Empires, Mortgages, and Cable TV

There’s a time and a place for everything.

Somewhere, it must be a bright, sunny spring day. But here in London, the sky is gray. The wind blows. It is a day that could pass for mid-winter in most parts of the world.

But to the English, it is fine weather…and they’re determined to enjoy it. While tourists shiver in their overcoats, the hardy Londoners go about in short sleeves as though they were in Florida.

The front page of yesterday’s International Herald Tribune tells us that China is building huge shopping malls — three times the size of the Mall of America in Minnesota. If you want to invest in a booming economy, dear reader, go to Asia. But hold onto your hat; the place is a whirlwind, with many a boom and bust coming.

America, in comparison, is in decline. Wages rise nearly 10% per year in China; in America, they are stagnant. New factories, airports, highways, office towers, and shopping malls are going up all over China; in America only residential housing — a consumer item — is going up. The Chinese are studying math and engineering; Americans study gender issues and finance.

But this doesn’t mean you can’t live well or make a lot of money in America — even if the empire has peaked out. No country with cable television ever experienced a violent revolution. And no economy with interest-only mortgage financing ever experienced a depression. So we have nothing to worry about. Besides, Ramsay Macmullen’s study of the decline of Rome explains that the process was extremely variable and took place over an extremely long time. Some parts of the homeland flourished hundreds of years after Roman power had begun to ebb away. People were generally unaware that Rome was in decline. Things changed. Some got rich; some got poor. Some lived happily; others suffered. It wasn’t until very recently that historians looked back on the whole period and saw the pattern we describe today as “the decline of the Roman Empire.” Still, houses in Rome must have fallen sharply when Alaric showed up at the city’s gates, with an army of "barbarians" behind him.

In America, the number of real estate investment clubs is soaring. There were 44 in 2002, says USA Today. Now there are 177. And not a single member of any club expects barbarians at the gates. We don’t either. But we are prepared to bet that real estate investors have under-priced the chance of some sort of fat tail event that takes down property values.

“Fat tails are extremely unlikely events,” colleague Dan Denning elaborated yesterday. “But they are also events that are extremely damaging.” It’s not very likely that your house will catch fire. But the effects are so devastating that you take precautions anyway.

What would take down house prices in America? A recession!

Bonds are rising. Commodities have slipped (more below…). The yield curve is flattening out; yields on 10-year Treasury notes look as though they could fall below 4%…just when Alan Greenspan is raising short-term rates. Gold, too, has fallen below our target buying price of $425. The dollar has strengthened. And leading indicators have turned down. All these things are signs of a slowdown in the economy. They are signs of a recessionary bust, not an inflationary boom.

A recession is not a fat tail event. Recessions happen fairly regularly. But the Greenspan Fed has made the likely effects of a recession far more dangerous. By increasing personal debt levels and causing a bubble in housing, the Fed raised the cost of recession. More people will have to cut back more than usual. Contracts to buy will be dropped. Mortgages will be abandoned. The result could be that an ordinary recession could turn into a fat tail credit implosion — a deflationary collapse.

Or…a Japan-style slump.

Long time readers will recognize this as the same forecast we have been making for the last several years. We’ll stick with our forecast — until it proves out…or until people start laughing at us.

• Poor Zimbabwe. The Zim dollar has fallen to 25,000 to the U.S. dollar on the black market. Food has disappeared from the stores. The only way to get it is to go to the street vendors — selling at black market prices. And now the government is rounding them up.

Zimbabwe shows why empires are so nice. The place was much better when it was still named after the English colonialist who developed it, Cecil Rhodes, when the British Empire still existed, and when Rhodesia was a part of it. Now it is a free, democratic nation, bearing its dreary independence like a war wound.

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