Jeff’s First Book Report (at least since the 10th grade)

Somewhere in the area of 75 AD the silver content of the Roman Denarius was about 100%. It was solid silver. Somewhere before 300 AD that content had fallen to around 10% or less. The value of the currency fell and the empire’s debt rose as Rome fell apart.

I thought that was an interesting fact, so I decided to tie it in to my suggestion to you that you find and read a book that came out last year called This Time is Different; Eight Centuries of Financial Folly by Reinhart and Rogoff.

The point of the book, of course, is that it never has been different. Not in the Roman Empire and not in the global financial crisis and resulting and ongoing Great Recession of 2007. The book is full of charts and tables but I guarantee you that not a single equation will rear its ugly head. Look at it this way; the time it takes to figure out the charts is probably the same amount of time you’d take to read the page.
“And this has what to do with action sports exactly?” you might ask. Well, nothing. Everything. We can’t make all our business judgments based on what we read in the popular media (I’ve pretty much given up on them by the way). If you listened to them, you heard that we created 88,000 new private sector jobs last month. You didn’t hear that we need close to 125,000 just to keep up with population growth. You may get told that the unemployment rate has gone down, but not that it went down only because the Bureau of Labor Statistics doesn’t, for some reason I can’t fathom, count people who have given up looking
 We certainly can’t rely exclusively on the discussions we have with our peers in our somewhat incestuous industry (like any industry I guess). And you can’t, especially now, take a short term perspective.
From around 1980 to 2000 we had what is simply the longest and strongest period of low inflation, growth, investment returns and employment we’ve ever seen. It was great wasn’t it? And we all kind of took it for granted. The cycle started to reverse itself in 2000 when the internet market crashed. The “recovery” was driven by the Federal Reserve’s decision to flood the market with liquidity and reduce interest rates, the breaking of the perceived relationship between risk and return, and tax cuts it appears we couldn’t afford.
I honestly think we would have been better off if we’d been allowed to have a bit more of a recession in the early 2000s. Maybe we wouldn’t have to be enduring our current one.
Anyway, we take for granted our 20 year up cycle, but are incredulous that there might be a long down cycle. I have never figured out why that is. The good news I suppose is that we’re ten years into the down cycle, however long it’s going to last. Don’t believe me? Go look at your overall stock market returns and  the change in average wages since 2000.
Here’s what This Time is Different teaches us.  I’m quoting at some length, because they just say this better than I can.
"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly."
"We show that in the run-up to the subprime crisis, standard indicators for the United States, such as asset price inflation, rising leverage, large sustained current account deficits and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis- indeed, a severe one. This view of the way into a crisis is sobering; we show that the way out can be quite perilous as well. The aftermath of systemic banking crisis involves a protracted and pronounced contraction in economic activity and puts significant strains on government resources."
They don’t do this with stories (though there a few good ones), nor with suppositions, nor with opinions. The analysis is based on 800 years of rigorously gathered data that goes back as far as 12th century China and medieval Europe. As they admit, it’s not perfect. But it’s as objective as they can make it.
You need to convince yourself, as you figure out how to position and run your business, that this time isn’t different, that’s it’s happened before, and will happen again. Human nature, as the authors point out, doesn’t change. Financially caused recessions are the worst, and they last the longest.  That’s not my opinion.  That what their data shows.  Hoping things get better won’t do. As I think a sailor once said, “Call on God, but row away from the rocks.”
Read the book please.



2 replies
  1. George Leichtweis
    George Leichtweis says:


    Great article. Sometimes we just don’t want to look in the mirror. I have an entire theory comparing our “freedom” to that of the peasant farmers in the feudal days. We are taxed (or tithed) to death and stricltly work for “the man” by providing him with 4 work days wages out of 5 (if I only worked five) throughout our lifetime. I need to put the entire scenario on paper, but most people don’t have it better today even though we are “free” to drive around the country (at $3 to $4 a gallon) at will.

    Keep up the good work.


    • jeff
      jeff says:

      Thanks George. I think I’d really like your theory and you need to write it down. You might enjoy (well, it’s pretty depressing, so “enjoy” is the wrong word) this lecture by Elizabeth Warren. The title is awfully gloomy, but the numbers she provides explain a lot of things that we all sort of know but can’t quite explain and quantify. Notice the lecture was in 2007. I haven’t posted or promoted it because I’ve finally learned after 15 years that sometimes getting people mad at you for telling them inconvenient stuff isn’t productive. As you say, we don’t like to look in the mirror.


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