confidently predicted future greatness. Over the last 15 years, the Japanese economy has stagnated, unemployment has risen dramatically, and confidence has waned. Japan still leads in many economic categories, but also has a suicide rate that is among the highest for industrialized countries.

So what path will the United States follow? Will it be Keynes vision of examined leisure created by information technology, or will we stumble down a painful path similar to that taken by post-bubble Japan?

We will develop the answer to this question throughout this chapter. To understand the problem we will have to wade knee-deep in economic statistics of debts, deficits, and productivity. When I ponder the U.S. economy, however, I do not think only of economic data. In addition, I think often of a high school classmate of mine-Steve-and his behavior in the fall of 1975.

In 1975 I was a junior in high school on a mediocre cross-country running team. Actually both the team and I were mediocre-so bad that our archrivals and state champions, Grosse Pointe North, used our competitions as practice days. Rather than drive to our competitions, North would run eight miles just to get to the starting line. Theyd then run the three-mile race, defeat us handily, and run the eight miles back home. They didnt want to waste a training day by running just a few miles against such a pathetic team as ours.

Into this gloom came the new guy, Steve, a young man with a great natural talent for running. Although he had not been on the team in previous years, he showed early promise and soon became the best runner on our team.

The funny thing about Steve, however, was that he didnt sacrifice much to be a great runner. While my friend Jim and I made sure to eat right and go to bed early, Steve was not averse to having a few drinks the night before a competition. He would even sometimes arrive at a Saturday morning race hungover, his natural talent usually allowing him to outrun the rest of us. Though on the mornings after particularly hard evenings, we were not sure whether Steves talent or Steves hangover

would prevail. Had the excesses of the previous night been extreme enough as to overwhelm Steves ability?

The U.S. economy faces a similar battle between hangover and talent. The United States has demonstrated an unmatched ability to innovate and produce. Our economic system seems to have a natural talent for making products both cheaply and well. Impeding that talent, at least over the next several years, is the financial hangover caused by the excesses of the 1990s.

What condition will win out? The hangover or the talent? To find out well delve into some macroeconomic issues. When I was an MBA student at MIT, the economist Lester Thurow said, If you like reading [dry] data tables, then you should consider becoming an economist. The shoe that Lester described fit me perfectly; after a few years I returned to get a Ph.D. and became an economist.

When I tell people at social functions that I am an economics professor, a very common response is that was my worst course in college. I have met literally dozens of people who took one economics course, found it distasteful, and stopped. Part of this dislike of economics comes from the standard teaching style (boring!), but part is due to the very nature of the subject (including dry data tables). As hard as it is for me to understand, I have learned that some people do not enjoy reading economic statistics.

Furthermore, some people can succeed financially without studying economic numbers. Take my friend David who works as an oil trader in the New York Mercantile exchange. He does his trading in a crowd on the floor of exchange-just like the people shown screaming at each other on TV and in movies, David makes his living by buying and selling oil. In fact, David once joked that his epitaph ought to read, He yelled for cash.

Davids yelling has resulted in quite a bit of cash. His lifetime earnings are north of $10 million, and he has earned more than $1 million in some years.

How does David make his money?

In the early days of trying to figure out Davids secret, I used to grill him. Do you think that the United States will start constructing new nuclear power plants and thereby reduce demand for oil? How did the

1991 oil fires set by Saddam Husseins troops affect the future capacity of Kuwaiti production? To all of these questions, David would calmly answer, I do not know. He even joked that to make money he wouldnt even need to know the number of gallons in a barrel of oil (42).

What is Davids secret? He summarizes it by saying, I know when the buying is real and the selling is real. David stands in the crowd, listens, observes, and acts. He capitalizes on emotional signals from his counterparts, and he uses little or no formal economic analysis.

So is it possible to make money just by exploiting knowledge of sentiment, with no economic analysis? The answer is yes, but I believe it is possible to make even more money by combining economic analysis with the science of irrationality. That is the course that we will follow in the rest of this book, and it requires that we delve into the economic details.

We begin with the economic evidence in favor of the worst of times, and then move to the arguments in favor of the best of times.

Bear #1: Animal House Fraternity Goes National

Fat, drunk, and stupid is no way to go through life, son, says Dean Vernon Wormer on his way to expelling the members of the Animal House fraternity. When learning of his expulsion, John Belushis character Bluto remarks, Seven years of college down the drain!

The first argument against the U.S. economy suggests that an economic path that is the equivalent of fat, drunk, and stupid cannot have a good ending. The three pillars of the U.S. economy are: (1) government deficit spending, (2) the Federal Reserves easy money policy, and (3) profligate spending by U.S. consumers.

Pillar #1: Deficit Spending

When the federal government runs a budget deficit, it sells U.S. Treasury bonds to make up the slack. From the beginning of the 1960s up until the late 1990s, the U.S government generally spent more than it collected in taxes so the supply of bonds grew. By the late 1990s, however, the gov-