Recommendation: The Coming Economic Earthquake By Larry Burkett

This book by Larry Burkett is one of those books you should only read if you're willing to have your eyes ripped open. Burkett is a well-known Christian finance guy, and this book is (from what I understand) one of his best works. Written in 1991, it provides a very interesting perspective on a great deal of not only what's gone before, but also in the past 18 years.

He starts out by explaining what contributed to the Great Depression, as well as the mindset of politicians in general over the years. He follows that with a quick walk through the decades, briefly covering the high points of the economy during those time periods. It's a great top-level snapshot of how we got to where we are today. There is a ton of wisdom and history in this book, but it is written in such a way that anyone can understand it.

One of the quotes that jumped out at me:

pg. 45: Perhaps President Grover Cleveland best stated the prevailing policy concerning transfer payments from the federal government to private citizens when he made his historic stand against helping a deserving orphanage in New York City during a severe economic crisis: "I will not be a party to stealing money from one group of citizens to give to another group of citizens; no matter what the need or apparent justification. Once the coffers of the federal government are open to the public, there will be no shutting them again." He went on to conclude, "It is the responsibility of the citizens to support their government. It is not the responsibility of the government to support its citizens."

In Cleveland's generation, another politician wrote, "A democracy is not a form of government to survive. For it will only succeed until its citizens discover they can vote themselves money from the Treasury, then they will bankrupt it." That politician was Karl Marx.

Sound familiar? Eerily prescient? This is what I've mentioned before about that 50% taxpayer tipping point - when 50% realize they can do nothing and still get government handouts, the country is finished. Obama is going to bring us dangerously close to that tipping point.

Burkett also explains how our financial system has migrated to a centralized one, which allows much greater federal control over the currency and opens up vast potential for trouble, which we'll see in a moment.

I think this section from the 1970s is worth quoting, since it applies to us today:

"The period of 1987 to 1989 paralleled the 1927 to 1929 era so closely it was astounding, even alarming. ... But the economy didn't crash in 1990. Instead, we entered a relatively short-lived recession of moderate severity. As a result, many people ... have concluded that the controls now in place are sufficient to avoid all future depressions. Such logic is both faulty and foolish.

In reality, the only conclusion that can be drawn is that we have the ability to delay the inevitable and lengthen the time between major cycles. The controls we have are adequate to alter, but not stop, the direction of our economy."

If you look at the numbers, you'll see that our current downward spiral also matches that of the Great Depression.

Burkett walks through a series of trends that shows a major economic downturn about every 60 years (from the end of one to the beginning of the next). There are constant smaller downturns in the meantime, but these are the big ones. There are things that can be done to delay those big downturns, but those delays generally mean that when it eventually happens, it will be worse than it would have otherwise. Burkett predicts the next big crash coming around 2000, but remember that this book was written in 1991. Put this into perspective - do you remember what happened between 1991 and 2000? That's right, Republicans took over Congress and cleaned things up, balancing the budget and establishing some fiscal responsibilty. It seems that those measures enacted a delay of the 2000 crisis, but that means when the inevitable crash was to happen, it would only be worse.

And now look at us, in 2009. Hmmm...

To me, one of the most disturbing sections of this book is when he talks about Germany and Argentina. In a nutshell, these countries should serve as a stark warning for America. Both were, at one time, thriving industrial nations, so politicians ran up huge debts. When a crisis struck, the unpayable debt load came due. Foreign investors refused to fund that debt, unemployment went up, and they were faced with two choices: fold, or inflate the currency. Both chose to inflate the currency, which eroded confidence in the economy, and ended in hyper-inflation, with exchange rates of several thousand to one (in the case of Germany, it reached 4.2 trillion to one at one point!). A thousand dollars in the morning was worth pennies by the end of the day.

The beginnings of this process have been happening in the U.S. for years. Debt has skyrocketed, both in government and in personal lives. The federal debt load is so high that politicians cannot stop it anymore. They can only kick it down the road a few years and hope the crisis doesn't materialize on their watch. Burkett quotes one of his professors, who said, "He who rides on the back of a tiger cannot dismount." We're on the tiger, and we can't get off. The question is not when we'll be forced off, but how much it will hurt when we are.

So when do we know a financial crisis is looming? Burkett points to three signs of trouble that will help us see it:

1. the deficit cannot be funded by additional borrowing (from foreign lenders)
2. monetizing the debt (basically, they'll print more money, causing inflation)
3. taxes, taxes, taxes (to meet fiscal shortfalls)

Again, does this all sound familiar?

When the crisis does begin to take shape, Burkett points to several cracks that will lead to the ultimate failure. Sit down, because this is the part that gets scary:

1. Banking crisis --- non-banking corporations will be allowed to own banks, thus thrusting banking problems into other industries like insurance or retail; once the number of bad loans exceeds the statistical number necessary to repay the depositors' interest, the banks will fail without government intervention; this crack will be highly publicized ... and will take a trillion dollars or more in government subsidies
2. Business failures and departures --- businesses (especially small businesses) will become a scapegoat for all the social ills in the political system; oppressive taxation and regulation will make it so difficult for businesses to operate in the U.S. that they will leave or shut down
3. The denial syndrome --- the worse the problem, the louder the deniers will claim that everything is okay (remind you of this?)

We've seen all of this beginning to take shape in the past few months. Burkett says that the one difference when it comes to America (compared to those other countries) is that Americans still have confidence in their system - we still believe that our system is the best, and we still largely trust in it. But look what Obama has been doing since he became the front-runner: talking about how this is a crisis of historic proportions, speaking doom and spouting fear. For proof of how that has affected the confidence of Americans, just look at the stock market.

Burkett is quite clear that any predictions are guesses at best, and his ultimate point is to startle people into taking care of their own affairs first, while demanding responsibility from their elected leaders. Both of these are the ultimate takeaways from the book, and this is what you should focus on yourself.

Read this book if you want a great background on how the economy works, how we got to where we are today, and how to recognize the signs of danger ahead.