The Great Reflation: How Investors Can Profit from the New World of Money

Chapter 14. Declining America:Will It Recover?

There is a lot of ruin in every nation.

Adam Smith

In Part III, we look at some of the broader issues arising from Parts I and II. The Great Reflation, as we discussed earlier, is an effort to pump air back into the 25-year credit and asset bubble that deflated so suddenly and dramatically in 2008 and early 2009. However, it would be naive in the extreme to think that this effort will make the economy and financial system whole again, and that somehow it will restore stability and prosperity without having any seriously negative consequences.

On one level, the financial crisis of 2008 was a manifestation of the failure of the American economic and political systems. The realization that certain key components of the American economic model do not self-regulate is no longer open for debate. On a political level, key individuals were aware of the dangers inherent in the high-risk practices of banks but did not act. The fundamental problem is that these failures go far beyond negligence to the system itself. The ultra-free market, credit-infused model that seemed to be so successful in generating extraordinary growth in the United States is broken and it will not be so easy to fix.

The fundamental reality for investors is that they must deal with a highly uncertain future. Part II discussed asset allocation issues to help investors make practical portfolio adjustments in the face of this great uncertainty.

Part III also looks at some deeper ...