While the "experts" want us to believe that all is well (or will be soon), nothing could be further from the truth. The worldwide financial crisis of 2008 and 2009 was just a sneak preview of what is to come. For those who act quickly and correctly, there is still time to protect yourself, your family, and your business in the next global money meltdown.

An excellent book that can really open your eyes to what may lie ahead of the US Economy as well as the Global Economy. Although the authors successfully predicted and foretold the Economic Meltdown of 2008 in the first edition of this book released in 2006, subsequent predictions outlined and explained in the 2011 Edition have yet to materialize as the end of 2016 approaches. This has caused many readers who read the 2015 edition of this book to lose the credibility of the authors. I disagree. My personal view is that the tactics of The Fed, ECB, BoJ and the BoE have largely propped up the financial markets. This has led to keeping the markets artificially inflated, especially during a Presidential Election year. Although I don't agree with all of the conclusions reached by the authors, I respect their willingness to take a stance. I do believe much of what the authors have predicted will eventually play-out, especially when the governmental institutions in the US, Japan and Europe "run out of tricks". The economic downturn may not be as severe as predicted in this book but, at the same time, it could end up being worse. The takeaway from this book is to keep up with what is happening and then adjust investments for not only protection but also to take advantage of declines. When a bottom is reached there will be great opportunities in solid investments. The edition discussed here was written in 2011. I plan to read the 2015 edition to compare and contrast what was said. I listened to the audio book version of this book which was purchased at audible.com. I intend to purchase either a hard copy or Kindle version of this edition of the book for reference. ( )

The author's analysis of the current Bubble Economy is compelling. They don't hold out any hope for good times ahead, although they have ethically suspect recommendations for individual protection & prosperity in the coming debacle. Their argument, however, could have been condensed into a medium-length article. The constant repetition of points already made, & a fair amount of self-congratulatory "we got it right the first time, so you should trust us now" rhetoric becomes, finally, more annoying than instructive.
Interesting in light of Obama's 2012 State of the Union speech with its emphasis upon productivity. Authors claim that only "real" growth can soften the bursting of the final of 4 economic bubbles to burst (real estate & stocks in 2008; US dollar & debt on the horizon). They expect too little too late, however (a bit like mitigating the consequences of Global Warming or Climate Change). Neither the authors nor the President, however, speak to environmental limiting factors to Growth. To my mind, these remain the elephant in the room that no one fully acknowledges. A capitalist (even a communist) economy is predicated on growth, not sustainability. Continuing increases in GDP require either more consumption by existing populations (since there must be an upper limit to need, even perhaps to want, such increases necessarily must reach an end, where all needs are met, where consumption reaches its saturation point) or continual increases in global population that would create new consumers (here we run into the carrying capacity, however defined, of the planet). According to some, at 7 billion world population we've already exceeded the Earth's carrying capacity by as much as 5 billion!
In the short term, increased consumption can arise from more equitable distribution of income and wealth, which would create billions of "new" consumers. Also, "new" products to meet infrastructure & "clean" energy demands might impact both demand for goods and somewhat mitigate environmental damage. The risk of environmental collapse won't go away however. In the long term, we have to move from growth to sustainability, from population increase to population decrease (unless, as some suggest, we develop the capacity to colonize another planet).

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Extremely Smart Rhetoric — But Not Smart Enough Science

I have to hand it to the authors of Aftershock: they can hammer a point across. This work was certainly written by one smart, little gang, and it is hard to argue their success. While I do agree with the book’s general view that a series of bubbles could pop and send the world’s economy into a vicious cycle, I am not so sure about the reliability of its methods or of its predictions. First off, any economist that claims to understand the economy is a charlatan. Anyone who claims to predict the path of economies years out cannot be taken seriously. Secondly, the book omits that governments, in particular the American, could indeed do something to deliberately deflate some or all of the bubbles. However, the authors display an unusual and at times entertaining level of street-smarts that bring forth real-world solutions and prudent advice. They even recognize that life should be in the center of human priorities and that it goes on even without money. For these last points, the book deserves 5 stars despite of its fundamental shortcomings.

This group of economists recognizes the profession of ours as being focused on “expert” economic issues while the big picture (of growth) is poorly understood, if at all. Unfortunately, it is discouraging to see the same group taking conventional wisdom to explain economic “breakthroughs” of the past. It crosses into the bizarre, when an author like Marx is given an A for effort and an F for results. This is because the authors obviously did neither study the Communist Manifesto nor the Capital, let alone the socio-economic context of Marx’s intellectual framework. All of the authors’ quoted breakthrough ideas are nothing other than dogmas of political economics, not breakthroughs or science. They pretend that the understanding of capital and interest is some sort of a modern idea. Obviously, they did not study the Bible either. The ideas of capital and its deployment for interest has made little progress for the last thousand years, or so. Since then, high finance and derivative instruments were widely used and their destructive consequences were probably understood by those that had deployed them. Apparently, the authors also have no understanding that monetary policies are mere superstitions, which only work as everyone else is a follower, or a believer, one should say. In other words, unlike the authors that long for the next big idea (i.e. dogma), this reviewer — one of the few surviving “responsible Capitalists” — stands for beginning all over, questioning the dogmas of free markets (an experiment that has not yet been conducted anywhere despite of what we are told and what we might like to believe) or of supply and demand equilibriums on which the modern and false mathematical models are founded. Today, there is no recipe for which monetary or fiscal option to choose in order to weather a storm or drive the economy from one trajectory onto another. If it were otherwise, there would be no political gridlock but only experts that could tell to pick this in order for that to happen. Most other experts would then be able to duplicate the logic of the authors and react to what they see in an orderly fashion. In fact, the one thing economists can easily verify is that their monetary models work! However, they lead to the expected result only for those failing to ask what would happen next. Just one step further, and then another, their own models would quickly duplicate that the end result would near a zero-sum game. Any half-baked student of economics for beginners could disprove the theory on less than six pages. As the authors say, there is no such thing as science, today, in economics, only political expediency and protection of chairs and retirement plans. Hence, this reviewer agrees with the authors that a paradigm shift is needed from philosophical economics to science, but again, disagrees with the authors’ of how to get there. They do not even mention competition, herd behavior or the effect of experience (as the antonym of the authors’ concept of not wanting to face facts) as one of their four economic key elements to a new approach (they would like to explore the learning process, but the decades old theory of memes should help to advance their thinking). Maybe big data, their forth element, or our aggregate minds will change economics eventually. But first, we have to raise the next generation that will understand it and command over reliable data of the past to run successful simulations. The authors are silent about the lack of historical data on which such models could be built and also about the fact that economies are inherently unstable and under constant fire of attempted disruptions. If it is impossible to predict what the next boom-bust technology will be, then it is also impossible to predict where the economy is heading in the long run. The authors think that the economy could be more like the weather without a static equilibrium but with a dynamic one. Scientific economics and the authors will eventually have to recognize that there is no such thing as equilibrium — period. Even their idea of evolving economics is not new or any better. This reviewer had the privilege to study under one of the great pioneers of evolutionary economics over twenty years ago. This theory still rests on the fundamental flaws of the previous ones. All these ideas have one thing in common: they all worked — until they did not work. What bothers this reviewer is that the authors undermine their own credibility by praising ideologies that were not based on any science, but turned out as false. Yet, it seems that the authors’ show an insecure flip-flopping between the praise and the view of Mark Twain that there are lies, damn lies, and statistics in the service of political titans in deviously conceived attacks on the taxpayers’ wallets. They call for one savior to come and ask the right questions — but only half-heartedly because they like to see themselves in this lofty position. They ask for new blood (even in other sciences such as physics, biology, and geology) to solve the fundamental puzzles — but they maintain that this is increasingly impossible, except for them, it seems. The fools are those that make the same mistakes twice (or perpetuate them), and here I wholeheartedly agree with the brainy team. But how convenient! Criticizing is easy and can be seen the world over, but bringing forth something new and ingenious is an entirely different story. Their wailing against their own is old news and no longer an insider joke. These sidekicks or afterthoughts — although quite entertainingly presented — are off topic in the context of the Aftershock other than filling more pages, and they are way out of their league.

The authors are obsessed with bubbles and their catastrophic implosion in a global mega-money meltdown. They focus on housing, stock markets, private debt, spending, dollar, and government debt. Compared to many other countries, housing in America has been cheap before 2008 and has become even cheaper now. While the authors focus on more downward pressure on the housing market due to inflation and rising interest rates, neither of the two needs to obligatorily come through. Switzerland, for example, has had high real estate prices for at least four decades. What the authors could call a housing bubble has been kept in check by low interest rates and no inflation. Certainly, housing prices will deflate if interest rates go up. Any rate increase will directly cut into the disposable income of households with flexible rates and potentially overwhelm it. This economic dream scenario, where one factor has been almost “fixed” for so long, lures the economic community into believing that their analytical methods are of any value — including the authors’ own ideas. Simply put, at an interest rate of 5% and a disposable income of $10,000 per annum, $200,000 can be capitalized, representing the potential home value. At an interest rate of 10% and a disposable income at still $10,000 per year only $100,000 can be capitalized. The same money that afforded a villa before, now can only buy a shack unless the price of the villa collapses with the rate increase, However, unless the aggregate factor of income changes, it still costs $200,000 to replace the villa, and the theoretical framework continues to be fundamentally flawed. The problem is not, as the authors recognize, rising real estate prices alone but rather the imbalance that has been created during three decades of stagnating wages AND real estate inflation. However, while the authors end there, real life moves on and finds new ways to deal with problems, even if they are not understood. By sheer numbers, seven billion of us demonstrate quite well what success despite the absence of knowledge means. For example, raising the minimum wage in America for “controlled” wage inflation and keeping interest low could indeed ease said imbalance — at least as an experimental thought. Subsidized variable to fixed rate mortgage swaps or interest spread caps would be other and safer examples of possible government actions.

The stock market has also been inflated for at least three decades since the introduction of “securities” has blown any prudence into the wind. Before, the value of a stock would be based on its performance and potential for leverage. Now, stocks are not unlike tulip bulbs from back in the seventeenth century. I agree with the authors, who even factored in the possibility that stocks could climb sky high again before collapsing (of course, this review is written from the top of the mountain). However, this is mainly fueled by the lack of alternatives, a factor in investor psychology that the authors do not seem to recognize. I also agree that a significant stock market correction is now just around the corner, possibly one or two months out (nobody will notice if this reviewer is wrong). All it takes is a trigger event to break the dam, possibly a high-speed trade (i.e. criminal insider trade) gone wild. However, stocks are not real estate. They are liquid means and, that is most important, mainly virtual, i.e. not real. If an investor, who should by definition be among the haves, bought stock at DJ 7500, it doubled in five years and then suddenly crashed to 8000, the stock owner did not lose anything other than the opportunity to a large profit. It is true, the sentiment and self-esteem is devastated and the potential to consume or reinvest more has just waned. But other than being bad for the psyche, nothing happened — in the aggregate view of the matter. The DJ could certainly fall below this point when aggregate losses would materialize through real aggregate transactions. If they did not leverage their wealth, they have less, but they are still among the haves. Those that did leverage, jump out the window, if they are dumb enough, or take action, declare bankruptcy, and walk away with a clean slate. The smart ones will return to rebuilding their wealth at once. That is what industrious humans do. There will be lots of small investors hurt that hopped on the train too late, of course. My advice to those is simple: If you cannot take the pain, stay out of the game. The authors’ advice is different, more elaborate, and justly based on prudence.

The more troubling issue with stocks is securitization, a factor that the authors do not seem to think being a big deal. They even think that the idea that securities could have taken down the economy is plain out wrong. A look at Greenspan’s interest rate manipulations would answer this question decisively as it was his efforts to cooling an overheated economy with direct rate hikes that triggered millions of homeowners defaulting on their mortgages. The time lag clearly shows the rising troubles with the securities and the financial dinosaurs that fell were those that could not deliver on asset calls that were triggered by securities. Given that nothing has fundamentally changed in the regulations since 2008, these can rapidly undermine the entire global financial system again if only one of the bigger players fails to deliver on its promises. The authors’ advice to invest in options (i.e. securities) is flat-out wrong. It is often forgotten that securities, despite their name, are of the most insecure investments out there, and that they are fully dependent on the underwriter’s capability to pay up when the market plays outside of the oscillations predicted in their mathematical models. In other words, the stock market bubble of the authors is irrelevant; the thousand-fold securities bubble behind the stocks is where the monster looms. Whoever believes in the Aftershock’s scenario of multiple bubbles popping should not invest into securities. In this case, governments would be overwhelmed by trying to bail out the institutions that issued them, and the authors’ predictions are contradictory and illogical.

Private debt has long been astonishing. How could an entire nation be foolish enough to refuse to save a single penny and instead perpetually return to spending as much or even more than they earn? Here, America is set apart from much of the rest of the world. Oddly enough, this strange behavior is at the foundation of the strength of America’s economy: it keeps the rat race going. Private households that find themselves in trouble have options, and some of the authors’ recommendations are street-smart and realistic, and it is here where the five stars are merited. First and foremost, anyone can opt out at any time to wait and see what happens. The government could and should prevent catastrophic fallout from a private debt collapse by banning floating interest for existing debt and by putting an interest spread cap on new private debt, for example. Even better, they could simply fix the prime rate and do away with speculation altogether. Financial institutions can always securitize (!) against floating rates. Here again, private debt is not so much a problem as the securitization (!!) behind it is, which led to irresponsible habits in banking, for example fat cat bonuses absent of any merit. If excessive lending would be regulated as unenforceable, smarter lending would lead to less systemic risk at the price of not so vigorous growth potentials. In addition, it is interesting that the authors do not seem to recognize corporate leverage as a much more fundamental issue than private debt. There, the absence of growth or a contraction has devastating effects on jobs, and a large player’s problems can cascade through the entire economy. Before the collapse in 2008, I had made a recommendation to my employees to refinance into fixed rate mortgages. While I agree with the authors’ recommendations on real estate debt, my employees have paid dearly for this safety. I am sure that these authors’ readership has a thing or two to say about their mortgage cost during these past five years, and the verdict is still out whether or not it was worth it.

A whole different issue is government debt, which is in this review bundled together with government spending. The authors claim that the United States will inevitably default on its debt. However, they seem to fail to recognize that humans are ingenious in cheating their way out of all sorts of tight spots (again, try to argue success story of the human journey). For example, a 0% super-bulk refinancing of government debt could push the imminent collapse 30 years out. With a couple of points in inflation, the debt would eat itself away before maturity. Another is by simply not telling the truth about the gravity of the situation, and the authors hint at that possibility. It seems that the authors are among a surprisingly small number of economists which recognize that the “recovery” is in deficit spending and government debt. In the absence of this, the American economy would have contracted substantially. The really interesting question is what will happen with interest rates since many countries that used to engage in austerity are now back to government spending on more debt. Will it trigger the monster of overwhelming debt servicing? The authors cannot stand up and claim to know what will happen next without making a fool of themselves.

The Aftershock’s escapades about the value of the dollar are prophetic, and thus not worth commenting on. As anyone else, they have not the slightest clue.

In the end of all said, while there are always options, I agree with the authors that government action may come too late and the ones now taken are in fact increasing the odds of a collapse down the road. However, neither the authors nor this reviewer know what actions will be taken when governments are faced with a cliff. Will we jump? Will we build a bridge? Or will we simply drive down and up again on the other side? Quite obviously, there are many ways to address a problem and the quiz would bring forth many options more.

For those still in need of a wakeup call, Aftershock is well worth the time. For their tips of prudence alone, this book deserves five stars. Despite their call to securities (to which many smart investors are averse), this is its strong point, and this reviewer is inclined to turn a blind eye on the overwhelming weak points because they differ little from common economic wisdom. Some of their predictions have come true, somewhat, but they are based on pretensions, speculation, or prophesy, not science or better analytical knowledge. After all, humans ignore all facts when inconvenient. My recommendation to the authors: stay away from economics and focus on the strengths: investment advice.

So, will there be an aftershock? Of course! Rule Nr. 1 is that all bubbles eventually pop. When and how big? Nobody has the slightest clue.

A.J. Deus
Social Economics of poverty
For an antithesis on the Aftershock’s ideas about the debt bubble see Debt Crisis – What Crisis? at www.ajdeus.org/articles/472 ( )

A Doomsday book with some substance. Personally i like the idea of diversifing in gold but it is scary to think what might happen. ( )