The NASDAQ 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 permanently.

Investment 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 money.

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 publishers.

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.”

Educated 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: Berkeley (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 NASDAQ.

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 out.

Credit 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!

Greenspan 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 town.

May 15, 2004

Gary North [send him mail] is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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