The Trouble with Prosperity

To investors in the 1990’s bull market, James Grant’s message in THE TROUBLE WITH PROSPERITY: THE LOSS OF FEAR, THE RISE OF SPECULATION, & THE RISK TO AMERICAN SAVINGS is a sobering one: the business cycle still exists, and the current bull market will end as surely as previous bull and bear markets have ended. Grant supports his thesis by analyzing seventy years of financial history. He argues that the seeds of each bust are sown in the preceding boom: when investment capital is cheap and the dominant mood is optimistic, investors bid up stock prices to unsustainable levels and developers over-build, causing the collapse of stocks and real estate gluts. Grant sees busts and bear markets as periods of “creative destruction:” redundant or flawed businesses are eliminated in “corrections” that, while painful, allow for the shifting of capital from unproductive investments into new, more promising ventures. Anything that interferes with this cycle—Grant includes efforts by centralized governments and banks to manipulate interest rates and the value of currency—hampers a free market’s otherwise self-correcting tendencies. Such governmental interference, as when the Japanese government made sure that no major Japanese bank or corporation was allowed to fail, may take some of the short-term sting out of an economic contraction, but at the cost of crippling the prospects for robust long-term economic growth.

Grant’s strength is his ability to combine macroeconomic analysis with specific stories on a human scale. In one chapter he details the history of one building, the skyscraper at 40 Wall Street. Built on the eve of the great depression, the structure’s fortunes fluctuated from a dearth of tenants and bankruptcy to rising rents and full occupancy, and back again. In another chapter he details the wild economic fluctuations generated by the gambling industry’s entrance into Tunica County, Mississippi. Throughout, Grant persuasively outlines the tonic effects of economic contractions and bear markets. With the stock market continuing its dizzying rise to a Dow over 7000 and interest rates hovering at comfortable levels, Grant’s book is a timely reminder that bull markets, like all good things, must end, and that such endings are not always to be mourned.