Grim Reaper economics
Wake Up! Survive and Prosper in the Coming Economic Turmoil by Jim Mellon and Al Chalabi John Wiley & Sons 304 pages, $31.99
The sky is falling. There is always a market for doomsday predictions about the economy and financial markets. Humans seem to get a vicarious thrill from contemplating disaster. Some may recall Surviving the Great Depression of 1990 by Ravi Batra ( written in 1988). He then had another go:
The Crash of the Millennium: Surviving the Coming Inflationary Depression, published in 1999. There also have been Meltdown: the Great ’90s Depression and How to Come Through It by William Houston ( published in 1993), and
The Great Reckoning: Protect Yourself in the Coming Depression by James Dale Davidson and Lord Rees Mogg ( published in 1994).
As a naturally gloomy sort, I ought to be a sucker for these tomes. But I find, on reading them, that the contrarian instinct seems to be stronger.
Normally, this is because the authors rely on some complicated analysis of charts, or a preordained historical cycle, as the basis of their argument. History is not that neat.
The authors of the latest jeremiad, Jim Mellon and Al Chalabi, almost make it without falling into this trap. But not quite.
In Chapter Six, they refer to Edgar Cayce, an early 20th-century U. S. psychic, who believed that economic depressions occurred about every 25 years. At this stage, they produce a table, citing the recessions that occurred since 1783. The table includes 1958, which carries an asterisk. The footnote says this indicates a “recession that took place without an actual contraction of the overall economy.” In other words, not a recession at all.
Thankfully, most of the rest of the book is rather more level-headed. They name-check virtually every factor that might keep an investor awake at night: high consumer debt levels, the U.S. current account deficit, a housing bubble in the Anglo-Saxon economies, the pension burden, terrorism, global warming and even greater obesity.
The authors’ thesis is that severe economic dislocation will appear by 2006 or 2007, leading to higher unemployment and bankruptcies. There will be widespread calls for protectionism, the dollar will be subject to increasing downward pressure, North Korea and Iran will continue to engage in brinkmanship and alQaeda attacks will dent fragile consumer confidence.
Even more alarmingly, “pockets of social unrest [will] become a serious threat to civilized order” and “pandemics in the west will be likely and many could die from illness and malnutrition”.
Blimey, that lot should have brought a cheer to your weekend. How likely is any of it? Of course, it is impossible to rule out any of those eventualities. And the authors are quite right to worry about a number of economic imbalances, including the U. S. trade gap and high consumer debts.
The difficulty is in timing. It seems plausible that, over the long term, the dollar will decline in the face of the U.S. trade deficit. But, in the short term, there are plenty of reasons why it might rise. Although the trade deficit is still growing, the dollar has risen this year.
Similarly, while consumer debt levels and house prices do seem too high, they have seemed so for some time. In the U.K., house prices have stalled, rather than crashed.
Even Japan, which witnessed a bubble in the 1990s, has not suffered collapse. True, investors have lost a lot of money, and the financial system has been severely weakened. But it has not been a calamity like the 1930s Great Depression.
It is safer to think of odds, rather than certainties. When any asset looks expensive relative to historical valuation measures, investors should be limiting their exposure. But making long-term bets about economies is enormously difficult. We had the Great Depression, stagflation in the 1970s and a couple of smaller recessions since then. The U.K. has now gone 13 years without a fall in output. Pick the pattern out of that.
The authors have a number of suggestions for preparing investors. Some, such as paying off credit card debts, make sense regardless of forecasts.
But they veer off the rails by suggesting readers keep six months worth of cash in their houses and, among other things, a “sharp hunting knife”. That is more a recipe for a jail sentence or a family tragedy than a piece of investment advice.