Mortgaging the Farm

“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom,” wrote Adam Smith. We wonder about the contrary…what is folly in private conduct, if it is not folly for the great kingdom?

Volatility is at a 12-year low. People do not expect much movement in the stock market. They are not getting much. Investors are calm, bullish, and delusional. Nothing happens. And nothing is just fine.

Because while they are making nothing from their stocks — the market is no higher today than it was 6 years ago — they are getting rich in real estate. Seventy percent of Americans own their own houses. In round numbers, the average house is worth $200,000. And the average house goes up 10% per year. This gives the average household $20,000 more "wealth" each year. What’s not to like?

In some areas, houses are going up five, six, even 10 times faster than consumer price inflation.

Wait, how could house prices be rising so fast and consumer price inflation so slowly? Isn’t housing the biggest single item in private expense accounts? Well, the statisticians who compile the figures take care to put into the CPI only items that people don’t like to see go up. More than two out of three houses are owned by their occupants, but who among them complains when house prices rise? The complainers are renters. So it is the rental figures that go into the CPI.

For the homeowner, the rise in house prices comes like free booze on an empty stomach. He puts the cup to his lip; in hardly any time, he’s a little giddy. The average homeowner thinks he has $20,000 more to spend. How is he supposed to know that the “wealth” is a figment of Alan Greenspan’s financial fiddle, and not the real thing?

Who can blame him for wanting to take advantage of a free drink?

Multiplied over millions of households, the alcohol eats away at the nation’s balance sheet as if it were liver. Every day, as Warren Buffett puts it, the nation spends 5% more than it earns. We are like a very wealthy family, he says, with a very big farm. We don’t earn the money we used to, so we keep mortgaging more and more of it to pay current expenses. In the end, we will still be a family, but we will not be wealthy.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.