The Depression of 2016 by Rafael Aguayo
Book Review Rating – 4 Stars
This is a fascinating book that takes virtually all of the politics out of the debate on the economic situation by building and discussing a systems dynamics model.
You hear about the annual deficits in the USA and the UK, the high growth in China and India, the troubles in the Eurozone and like me, you probably think about how these things can be connected.
Well this book helps to answer those thoughts although its main focus is on the relationship between the USA and China.
The Origins Of The Crisis – The Boom in the USA – 1980 to 2000
Statistics analysis shows that this was a remarkable period that caused the Dow Jones index to soar. The authors research traces this back to two connected but compensating forces that have caused a great imbalance:
- The annual fiscal deficit in the USA that has pumped up the economy
- The annual trade deficit in the USA that has deflated the economy and at the same time caused the stock exchange bubble and then the real estate bubble.
The net results is a high debts and few manufacturing jobs in America. It’s a terrible situation to be in but it is echoed in the UK, the numbers are just smaller.
Since 2000, the governments have been propping up the economies, refusing to allow the harsh recession that the free market demands. Yes things have been bad but they should have been much worse.
Who’s to blame? The central bankers and the respective governments of Reagan, Bush, Clinton, Bush and Obama all had the chance to do things differently and which could have reduced the impact of the coming crisis.
Systems Dynamics
The world is full of cause and effect relationships. These naturally break into two kinds:
- Positive reinforcement – this is the virtuous circle when things are good and the vicious circle when things are bad. These systems are unstable and out of control. This is bubble economics where values rise sharply and then collapse.
- Negative reinforcement – these are compensatory systems that identify and automatically help to bring things back into control and closer to a target. In the physical world, think of a thermostat, in the economics world, think about the automatic stabilisers that the deficit financed unemployment benefits provide during recessions.
These systems can be linked to create a more comprehensive model of compelling cause and effect logic.
This is exactly what Rafael Aguayo has done and it helps to explain how the world economy works at a level that can be understood.
Conclusions
There is no easy way out.
The depression may happen in 2014 or 2018 but it’s hard to refute the conclusion that a major economic collapse is coming.
While the 2008 financial crisis has been papered over by massive fiscal and monetary intervention, it has just delayed and worsened the day of reckoning.
Rating
The thinking and analysis behind this book deserves 5 stars.
The world needs to understand what is happening and why.
The book lost two half stars:
- the message is vital but the book needs better editing. It doesn’t flow as it should although I accept that this is a hard topic to write about because of the need to understand economics and systems dynamics.
- the diagnosis of the problem makes a great deal of sense to me but there is little discussion of how things can be made better at the level of national policy makers and (more importantly for the majority of readers) at the individual level. A crisis is coming after the fake illusion of a recovery but what should you and I as business owners, house owners and savers do about it?
It is available to buy from Amazon.co.uk and Amazon.com.
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