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topped out on March 10, 2000, at 5040. From there, it reached
a low of around 1100 in October, 2002, and is now in the range
of 2000. The price/earnings (P/E) ratio was over 200 in December,
1999 — a classic sign of a mania. Yet the NASDAQ was considered
a no-lose market, the wave of the future. It was a wave, all right,
in what surfers call a wipe-out. Vitually no one in the conventional
business press sounded a warning that any collapse of this magnitude
was imminent. In the collapse, trillions of dollars in paper wealth
melted away. The NASDAQ mania of 1995-2000 ended — I believe

manias are created by the elite, not the masses. The masses are
not wealthy. They save little money. Their net worth is usually
close to zero. They are heavily in debt. They worry about the
monthly budget. They are not the source of stock market manias.

It was not
the broad mass of Americans who were caught up in the NASDAQ bubble.
While millions of Americans do have pension fund assets — not enough
to live on in retirement, of course — the people who created the
NASDAQ mania were fund managers, who are highly educated, well-paid
professionals. They funded the NASDAQ mania with other people’s

The broader
the mass of investors, the wider the range of opinion. This is
true of every field, not just investing. The more people in a
group, the more noise there is. They don’t reach agreement easily.

The elite
in the United States is college educated.

They read
the same textbooks as freshmen and sophomores. The range of popular
textbooks is limited: about a dozen in each academic major have
80% of the market. Committees of scholars screen textbooks for

As the great
and hated book The
Bell Curve
argues, the best and the brightest young adults
in the United States attend a few dozen colleges and universities.
They are taught the same outlook. They adopt the same attitudes.
They come into contact with each other. They create life-long
networks: employment, marital, social, cultural. Access into this
elite since 1960 has been based on brains, not money — the
thesis of David Brooks in Bobos
in Paradise

The authors
of The Bell Curve deplored this phenomenon, because they
understood the problem of elites: they run in packs. We hear all
about diversity these days, yet we live in an era in which diversity
is rapidly disappearing at the top. Clark Kerr, the Chancellor
of the University of California back in my day, coined a term,
"multiversity." It was clever, and it was wrong. "University"
is correct, as in "uniformity."

people know the premier schools. The list does not change much,
century to century: Harvard (always at the top), Yale, Princeton
(since Woodrow Wilson’s era a century ago), University of Chicago
and Stanford (newcomers), Columbia. In science, there are MIT
and CalTech. The premier tax-funded school is always the same:
(University of California). There are a dozen four-year elite
colleges: Swarthmore, Pomona, Oberlin, Carleton, Occidental, etc.
There are two dozen second-tier schools: Texas (Austin), Michigan
(Ann Arbor), Virginia, North Carolina, William & Mary. Then
there are the law schools: Harvard, Yale, Chicago. The business
schools: Harvard,
Stanford, Wharton, and Chicago.

The graduates
of these institutions run the nation. I don’t just mean run it
politically, although that is more obvious this year than ever
before: Skull & Bones’s triumph. I mean in every field that
requires formal screening and certification.

My friend
Ernst Winter, who has been part of the elite in diplomacy circles
for sixty years, the son of the Vice Mayor of Vienna in the pre-Nazi
days, the son-in-law of Col. von Trapp, and an old associate of
Henry Kissinger in the immediate post-War years (Henry was the
newcomer, not Ernst), still teaches young men the art of diplomacy.
He knows many of the elite in China. As a former UN official,
he knew Chou En-lai. He stays in contact with the up and coming
foreign policy elite in China. He says that these young men are
graduates of the elite American universities. They think like
all the other graduates. He thinks this development is unwise:
the substitution of a single outlook for the international diversity
that once existed.

The mark
of a mania in any field is narrowness of vision. The participants
are focused, to use an over-used word. In investing, the participants
are obsessed by the dreams of avarice, and they see Easy Street
as a one-way street. They find one narrow avenue that they expect
will produce riches, and they buy.

An ongoing
stream of similarly obsessed, similarly focused investors, checkbooks
in hand, drives up the price of one asset group. This confirms
to everyone involved that their original assessment was accurate,
that this asset group is the wave of the future. Word then gets
out within the narrow group that constitutes the capitalist class.
About 3,000 to 5,000 fund managers make most of the capital allocation
decisions in the United States. They talk to each other, read
the same investment magazines, and use similar formulas to assess
potential risks and rewards. In short, they run in packs. They
are agents of the wealthiest 20% of all Americans — and, increasingly,
the world.


When some
entrepreneur gets rich in China or India — and millions of them
have — they look for diversification. They get rich in one field,
but they have so much money that they want to put some of it abroad,
"just in case." The problem is, what is diversification
for them is unification for America’s capital markets. These foreign
investors look for the best organized capital markets, and the
United States is at the top of the list. For them, buying investments
here is diversification. Yet from the point of view of the P/E
ratio in the United States, it is mania investing. It is Son of

In March,
the U.S. trade deficit was $46 billion. This astronomical gap
was up 9% over February. Americans are buying more from foreigners
than they are selling to foreigners. Foreigners are not doing
this for free. They are not charitable. They are looking for profits.
So, they are providing the money that enables Americans to buy
all the goodies. They are investing the trade surplus here.

The problem
is, they are investing through the existing network of U.S. government-tested
and certified brokers, who put this money into U.S. government-regulated,
SEC-approved companies. In the history of man, no good old boy
network has ever directed the flow of capital on a scale like
today’s money managers. The comparative honesty and reliability
of America’s state-registered capital markets has created a gigantic
sink-hole of wealth. The P/E ratios of almost any asset class
in the United States are so high that any successful entrepreneur
can make five times as much in his own business. In China, it’s
probably closer to ten times more. Yet in their quest for diversification,
the world’s most successful investors are betting on America’s
capital markets. This has created a worldwide mania. America has
become NASDAQ nation.


In the April
7 issue of Strategic Investing, Mark Faber made an important
observation. Faber has lived in Hong Kong for years. He publishes
the Gloom, Doom, and Boom letter. He has a far broader
view of investment markets than the typical newsletter writer,
let alone fund manager. He, like Warren Buffett, is finding it
difficult to identify undervalued asset classes. The prices of
all asset classes have been pushed into high regions. The single
most important factor in the creation of this mania, he says,
is Alan Greenspan.

. . . Moreover,
the global economy has moved into uncharted waters. Never before
has a monetary authority embarked on a well-publicized monetary
policy whose sole purpose is to boost asset prices in order
to sustain consumption, and hence the economy, as is now the
case in the United States. That such a desperate, and on many
counts highly objectionable, monetary policy can only end in
calamity should be clear, but what is less clear is precisely
when disaster will strike and how the calamity will play itself

has to be given to Fed Chairman Alan Greenspan. He is the first
head of a monetary authority who has not only managed to create
a series of bubbles in a domestic economy, the United States,
but also managed to create bubbles everywhere in the world — in
New Zealand and Australian dollars, emerging market debts, government
bonds, commodities, emerging market equities, and capital spending
in China. This is an achievement that no one else in the history
of capitalism has ever accomplished, and one that investors
will never forget once this universal bubble bursts and fills
entire chapters of financial history books!

is not alone, of course. The central bankers of every nation have
all worked hard to cut every currency from gold redemption. This
development has been escalating since World War I broke out in
the summer of 1914. But Greenspan is the acknowledged master of
monetary manipulation. Central bankers imitate him, seeking the
same kinds of solutions to recessions and collapsing equities
markets. Greenspan did not invent the modern system of worldwide
central banking, but he surely represents it and serves as the
model for his peers.

Central bankers
and their salaried economists learned the basics of monetary theory
from the same textbooks. They did not learn monetary theory or
policy from the one textbook that really explains what is going
on, namely, Murray Rothbard’s The
Mystery of Banking
(1983), which is on-line for free.
I wrote the Foreword.

[I realize
that almost none of my readers is sufficiently interested in
the banking system to download this book, print it out, and
read it with a yellow highlighter in hand. This is why the scam
goes on, decade after decade. It’s a MEGO problem — "My
Eyes Glaze Over." Those inside the system who profit from
the arrangement have nothing to fear politically from a mass
movement of enraged voters who demand an end to fractional reserve
banking. There will never be such a mass movement. So, zeroes
are added to our net worth, if any, decade after decade, and
the asset bubbles proliferate. So does debt.]

What is going
on, Rothbard argued, is massive theft through monetary inflation
in a series of sting operations that are licensed by all governments
for the sake of domestic commercial bankers and their continuing
ability to buy government debt. This is why Greenspan and his
imitators are willing to issue what is in effect counterfeit money
in order to prop up the equities markets. "Liquidity"
is the key word. It is another word for "debasement,"
which is unpopular and rarely used in polite circles.


The existence
of a balance of payments deficit in the $500 billion/year range
testifies to the power of manias today. Foreign investors and
central bankers are buying dollars to buy American capital. The
P/E ratios rise, but sophisticated investors — Buffett and Templeton
aside — see no problem. The boom in asset values will go on indefinitely,
they assume, because there are always more newcomers, money in
hand, seeking asset diversification.

The multiversity
is a myth. So is asset diversification in a government-regulated,
government-approved capital market. What appears to be diversification
is in fact a massive international misallocation of capital into
officially approved channels. The mania phenomenon appears to
be rational because most of the smart money is pouring into a
narrow class of assets. It is like a roulette table that everyone
knows is rigged, yet they still play. Why? "It’s the only
game in town."

Find another

15, 2004

North [send him mail]
is the author of Mises
on Money
. Visit
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