Product Description

The Second Great Depression

This is a frightening book. It shows how massive consumer debt triggered this second depression, which started in 2007/2008.

The exuberance of the overheated stock market of the 90s caused consumers to stop saving and go into debt. Then, the dramatic drop in mortgage rates enabled people to refinance their homes and go even further into debt. People were no longer living on what they could afford; instead they were living the lifestyle they thought they deserved, costs be damned!

With payments increasing, savings rates near zero, and debt at its maximum; many people were pushed over their debt limit, having homes foreclosed or going into bankruptcy. Others are heeding the warnings and reducing spending, causing a dramatic slowing of the economy.

To survive this depression, savings should be in Treasury Inflation Protected Securities, and the stock market should only be reentered after it drops 68% from its early 2008 level. Included charts show required savings for retirement in this environment.

In this depression, the United States will be brought to its knees. But not unlike the mythical bird Phoenix that dies in flames and is then reborn out of its own ashes, the United States will also be reborn. However, it will be a poorer and less arrogant country that emerges from its own ashes.

"This is a book that anyone - young, old or anywhere in between - should read and study. It is superbly researched and thoughtfully written. The first half of the book is a window into the future and the second half is an outstanding guideline for facing that future. This is the most important book I have read."

Christopher Welker,
General Manager of Technology
for a Fortune 100 Company

Product Details

• Amazon Sales Rank: #337889 in Books
• Published on: 2005-03-18
• Format: Illustrated
• Original language: English
• Number of items: 1
• Binding: Paperback
• 300 pages

About the Author
Warren Brussee spent 33 years at GE as an engineer, plant manager, and engineering manager. He earned his engineering degree at Cleveland State University and attended Kent State towards his EMBA. The author has written two other books, Statistics for SIX SIGMA Made Easy and All About Six Sigma.

Excerpt. © Reprinted by permission. All rights reserved.
I had two neighbors in the late nineteen nineties, one a retired doctor and the other a retired small business owner, who were never seen in the daytime when the stock market was trading. But in the evenings, they would have smiles on their faces akin to those of teenage boys who, the evening before, had talked their girlfriends into the backseat of their cars. These neighbors had both become day traders, and each of them felt that they had discovered the secret to wealth. Neither of them ever shared with me their "methods" of playing the market, but their wives worried that they were buying stocks based on hunches, rumors, recent headlines, etc. Apparently no in-depth analysis of stocks was being done, nor did they make any effort to see if they were doing any better than the market in general. All they cared about was that, on an almost daily basis, their on-paper worth was increasing. They believed that they had discovered the secret to making a lot of money without working!

They weren’t alone in their craziness. Something strange was happening to most of the country during the nineties. Computer nerds, who were never thought to be giants in the practical world of business, were given almost unlimited funds to pursue their latest business ideas related to the net or other software ventures. These newly ordained entrepreneurs told everyone that their dot-com businesses did not have to make a profit; that the idea was to develop a customer base using information technology, and the profits would come later. They used esoteric measures, like "eyeballs," to determine how many people were visiting their websites, which they felt was a measure of their business success. Or they counted how many other worthless web sites were sending visitors to THEIR worthless site. They didn’t even bother estimating when they would make a profit, nor was there any analysis of what those future profits would be. They said that the important criterion in these new-era businesses was generating customers; profits would just naturally come later. Some of their projections of customer base growth took them quickly to exceed the population of the world, but no matter. Venture capitalists and investors believed them. So did my neighbors. We ALL believed!

Not only were investors like my neighbors sucked in; grizzled CEOs of large companies, who should have known better, gazed at these dot-com companies in awe. These were the same executives that, just a few years before, were trying to look, act, and dress like the Japanese, who were the previous rock stars of industry. These techie-wannabe executives tried to do high-fives and make their companies look and perform like the dot-coms. These experienced executives took crash courses on using the net. Of course, this was only after one of their in-house techies bought them computers and taught them how to boot up. GE’s CEO Jack Welch even bragged that investors looked at GE as being equivalent to a dot-com company. He made all GE executives take courses on surfing the net, and each individual business within GE had to set up their own web site where customers could peruse that business’s management and product lines. Any project having interaction with the net got priority corporate funding. Jack Welch and many other corporate heads also did what was necessary to make their stock prices act like dot-com stocks. No matter that most of the perceived financial gains during this era came from accounting creativity that made bland corporate performance look stellar by pushing costs into future years and doing other financial wizardry.

Baby boomers, who were wondering if they were going to be able to keep up with the gains realized by their parents’ generation, suddenly saw their salvation. Like my day-trader neighbors, the baby boomers would buy stocks in this new era stock market and watch their riches grow. As more and more of them bought stocks, the demand drove prices up to ridiculous levels. The feeding frenzy had begun. As a result of all this buying pressure, in the later years of the last century the stock market performed brilliantly.

It wasn’t just naïve investors who got overconfident in their abilities related to the market. In 1994, Bill Krasker and John Meriwether, two winners of the Nobel Prize in Economics, started a company called Long Term Capital Management (LTCM). These two "geniuses" had done massive data analysis on the "spreads" between various financial instruments, like corporate bonds and Treasury bonds. When these spreads got wider than what was statistically expected (based on their computer program), LTCM would buy the financial instrument likely to gain from the correction that was expected to occur shortly.

Using this methodology, LTCM was unbelievably successful for four years. By leveraging their money, they had gained as much as 40% per year for their investors, and Bill Krasker and John Meriwether got very wealthy.

They were so successful that, by 1998, LTCM had $1 trillion in leveraged exposure in various financial market positions. Then, LTCM became victim of the "fat tail" phenomena, which is where a normally balanced distribution of data now has a lot of data far out to one end of the distribution tail. The reason this happened is that everyone who played in similar financial markets all decided to get out at once, and LTCM was seeing results that their computer models had predicted would not statistically happen in more than a billion years! Unbeknownst to them, because of the sudden exit of the others playing this financial game, the relationships of the "spreads" between various financial instruments had changed, which made the earlier computer-generated probability predictions invalid.

The risks that LTCM had taken were so dangerous that LTCM was close to upsetting the whole world’s financial institutions. Fed Chairman Alan Greenspan and several of the world’s major banks got together to offer additional credit to LTCM to successfully avert this potential global financial disaster.

Customer Reviews

People who believe that consumers can over-spend forever will not like this book.
This book has three parts. In the first part, the author uses government data and charts to show how the consumer is building up debt at a rapid pace. The author believes that this can not go on forever, and eventually the consumer will have to slow his spending, which will dramatically slow the economy. If you don't believe this conclusion, and the data that supports it, then the rest of the book is meaningless.

The second part of the book states that as the economy slows, the stock market will drop. The author uses several methods to estimate how far the market will drop, including Yale Professor Irving Fisher's formula that uses dividends for deriving real market value.

The third part gives conservative savings calculations for retirement. These calculations differ from those in most books because they don't include stock market gains, and they assume that Social Security retirement benefits in the future will be delayed until age 70.

I liked this book a lot because it backed up all its conclusions with data; sometimes almost too much data to digest. But the inclusion of this data, the focus on consumer spending, and the willingness of the author to extrapolate as to when the consumer debt limit will be reached, separates it from other books predicting generic economic problems `some time in the future'.

I was surprised to read the very negative rating of this book by an earlier reviewer. The fact that the author graduated from Cleveland State University in engineering and was a former GE Engineering Manager is right near the front of the book, so I don't understand the surprise. This book is very data oriented, and the author's earlier books on Six Sigma seem to validate that he has expertise in data analysis. As for not suggesting selling stocks short, which has a risk theoretically greater than the amount invested; this is consistent with the author's apparent conservative approach for riding out the first half of the predicted depression. I, personally, would consider gold more strongly as an option; but again, the author is very conservative.

(...)

An interesting read
It's a scary book, but maybe not half as scary as it should/could have been. The publishers faced the usual quandry - how to tune just the right balance of fear (get their eyeballs) leavened by hope (you'll be OK). A razor's edge for doomster types of books.

But I'm not saying this book is unrealistic. While the author does devote a few pages to cinematic doom stuff, it felt to me as though the scary "depression" theme was grafted at a late stage onto a fairly run-of-the-mill book on conservative investing strategies and retirement financial planning.

What's WB's limited imagination apparently does not extend to are things such as Peak Oil, World War III, a pandemic of Extinction Level Event magnitude, runaway climate change, and so on - though I'm not saying that he should have explicitly addressed all that in a single book on his single subject.

My point is that he spends so many pages on very detailed calculations and tables around mild stuff like how to re-invest in the market, how to get an extra percentage point here and their in your retirement savings - all the while apparently oblivious to the strong possibility that a depression of the magnitude he envisions could well trigger or be grotesquely compounded by any of the above singularities and more - it would then be a total bonfire of the certainties. Thus his mildly scolding, timidly middle-class schoolmarm'ish tone didn't always seem to match the content of his message.

The Second Great Depression
While Brussee's suggested defense against a predicted depression may be a little too conservative for some readers, the data presentation, even by itself, makes a strong case for depression. Everyone needs to move their investments to a place where they can quickly react to any event that triggers stronger inflation or a consistently falling dollar. Without knowing what's in this book, most folks will not be ready or armed emotionally to avoid getting hurt.