“Much of the middle class was wiped out.”
So said our lawyer in Buenos Aires. He was speaking about the last financial crisis in Argentina.
“Those who understood what was going on didn’t lose a thing. We had our money in dollars or euros…with accounts in Switzerland or Miami. But when the government let the peso fall…and then put on controls to keep you from getting your money out of the bank while it was falling, you can imagine what that did to people. It’s always the middle classes who suffer.”
Argentina is now on the mend. People are working. The streets are crowded and the restaurants are full. The peso, which was once worth as much as a dollar, is worth only one third as much. But in the last year, the peso has gone up. It is the dollar that is falling now.
And who will get wiped out this time?
We have been wondering. The popular illusion is that the Fed will manage the dollar down gently. Little by little, the presses will roll at the U.S. Treasury, dollars will pile up overseas, and the greenback will fall against foreign currencies — and gold — in a landing so cushioned that no one will notice. The dumb foreigners will simply wake up one day and find their U.S. dollars and U.S. bonds worth only a fraction of what they thought they were worth. America’s debtors will get off scot-free.
Could it be that easy and smooth, dear reader?
We venture a little analysis here. In the short run, as Warren Buffett puts it, the markets are a voting machine. People get any goofball result they want. Vox populi; vox dei. But in the long run, markets are weighing machines. The masses are left mute. Sola vox dei loquitur. Only God speaks. Only the fundamentals matter. Only the truth is heard.
America’s middle class has put their faith in various graven images: Ben Franklin, Andrew Jackson, George Washington — dead presidents printed on green paper. They have voted for more and more spending, more and more bread, more and more circuses, more and more foreign wars. They claim to be religious, but they put their faith in the princes and powers of this world — in jobs and credit…in the government. Their voodoo economy is built on magic paper money and directed by witch doctors. Everyone knows they make mistakes, but no one expects them to fall on their faces.
And most of all, America’s middle class counts on houses. Most have few assets beyond their own homes. They have no secrets accounts in Switzerland. They have no euros. They have no Picassos and no Bugattis — or Joe Camels. They have no gold. Even the little they do have — their own homes — are mortgaged more heavily than at any time in the past. A modest decline in prices would leave millions of people upside down — with mortgages higher than their house prices.
Americans used to pay off their mortgages during their working years and then live in their homes, free and clear of debt, during their retirements. Typically, houses were then passed along to the next generation. Now, the house serves a new role. It is supposed to pay the bills from the cradle to the grave. Rather than savings or pensions, people are counting on the rising value of their own homes, not only for current expenses, but for those in retirement, too. Many people take out mortgages on their primary residences, says USA Today, in order to buy vacation houses. When they retire, they intend to live in their second home year round, sell their primary house, and use the proceeds to fund their golden years. Who is going to pay for all those houses left behind? Illegal immigrants from Mexico? Maybe.
Don’t wait too long, is our advice. Remember, voting eventually yields to truth. The truth is, houses are already so expensive in many areas that few people can afford them. And the foreigners look like they could wise up at any moment.
Boom begets bust. A bust in housing would leave a lot of Americans broke at the worst possible time — just when their working years are coming to a close. A real collapse in the housing market would wipe out much of America’s middle class — no matter what happens to the dollar.
“Bay area home sales fall sharply,” says one of yesterday’s ominous headlines.
u2022 “One Million in Britain Fear Bankruptcy,” is the headline story on today’s subway tabloid. Only a million? Surely the number will go up as the down cycle intensifies.
u2022 In America, two headlines suggest worry among top officials: “Fed Chief Urges Caution on Mortgages,” says one, from the Financial Times. The other comes to us from the Wall Street Journal: “Greenspan Expresses Concerns on Derivatives…” Fed chiefs, present and past, are covering their derrieres.
u2022 And in Afghanistan and Iraq, things seem to go from bad to worse…bombings, drugs, murders. We recalled our own words from four years ago: No one goes to war in Afghanistan or Mesopotamia without later regretting it.
u2022 Gold…gold…gold! Gold fever has not yet hit the world’s investors. This is still just the second stage of the bull market. As foretold in this space, gold seems to be in a correction. We looked at a chart this morning that made us think the price should drop between $650 and $545 before the correction was over. But what do we know?
All we know is that when the voting stops and the truth-telling begins, gold is likely to be a lot more valuable — in dollar terms — than it is now. We are hoping the price falls below $650. We will buy more.
u2022 Finally, we are always trying to connect the dots in order to see the big picture. Sometimes we see clearly, but most often, not. We thought we saw a few more connections on Sunday, when listening to our favorite Anglican priest, Peter Mullen, at St. Michaels.
Unlike other economists, we have no illusions about our trade. We cannot tell you how to get rich (other than the old-fashioned way: work hard, save your money, get lucky), nor can we offer any new raz-ma-tazz formula for the U.S. economy. In fact, we are always amused when the question is put to us: “What should the U.S. do to avoid the financial disaster you see coming?”
“Well, nothing,” is our stock reply.
Of course, there is a lot that could be done, but nothing that would actually eliminate the problems. People are too deeply in debt. They, and their elected representatives, have made promises that can’t be kept. To make matters worse, the world economy is evolving. The great advantage enjoyed by the West for the last 300 years is disappearing. The teeter-totter is teetering toward the East. Like it or not, the Western nations are destined — on a relative basis — to get poorer. And their creditors, foreign and domestic, are likely to be stiffed.
Still, government officials and private consumers could cease making the situation worse. They could stop spending money they don’t have, on things they don’t need. Of course, that would trigger the very crisis they hope to avoid. At least it would clear the air and prepare the way for genuine growth and prosperity in the future.
But don’t hold your breath, dear reader. It is not likely to happen. Success is a hard thing to recover from. The success of the American empire — and the American consumer economy — will not be corrected easily. It will, most likely, require full, frontal catastrophe. That is just the way things work. All of life grows, develops, matures, corrupts, degrades, degenerates…and eventually expires. At its peak, an organism — or an institution — is like a man in his 50s at the top of his success — a midlife crisis waiting to happen. It could be a pretty girl in the office, a war in a foreign country, architecture, booze, disease, or just the advancing years: something will bring him down.
“People make a fundamental mistake,” explained Mr. Mullen, or words to that effect. We don’t take notes during a sermon…perhaps we should. “They confuse themselves with God. They think that their own personalities are divine. So, when they do something wrong, and feel bad about it, they don’t think they need to stop doing it. No, they think they need to find a way to feel good about what they are doing.”
That is the problem with modern economics, too. Economists have given up trying to figure out what rules an economy follows. Few seem to have any interest in the rules and even fewer advise people to stick to them. Instead, they make up their own rules as they go along — helping to set interest rates, trade restrictions, fiscal policies, tax levels, all in the guise of managing and guiding the economy. There is no right and no wrong, they say, just technique. They admit that they cannot tell us what price oil will sell for next week…or even tomorrow. Still, they pretend that they can look into the future and improve it before it happens, by adjusting, jiggling, tuning, and manipulating whatever levers are available to them.
We don’t believe it will work. “As ye plant, so shall ye reap,” we recall. If ye cast your seed on barren rock, it will not grow — no matter how many levers ye yank. And if ye sow the wind, well, ye might end up getting a cyclone.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.
