NEW YORK -- How bleak can the bad times get?
While most mainstream economists are asking how much better and how soon, James Dale Davidson, a Baltimore-based investment adviser with an eclectic international following has another answer: extremely bleak, and the sooner the better.
He recently published a book, "The Great Reckoning," with Lord William Rees-Mogg, former editor of The Times of London, and has been visiting financial publications to tout it. Like other doomsday scenarios, this one invites disdainful reviews, and some publications, notably the Wall Street Journal, have obliged.
But Mr. Davidson responds that the blithe optimism is typically evident before disasters, as is cavalier dismissal of dismal signs. Historically, no one ever thinks a long cycle is coming to an end," he said in a recent interview. "They do come to an end, and it is certainly not ludicrous to say this is not a different era. All the great mistakes come from thinking we are different."
Dismissing the pessimistic outlook in the book would be easier if the pairs' last offering, "Blood in the Streets," wasn't so unerring. It predicted the crunch in real estate prices, the U.S. and Japanese market debacles, thrift crises, the end of communism in Eastern Europe and the decline in blue-collar incomes. Stuck with a home purchased in the mid- to late 1980s? Should've read the book.
This time, Mr. Davidson and Lord Rees-Mogg have used the standard thrust of an investment text (what to buy, what to sell, etc.) to write what in essence is an extensive essay on how the United States, and the world, might unravel. In doing so, they are even willing to violate the cardinal tenet of forecasting -- give a date, give a price, but don't give both.
By 1995, they believe the United States will be in a depression. The only remaining question is what shape it will take, and whether the result will be a foundation for a sustained recovery or a prelude to greater turmoil.
Already, the resources of people on the edge have collapsed, Mr. Davidson said. The Donald Trumps and other highly visible, and highly leveraged, moguls of the 1980s are more likely to be found avoiding their lenders than patronizing them, and they are just the beginning. "The shore is eroding quickly," Mr. Davidson says.
Reference to the well-known problems in the financial sector are only a facet of a broader thesis of decline promulgated by the authors. The world is in a transitional period that is creating almost intolerable pressures, they say. Power is the foundation of societal structure, and it is slipping away from large, sluggish organizations, be they governments, labor unions or companies, and shifting to individuals, specifically those who are the most intellectually productive and those who are the most violently dangerous.
On the most basic level, the spread of increasingly powerful weapons has given unprecedented muscle to the most anarchistic segment of society.
At the same time, the conditions for collective prosperity depend less on the physical resources of a nation, be they strong backs or minerals, and increasingly on the knowledge of individuals. That is easily transportable.
As a result, governments will find themselves in thrall to their most dangerous constituents for social peace and to their most flexible constituents for income. It is an unstable blend.
At the moment, the result in the United States, the authors say, is social gridlock with mounting social payments well beyond the ability of government to afford. Ultimately, Mr. Davidson says, the welfare state will end.
Good spots to be
Cities and even countries will be forced to compete for productive citizens who are likely to refuse to subsidize a welfare state. Areas unable to make an attractive case for these people will be in the almost intolerable position of having to raise taxes to subsidize an increasingly desperate constituency while the best source for those resources have departed for more amenable shores. An appendix provides a list of potentially good spots to be -- typically high-income rural enclaves with educated populations.
But even these places will likely get worse in the forthcoming years.
The broad post-World War II boom in both credit and industry is ending, the authors argue. The nuclear era, which made superpowers spend annually on weapons in anticipation of war, as opposed to in response to it, caused the United States to conduct a war economy with highly stimulative, and inflationary, expenditures on weapons. That will end. A deflationary period of declining federal expenditures and employment will mean that government will be unable to to ameliorate problems in the other parts of the economy. Asset deflation is inevitable, unless the government makes a futile attempt to stimulate the economy through a massive increase in the money supply that will cause equally devastating hyper-inflation.
The broad decline in the economy will continue until the massive, and unsustainable, amounts of debt held by the United States and many other countries are wiped away.
The last depression, Mr. Davidson contends, bottomed on July 9, 1932, when debts from World War I were liquidated for a penny on the dollar.
The only barrier is the legal system, which, by stretching out bankruptcy negotiations, will hinder the inevitable. But, he said, "a new system will be made on a sounder footing." The entire process "wouldn't even be that frightening if people saw it as a cycle."
Though Mr. Davidson said the book contains his best advice, he doesn't always follow it. Baltimore, where he works, is absent from his list of suggested cities. "I don't think Baltimore is a good place to live," he said. "Taxes are too high, as are the dangers of social unrest. It's a city tied to dying industries.
"But there are some things in life that are not entirely rational, and I'm an Orioles fan."