Yesterday I mentioned that my view on the sustainability of our debt-based economy in general, and real estate in particular has largely been shaped by a handful of books. I’ve received quite a few emails asking me for the titles of the books. Rather than emailing everyone, I’ll instead list a handful of the important books that influenced my macro economic views, in no particular order. I’ve also included some commentary on the books and on how they’ve shaped my convictions in certain areas.
Irrational Exuberance (2000)- Robert Shiller
Overview: Perhaps the most eye-opening and thorough overview of bubble dynamics. The first edition looks at some famous bubbles of the past (South Sea, Tulip, Dot Com, etc.) and looks for commonalities in all of them. In the second edition (2005) Shiller turned his eyes to the US housing market, correctly calling it a bubble set to burst with significant consequences. Once again, and as I keep stressing, it was through an analysis of long-term drivers of fundamental value that Shiller came to his conclusions. These are the same fundamentals that convince me that real estate is overvalued and in for a rough stretch. Robert Shiller has likely influenced my thinking more than anyone else. I highly recommend any of his books. As an aside, Shiller’s new book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” is also fantastic.
Extraordinary Popular Delusions and the Madness of Crowds (1841)- Charles Mackay
Overview: An all-time classic illustrating the fact that the same animal spirits that cause us to be comforted by following the crowd today were in play almost two hundred years ago. Mackay delves into asset bubbles such as the South Sea, the Mississippi, and the Dutch Tulip bubbles, as well as seemingly non-related matter such as alchemy, crusades, and witch manias. The thread that ties it all together is our incredible tendency as a species towards group-think. As I’ve said before, one of the fundamental requirements for a credit bubble to form is for people to almost unanimously embrace credit, shun savings, and partake in a secular shift towards consumerism. The net result, of course, is to pull demand forward leaving an eventual gap in demand once peak credit hits, setting the stage for deflationary forces of debt repayment and savings. That’s where we are, by the way.
Empire of Debt- Bill Bonner and Addison Wiggin AND Financial Reckoning Day- Bill Bonner and Addison Wiggin
Overview: Two of the main authors over at Daily Reckoning teamed up to explain the nature of debt and analyze our current situation within a historical perspective. The book deals with America’s debt problem, but there are very strong parallels and important insight to be gleaned from both of these books. Their ultimate conclusion is that the US will see strong inflation or hyperinflation as a result of their debt issues. I don’t disagree that this is a possibility, but in my mind they don’t adequately discuss the impact of debt induced deflation, which must happen before there can be any significant inflationary pressures (without which hyperinflation becomes extremely unlikely, though not impossible).
The Coming Generational Storm- Laurence Kotlikoff and Scott Burns
Overview: An excellent and insightful book, though once again America-oriented. It deals largely with the massive entitlement obligations we’ve created in the Western world, Canada included. This is a topic of monumental concerns to all citizens as I believe that will absolutely be one of the defining issues of the next decade. Society has experienced a massive shift over time in terms of what it expects its government to provide, and what they are entitled to. It has led to promises being made at a time when: 1) our economy was experiencing organic expansion due to production and innovation, rather than debt and consumer credit; 2) the population of young workers was steadily expanding relative to the population of older workers who would live off the taxes generated from their wages; 3) life expectancy was significantly less than today; 4) a ‘comfortable lifestyle’ meant living with far less than we expect today.
When combined, it amounts to the fact that we have made promises that are virtually impossible to keep without a massive series of tax hikes to pay for them. Who will bear the brunt of these tax hike? The under 40 crowd. It basically boils down to this: Previous generations have enjoyed an artificially high standard of living based on the perpetual expansion of debt at every level of society. They expect that living standard to continue. But that debt is now a constraint on growth and must be repaid NOT by those who largely got the benefit of enjoying the artificial standard of living, but by subsequent generations of workers. It absolutely sets the stage for generational tensions to come. Look no further than the attempt to raise the minimum retirement age in certain European countries for examples of the sort of tensions that await us.
Socionomics: The Science of History and Social Prediction (2003)- Robert Prechter
Overview: Let me start by saying that I in no way endorse some of the predictions that Prechter has made of late, namely that the Dow will hit 1000 (for a loss of over 90% of value from its current level), and I am not a strong believer in the Elliot Wave Theory beyond some obvious applications to the cyclical nature of human mass psychology. As is the case with any book, you ‘eat the meat and spit out the bones’, as they say. This book (actually a two book set) has some fantastic insight into what drives broad social changes, or what I like to call ‘secular shifts’ in attitudes. It convinced me that a secular shift in attitudes about debt and savings were inevitable. When I began researching the implications of those two factors, it pointed me clearly towards deflationary pressures. It reads somewhat like a textbook and can be quite dry, but it is absolutely full of great insights. Prechter is one person who has influenced me to examine the deflationary nature debt.
The Ascent of Money (2008) – Niall Ferguson
The book provides an interesting historic perspective on the nature of money. Where the book really takes off is where it discusses our newly devised non-conventional forms of money such as swaps, derivatives, mortgages, credit cards, etc. Ferguson then examines the social implications of the proliferation of this debt-based ‘money’, namely our inability as a society to exercise restraint and moderation, our relatively new-found propensity to take significant risks with our own and borrowed money, and the associated fallout when these debt bubbles burst. It’s a fascinating read.
Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free (2008)- Ellen Hodgson Brown
A newer book that does a great job of explaining how money is generated in our fractional reserve banking system. Every person should understand this dynamic since it amplifies the creation of money (inflation) when there is a demand for credit, but intensifies the deflationary forces on the lee side of the credit mountain. As I’ve said before, I believe the entire Western world is near or past peak credit, meaning that this very deflationary dynamic is working against economic growth. It is what keeps central bankers up at night. It’s what has kept Japan in a deflationary funk for 20 years. It’s the reason why zero interest rate policies by the US fed have failed to stimulate the economy: demand for debt is nearly non-existent at the consumer level and any debt that is being created is massively dwarfed by the destruction of debt as it is paid off or defaulted on.
As an aside, I first became interested in fractional reserve banking after reading another similar book called, ”The Creature from Jekyll Island : A Second Look at the Federal Reserve” (1998) by G. Edward Griffin. Between the two books, I found ‘Web of Debt’ to be the easier to read, more concise but equally insightful, and perhaps a bit less ‘conspiracy theory-ish’, though both are a great read.
There you go. Now I may also post a second list of books that have shaped my investment philosophy. I know there are a number readers of this site who are faithful followers of Garth Turner’s site. I think it might be fun to compare and contrast our investment philosophies. There’s a great deal that we agree on, but some very significant differences also.