You are out of your mind. You are wrong in every aspect because everything you outlined lacks balance.

What you wrote here only leads to huge speculative bubbles and rewards extreme risk taking. Your thinking is what led us to the breaking point.

Take a closer look at Myth #1. Right before almost every recession the savings rate took a sharp dive and then right before it started the savings rate turned up. This is because the consumer knows we are in a recession before the market does. The consumer knows when they can't spend any more money but it takes a while for this to show up on the street in the form of earnings.

It looks like spending money is what caused the recessions, not saving money. When the consumer has no savings they have no ability to weather a disruption. As soon as a recession starts it is magnified by the consumer's lack of assets.

See corporations and therefore Wall Street believed that the increase in sales due to increased spending could keep on increasing indefinitely. This can only happen if incomes continue to grow faster than the market, which will never happen. Wall Street borrowed against the levels of consumer spending and made bad bets on future earnings performance. Stocks were driven from the historical P/E of 7 to P/Es in the 40s. In some rare cases above 100. No company can ever be worth 10 times its share price let alone 100 times.

Eventually the consumer runs out of money. See true incomes have barely gone up over the past 30 years and there is only a set level of money that can be spent. All of a sudden the sales growth goes away because you hit the income ceiling and earnings disappoint on a large scale. This causes the market to drop and mass layoffs to begin in order to increase the net margin to the levels set by the street. You end up with a recession because of spending that isn't there.

You cite the decreased savings rate over the past 30 years as what led to the massive market gains of the past 30 years. Wrong, go deeper than that and look at the massive gains in debt. The savings rate didn't decrease because people were spending more or starting new businesses. In fact over the past 30 years more small businesses have shut their door than were ever created during the same time.

Please do some research on the number of independent hardware stores between 1970 and 2000. Do the same on independent sporting goods stores, drug stores, and grocery stores. Please check the number of independent producers of manufactured goods or independent farmers. Numbers that used to register in the hundreds of thousands to millions are now but a handful.

SMALL BUSINESS WAS DESTROYED BY THE DEBT FINANCED MARKET BOOM. MILLIONS OF WELL PAYING SMALL BUSINESS JOBS WERE REPLACED WITH MINIMUM WAGE BIG BOX CORPORATE JOBS FROM 1970 TO TODAY IN ORDER TO SATISFY THE MARKET ANALYSTS AND DRIVE THE DOW UP UNDER FALSE PRETENSE SO THE RICHEST AMONG US COULD PROFIT FROM CORRUPTING THE BALANCE OF POWER.

The savings rate declined because the massive rate of inflation in the 1970s led to a greater percentage of real income needed to pay for essentials. Coupled with the destruction of well paying small business jobs people in fact had less money and therfore less savings. With less disposable income they used access to the easy credit created in the 1980s to finance the huge consumer boom. Is it any wonder that the establishment of easy credit in the 1980s led to a huge consumption boom?

Access to easy credit allowed the economy to grow out of balance. Without the credit boom there would have been no market boom because the consumer didn't have the real income to finance it. This debunks your great "Debt is Bad" myth. Debt only leads to greater inflation and therefore greater collapse. The Great Depression was caused by the inflated value of assets and the increase in debt needed to finance the purchase of them. Inflated levels of value led to an inflated market and a culture of corruption bent on making sure those values kept increasing for profit.

Your points are good if you want a totally corrupted and unethical system that puts easy profit ahead of hard work. I would love to go into greater detail pointing out how wrong you are but I do not have the time. Maybe some other time.

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First off, thanks for this well thought out post. You bring up some great points, even the one that says "you are out of your mind."

First off, this is not the first time this sentiment (that "Savings is bad") has been stated, particularly when referring to savings in a recession. This is known as "the paradox of thrift" in economics - the idea that in a recession in particular, which is what this article is about, savings is not so good. Admittedly there is debate around the concept but the best known example is Japan where a recession in 1990 kick-started their savings bubble which led to more-or-less a perma-recession over there.

Here's a text version of the book, "The Fallacy of Saving" written in 1892 which first described the paradox of thrift:
http://www.archive.org/stream/fallacyofsavings00robe/fallacyofsavings00robe_djvu.txt

It was then later picked up by Keynes to describe what was going on in the Depression.

Not everyone believes in the paradox (you clearly don't) but its also clear that savings right now is whats putting a clamp on the consumer. If the consumer would unleash a little bit, we'd get back to more GDP and less reliance on any government stimulus.

Your comments that small businesses were destroyed is very true. But other businesses rose to fill their place. Perhaps small hardware stores went out of business, but Home Depot has grown 100,000% since its started and has created millions of jobs in its history. You mention that these are lower wage jobs but that can't possible be true across all jobs that have been created since not only has employment gone up but real wages have risen almost every year over the past 30 years (with the exception of this year - when savings are up).

Finally, easy access to credit did not create this problem (although "too easy" access was a side effect of the real problem): securitization of credit did, which allowed for nonsense credit to exist. Lets not forget that the bubble of the 90s and the initial loosenings of credit in the early 00s allowed millions of people to own homes who never would have even considered owning homes before. This is a good thing. The massive securitization that occurred starting "vintage 2004" combined with the mark to market accounting that brought in the tide and left everyone standing naked is what ultimately led to a complete collapse of the financial system. A collapse that even as late as 2007 didn't have to happen.

Please keep the comments coming.

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I would add some kind of caveat to #4.
Yes it is unfair to mark assets to firesale prices but who is to say today's firesale isn't the new normal?
There has to be a balance (some kind of independent evaluation?) between what a bank claims a hard to price asset is worth (a shipper container full rubber ducks has value to someone somewhere) and easy to value asset being sold due to unusual circumstances (lost executive in Mexico selling his Rolox for $100 to get a bus home)

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I think you're arguing two separate things here, that these metrics are good for the economy, and that the "turns" are actually going to occur in the near future. Your bullish assumptions rest on the latter. The paradox of thrift may continue in trend while other international countries develop more of a consumer base.

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The savings part of the piece needs the most help. How America defines savings is not the same as in other countries so any comparison doesn't fly.

In the US, the uptick in home values may be savings to us but not to the rest of the world. IRA and 401-K's also don't count for the most part.

We tax saving accounts in the US. The consumer saves for a rainy day when they feel threatened. Very logical wouldn't you say?

Equating the high savings rate with a downturn is like equating cottage cheese with being fat. Backwards.

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James, what grade did you get in Econ 101? If it was even passing, something is suspect.

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I think what he is saying is that "building savings" during a recession is bad. But "having savings" in a recession is good. Certainly liquid capital reserves to the ture of about three months of income can't be a bad thing for any one person. California just put a plan in place to build its reserves. The president just spoke to the finance industry about having larger reserves on hand.

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am i the only one taken aback by the first lines of myth #5?

someone forgets to bring a glass of water or relay a message, and they must be destroyed? (what is this, a yelp review?)

Altucher, you say you've managed hundreds of people. if this is what you've learned, it's management only in name.

here's Alan Mulally as an example of how to work with people (i don't own the stock):

http://www.nytimes.com/2009/09/06/business/06corner.html

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@7, I got a B+ in Econ 101 but it was when I was doing a summer program while in high school in 1985 so a very long time ago. And I was distracted by Sophie Lee who was sitting next to me and i was very nerdish (still am) at the time and too busy trying to get her attention to pay attention to the professor.

@8 Its just that people in this economy have had no fear for too long. Its only now that people see unemployment as a real possibility. this is not about management but about the overall benefit of instilling some discipline and work ethic back into the system.

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I think people are taking this waiter thing a little too far. My main point is that productivity was declining because people were feeling a little too entitled to their jobs. Yes, losing a job is a horrible and wrenching experience. yes, people are in a lot of pain. A recession is good for nobody. But, with the recent declines in unemployment we've also seen a surge in productivity. Now, as inventories begin to get replenished, productivity should decline as we begin to rehire. This is all a good thing and I think it will bring about a new improved work ethic throughout the economy.

And I don't like beer.

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Who wrote this article? Goerge "DIMWIT" Bush? America has turned just plain scary. All these MBAs and CEOs and absolutely clueless and lying politicians... THEY HAVE PUT THE PEOPLE AT RISK FINANCIALLY, MILITARILY, AND MORALLY. THE PEOPLE HAVE DONE NOTHING WRONG EXCEPT VOTE IDIOTS IN LIKE BUSH, and NOW, OBAMA. In defense of OBAMA, noone should have to take the reigns of the disaster BUSH left. How can we have gotten so lost and so far away from the advice of the constitution? Its financial "EXPERTS" like James Altucher
who have sucked money out from the people who actually produce something (like products!??), while lining their own pockets creating absolutely irreverent and confusing products and statements like this article. HEY... COMMON SENSE? WE MISS YOU! Its so sad. Common folk, GET MAD! Its the financial parasites and growing government that has created our diisaster. Anyone who thinks we are coming out of this recession have absoluttely NO CLUE! EAT YOUR WORDS THERE Altucher, as our economy crumbles even further into a black abyss.

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Terrific essay. Point #3 is the most important. It is my experience, after managing equity portfolios for 31 years, that stock and bond prices generally trend in the same direction as the credit markets. Healthy credit markets support higher stock and bond prices. Weak credit markets drag stock and bond prices lower. Invest for growth when the credit markets are healthy. Invest defensively when credit markets are weak. All the rest is "nice to know", but not very important.

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I sure hope this article was meant to be sarcastic.
Specifically, related to Myth # 1: Have you talked to people who are unemployed and don't have savings, as to how they are getting through the current downturn ? Have you talked to people who can't afford health and other insurances in spite of working very hard and diligently; some of them end up filing for bankruptcies because they don't have savings because the wages / incomes have stagnated over last 30 years. Let alone health care, some can't even afford to fix simpler / cheaper things like fixing their cars, buying enough food, heating their homes, etc.
Have you talked to those who are very close to retiring or are already retired, whose retirement portfolios have been trashed by the bursting of the recent bubbles. I would prefer sleeping peacefully at night because I have savings instead of living from paycheck to paycheck or having to beg from govt or others, just to survive.
Related to Myth # 3: Just because it has been going on for 4000 years, doesn't make it right. By the same token / argument, loan sharking would be OK, slavery and child labor would be OK, not allowing women to vote would be OK, inequality between man and woman's pay / wages would be OK, and so on and so forth. I understand not all debt is bad but debt that's used just to fund a lifestyle (keeping up with the Joneses: buying bigger and bigger housing, gas guzzling cars, multiple flat screen TVs, going on cruises and vacations, etc.) based on inflated asset prices is wrong and misguided; if we care about just paying the interest on the debt and don't care about paying back the principle ever, then I guess debt is OK, as long as we have access to cheap money and can service the debt without crimping the investments in productive / meaningful businesses and activities. UNDUE Debt based on over inflated asset prices is BAD. That leads me into Myth #4: MTM is necessary to curtail over-leveraging; granted there is no perfect way / formula to MTM but just because we don't know how to price something, doesn't mean we assign some arbitrary high value to it. Your example about divorcee having to sell at $200,000 is not a very compelling argument; one data point (anomaly) does not establish a price trend: price is a combination of supply & demand, what buyers can afford, credit availability, lending standards etc., is what determines the pricing.

The kind of arguments that James makes have encouraged and solidified the mentality of entitlement, instant gratification at any cost due to cheap money and credit, leading to extreme boom and burst cycles; rich are getting richer, poor keep getting poorer and middle class is shrinking; the rolls of uninsured and under insured keep growing, the Social Security and Medicare-Medicaid commitments and shortfalls keep growing. I am not a retiree or no way close to retiring; have been out of permanent / full-time work for close to 2 years but still am able to sleep peacefully at night and re-educating / re-training myself because I have savings, not having to run to the govt to beg for help / survival, unlike the big businesses (Banks, Auto manufacturers, AIG, Frddie, Fannie, etc.), especially Wall Street firms, who privatize the profits and socialize the losses.

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Gee, how many jobs were actually saved?

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Re # 5 This "downsize it" attitude is the biggest most cowardly thing that has happenned in the USA. I had a new "manager" ( AKA Axman) come in to our place and BRAG how he fired people, . "Lean and mean" was his motto. ( Translation... "Make four do the work of 7" ) Translation 2... "If I have to can 50 to keep MY job... OH f...ing well?" Well... He fired the most hard working, smartest, work detailed, guy that everybody on the line respected because "Mike" had seniority and made few K more than his replacement. "On paper" the Axman saved 1000's...In reality>>> Without Mike, the place went to hell and no one in Mgmt could figure out why. We lost accounts because we were late on deliveries. Quality suffered because Mike's cheaper replacement was too busy Ass wiping instead of supervising. The replacement's attitude was.. "Well, I'm not a freekin babysitter!" The American worker hasn't lost work attitude for no reason... It all starts from the TOP! It's only in the last 10 years or so that I heard OFTEN on the floor... "WEll, Management doesn't give a s..t, why should I? " The "suggestion box" disappeared because it became a source of grief for managers. "It took up too much time hearing all the whinies." Oddly... When I walked into the offices, I used to OFTEN see managers chatting their golf game, or ... Exchanging the latest nudies they found on the "Net".
Want to talk "productivity?" Show me a manager who talks the walk and and I'll go ..."Oh yeah,that old We're a TEAM" crap again. Show me a manager/super who actually makes a difference, and I WILL give 110% Case in point... Busting my knuckles to strip a mold with a wood implement, my "super" Mike had Maintenance make up a much more useful aluminum one. Closest I've ever come to hugging a boss! 8 hours a day, 5 days a week, half my waking hours made a bit easier by a boss who actually cared? Lead me into "battle" Mike.I'll follow! >>> "For lack of a nail, the shoe was lost. For lack of a shoe, the horse was lost. For lack of a horse...Etc." When a company is failing..It's the same old story... "We can't compete against foreign labor." Where would the USA be today if our anscestors had that attitude? When our Co. was family owned, They fought.They had pride and said... "We'll find a way." And DID! Today, our management's attitude seems to be... "I got a decent severance package. What? Me worry?"
I'm an American worker. Tell me... "WE are a team" and I'll smile at the meetings. So will most of my co-workers. Life is good? After the meetings ... We'll all grumble... "Same old B.S." That's the truth bub.
Why? Because it IS! We may not be College graduates,or Judge Judy, but.. we're not as dumb as we look. It's always the same old story... Foreign competition is the bad guy. You know what?... Give me the nail for the shoe, and...the shoe for the horse, and S>O>B> I'll bet we can kick ass on those "foreigners."
Let's re-look on the cost of overseas oversight. Shipping, duties, etc. Just maybe...."Made in the USA" can be whittled into something "Cost-effective?"
What "Us" USA workers have seen, and sensed, so far is...... It's easier for managers to just throw up their hands, lay off a bunch, ( Always the easiest way out, on paper) and ... Give up.
And yet.. perhaps...A few "Nails" might make the difference between a bankruptcy and The "Holy Grail?"
( "Return on Assets Employed." )
As grief filled as a suggestion box might seem....... 10 manager minds versus a 1000 employees.... If there is a one in 10,000 chance a really good idea comes up, that's still a whole lot better odds than winning Powerball?

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