The Trouble With Prosperity – Book Review

This is another book in the Bernstein recommended list and the second book I’ve read and reviewed by James Grant. The other review was Money of the Mind.

Along with being an author, Grant is also the founder of Grant’s Interest Rate Observer, an investment newsletter based in New York City. As one might expect, books written by a guy who sits around and observes interest rates all day long, might not be that exciting. I’ve concluded that although he is a good writer and his books contain tons of research – he’s no Clive Cussler. Ironically I was reading a Cussler novel at the same time I was trying to read this book.

For the record, I managed to get through two thirds of this book and just skimmed the remainder, so needless to say I don’t recommend it unless you are absolutely desperate for an insomnia cure.

The premise of the book (not that it really matters at this point) is that Grant is of the opinion that there are natural business cycles which shouldn’t necessarily be interfered with as much as governments and central banks tend to do. In particular he says that when there excesses created as a result of good times (his theme in Money of the Mind), it’s important that when the inevitable recession or depression occurs that it be severe enough to “clean up” all the inefficient investments, companies etc. If the central bank works too hard to soften the blow then it only prolongs the inefficiencies. He uses Japan as a prime example of a country where the banking system was sorely in need of a major overhaul after that country’s great economic success in the 80’s but as we’ve seen, Japan never had the major downturn that might have let them fix their problems and then grow normally.

Although I don’t disagree with his logic I’m not sure I completely buy the fact that you have to make every business a lean machine before heading into the next upswing. If you only have a mild recession after a long up cycle then there will be companies that are not all that efficient staying in business, but the way I look at it, if the market values them accurately then someone will come along and buy them and make them more efficient.