How to Ruin a Summer Vacation

Tom Peters

Let’s take Dr. Ravi Batra over the top! His book, The Great
Depression of 1990, ranked fifth on The New York Times bestseller
non-fiction list on August 9. I strongly urge you to push him
into the top slot by buying a copy to take to the beach. It may,
however, ruin your summer.

Dr. Batra’s doom and gloom scenario is not out of the Paul
Erdman school of science fiction. The forecasting record of this
widely respected Southern Methodist University economist has won
glowing praise from many pragmatic Wall Street investment masters.
In this book he traces historical and economic cycles that have
caused past recessions and depressions, and he concludes we are
due to suffer the worst depression ever in 1990, lasting to 1996.

Batra’s underlying logic and his careful comparisons with our
past great depressions are compelling. For instance, Batra makes
it clear that economists really don’t know what causes great
depressions. Those who belong to the “monetarist school” blame
depressions on officials’ wrong-headed contractions of the money
supply when a mild recession is in progress. “Fiscalist”
economists point the finger at the government’s failure to
stimulate a weakening economy by deficit spending — that is,
borrowing money to increase federal spending to stoke investment
and demand. Batra argues that both explanations accurately
describe the causes of recession, but neither adequately
foretells why some recessions collapse into full-scale
depressions.

What, then, turns a tumble into a plunge? Batra fervently
believes that the wild card is when the following economic
triplet — the coincidence of the end of major up and down cycles
of inflation and money growth and regulation — is accompanied by
gross distortion in the concentration of wealth. Such wealth
imbalances are characterized by the middle class borrowing more
and more, which loads bank portfolios with ever riskier loans,
while increasingly wealthy investors go on a speculation binge.

Wealth concentration is at about the same level as during
the Great Depression, and is accelerating at an unprecedented
rate. For example, the top one percent of the U.S. population
holds almost 40 percent of the wealth; the number of billionaires
in the U.S. nearly doubled between 1985 and 1986 alone.

Batra points out the dangerous side effects of that
concentration. Speculation is indeed rife: witness for example,
the explosion of speculative financial instruments such as “junk
bonds” and “securitized debt” (such as mortgages that are
“packaged” and sold on the open market, immediately distancing
the credit grantor from the risk); and the annual $80 billion of
currency trades that support just $4 billion in world
transactions of real goods and services. Although there were
different names for different financial games, the same frenetic
speculation marked the 1920s too. And while post-Great Depression
regulations on commerce and banking provide some protection
today, most of the new financial investment instruments,
including the trillion-dollar-plus Eurocurrency market, are out
of every nation’s control.

The other out-of-control sore spot is debt: our burgeoning
consumer, corporate and federal debt. The U.S. budget now seems
permanently stuck in the red at $100 billion or more per year,
despite the record-long “recovery.” Due to that deficit, and
the huge trade deficit, the U. S. quickly flip-flopped from
creditor to the world’s chief debtor in just two years; U.S. net
borrowing from other countries soared 135 percent last year, from
$112 billion in 1985, to $264 billion. Another renowned
forecaster, Salomon Brothers managing partner Henry Kaufman,
disgorged his growing fears, in his book Interest Rates, the
Markets, and the New Financial World. Kaufman’s preoccupation is
the accumulating, ever riskier borrowings of all sectors,
including government, business and individuals. The amount of
this outstanding credit has shot up from $1.5 trillion in 1970 to
$7.1 trillion in 1984, which doesn’t include what he calls
“hidden debt,” such as the obligations contained within futures,
options and interest-rate swaps.

Why does Batra pinpoint 1990 as the year of reckoning? In his
detailed comparison of the 1920s and 1980s, he shows how each
year of the current decade, through 1986, bears an eerie
resemblance to its 1920s counterpart — from bank failure rates,
to the ups and downs of unemployment, to the precise content of
federal tax legislation.

Batra, sad to say, is not alone in his gloom. His book has
garnered loud praise from such luminaries as John Kenneth
Galbraith and The New York Times’ Leonard Silk. It also can often
be found on the shelf next to The National Debt, by
seasoned Time magazine economic reporter Lawrence Malkin. Malkin,
too, emphasizes the pernicious costs of the national debt,
speculative fever in its many clever guises and of the fragility of
the international financial marketplace.

Perhaps our chief problem is that so few people in power
remember the Great Depression. Those in Washington, in corporate
boardrooms and especially in youth-dominated Wall Street offices,
have been lulled by the long run of relative stability from World
War II through today. They remember no cataclysmic wars or
financial disasters. They can recall neither the speculative
conflagration and coincident confidence that marked the end of
the 1920s, nor of the miles-long bread lines and true spectre of
U.S. communism that marked the disarray of the subsequent 1930s.

In the end, the issue is not whether Batra is right or wrong,
but that his conclusion is ever so plausible. I am an optimist by
nature. My grounding in economics is conventional, and I am
skeptical of new theories. But by the book’s conclusion, for the
first time in my life, I was shaken enough to seriously consider
stashing away a pile of gold coins. Happy reading!