Book Review: Warren Brussee's 'The Great Depression of Debt'

Mar. 3.09 | About: iShares TIPS (TIP)

After reading Warren Brussee's The Great Depression of Debt, you may feel compelled to buy canned goods, water, and weaponry. If a Depression is coming and is as bad as Brussee thinks it will be, Americans are in deep trouble (and yes, "trouble" is a euphemism for something else). Here's one typical excerpt:

[I]t will take until 2012 or 2013 before the economy bottoms out and our economy again begins to grow. In the meantime, the stock market will drop dramatically, unemployment will be over 15%, and the dollar will lose its position as lead currency. Our country will be humbled as it is forced to adapt to a far lower and simpler standard of living. [page xii, hardcover, Wiley, 2009]

The problem with Brussee, however, is that his unpolished writing style mutes his persuasive power. For example, he uses far too many exclamation points, which is especially inappropriate when his message is that a financial apocalypse is near. In fact, I almost stopped reading after seeing yet another unnecessary exclamation point. While I'm glad I continued reading, Brussee needs to improve his writing style. In any case, below are his major points.

1. Brussee neatly summarizes the problems of having a large trade deficit:

If these [U.S.-debt-buying] countries get tired of the current decline in the dollar, which makes their investments net losers, they will will instead use the deficit funds to buy investment instruments elsewhere, for example in Europe. However, the United States needs these countries to buy our bonds because that is how we fund our deficit spending. So, if the foreign investors start to hesitate to buy our treasury bonds, the interest on the bonds will have to be raised high enough that the foreign investors won't go elsewhere. [page 28]

From what I've read elsewhere, if the current state of affairs continues, at least 2 to 3% of America's budget will go to paying interest to foreign investors. That's not a politically stable situation.

2. Listen up, market bears and Nouriel Roubini fans: Brussee thinks the S&P 500 will hit 423. As of February 27, 2009, the S&P 500 was 735.09, so Brussee believes the stock market--which is at 12 year lows--is 42% overvalued (See page 66).

It gets worse--according to Brussee, "[b]y 2013, people in the United States will have given up...the stock market will be akin to poison for most people...We will withdraw from many trade relationships with other countries, having set up trade barriers in response to our country's huge financial and unemployment problems." [page 83] These predictions may come true, but Brussee takes his pessimism to a level of hysterics, which ruins his credibility:

Retirement age will be changed in 2011 to age 70...A law will be passed that companies cannot lay off any more people due to reduced sales...The birth rate will go to zero...No one will want to bring a child into the very tenuous economy that will be gripping the United States. [Page 82]

Let's examine these claims. First, Brussee is vague when he refers to "retirement age," but he is probably concerned with Social Security. However, Social Security is not America's worst problem--Medicare is the much larger elephant in the room. Social Security's problems can be temporarily alleviated by raising payroll taxes and limits. Both these solutions will probably occur before Congress raises the retirement age to 70 for Social Security benefits. As for extending Medicare's eligibility age, it is very difficult to deny senior citizens necessary health care. In addition, senior citizens are a powerful voting bloc and will use their political power to prevent any major changes to Medicare. (See The Simpsons' "Wild Barts Can't Be Broken," Season 10, Episode 11, for a hilarious reminder of senior citizens' voting power.)

Second, the day Congress--with its influential corporate lobbyists--passes a law preventing layoffs is when a socialist party gains majorities in Congress. (Before you make jokes about the Democrats, remember which president increased our deficit by trillions of dollars in just eight years.) What will most likely happen first is that Congress will make it more expensive for companies to lay off workers, increasing corporate unemployment insurance contributions, or lengthening the time period employees can accept unemployment insurance. At most, Congress may require companies to pay some severance pay to laid-off employees.

Third, the idea that America's "birth rate will go to zero" requires an almost impossible set of events to occur: one, all illegal and legal immigration must stop; two, the Catholic Church must cease having influence over its adherents; and three, unplanned pregnancies must cease, or abortions must become as ubiquitous as Starbucks. Yet, none of these things will happen in our lifetimes. Whoops, there goes your credibility, Mr. Brussee. That's a shame, too, because Brussee makes some very good points. See below.

3. Brussee is against Obama's shovel-ready recovery plan, but for clean and renewable energy:

Where possible, government money given to industry should be accompanied by matching funds from the receiving company. In this way, the involved company has a vested interest in success... It will be very tempting to invest money on rebuilding our infrastructure, like roads, bridges, dikes, and so on. This was done in the thirties depression, and we are still enjoying the benefits of this work in our parks and in our infrastructure. But, as desirable as this is, funds invested in infrastructure will not lead to self-sustaining additional jobs...We must stay focused on meaningful job creation...Eventually the goal must be to develop completely electric vehicles. [pages 111-112]

Brussee is saying that shovel-ready stimulus is only a short-term fix. If the government spends money on building bridges, at some point, the bridge will be built, and the job will go away, and it's back to square one. Prior to reading the above paragraph, I had not thought about this now-obvious point.

4. Some random facts:

a. The wealthiest 1 percent of people currently own 40 to 50 percent of the country's [America's] wealth. [page 68]

b. Inflation is running at a 6 percent annual rate. [page 37]

c. In Smithers and Wright's Valuing Wall Street, the authors state that, when using a buy-and-hold strategy, investors never lost money when they were invested in stocks for 20 years. [page 145]

5. What makes Brussee more interesting than the average world-is-coming-to-an-end "economist" is that he's not a gold bug--he's a TIPS (Treasury Inflation Protected Securities) bug:

[G]old actually went down in price from 1933 (when the United States went off the gold standard) to 1968. It also generally lost money after its peak in 1978. So, it appears that for most periods between 1933 and 2007, the real value of gold did not keep up with inflation...Although gold may be a good crisis has generally not been a good inflation hedge. [page 123]

Investors interested in Brussee's investing tips may want to explore iShares Barclays TIPS Bond (NYSEARCA:TIP) and/or Vanguard Inflation-Protected Securities (VIPSX).

6. Here is Brussee's investment strategy:

[B]uying the most recent stocks added to the Dow, when the S&P 500 price/dividend is 17.2 or below; [and buying] stocks anytime the price/dividend ratio on the S&P is at or below 17.2. We will not only putting investment money into buying these stocks, but we will also sell all the TIPS we have accumulated and use those funds to buy stocks. When the price/dividend again goes above 17.2, we will stop buying stocks with new investment money and start buying TIPS. If the price/dividend goes above 28, we will sell all the stocks we have accumulated and use the funds from the sale to buy TIPS. [pages 116, 261]

Got that? What's the price/dividend ratio right now? Good question--that kind of current data is harder to find for average investors. Googling "price/dividend ratio" got me nothing current or useful.

7. Brussee is obviously a number junkie, and I loved his inflation stats at the end of his book [See page 296 et al]. Brussee lists the inflation rate in each year, from 1900 to 2007, along with some other numbers. You can get more economic numbers by going to Robert Shiller's website, located here.

Overall, Brussee has some compelling ideas. It's unfortunate he intersperses unlikely scenarios in between his rational ideas, which reduces his credibility. Readers deserved more respect and less sensationalism, especially with all the other good ideas in The Great Depression of Debt.

Disclosure: I own shares of TIP.

This book is available from Agora Book Publishing.