting on the situation in the world and what the predominant thinking is regarding that situation. A reader, such as this reviewer, who tries to focus on what is not known, will find what I have called a “few boo-boos” in this book. But these do not detract from the superb job the authors have done in summarizing mainstream economic thinking.
Do not avoid this book because it does not analyze the shortcomings of neoclassical theory. That was not the authors’ objective.
Advice for Investors
Mauldin and Tepper discuss at several points in the book, but mostly in Chapter Fifteen and the Epilogue, what all this means for investors. Their comments are probably more general than some investors would prefer, but they do make sound suggestions of sectors to remain on the investor radar screen: biotech, telecommunications, electronic technology, energy technology and emerging markets. They also give quite specific asset class recommendations for investing in a deflationary environment and another set for an inflationary environment.
Summary
This book is highly recommended as a plain language dissertation on the nature of the global debt bubble and some of the resolutions that may obtain. It does not give a prescription for how the crisis will be worked out; but it does outline some of the paths that may be followed. The authors go out of their way to be non-judgmental and discuss the need for political decisions to be made, not just economic choices.
This is a book that can be understood by those who are quite unschooled in the world of political economy and how the financial world works. At the same time it is a worthwhile reading for those who are much more knowledgeable in the arcane intricacies of economic theory and national/global government politics. There are some technical details that are not quite correctly presented in this reviewer’s opinion and others that are very correct and at the same time presented succinctly, a difficult task for the subject.
And, as I stated at the beginning, if there ever was a time to read Endgame, it is now.
