Slouching Towards Comfort

September 28, 2002

Degrade first the Arts if you'd Mankind Degrade.

Hire Idiots to Paint with cold light & hot shade:

Give high Price for the worst, leave the best in disgrace,

And with Labours of Ignorance fill every place.

William Blake

Here at the Daily Reckoning, dear reader, we favor Hayek's Austrian School of economics, if only because it is the only one simple enough for us to understand. People go about their business and create a 'spontaneous order' - like natural languages and beehives. Constantly evolving, through good times and bad, they are never perfect - but they are what they are and can rarely be improved by government edict or central bank legerdemain.

A man can make a mess of his life and his business. Acting in concert with others, he can cause markets to boom and bust. But if you really want to bring on an epic disaster, you need politicians and central bankers.

The typical man - especially the successful one - cannot bear the uncertainties of life; he is always afraid things will turn against him. So, when the politicians promise him stability, he listens with three ears. He is perfectly happy for the bankers to set interest rates, for example, if he believes it will secure his financial position...and perfectly content to trade away his liberty if he thinks it will make him safer.

What he actually gets is only a temporary advantage. For sooner or later, the stability that the meddlers have given him blows up in his face. Having crimped the hose of evolution, the many small adjustments that a society needs back up into a huge bubble, which sooner or later must burst.

What goes up must come down, say the Austrians. Every bubble must be followed by an equal and opposite bust, they add. Real prosperity can only be had by schlepping and saving, they conclude; anything else is a fraud.

It makes sense to us.

In the Great Bubble Economy of 1996-2002 fraud crept into every financial orifice. It was supposed to be the Information Age, yet 'Labors of ignorance' filled every place. Instead of real earnings, investors filled their heads with operating earnings and believed that stocks were always a good long-term investment, even at 50 times earnings. Instead of real savings, consumers fluffed out their balance sheets with the inflated equity in their own homes.

And then, of course, there was the Social Security 'lock box' which existed only in fantasy...the 'peace dividend'...the federal surplus...and all the rest. The standards, customs and habits that had kept people honest seemed to yield to convenience and comfort...much like starched white collars had given way to Lacoste golf shirts.

Taking the train from Paris to Italy, we were offered lunch for 46 euros. Since we had not dejeuned, we took the proposal and tucked in to a rich repast of confit de canard sluiced down with half a bottle of rose wine. Intending to work, we instead fell into a state of near-unconsciousness, from which we did not revive until we had reached Lausanne. There, we stared at the stately homes around the lake. Built of stone and concrete, with oversized roofs and faded wooden shutters, they looked as though they had been there forever.

In our dreamlike state, we remembered our visit to Chateau Bois Morand. Priced at 7 times the average American home, it beckons to new owners like a movie queen to a truck driver: Come hither. Take me and I will make you more than you are.

What an awful investment! It had probably never sold for anywhere near what it really cost to build. Even now, after the biggest boom in Western history, it is still priced at probably less than 20% of replacement cost.

And yet, drifting back to the days before central banking and stock markets, when even kings lived like pigs and terrorists lurked behind every bush, had not its stone walls provided protection? How much was that worth? And had it not already sheltered 20 generations? And had not each one been encouraged...stimulated...pushed forward and uplifted by the grandeur and rigors of the place? For you have only to move in and you are immediately in a different class of society; you are a 'chatelain,' and are expected to act the part. You are expected to live up to your house.

It is just a feeling, of course...the kind you get on moving trains when you are half-drunk...a presentiment perhaps...but we worried that the bear market may be more than just a financial event, or even an economic one. Something bigger and more painful.

Houses are thrown up all across America and priced at more than the cost of construction. Owners believe they have found a kind of a drunk on Sunday finding an unlocked liquor store...where they can pad around in complete comfort and get rich without saving. Their houses demand nothing from them. There are no cold drafts, no cold stones...not even shutters to close at night. An owner can sink as low as he long as he can make the mortgage payments - which, at today's low rates, are a snap.

Likewise, a marginal student at Harvard - without any special exertion - can now expect to graduate 'with honors.' One from a favored minority group may only have to show up for class.

"The American models stand out in Milan," Maria told me over dinner last night. "They all seem to slouch..."

All across the country, the innocent and the connivers slouch toward comfort. A long period of stability, progress, peace and prosperity has brought on a lazy-boy relaxation where it is dress down Friday all week long.

But in bear markets things go wrong. We wonder how the average American will react when they do.

A one-ounce gold nugget is rarer than a five-carat diamond.

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