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Have you ever thought about how Japan became king of the Post WW2 economic period, rising from the ashes like a phoenix after being utterly destroyed in that war? They are known world wide for saving 25% or more of their incomes. Frugal, hard working and economically dynamic…. And then, somehow after amassing a great deal of capital right up into the 1980’s, they found their way into a massive stock bubble that collapsed, and a real estate bubble which also collapsed as well, leading Japan into 15 years of economic stagnation and stubborn deflation… How do the most industrious people on earth find themselves in a gigantic stock bubble and an economic collapse that followed? Well, the answer is easy, and it applies to the US and the world today as well. The answer is that after the frugal years they saved a lot of money, and fell into WC Fields’ trap. When a nation finds itself wealthy, the younger generation starts to speculate. No longer satisfied with mere hard work and savings, they put their money into markets and create a self generating bull market. This creates self perpetuating paper profits that are merely representations of all the new money finding its way into the latest fad market, drawing in cab drivers and lawyers who have no business in speculating in the first place. That process resets the prevalent mindset from hard work into an impatient speculative mindset that creates its own growing greed as money flows into equities, generating more paper profits…. thus generating more greed and impatience. Pretty soon the whole nation finds itself in a speculation frenzy, throwing caution to the winds, and won’t even look at making a few bucks in a good turnover business, but rather demand to be excited with 20, 50, 100% gains in a year, a month, then in a day. An honest man just works hard. Now I am not going to call all speculators dishonest. But I am going to say that, once the general population becomes enthralled with a market bubble, they lose their innocent hard work ethic, demean simple work, and if one is not in some speculation he is considered a simpleton. Simple hard work becomes a demeaned lifestyle, for simpletons and not ‘sophisticated’ people. The US right now is in the same economic boat. A 5 year housing bubble has caused real estate to rise in most cites by over 100%, and because real estate is easy to leverage, people using historically low interest rates have basically succeeded in mortgaging their houses well past levels that would be sustainable. The reason WC Fields said “you can’t cheat an honest man” is that, an honest man cannot be enticed with either ill gotten gains, or excessive promises of profits. A lie is easiest when combined with the prospect of imminent retirement from the work treadmill… an attractive and enticing prospect indeed for everyone from overworked doctors to harassed bell boys. I have heard on the street recently that people plan on retiring quite soon, that is, when they sell their house. They count the equity as savings, but don’t realize that it is not savings, but potential savings once the house is sold. But of course, note everybody can sell their houses at once now can they? Therefore, if you believe that you have savings in your house, you had better plan on selling that puppy well before everyone else realizes the housing bubble has cooled, and properties just aren’t going up 15% a year anymore. My point is that people really believe their ‘equity’ is real savings! When, in fact, that equity is only a theoretical figure based on the latest housing prices, and is a very transient thing indeed. One of the most irritating ads for the masses I hear today is this: “Pay off your debts and high interest credit cards! Refinance your home at an ultra low 6%.” Now pray tell, how does one pay off their debts and credit cards by borrowing that money against their house??? The mortgage just goes up accordingly! But this simple logic is lost in the continual din of easy home finance. As Hitler said, “If you repeat a lie enough people will believe it” and “the biggest lies are the easiest to believe” Amazing stuff lies. They really are capable of making people believe the most ridiculous things, and if propagated often enough can infect an entire society. Now people have been enticed into an endless cycle of buying on credit cards and sold the lie of using a home mortgage to pay those off, only to begin the cycle again. And now we have these new bankruptcy laws that are waiting to lower the boom on the many people who were enticed and unwisely accumulated lots of debts, having been seduced by a chimera of rising housing values that are only going to fall off a cliff once the people realize the jig is up. 90% of them will lose their shirts… sadly….
The Prudent Squirrel newsletter is Chris Laird’s weekly macroeconomic gold newsletter. A month or so ago, I predicted the short term gold bear market is over based on the weak USD and the continuing concern in the Mid East. That has proven to be true – holding up gold in spite of weakness in the base metals…. Stop by and have a look. CONTACT
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