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JIM: Let?s begin with this myth of the new era. You identify very well in your opening chapter of this book the economic myth that we?ve had of a new era with superb economic growth and earnings. Address that issue, because a lot of people have not seen through it yet.

BOB: The famous ?new economy,? right? The first graph in the whole book is a lot of fun. It shows the number of times in news articles that the term ?new economy? appeared in the news worldwide. Of course, it peaks out in the year 2000, with over 4000 mentions of the ?new economy.? So it was a really hot topic in 2000. The question is, does the emperor have any clothes on? And we find out that he really didn?t. The talk of the new economy was engendered almost entirely by psychology and the optimism and ebullience that was going on. It was independent of the stock market, but it showed up in the stock market. What we didn?t have, in actuality, was a new economy. All you have to do is look at the figures and compare those powerful bull market years from 1974 to 2000 with an equivalent time period of rising stock prices from 1942 to 1966. We found out that, in every case (and some of these numbers are very interesting), what we call the fifth wave ? the rise from 1974 ? was weaker from gross domestic product to industrial production, capacity utilization, the unemployment rate and right through to all the measures of debt and liquidity and interest rates. We had a much stronger period in the 1940s and 1950s into the early 1960s than we did from the mid-1970s until the year 2000. It?s clear, across the board, in all of these figures. So, my question is, where is the new economy? And the answer is, we didn?t have one.

JIM: That was very clearly stated in your book. You also showed charts. We?ve got this myth ? maybe it was helped along by the financial media ? of companies beating expectations with superb profits. There is a falseness to some of these numbers. But I want to go on and talk about something that?s very different today. That is the level of debt. We heard all these wonderful stories in the ?90s about the government paying down the deficit ? and that?s a story in itself ? but corporate debt went up and consumer debt levels went up as a percentage of GDP. We?ve got installment debt, credit card debt at record levels, corporate debt at record levels and more surprising, and going along with that, we have a negative savings rate. I wonder if you might address how these conditions spell an end to a boom, because you can?t borrow your way to prosperity.

BOB: I think you hit the nail on the head. Here are some of the figures that you were talking about. During that third wave, from 1942 to 1966, consumer debt was only 64% of annual disposable personal income on average. At the end of the fifth wave in the year 2000, it was 97%, and as you point out, right now, it?s over 100%. So debt is greater than annual disposable income. We had total credit market debt at 150% of GDP back in the third wave. It?s 300% today ? double that amount. So three times annual GDP is what we owe. I think this is fascinating. The prime rate was 3.75% on average during the 1942 to 1966 period. It was just under 10% on average between 1974 and 2000. That to me ? and we?re going to get to that later in our discussion I hope ? is the big problem. It?s one thing to have an unprecedented amount of debt outstanding, but it?s another to have that debt saddled with a high real rate of interest, because that rate of interest is larger than the economy can produce.