Housing Prices Will Fall By 90% -- Templeton
Dec. 5th, 2003 04:21 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
arisbe> Gary North's REALITY CHECK
>
> Issue 298 December 5, 2003
>
>
> HOUSING PRICES WILL FALL BY 90% -- TEMPLETON
>
> John Templeton was one of the great investors of the
> twentieth century. He began in 1937. He made billions of
> dollars for his clients. He created a family of mutual
> funds that consistently outperformed the stock market.
> Then, at age 80, he sold his companies for $440 million.
> That was in 1992.
>
> He now does what very few extremely rich men ever do:
> he is giving away his fortune, to the tune of $40 million a
> year. The general rule is this: "Rich men know how to make
> money. They don't know how to give it away." This
> aphorism does not apply to Templeton.
>
> In 1972, he created up the Templeton Prize for
> Progress in Religion. He gives away a million dollars each
> year to one winner. I have known two of them personally.
> Based on their achievements, they both deserved the money,
> and they both proved this by giving the award money away.
>
> Templeton was the perfect investor for his era, which
> began in the Great Depression. He is very smart. He
> graduated at the top of his class at Yale University and
> won a Rhodes Scholarship to Oxford. He looked around him
> in 1937, and he saw enormous pessimism. He bought low, and
> later sold high. Here's how, according to his Web site:
>
> When war began in Europe in 1939, he borrowed
> money to buy 100 shares in each of 104 companies
> selling at $1 a share or less, including 34
> companies that were in bankruptcy. Only four
> turned out to be worthless, and he turned large
> profits on the others after holding each for an
> average four years.
>
> He continued to do this. Here were the results:
>
> Templeton launched his flagship fund, Templeton
> Growth, Ltd. in 1954. Each $100,000 invested then
> with distribution reinvested grew to total $55
> million in 1999.
>
> http://www.templeton.org/sir_john_templeton/index.asp
>
>
> A SILVER LINING IS MOSTLY DARK CLOUD
>
> He is now a bear. To say that he is a bear barely
> does him justice. He has looked at the economic
> fundamentals, and he sees a bad moon rising.
>
> The economic problem of problems is debt. Americans,
> both as individuals and as taxpayers, are deep in debt.
> America is addicted to debt. Americans are betting their
> economic futures on the productivity of consumer debt.
> This is an unwise bet, says Templeton.
>
> In a recent interview by Robert J. Flaherty of
> Equities magazine, Templeton went into detail about what he
> sees for the American economy in general and the two
> markets that have attracted most Americans' investment
> capital: stocks and real estate. Most Americans believe
> that the stock market will always go up. They also believe
> that real estate is a sure thing. Both assumptions are
> wrong, Templeton says.
>
> As you read his opinions, bear in mind that he made
> it, and made it big, by riding the stock market boom from
> close to the bottom to 1992. He missed the 1995-2000
> bubble, but he also missed the bear market that followed.
>
> He was interviewed in 1999 and 2000 by the same
> publication, and both times he was bearish. If readers
> then had heeded his warning, they sold out close to the
> top. But, of course, most people didn't agree, and could
> not all have gotten out at the top if they had agreed.
>
> He is still convinced that there is great downside
> risk to both the American stock market and the housing
> market. I agree with him. But not many other investors or
> investment analysts do agree with him. Here is his take on
> the stock market.
>
> "The stock market is broken, and it will take
> some time, maybe years, to repair it. Mass
> media, especially TV today is so short-term that
> few in its audience grasp the lasting damage and
> corrective impact which will continue to linger
> from the greatest financial crash in world
> history."
>
> Linger over this phrase: "the greatest financial crash
> in world history."
>
> Here is a man who made it big personally and who made
> tons of money for those who heeded his advice. He is very
> rich. He is not driven by money, which is why he is giving
> it away. If he were to keep his opinions to himself and
> concentrate on public relations, how could he lose? "Rich
> man gives away a fortune!" That's always good public
> relations. He would go down in history as a giant.
>
> But here he is, saying things like this, predicting
> "the greatest financial crash in world history," as if he
> were some screwball newsletter writer looking to sell a
> subscription.
>
> If he did not firmly believe his forecast, why would
> he go public? Why not just short the stock market
> privately and be done with it? I look at the money he
> could make by keeping quiet and shorting the market, and I
> conclude: "This guy is serious."
>
> "It would be unlikely that the bear market is
> over when the American stock market is only down
> about 30%, when in the biggest boom ever, it had
> been up 10 times over where it had been years
> earlier. . . . Following such a large increase, a
> 30% decrease is small."
>
>
> WHEN YOUR CASTLE IS HEAVILY MORTGAGED
>
> If the stock market is headed lower, how will real
> estate not follow suit? It didn't in 2000-2002, but this
> was a mild recession, not "the greatest financial crash in
> world history." Templeton thinks that large-scale
> bankruptcies lie ahead for home owners, meaning mortgage-
> paying debtors.
>
> "Every previous major bear market has been
> accompanied by a bear market in home prices. . .
> This time, home prices have gone up 20%, and this
> represents a very dangerous situation. When home
> prices do start down, they will fall remarkably
> far. In Japan, home prices are down to less than
> half what they were at the stock market peak."
>
> The example of Japan seems applicable. The peak came
> in December, 1989. The Nikkei approached 40,000. Real
> estate prices, fueled by easy credit and a highly
> concentrated urban population, soared to astronomical
> heights. Example: membership at a top-name Tokyo golf
> course cost over a million dollars, and each 18-hole round
> had a course fee of $4,000. This was why Japanese golfers
> bought up a golf course in Hawaii -- where prices were high
> by mainland standards -- and would charter a 747 for a
> weekend.
>
> But it was a bubble, and it did not last. Liquidity
> disappeared in the 1990's. People who had thought they
> were rich found themselves saddled with heavy mortgage
> payments. Their equity disappeared. They became net
> debtors.
>
> The Japanese are heavy savers. Americans are not.
> The equity cushion in Americans' houses, at least those
> Americans under age 55, is minimal. I agree with
> Templeton: "A home price decline of as little as 20% would
> put a lot of people in bankruptcy."
>
> Templeton's bugaboo is debt. He told Flaherty the
> following:
>
> "Emphasize in your magazine how big the debt is.
> . . . The total debt of America is now $31
> trillion. That is three times the GNP of the
> U.S. That is unprecedented in a major nation. No
> nation has ever had such a big debt as America
> has, and it's bigger than it was at the peak of
> the stock market boom."
>
> Bigger, indeed. The U.S. government is running an
> annual deficit now approaching $500 billion. The mild
> economic recovery should bring in increased revenues in
> fiscal 2004, but Congress has just passed a Medicare law
> that is going to cost -- minimum -- an extra $40 billion a
> year, permanently, assuming that seniors will not sign up
> in numbers beyond what the statisticians have assumed.
> Always in the past, the statisticians have underestimated
> the costs of federal welfare programs. Like B'rer Rabbit
> dealing with the tar baby, the government's first punch is
> never its last. Meanwhile, the economic cost of our
> occupation of Iraq just keep getting higher, an estimated
> $2 billion a week. Templeton continies:
>
> "Think of the dangers involved. Almost everyone
> has a home mortgage, and some are 89% of the
> value of the home (and yes, some are more). If
> home prices start down, there will be
> bankruptcies, and in bankruptcy, houses are sold
> at lower prices, pushing home prices down
> further."
>
> How far down will this go? At this point, Templeton
> achieves what I did not expect any self-made multi-
> millionaire to do: he exceeds my pessimism.
>
> "After home prices go down to one-tenth of the
> highest price homeowners paid, then buy."
>
> That means a loss of 90%. He thinks that the U.S.
> housing market is worse than the NASDAQ in March, 2000.
>
> In case anyone wonders, I rent. But I'm not waiting
> to buy a home at ten cents on the dollar. I'd settle for
> 60 cents.
>
>
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> -----------------------
>
>
> IS TEMPLETON A RELIC OF ANOTHER ERA?
>
> Templeton made it, and made it bigger than most, in an
> era of inflation, debt, and easy mortgage money. He knew
> how to make the system work for himself and his clients,
> and not just the American system. He is best known as the
> first major fund manager to go offshore, beginning in 1939,
> after World War II had broken out.
>
> It may be that he is warning people that they can do
> what our parents did, but not at today's prices and level
> of debt. He may be saying -- I think he is saying -- that
> what goes up must always come down. To do what he did, you
> must start at the bottom. He got into stocks in 1937, but
> he started his first fund in 1954, which was basically the
> beginning of the stock market boom, which peaked in 2000.
> He rode it all the way up, and then he warned people that
> the game was over -- right at the top.
>
> What he is saying, loud and clear, is that there will
> be other smart men who will do as he did. But to achieve
> this, the markets must get back to where they were when he
> was starting out.
>
> Getting from here to there means that the dreams of my
> generation and those behind me will be smashed on the
> shoals of de-leveraging, i.e., bankruptcy. Debt and
> monetary inflation created the present investment universe.
> To argue that the price of capital will fall back to those
> earlier levels is to argue that there are limits to
> monetary inflation.
>
> Here is where I part company with Templeton. I
> believe that civil governments can do only a few things
> efficiently, but debasing the currency is one of the things
> they do well, after centuries of practice. In the social
> division of labor, government has a monopoly on currency
> debasement. The Byzantine Empire kept its gold coins
> stable in gold content for over a millennium, 325 to 1453,
> with only one minor devaluation after 800 years. No
> government in history has ever matched that record, or
> wanted to.
>
> Of course, if we get into what Greenspan calls
> "cascading cross-defaults," we could see Templeton's vision
> come true in a matter of weeks. In a system of fractional
> reserve banking, such a scenario is plausible. That's why
> you should have currency, including $1,000 in junk coins
> (not silver), in reserve. But this probably won't help you
> much in a true lock-up of the banking system. The collapse
> of the division of labor will put you at too much risk. To
> bet on this scenario, you should be in the country with
> food in reserve. You should, in short, live as I do. But
> few people will or can.
>
> If you are going to pick a scenario to live with --
> and you must -- then pick one that says that the central
> banks of this world can keep the digital printing presses
> going, and will. They can make credit available, and will.
>
> This means that future Templetons will sell their
> companies at age 80 for $4 billion or $40 billion or $400
> billion. It means that monopoly money will depreciate,
> just as it has. The dollar will unofficially go bust in
> order to keep voters from officially going bust.
>
> Eventually, though, there will be a day of reckoning.
> Ludwig von Mises predicted this back when Templeton was
> just starting out. There will be either a massive
> depression after the central bank ceases to inflate
> (unlikely), or else what he called the crack-up boom, where
> mass inflation destroys the division of labor economy by
> creating monetary chaos and therefore bad economic
> information.
>
>
> THE RACE TO INFLATE
>
> We now learn that the bureaucrats in Europe are
> worrying about the appreciation of the euro. The dollar is
> falling, as I have predicted repeatedly. It is falling so
> rapidly that the Eurocrats are worried about the rising
> price of European goods for America, aka The Mouth.
>
> What to do? According to Andrew Evans-Pritchard,
> Bill Clinton's thorn in the flesh, the Eurocrats are now
> talking about the age-old favorite policy, which never
> works for long, currency controls.
>
> The European Commission is examining the legal
> basis for 1970s-style exchange controls to stop
> the euro surging to destructive levels.
>
> A team working for Pedro Solbes, economics
> commissioner, claims Brussels may lawfully impose
> "quantitative restrictions" on capital inflows,
> clearing the way for a crisis response if the
> dollar continues to fall.
>
> The document, drafted last month on the orders of
> Mr Solbes's director-general, Klaus Regling,
> concludes: "Should extremely disturbing capital
> movements endanger the operation of economic and
> monetary union, Article 59 EC provides for the
> possibility to adopt restrictive measures for a
> period not exceeding six months."
>
> In short, bureaucrats never learn. The Bible has a
> choice phrase for the inability of boneheads to learn from
> experience.
>
> As a dog returneth to his vomit, so a fool
> returneth to his folly (Proverbs 26:11).
>
> These people think they can change just one thing. In
> this case, the thing they think they can change is price
> flexibility in the capital markets. Like someone suffering
> a fever, they plan to solve the problem for putting a legal
> ceiling on the temperature registered by the thermometer.
> In biological affairs, we recognize such an approach to
> cause and effect as the product of the fever: delirium.
> But in monetary affairs, this is The Latest Thing. In
> fact, it's the same old stupidity.
>
> If you plan to ride a bicycle, don't solder the handle
> bars to the frame. If you do, you will either fall over,
> run into something solid, or go over an embankment.
>
> Similarly, don't try to put restrictions on capital
> flows in order to fix a price -- in this case, the price of
> the dollar vs. the euro. A price reflects supply and
> demand in a free market system. Buyers and sellers can
> make deals that they think are mutually beneficial.
>
> This freedom is what bureaucrats resent. But to
> abolish the movement of capital in the name of stabilizing
> the mutual price of two currencies will create black
> markets and a shortage of capital -- in this case, euros
> for dollar-holders to buy in order to invest in Europe.
>
> This is a European assault on Europe's future -- its
> capital markets -- in the name of overcoming a falling
> dollar/rising euro situation.
>
> The document, drafted last month on the orders of
> Mr Solbes's director-general, Klaus Regling,
> concludes: "Should extremely disturbing capital
> movements endanger the operation of economic and
> monetary union, Article 59 EC provides for the
> possibility to adopt restrictive measures for a
> period not exceeding six months."
>
> In short, the Eurocrats don't want holders of dollars
> to sell them for euros and then invest their newly
> purchased euros in Europe's capital markets. Why not?
> Nobody admits the truth. This proposed policy is one more
> revival of mercantilism -- state-directed economics --
> which promotes the export of goods by altering the exchange
> rate of currencies.
>
> Mercantilism promotes exports (a small segment of any
> nation that is larger than Hong Kong), either by debasing
> one's currency through monetary inflation or else by
> restricting foreigners' legal access to one's currency.
> The bureaucrats create a two-tier market: one for
> foreigners who want to buy your exported goods (good!), and
> the other for them to buy your domestic capital (bad!).
> Adam Smith refuted this view of state-run economics in
> 1776. Bureaucrats simply do not learn.
>
> As a dog returneth to his vomit, so a fool
> returneth to his folly.
>
> Evans-Pritchard provides evidence that this is one more
> case of tampering in the name of exports.
>
> Industry leaders in Germany and France say the
> euro has crossed the "pain threshold" and risks
> aborting the euro-zone's fragile recovery.
>
> Which industry leaders? His article doesn't say, but after
> 350 years of mercantilism, we know: exporters.
>
> Of course, this is not to say that there are not
> critics of these controls on capital. No, indeed. There
> are plenty of members of Team B, the inflationists. Don't
> put controls on the flow of capital, they say. Instead,
> debase the euro. Do what China does. Inflate!
>
> Strong factions within the French and German
> governments want the European Central Bank to
> counter the "easy credit" policy of the US
> Federal Reserve with aggressive monetary
> expansion in Europe.
>
> Faced with stubborn resistance from the
> anti-inflation hawks at the ECB, they are instead
> eyeing exchange rate policy as a means of
> imposing their will.
>
> Here is what nobody in power recommends: stabilize the
> euro, allow the free flow of capital, and allow currency
> exchange rates to move in response to supply and demand:
> dollars vs. euros. In other words, allow economic liberty.
> To which the Eurocrats reply: "What? Are you mad, sir?"
>
> It is widely assumed EU law guarantees the free
> movement of capital but, after combing through
> the treaties and court judgments, EU experts have
> concluded that this "absolute freedom" can be
> limited in an emergency.
>
> "Among the actions that can be undertaken when a
> member state experiences serious balance of
> payments difficulties, Articles 119 and 120 EC
> provide for the possibility to reintroduce
> 'quantitative protective measures' against third
> countries."
>
>
> CONCLUSION
>
> Templeton predicts default through deflation. I
> predict default through inflation. In both cases, the game
> is the same: stick it to the creditor, good and hard.
> Stick it to the evil capitalist. Fact: there are more
> debtors who vote than creditors who vote.
>
> The game of "choose our default" will go on. There
> will be time outs. The Eurocrats are talking about a time
> out of six months. Then what? They have no idea, other
> than this one: the free market cannot be trusted.
>
> There is a race among central bankers to see which bank
> can debase its currency the most efficiently. This race
> began in 1914. There is no central bank that seeks to
> stabilize its money supply and allow its currency to appreciate
> against rival currencies. Currencies that appreciate are not
> appreciated by central bankers and exporters.
>
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Interesting. Worth thinking about.
=====
Looking for an opportunity? http://arisbe.estarnetwork.com/.
>
> Issue 298 December 5, 2003
>
>
> HOUSING PRICES WILL FALL BY 90% -- TEMPLETON
>
> John Templeton was one of the great investors of the
> twentieth century. He began in 1937. He made billions of
> dollars for his clients. He created a family of mutual
> funds that consistently outperformed the stock market.
> Then, at age 80, he sold his companies for $440 million.
> That was in 1992.
>
> He now does what very few extremely rich men ever do:
> he is giving away his fortune, to the tune of $40 million a
> year. The general rule is this: "Rich men know how to make
> money. They don't know how to give it away." This
> aphorism does not apply to Templeton.
>
> In 1972, he created up the Templeton Prize for
> Progress in Religion. He gives away a million dollars each
> year to one winner. I have known two of them personally.
> Based on their achievements, they both deserved the money,
> and they both proved this by giving the award money away.
>
> Templeton was the perfect investor for his era, which
> began in the Great Depression. He is very smart. He
> graduated at the top of his class at Yale University and
> won a Rhodes Scholarship to Oxford. He looked around him
> in 1937, and he saw enormous pessimism. He bought low, and
> later sold high. Here's how, according to his Web site:
>
> When war began in Europe in 1939, he borrowed
> money to buy 100 shares in each of 104 companies
> selling at $1 a share or less, including 34
> companies that were in bankruptcy. Only four
> turned out to be worthless, and he turned large
> profits on the others after holding each for an
> average four years.
>
> He continued to do this. Here were the results:
>
> Templeton launched his flagship fund, Templeton
> Growth, Ltd. in 1954. Each $100,000 invested then
> with distribution reinvested grew to total $55
> million in 1999.
>
> http://www.templeton.org/sir_john_templeton/index.asp
>
>
> A SILVER LINING IS MOSTLY DARK CLOUD
>
> He is now a bear. To say that he is a bear barely
> does him justice. He has looked at the economic
> fundamentals, and he sees a bad moon rising.
>
> The economic problem of problems is debt. Americans,
> both as individuals and as taxpayers, are deep in debt.
> America is addicted to debt. Americans are betting their
> economic futures on the productivity of consumer debt.
> This is an unwise bet, says Templeton.
>
> In a recent interview by Robert J. Flaherty of
> Equities magazine, Templeton went into detail about what he
> sees for the American economy in general and the two
> markets that have attracted most Americans' investment
> capital: stocks and real estate. Most Americans believe
> that the stock market will always go up. They also believe
> that real estate is a sure thing. Both assumptions are
> wrong, Templeton says.
>
> As you read his opinions, bear in mind that he made
> it, and made it big, by riding the stock market boom from
> close to the bottom to 1992. He missed the 1995-2000
> bubble, but he also missed the bear market that followed.
>
> He was interviewed in 1999 and 2000 by the same
> publication, and both times he was bearish. If readers
> then had heeded his warning, they sold out close to the
> top. But, of course, most people didn't agree, and could
> not all have gotten out at the top if they had agreed.
>
> He is still convinced that there is great downside
> risk to both the American stock market and the housing
> market. I agree with him. But not many other investors or
> investment analysts do agree with him. Here is his take on
> the stock market.
>
> "The stock market is broken, and it will take
> some time, maybe years, to repair it. Mass
> media, especially TV today is so short-term that
> few in its audience grasp the lasting damage and
> corrective impact which will continue to linger
> from the greatest financial crash in world
> history."
>
> Linger over this phrase: "the greatest financial crash
> in world history."
>
> Here is a man who made it big personally and who made
> tons of money for those who heeded his advice. He is very
> rich. He is not driven by money, which is why he is giving
> it away. If he were to keep his opinions to himself and
> concentrate on public relations, how could he lose? "Rich
> man gives away a fortune!" That's always good public
> relations. He would go down in history as a giant.
>
> But here he is, saying things like this, predicting
> "the greatest financial crash in world history," as if he
> were some screwball newsletter writer looking to sell a
> subscription.
>
> If he did not firmly believe his forecast, why would
> he go public? Why not just short the stock market
> privately and be done with it? I look at the money he
> could make by keeping quiet and shorting the market, and I
> conclude: "This guy is serious."
>
> "It would be unlikely that the bear market is
> over when the American stock market is only down
> about 30%, when in the biggest boom ever, it had
> been up 10 times over where it had been years
> earlier. . . . Following such a large increase, a
> 30% decrease is small."
>
>
> WHEN YOUR CASTLE IS HEAVILY MORTGAGED
>
> If the stock market is headed lower, how will real
> estate not follow suit? It didn't in 2000-2002, but this
> was a mild recession, not "the greatest financial crash in
> world history." Templeton thinks that large-scale
> bankruptcies lie ahead for home owners, meaning mortgage-
> paying debtors.
>
> "Every previous major bear market has been
> accompanied by a bear market in home prices. . .
> This time, home prices have gone up 20%, and this
> represents a very dangerous situation. When home
> prices do start down, they will fall remarkably
> far. In Japan, home prices are down to less than
> half what they were at the stock market peak."
>
> The example of Japan seems applicable. The peak came
> in December, 1989. The Nikkei approached 40,000. Real
> estate prices, fueled by easy credit and a highly
> concentrated urban population, soared to astronomical
> heights. Example: membership at a top-name Tokyo golf
> course cost over a million dollars, and each 18-hole round
> had a course fee of $4,000. This was why Japanese golfers
> bought up a golf course in Hawaii -- where prices were high
> by mainland standards -- and would charter a 747 for a
> weekend.
>
> But it was a bubble, and it did not last. Liquidity
> disappeared in the 1990's. People who had thought they
> were rich found themselves saddled with heavy mortgage
> payments. Their equity disappeared. They became net
> debtors.
>
> The Japanese are heavy savers. Americans are not.
> The equity cushion in Americans' houses, at least those
> Americans under age 55, is minimal. I agree with
> Templeton: "A home price decline of as little as 20% would
> put a lot of people in bankruptcy."
>
> Templeton's bugaboo is debt. He told Flaherty the
> following:
>
> "Emphasize in your magazine how big the debt is.
> . . . The total debt of America is now $31
> trillion. That is three times the GNP of the
> U.S. That is unprecedented in a major nation. No
> nation has ever had such a big debt as America
> has, and it's bigger than it was at the peak of
> the stock market boom."
>
> Bigger, indeed. The U.S. government is running an
> annual deficit now approaching $500 billion. The mild
> economic recovery should bring in increased revenues in
> fiscal 2004, but Congress has just passed a Medicare law
> that is going to cost -- minimum -- an extra $40 billion a
> year, permanently, assuming that seniors will not sign up
> in numbers beyond what the statisticians have assumed.
> Always in the past, the statisticians have underestimated
> the costs of federal welfare programs. Like B'rer Rabbit
> dealing with the tar baby, the government's first punch is
> never its last. Meanwhile, the economic cost of our
> occupation of Iraq just keep getting higher, an estimated
> $2 billion a week. Templeton continies:
>
> "Think of the dangers involved. Almost everyone
> has a home mortgage, and some are 89% of the
> value of the home (and yes, some are more). If
> home prices start down, there will be
> bankruptcies, and in bankruptcy, houses are sold
> at lower prices, pushing home prices down
> further."
>
> How far down will this go? At this point, Templeton
> achieves what I did not expect any self-made multi-
> millionaire to do: he exceeds my pessimism.
>
> "After home prices go down to one-tenth of the
> highest price homeowners paid, then buy."
>
> That means a loss of 90%. He thinks that the U.S.
> housing market is worse than the NASDAQ in March, 2000.
>
> In case anyone wonders, I rent. But I'm not waiting
> to buy a home at ten cents on the dollar. I'd settle for
> 60 cents.
>
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>
> IS TEMPLETON A RELIC OF ANOTHER ERA?
>
> Templeton made it, and made it bigger than most, in an
> era of inflation, debt, and easy mortgage money. He knew
> how to make the system work for himself and his clients,
> and not just the American system. He is best known as the
> first major fund manager to go offshore, beginning in 1939,
> after World War II had broken out.
>
> It may be that he is warning people that they can do
> what our parents did, but not at today's prices and level
> of debt. He may be saying -- I think he is saying -- that
> what goes up must always come down. To do what he did, you
> must start at the bottom. He got into stocks in 1937, but
> he started his first fund in 1954, which was basically the
> beginning of the stock market boom, which peaked in 2000.
> He rode it all the way up, and then he warned people that
> the game was over -- right at the top.
>
> What he is saying, loud and clear, is that there will
> be other smart men who will do as he did. But to achieve
> this, the markets must get back to where they were when he
> was starting out.
>
> Getting from here to there means that the dreams of my
> generation and those behind me will be smashed on the
> shoals of de-leveraging, i.e., bankruptcy. Debt and
> monetary inflation created the present investment universe.
> To argue that the price of capital will fall back to those
> earlier levels is to argue that there are limits to
> monetary inflation.
>
> Here is where I part company with Templeton. I
> believe that civil governments can do only a few things
> efficiently, but debasing the currency is one of the things
> they do well, after centuries of practice. In the social
> division of labor, government has a monopoly on currency
> debasement. The Byzantine Empire kept its gold coins
> stable in gold content for over a millennium, 325 to 1453,
> with only one minor devaluation after 800 years. No
> government in history has ever matched that record, or
> wanted to.
>
> Of course, if we get into what Greenspan calls
> "cascading cross-defaults," we could see Templeton's vision
> come true in a matter of weeks. In a system of fractional
> reserve banking, such a scenario is plausible. That's why
> you should have currency, including $1,000 in junk coins
> (not silver), in reserve. But this probably won't help you
> much in a true lock-up of the banking system. The collapse
> of the division of labor will put you at too much risk. To
> bet on this scenario, you should be in the country with
> food in reserve. You should, in short, live as I do. But
> few people will or can.
>
> If you are going to pick a scenario to live with --
> and you must -- then pick one that says that the central
> banks of this world can keep the digital printing presses
> going, and will. They can make credit available, and will.
>
> This means that future Templetons will sell their
> companies at age 80 for $4 billion or $40 billion or $400
> billion. It means that monopoly money will depreciate,
> just as it has. The dollar will unofficially go bust in
> order to keep voters from officially going bust.
>
> Eventually, though, there will be a day of reckoning.
> Ludwig von Mises predicted this back when Templeton was
> just starting out. There will be either a massive
> depression after the central bank ceases to inflate
> (unlikely), or else what he called the crack-up boom, where
> mass inflation destroys the division of labor economy by
> creating monetary chaos and therefore bad economic
> information.
>
>
> THE RACE TO INFLATE
>
> We now learn that the bureaucrats in Europe are
> worrying about the appreciation of the euro. The dollar is
> falling, as I have predicted repeatedly. It is falling so
> rapidly that the Eurocrats are worried about the rising
> price of European goods for America, aka The Mouth.
>
> What to do? According to Andrew Evans-Pritchard,
> Bill Clinton's thorn in the flesh, the Eurocrats are now
> talking about the age-old favorite policy, which never
> works for long, currency controls.
>
> The European Commission is examining the legal
> basis for 1970s-style exchange controls to stop
> the euro surging to destructive levels.
>
> A team working for Pedro Solbes, economics
> commissioner, claims Brussels may lawfully impose
> "quantitative restrictions" on capital inflows,
> clearing the way for a crisis response if the
> dollar continues to fall.
>
> The document, drafted last month on the orders of
> Mr Solbes's director-general, Klaus Regling,
> concludes: "Should extremely disturbing capital
> movements endanger the operation of economic and
> monetary union, Article 59 EC provides for the
> possibility to adopt restrictive measures for a
> period not exceeding six months."
>
> In short, bureaucrats never learn. The Bible has a
> choice phrase for the inability of boneheads to learn from
> experience.
>
> As a dog returneth to his vomit, so a fool
> returneth to his folly (Proverbs 26:11).
>
> These people think they can change just one thing. In
> this case, the thing they think they can change is price
> flexibility in the capital markets. Like someone suffering
> a fever, they plan to solve the problem for putting a legal
> ceiling on the temperature registered by the thermometer.
> In biological affairs, we recognize such an approach to
> cause and effect as the product of the fever: delirium.
> But in monetary affairs, this is The Latest Thing. In
> fact, it's the same old stupidity.
>
> If you plan to ride a bicycle, don't solder the handle
> bars to the frame. If you do, you will either fall over,
> run into something solid, or go over an embankment.
>
> Similarly, don't try to put restrictions on capital
> flows in order to fix a price -- in this case, the price of
> the dollar vs. the euro. A price reflects supply and
> demand in a free market system. Buyers and sellers can
> make deals that they think are mutually beneficial.
>
> This freedom is what bureaucrats resent. But to
> abolish the movement of capital in the name of stabilizing
> the mutual price of two currencies will create black
> markets and a shortage of capital -- in this case, euros
> for dollar-holders to buy in order to invest in Europe.
>
> This is a European assault on Europe's future -- its
> capital markets -- in the name of overcoming a falling
> dollar/rising euro situation.
>
> The document, drafted last month on the orders of
> Mr Solbes's director-general, Klaus Regling,
> concludes: "Should extremely disturbing capital
> movements endanger the operation of economic and
> monetary union, Article 59 EC provides for the
> possibility to adopt restrictive measures for a
> period not exceeding six months."
>
> In short, the Eurocrats don't want holders of dollars
> to sell them for euros and then invest their newly
> purchased euros in Europe's capital markets. Why not?
> Nobody admits the truth. This proposed policy is one more
> revival of mercantilism -- state-directed economics --
> which promotes the export of goods by altering the exchange
> rate of currencies.
>
> Mercantilism promotes exports (a small segment of any
> nation that is larger than Hong Kong), either by debasing
> one's currency through monetary inflation or else by
> restricting foreigners' legal access to one's currency.
> The bureaucrats create a two-tier market: one for
> foreigners who want to buy your exported goods (good!), and
> the other for them to buy your domestic capital (bad!).
> Adam Smith refuted this view of state-run economics in
> 1776. Bureaucrats simply do not learn.
>
> As a dog returneth to his vomit, so a fool
> returneth to his folly.
>
> Evans-Pritchard provides evidence that this is one more
> case of tampering in the name of exports.
>
> Industry leaders in Germany and France say the
> euro has crossed the "pain threshold" and risks
> aborting the euro-zone's fragile recovery.
>
> Which industry leaders? His article doesn't say, but after
> 350 years of mercantilism, we know: exporters.
>
> Of course, this is not to say that there are not
> critics of these controls on capital. No, indeed. There
> are plenty of members of Team B, the inflationists. Don't
> put controls on the flow of capital, they say. Instead,
> debase the euro. Do what China does. Inflate!
>
> Strong factions within the French and German
> governments want the European Central Bank to
> counter the "easy credit" policy of the US
> Federal Reserve with aggressive monetary
> expansion in Europe.
>
> Faced with stubborn resistance from the
> anti-inflation hawks at the ECB, they are instead
> eyeing exchange rate policy as a means of
> imposing their will.
>
> Here is what nobody in power recommends: stabilize the
> euro, allow the free flow of capital, and allow currency
> exchange rates to move in response to supply and demand:
> dollars vs. euros. In other words, allow economic liberty.
> To which the Eurocrats reply: "What? Are you mad, sir?"
>
> It is widely assumed EU law guarantees the free
> movement of capital but, after combing through
> the treaties and court judgments, EU experts have
> concluded that this "absolute freedom" can be
> limited in an emergency.
>
> "Among the actions that can be undertaken when a
> member state experiences serious balance of
> payments difficulties, Articles 119 and 120 EC
> provide for the possibility to reintroduce
> 'quantitative protective measures' against third
> countries."
>
>
> CONCLUSION
>
> Templeton predicts default through deflation. I
> predict default through inflation. In both cases, the game
> is the same: stick it to the creditor, good and hard.
> Stick it to the evil capitalist. Fact: there are more
> debtors who vote than creditors who vote.
>
> The game of "choose our default" will go on. There
> will be time outs. The Eurocrats are talking about a time
> out of six months. Then what? They have no idea, other
> than this one: the free market cannot be trusted.
>
> There is a race among central bankers to see which bank
> can debase its currency the most efficiently. This race
> began in 1914. There is no central bank that seeks to
> stabilize its money supply and allow its currency to appreciate
> against rival currencies. Currencies that appreciate are not
> appreciated by central bankers and exporters.
>
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Interesting. Worth thinking about.
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no subject
Date: 2003-12-05 02:06 pm (UTC)but i do appreciate Templeton, both for making a lot of money, but more for intending and trying to give it all away.
so thanks for the link. it is REALLY good reading and i sub'ed to the list at the site. as a measure of contrary thinking North ought to be at the top of our lists.
"just because you are diagnosed a paranoia doesn't mean everyone is not out to get you"
no subject
Date: 2003-12-09 10:43 am (UTC)no subject
Date: 2003-12-05 02:47 pm (UTC)I wish I could read the original interview. He sounds like a dynamic, intelligent man.