The Mystery of Wyndclyffe

Americans are consuming and indebting themselves just to "keep up with the Jones." But did you ever wonder who this infamous Jones was? In this classique essay that ran on Sept. 30 of last year, Addison Wiggin looks at the face behind the phrase…

"Guys, here’s a rich metaphor for you," writes friend and colleague Porter Stansberry. "The house that originally spawned the term ‘keeping up with the Jones’ and which led to the building of gaudy mansions on the Hudson River is collapsing and in disrepair…"

The story was printed in yesterday’s Wall Street Journal. "It was the original McMansion"…so grand it had its own name: Wyndclyffe. The house was built in 1853 by Edith Wharton’s spinster aunt, Elizabeth Schermerhorn Jones, and kicked off a flurry of mansion building up the Hudson River Valley. Wyndclyffe sported a four-story tower, 24 rooms, 80 acres of lawn and "sweeping river views."

After the completion of the Jones house, turret towers and extra wings began appearing on nearby homes – hence the now-famous phrase, "keeping up with the Jones’." Nowadays, the maxim illustrates the modern desire of suburban Americans to keep up appearances…by taking out home equity loans to buy Humvees and home theater systems.

Last week, as you’ll recall, we had to save face for arriving late to a symposium conducted here in Paris by economist Hernando de Soto – by running his overhead projector. We’d like to return to the scene of the crime for a moment. De Soto is doing some of the most interesting work in economics today…and having picked up his book The Mystery of Capital, we’ve become intrigued with the question he poses in Chapter 5: "What became of the missing lessons of U.S. history?" (And…we also still feel like we owe him something for interrupting his speech.)

Hernando de Soto runs a think tank called the Institute for Liberty and Democracy. With a name like that, you’d think it was a half-cocked Washington-based fundraising scheme invented by friends and associates of Richard Perle. It’s not. Headquartered in de Soto’s native Peru, The Economist magazine called the Institute for Liberty and Democracy one of the most important think tanks in the world. "Over the past five years," de Soto explains in The Mystery of Capital, "I and a hundred colleagues from six different nations have closed our books and opened our eyes – and gone out into the streets and countrysides of four continents to see how much the poorest sectors of society have saved. The quantity is enormous.

Hernando de Soto: A Lack of Usable Capital

"The poor inhabitants of [Third World] nations," explains de Soto, "some five-sixths of humanity, do have things, but they lack the process to represent their prosperity and create capital. They have houses, but not titles; crops, but not deeds; businesses, but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalisms work."

The inability of poorer countries to transform their assets into usable capital is not the endgame of some sort of neocolonial monopolistic conspiracy, de Soto’s argument goes. Rather, the West is oblivious to the developing nations’ dilemma: "Westerners take this mechanism so completely for granted that they have lost all awareness of its existence…" So much so that its history is all but undocumented.

De Soto’s search for the reasons why capitalism thrives in the West – but is the target of scorn elsewhere in the world – has led him through thousands of pages of archived material, much of it detailing the westward expansion of U.S. pioneers in the late 18th and early 19th century. Going back as far as 1783, for example, George Washington "complained about ‘Banditti…skimming and disposing of the cream of the country at the expense of the many.’" These banditti were squatters and illegal entrepreneurs occupying lands to which they had neither title nor deed.

"Americans and Europeans," says de Soto, "have been telling the other countries of the world, ‘You have to be more like us.’ In fact, they are very much like the United States of a century or more ago, when it too was an undeveloped country. Western politicians were once faced with the same dramatic challenges that leaders of the developing and former communist countries are facing today."

Hernando de Soto: The Doctrine of Pre-Emption

In the United States, it wasn’t until the application of the doctrine of "pre-emption" that America’s backwater culture began picking up the steam that would empower it to become the foremost economic power on the planet. Pre-emption allowed a squatter who had made improvements on a piece of land, simply by building shack or a mill there, first right of refusal on its purchase. Once the deed became legal, it also became a commodity.

Henry Clay, a senator from Kentucky in the early 19th century, explained the process: "They build houses, plant orchards, enclose fields, cultivate the earth and rear up families around them. Meantime, the tide of emigration flows upon them, their improved farms rise in value, a demand for them takes place, they sell to the newcomers at a great advance and proceed farther west…in this way, thousands and tens of thousands are daily improving their circumstances and bettering their conditions." The squatters, banditti and flagrant ne’er-do-wells thus became the vaunted ‘pioneers’ of American history."

Unfortunately – as we’re wont to say here at The Daily Reckoning – nothing fails like success.

The pioneers successors, de Soto observes (that would be you, me, the Fed, etc.), "have lost contact with the days when the pioneers who opened the American West were undercapitalized, because they seldom possessed title to lands they settled…when Adam Smith did his shopping in black markets and English street urchins plucked pennies cast by laughing tourists on the banks of the Thames…when Jean-Baptiste Colbert’s technocrats executed 16,000 small entrepreneurs whose only crime was manufacturing and importing cotton cloth in violation of France’s industrial codes. That past is many nations’ present."

The process of change, according to de Soto, is unquestionably a political one: revolution. "In most nations of the West," says Hernando, "the major task of widespread property reform was completed only about a century ago; in Japan, it has been in place for less than 50 years…Law [has thus been made] to serve popular capital formation and economic growth. This is what gives the present property institutions of the West their vitality. The property revolution was a political victory. In every country, it was the result of a few enlightened men deciding that official law made no sense…if a sizeable part of the population lived outside it."

The neocons have taken the political lesson to heart and, like the Leninists of the early 20th century, are using Iraq as a test case to see if revolution can be had at the point of a gun. In the meantime, the Fed and the Treasury have lost their way altogether. Gone are the days when self-reliance meant busting your gut to build a house, a factory…or even a fine piece of furniture. Now credit lines grow ever longer and home equity loans more ubiquitous.

Hernando de Soto: Know-How to Nowhere

Boobus Americanus – to borrow a phrase from H.L. Mencken, by way of our friend Doug Casey – has regressed along the line from "know-how" to "nowhere." And judging from the reader mail we expect to receive upon publication of this letter, they’re quite belligerent about it.

Bill Gross calls it "hegemonic decay." In his September Investment Outlook for PIMCO, Gross writes, "Pretend you are the head of a household. You earn a good living, but it never seems to be enough. There are bills to pay, the Jones to keep up with, you’ve had your eye on that goofy Hummer for at least three months now. You’d like to save money, but you can’t or you won’t, so you don’t. In fact, each year for the past decade you’ve had to borrow 4%, 5%, 6% of your annual income to pay for what you want. You’re running a personal deficit, not a surplus."

People are no different than countries…sooner or later, the bill comes due. Gross: "With no savings and a boatload of debt, the wheels all of a sudden go into reverse. Creditors are not so friendly…Forget the Hummer, pal. You’re thinking of survival, not staying up with Jones. This hegemon with a face…has started to decay."

The great mystery, at least from the vantage point of your puzzled Parisian pontificators, is how is it that the country from whence naturally arose the property rights that helped unlock de Soto’s "dead capital" – and serves as a model for emerging nations today – is also the current site of the most egregious credit-goosed spending binge and bust in economic history? The answer, we fear, lies somewhere in the ruins of Wyndclyffe.

Regards,

Addison Wiggin
The Daily Reckoning
October 27, 2004

P.S. "Miss Jones, Edith Wharton’s spinster aunt," the WSJ article states, "was a cousin to the Astors and entertained William and Henry James in the mansion. After she died, the house was purchased by Andrew Finck, a brewer who, legend has it, set up a beer tap that flowed from the basement to the tennis courts. During the Depression [the last great credit-goosed financial disaster to visit the land], Wyndclyffe was neglected, like many other lavish houses of the time. Then it had a string of owners, most of whom didn’t live in the house or make repairs. Neighbors say Wyndclyffe briefly housed a nudist colony in the mid- century."

The ruins are apparently littered with garbage and frequently used by bands of nosed-ringed teenagers, dressed in black and sporting Matrix-style long coats. When asked what should be done with the ruins, Charles Eggert, who owned Wyndclyffe in the ’60s and ’70s, said, "Maybe some crazy idiot will buy it. I think it should be torn down."

Here we go!

The Dow popped up 138 points yesterday.

George Bush needs a rally. The liberals have always detested Bush; the man was everything they thought conservatives should be but never quite were. And now the conservatives are abandoning Bush too. Better to have the nation ruined by a real liberal rather than a phony conservative…

Bush may get his rally. He may get another four years to mess up the country. Or Kerry may have to do the job. Either way, the next few days should be interesting. Because things are beginning to happen.

"The market has already completed a countertrend rally, and the psychology of investors, advisers and economists is dangerously optimistic," writes Bob Prechter. "The market is probably doing something more akin to what happened in 1835-1842 or 1929-1932 [versus the 1970s]. According to my analysis, the bear market has already resumed, so the crash potential is significant."

Bonds have edged up. Consumer sentiment is falling. Investors fear that higher oil prices will slow the economy.

But foreign buying of U.S. Treasurys seems to be falling too. Until now, the foreigners reached in their pockets every time they passed Americans with their hands out. What if they should turn their backs instead?

Ooh la la…all of a sudden, the dollar would collapse. And stocks? A crash? Maybe Prechter is right…

But who can know these things? Certainly, if anyone does, he doesn’t work here at the worldwide headquarters of The Daily Reckoning…or he’s keeping his mouth shut.

We’re such optimists. Even the threat of a stock crash hardly darkens our joie de vivre. Besides, if people like stocks now, why wouldn’t they like them even more at half the price? They could buy twice as many!

But stock pricing is not an individual pursuit…but a collective endeavor. The mass mob of investors sets prices, based not on any kind of rational analysis, but on feeling. P/E ratios are determined by the mood of the crowd, nothing more. When the lumpen are happy, they will happily pay 20 times earnings for a stock. When they are gloomy, on the other hand, they judge even 10 times earnings a little on the rich side.

In the months ahead, dear reader, we do not expect any change in the heavens. But the mass of mankind is likely to experience a violent mood swing. Advice to investors: Keep a bar of chocolate in the cupboard and a bottle of whiskey in the desk drawer.

And now…more news from our friends at The Rude Awakening:

———————

Tom Dyson, reporting from the lively streets of Baltimore…

Foreigners are emptying their pockets of American dollars as fast as they can…Check out today’s Rude Awakening to see how this will affect you.

———————

Bill Bonner, back in Ouzilly…

*** From Fleet Street editor Chris Mayer:

"Throughout history, there has always been a leisure class.  Whether the wealth was primarily in the hands of Victorian Brits or Frenchmen in the age of Napoleon, whether it was in hands of Japanese export moguls, Saudi Arab oil emirates or American dot com kings – there has always people that make it big.

"Where will the next leisure class emerge?  They may be Chinese.  According to the World Tourism Organization, some 20 million Chinese travelers spent $48 billion shopping around the world in 2003. This number is projected to grow by 13% per year over the next decade.

"But, the beauty of the global leisure class idea is that it doesn’t matter where the next big money is made.  The global leisure class idea takes advantage of the fact that somewhere, a leisure class will flourish and money can be made catering to these people.

In Chris’ latest letter, he alerted readers to an outstanding opportunity to play the new leisure class… a small global company that accommodates the world’s wealthiest travelers. It’s cheap, trading for a 33% discount to its underlying net asset value and earnings should grow 30% this year.

*** A reader:

"In The Daily Reckoning Oct. 19 issue,
Bill Bonner mentions reading a book of letters of French soldiers of World War I. Would there be a way to get the title and publisher of the book? I have been interested in the subject since I first a saw a display of such letters at a war cemetery in Normandy."

Editor’s response: The book mentioned was Paroles de Poilus, published by Librio.

The letters open your eyes and break your heart. These are letters from young men – and some not so young – who have been called to duty and earnestly do it. When they are expected to die, they die – with faith, courage and, often, good humor. Putting it in perspective, on a single day – the 22nd of August, 1914 – 27,000 French soldiers were killed. By the time the war was over, 10 million men had died, and 20 million had been wounded.

Nearly 100 years later, we wonder why. Looking back on it, the whole conflict seems completely pointless. If it cost a single life, it was too many. For no one stood to gain anything of any importance from the war…and no one did gain anything of any importance. Instead, the war destroyed the lives of millions of people and undermined the foundations of Western bourgeois civilization.

Curiously, men get caught up in war like they get caught up in bubbles – based on feelings, not on logic or rational self-interest. They do their duty as the group sees it…even for no good reason. As far as we know, only the communists and anarchists had the clearheadedness of Bill Clinton or George Bush…that is, the good sense to slip out the back door when the soldiers were called up; but there are no monuments to the shirkers in France.

*** Another reader:

For the record…

"I was there…as drunk as drunk could be….Place Pigalle, Cartier Gauche, Hotel Lutetia, Barrio Latino, Stade Francais, Le Metro….you name it, we were there en masse, singing and drinking, or was it the other way around? Thirty-five thousand Padraigs invaded your beautiful city two weeks ago for the France vs. Ireland football World Cup qualifier. It was 0-0, and we should have won (ask any taxi driver or barman)…the French underperformed badly, considering their vast superiority, both on paper and at the bookies.

"We even sang the French national anthem at the game as the locals could not be heard. It was a fantastic atmosphere for the Irish fans, one of the best I’ve ever witnessed.

"However, as one of your other readers pointed out, Paris is getting unbelievably expensive. Especially beer. Ten euros a pint was the average price we forked out all week. One in our group even paid 250 euros for a bottle of champagne, although that was probably his own fault for straying into a brothel.

"There’s something wrong with Ireland these days. From Europe’s poor relations a mere 10 years ago, Ireland now ranks third wealthiest. Whatever genius at The Economist figured that one out failed to mention that we are also one of the most indebted nations in the world, with 185 billion euros of private sector borrowings (or 45,000 for every man woman and child). The weekend in question is reported to have cost the country another 40 million euros, which hardly registers in the grand scheme of things.

Garcon, l’addition s’il vous plait.

*** And now the shocker. The American Conservative magazine has announced its choice for president: John Kerry.