These books are written by the Father-Son duo of Irwin & Peter Schiff, albeit at various points in time. The first book titled, ”How an economy grows and Why it doesn’t ?” was written by Irwin A Schiff in 1979 and his son has followed it up in 2010 with the second book titled,” How an economy grows and Why it crashes?”. Both books give a chance to ponder over the situation that US is in, financial crisis of 2008 which is still on with full force in 2011. I have summarized the first book here. In this post, I will try to summarize second book , that the author, Peter Schiff calls it “a riff of the original one”.
Out of 220 odd pages of the book, first 130 odd pages is mostly a repeat of first book, in words and few illustrations. I prefer the graphic novel approach of the first book than the textual description of the situation. The first book ends with senator finally comes out and openly declares that he can do nothing but ask the islanders to go back to fishing. This book takes a different route, obviously looking at what has happened in the last 20 years- ”the rise of China”. Just when the senator is thinking of talking openly to the public, there is lifeline that appears – Sinopia. BTW the main island of the story is given an obvious name Usonia. Sinopia was a strange island where all citizens were required to fish but their catch did not belong to them. Instead the fish were turned over to the kind who then decided which subjects deserved to get some back. This system did not provide much fish per capita but there was huge income (fish) disparity in the island. Seeing the progress of Usonia, Sinopian king decided that he would somehow possess Fish reserve notes that were supposedly seen to be key to advancement. Thus he knocked on the doors of Usonia to exchange real fish to Fish reserve notes. This was a lifeline to Usonia who realized that their notes were actually worthless. This lifeline got back fish in to the reserves, prices began to cool down, consumption was back, island was back to functioning state..all becoz of Sinopia.Sinopian king now used these notes to buy tools from USonia and left over notes were parked in Fish reserve bank as Sinopia had no robust banking system. Sinopian king made a policy that whoever purchased tools from the king could keep all the extra fish they caught. Also he did a devious thing. He required his citizens to swap their extra fish for Fish reserve notes. Basically the king hedged his risk and the counterparty was his own islanders. With flushed Fish reserve notes, the Sinopians started pumping in money in USonia as savings and thus Usonia was flush with funds and credit, thus creating a spending binge atmosphere on the island. With most of production work happening in Sinopia, Usonia now concentrated on Service sector. With Sinopians willingness to accumulate notes, trade relationship was a skewed one where one island largely produced and other island consumed.
One of the residents of an island, Bongobia , realizes that there was a threat that Usonia might not be able redeem the note with fish and hence started to hammer the fish reserve counter to exchange notes with fish quickly. Senator-in-Chief has no option but to close the Fish reserves window. From then on, the Fish Reserve notes on the international market would be determined only by what someone was prepared to trade for them, not because they could be redeemed for fish. In truth, the notes’ value hanged on Usonia’s status as a great economic and military power. No disaster happened after closing the fish window and Usonia experienced unprecedented growth on the back of consumer spending, demand of Fish reserve notes.
The book then moves on to creating characters and extending the story to narrate the housing market crisis in US.
With the service sector in full swing, Usonian bank loan officers cast their eyes on island’s sleepy hut loan market. To become popular, Senator Cliff Cod devised a plan where govt would ensure that everyone could get a hut loan. He creates Finni Mae and Fishy Mac to buy hut loans from the market.The hut lending program was a massive hit amongst banks as they were earning risk-free profits. Another agency Sushi Mae started to underwrite loans to youngsters who wished to enroll in surfing schools. These agencies created a big industry where hut building, hut selling and hut decorating industries took off. BTW, no actual fish was being generated, nothing productive was happening. Loans were being now being made not because they were necessarily the best use of savings, but because the senators had a political stake in encouraging hut ownership and education. The senate gave tax breaks on hut loans and thus stimulated the activity to crazy levels. With the influx of Sinopian fish, there was amazing amount of credit available and risk was conveniently ignored.
In this environment enters , Manny Fund. Manny starts to offer a different type of loan “hut fish extractions” in which hut owners refinanced existing loans with bigger loans, given the appreciation of hut value since their investment. Thus it was all more easy credit available for islanders. Huts started becoming more luxurious and hut values reached stratospheric levels. Islanders now started looking at hut as short term investment rather than a place to stay….. It had to happen someday. The hut market took a down turn and every associated industry felt the pain. Unlike any sectoral downturn, this was a credit based pain . It was like removing oxygen from the air and hence everybody started to suffer. The govt could only do one thing – urge consumers to spend more. It wanted to somehow spend through the crisis. Stimulus was not working. In need of fish, it desperately took a loan from Sinopia. Its ploy as usual was to pay back using Fish Reserve Notes.
Despite the bailouts, Usonia was going nowhere out of the crisis. In such a scenario, Barry Ocuda becomes the new Senator-in-Chief after promising the islanders on the theme of “transformation”. He started pushing the Fish reserve notes to the public by giving them assistance explicitly and implicitly(incentives to first time hut buyers), increase direct aid to schools , tried to create some construction jobs etc. Was this spending the most efficient use of island’s resources ? Instead of market deciding the resources, a small group of people started making decisions. While this massive plan was put to practice, there was one problem. Usonia was completely out of fish. Instead of taking harsh measures, it took an easier option. Borrow more. It reached a situation where most of the debt was funded by other islands.
However things started to change in Sinopia. In a turn of events Sinopia stopped buying Fish Reserve Notes as it was seen as unnecessary for all the goods and services could be produced and consumed in Sinopia itself. Why bother about Usonia, when all the resources are in the homeland ? With Fish Reserve notes demand falling Usonia was basically stuck. Other Islands followed Sinopia in cutting down the demand for Fish Reserve Notes. Amidst such a situation, a Sinopian ship landed on Usonia shores with loads of fish. As usual Usonian govt thought that Sinopia was interested in swapping fish for Reserve notes. In a devastating move for Usonia, Sinopians instead chose to use their original fish to buy out all the major corporation in USonia, huts, services etc. In one move, Usonia became an impoverished island. Barry Ocuda had no choice but to openly ask the islanders to start fishing again.
The book’s message is very clear. If US keeps its spending and borrowing levels the same, it is soon going to be hit by hyperinflation and the country will face an economic devastation.
This book brings the china factor in to the equation and shows the deadly consequences to the US in the times to come. Hyperinflation, currency default and ultimate economic devastation will be a reality to US unless it takes harsh measures. “Will it ? “ , is something that time would reveal.