“Inflation is a crowd phenomenon in the strictest and most concrete sense of the word. The confusion it wreaks on the population of whole countries is by no means confined to the actual period of the inflation. One may say that, apart from wars and revolutions, there is nothing in our modern civilizations which compares in importance to it,” wrote Elias Canetti in Crowds and Power. "The upheavals caused by inflations are so profound that people prefer to hush them up and conceal them.”
Last night, before going to bed, we read a Mises Institute essay by Paul Cantor about hyperinflation in Germany in the 1920s and how it affected the writings of Thomas Mann, particularly his short story, Disorder and Early Sorrow. Cantor deconstructs the story from the perspective of Austrian economics, showing how hyperinflation provides not merely a background, but also a means of understanding it.
This is how Mann describes one of his characters, a housewife, coping with skyrocketing prices:
“The floor is always swaying under her feet, and everything seems upside down. She speaks of what is uppermost in her mind: the eggs, they simply must be bought today. Six thousand marks a piece they are, and just so many are to be had on this one day of the week at one single shop fifteen minutes’ journey away.”
We find we do our best thinking when we are asleep. While we were dozing, our brain must have gone to work on the theme of the article like a Pakistani policeman on a “jihadi.” We awoke in the middle of the night to find it reduced to a bloody pulp, and blabbing about one simple and horrible crime: the destruction of the American middle class.
But, the culprit is no pawn of jihad. No splinter faction or 5th columnist…no mole, no collaborator…no revolutionary cell skulking in basements. No, in the United States in the early 21st century, as in the Weimar Republic, the saboteurs are the financial chiefs ensconced in the capital itself. They are the nibs whose faces grace magazine covers, who give speeches, win honorary degrees, and chivvy consumers — can you believe it? All to avail themselves of every latest innovation from the financial industry…such as adjustable rate mortgages.
Remember that although the value of the dollar was whittled in half during his tenure at the Fed, Alan Greenspan enjoys his retirement today like a portly bishop…basking in a job done well. And, was it not the same Alan Greenspan who was knighted by Queen Elizabeth II, shortly after he won the prestigious Enron Prize?
The inflation of the mark in Germany led to disorder. It then led to sorrow. The inflation of the dollar, over the last quarter of a century, leads in the same direction…winding through bubbles, busts, ARMs and Neg Am mortgages. In the last four years alone, debt in the United States has gone up by an amount equal to 100% of the GDP. There are now an estimated $300 trillion worth of derivative contracts outstanding — in a world economy only worth $55 trillion. And, it takes five to six dollars of additional debt to create one single dollar of additional GDP. The typical ratio is usually about two dollars of debt to one dollar of GDP.
But it is the bust in residential real estate that creates the most disorder and the most sorrow, because it has got the middle and lower classes caught in a steel trap from which they cannot escape.
“No Money Down Disaster,” reads a headline in this week’s Barron’s. The author notices what we have been saying for months that adjustable rate mortgages are on the verge of ruining the marginal borrower and dragging down the entire economy, too.
For, now, says Barron’s, residential real estate is threatening to revert to the mean, which may indicate a 30% drop in prices that will wipe out the equity of millions of homeowners.
Either they will end up paying more than they can afford (why did they go for “no money down” in the first place?), for something worth less than they paid for it (that is what happens in a bear market). Or, they will lose their houses. When that happens, the world they thought they understood, will give way beneath their feet.
As Dr. Cantor writes about the 1920s, “A society composed of embittered people…is soon going to face major political problems, as the rise of fascism in Germany was to show.”
u2022 “A fool and his money are soon parted,” goes the old saying. What has always puzzled us is how the two of them got together in the first place. The world is full of dunces and dimwits…many of them with money. But, where and how did they get it?
We are not sure of the answer to that, but we are dead certain we know how the two go their separate ways.
The other day, for instance, we were sitting down with a young friend of ours.
“Yes, I’ve decided to set up my own business,” he said.
“Doing what?” we wanted to know.
“Managing money,” he explained. “It’s just much better to be on your own. You don’t have all that overhead and employees to bother with. And here in Europe, there’s not a lot of regulation, as long as you stick to rich clients. You know, high net worth individuals. ‘I only invest in value’ plays. Remember, I used to try technical trading and other forms of speculation. But what I learned from you was that what really works is following a ‘Warren Buffett’ approach. And so far, I’m up 40% this year. And, I made a 38% gain last year. Really, I’m just in two areas now: gold stocks (I guess I learned that from you too) and Chinese stocks.
“And, I charge clients just like everyone else, a 20% performance fee…”
Thus is a hedge-fund manager born.
And thus, does a whole industry of clever folk get to work to try to take a fool’s dough away from him. They offer to protect it, to manage it, to invest it, to coddle it, caress it, clip its nails and dye its hair. And when they’re done, so is the dough.
Our young friend knows nothing about investing — or rather, not much. How do we know? Because we taught him everything he knows. Yet, here he is now providing financial services to hundreds of wealthy clients — one of thousands, maybe millions, of people in the world’s most profitable sector.
u2022 The Italian Riviera is far more dramatic — and inhospitable — than the French one.
‘Riviera’ technically means a location in which the mountains drop directly into the sea. On the Italian side, this is definitely true. The beaches are beds of sea-worn rocks roughly 10 meters wide. Stepping into the sea is more like diving into the deep end of a swimming pool than wading softly off a sandy beach into sun-warmed seawater. The bathers are still topless from time to time. And the atmosphere still relaxed, if not more so. But there’s less space between the cliffs and the sea.
This weekend we slipped away to the Italian coastal ville San Remo. We’d heard of an enormous flea market in the center of town, which turned out to be true. But the old salt that the journey is often worth more than the destination proved itself true. On the way back, we ended up making a pit stop at a restaurant that couldn’t have been built on more than 20 meters of land. High class. Civilized. And empty, but for a few well-dressed diners in the middle of a hot day.
We entered and immediately caused a commotion. Our two boys were sporting soccer shirts we’d purchased at the flea market. One wore a French national team shirt with Zidane written across the back…the other, Italy, and the name Meterazzi. (If you don’t follow le football, France and Italy were in the finals of the World Cup this year. Zidane, the French national star, was thrown out of the game with 10 minutes remaining after head-butting Meterazzi, an Italian player, in the chest. The fact that our kids were wearing both shirts earned them free entrees in the restaurant. Heh.)
Above the French border town of Menton, a few kilometers later, we discovered the little village of St. Agnes, which claims to be the highest coastal village in Europe. We don’t dispute the claim; it rests on top of an 800-meter mountain with cliffs on three sides. There have been people living in the area since before the Romans conquered Gaul. The ruins of a ninth-century chteau rest at the very crest of the mountain.
The high mountain village of St. Agnes is also the site of the second fort inland, of those that made up the Maginot line. A deep bunker with gun turrets and enough room to house nearly 400 men, the fort is a testament to the adage that generals always strive to fight the last war. It was opened in 1932, but closed in 1938 before the real hostilities between France and Italy began.
This area had formerly been in dispute for centuries. Not far from the village, in a hamlet known as La Turbie, lies an enormous Roman ruin known as La Trophee des Alpes. It sits high on a mountain overlooking the tiny principality of Monaco. In fact, directly below the edge of the park in which the ruins lie, you can see the palace of the Grimaldi family, and the many casinos of Monte Carlo. The Senate in Rome dedicated the Trophee des Alpes to commemorate the Emperor Augustus’ dominion over the tribes of Gaul. The site also served as the starting point on a coastal highway known as the Via Julia that connected Italy with Spain and opened the whole of the western part of the Empire to trade.
Today, on both sides of the border, residents are equally fluent in French and Italian. It’s as if the Trophee des Alpes and the forts of the Maginot Line never existed. “In Europe,” Dr. Kurt Richebcher explains, “the people have taken over. Our politicians talk and try to do things. But nobody listens to them anymore. We know that nothing good can come of it.”
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.
