"A Cold Day in Hell"
A look at what happens when vernacular economies break down.
by Bill Bonner and Joel Bowman
Delray Beach, Florida - "In the news this week, The Hill: "Home sales declined the most on record in September as mortgage rates surged and pushed prospective buyers out of the once-hot housing market, according to a new report. A report from the real estate company Redfin shows the number of homes sold fell by 25 percent and new listings dropped by 22 percent last month, marking the biggest declines on record in both categories - excluding numbers at the onset of the coronavirus pandemic in April and May 2020. Although prices have declined recently, sky-high mortgage rates have pushed monthly payments up by more than 50 percent year over year, according to the report."
Middle class Americans store much of their wealth in their homes. If house prices are cut in half, so is much of their wealth. And, houses are typically a leveraged asset, a liability as well as an asset. They owe money on it. As their asset declines, the gap between the asset and the liability narrows… and sometimes closes altogether. Then, they are ‘under water,’ with no more asset left. Only liability.
But household wealth is not an easy-come, easy-go matter. It is the story of who we are and where we came from. It is a vernacular story; it echoes personal challenges, successes and failures over many years. We might have labored for an entire 40-year career in coal mining, truck driving or biological research. We invested in Amazon… we missed Tesla… and how were we supposed to know the market would turn down in 2022?
Blood, Sweat & Years: In a normal, honest, give-and-take world, people do the best they can with what they’ve got. They suffer failures… they enjoy successes; they spend much of the money they earned. But they made their mortgage payments and saved as much as they could. And now those savings are stained with sweat… and often tears. And then, when they go to their graves, a lawyer does a financial obituary, adding up the hours worked…subtracting the pizzas ordered; he comes up with a final tally.
But sometimes an anti-vernacular event – a rip-off – intrudes. The novelist Stefan Zweig described hyperinflation in Germany in the early 1920s. “The mark plunged down, never to stop until it had reached the fantastic figures of madness – the millions, the billions and trillions. Now the real witches’ sabbath of inflation started….
I sent a manuscript to my publisher on which I had worked for a year; to be on the safe side I asked for an advance payment of royalties on ten thousand copies. By the time the check was deposited, it hardly paid the postage I had put on the parcel a week before.
On street cars one paid in millions, trucks carried the paper money from the Reichsbank to the other banks, and a fortnight later one found hundred thousand mark notes in the gutter; a beggar had thrown them away contemptuously. A pair of shoelaces cost more than a shoe had once cost; no, more than a fashionable shoe store with two thousand pairs of shoes had cost before; to repair a broken window cost more than the whole house had formerly cost, a book more than the printer’s shop with a hundred presses.
Teachers had been held in high esteem in German society – before this episode of hyperinflation. But the poor professors’ wages were cut down to nothing by the inflation. They had to roll up their sleeves to pick through the garbage… or turn their daughters out onto the street to prostitute themselves… so that the family might eat."
We’ve seen a more modest version of this with our own eyes.
Promises Broken: We had a meeting with the then-president of Argentina in the late ‘90s. He had connected the Argentine peso to the US dollar, one to one. Everything seemed fine. And he swore that they would never abandon ‘the peg’ with the dollar. “It would be disastrous,” he predicted.
But just months later, we got to see how disastrous it was. The government had spent too much money. It could no longer afford to redeem pesos for dollars. So, it ‘broke the peg.’ Bank accounts were seized. Accounts that had been in dollars were converted to pesos. People who saved in dollars, ‘just to be safe,’ suddenly found their wealth clipped of 65% of its value.
Salaries were slashed by inflation. Picking through trash became common. Some people looked through the trash to find something to eat. Others pulled out the cardboard boxes which they could sell for pennies to recyclers. There were riots and demonstrations… which ended in the election of one of the most corrupt and incompetent governments in Argentina’s history. Inflation rose. The peso was worth about 30 US cents in the early 2000s. Now it is worth less than half a penny.
Civilized, vernacular order broke down. People came to see that the system was unfair… and that it rewarded people who cut in line. Each payday, they felt cheated. “What’s the point of working,” they asked themselves. And then…“These guys are crooks… and they’re getting rich. I should be a crook too.” When that happens, the whole system breaks down.
China’s Great Leap Forward: In the late 1950s, China began an ambitious campaign to modernize itself. Led by Mao Tse Tung and the communist party, the Chinese embarked on a great crusade. The whole society – its government, politics, economics, finances, and industries…all were all brought together, like an attacking army, to transform China into a modern industrial powerhouse.
At the time, China was an agrarian society. Most people still tilled the soil… and stuck to their traditional ways of life. It wasn’t the most sophisticated economy in the world. But it was capable of supporting 600 million people. In Mao’s new plan, farmers were forced onto collective farms. Private plots were made illegal. People who tried to keep their own gardens were branded as ‘counter-revolutionaries,’ and often tortured, imprisoned, killed outright, or worked to death.
So too, the customs of the countryside were banned. Weddings, funerals, feasts – traditional rituals of vernacular society – were outlawed. They were replaced by propaganda meetings and ‘struggle sessions,’ in which the ‘deniers’ and unreconstructed peasants were beaten… forced to admit their crimes… and often killed.
Early on, Mao had played a little trick on his enemies. He invited criticism. This flushed out his adversaries, conservative intellectuals, and ‘bourgeois elements.’ Later, these people were targeted. The intellectuals were sent to the countryside, where they were worked and starved. The resistors were tortured, tried, and executed. Critics learned to keep their mouths shut. Even at the height of the madness… when millions were dying, and it was obvious that the modernizing crusade was a ghastly failure… there was very little criticism or debate.
Mao knew nothing about metallurgy. Somehow, he became convinced, in the way confident ignoramuses often are, that the peasants could make steel in backyard furnaces. Millions of trees were cut down to fire up these primitive steel mills. Billions of man-hours were wasted trying to do what couldn’t be done. The result was only a few lumps of useless pig iron.
Meanwhile, those left on the farms were given new directives – from bureaucrats who knew nothing about farming. They were told to plow deeper, in the belief that the roots would have more room to grow… and to plant the seeds closer together to increase the harvest. Then, the deciders set productivity quotas based on their fantasy projections and confiscated almost all the food the farms actually produced.
Elsewhere, crops went unharvested because so many people had been diverted into the fruitless campaign to make steel in backyard ovens. The result was the largest famine in history – manmade… and unnecessary. How many died? Maybe 30 million. Maybe 50 million. Jung Chang and Jon Halliday, historians who wrote what many consider the definitive biography, Mao: The Unknown Story, reckoned 70 million. Of course, no one knows exactly. But the suffering was on a scale not seen since the Black Death haunted Europe. Whole families tried to survive by eating tree bark and clay… but starved to death anyway. There were widespread reports of cannibalism. Trying to escape or begging were punishable – even by death.
In addition to the famine, the communist police and militia did their part. In their efforts to force the Great Leap Forward onto the people, they are said to have tortured and killed more than 2 million of them.
The Next Great Crusade: China’s Great Leap Forward is worth studying. Because it is recent history; it happened during the lifetimes of many people reading this. Science was already well developed – including chemistry, metallurgy and agriculture. China, for all its faults, had automobiles and trains… it had tractors and trucks. And it had a civilized culture that was thousands of years old.
And yet, its elite – then in charge of the communist party – thought they knew better. Even when they saw that their new crusade would actually reduce China’s GDP and its population – they refused to admit failure. Instead, they stuck with it, only gradually and quietly dropping the worst elements of the program.
Chairman Mao, by the early ‘60s, was responsible for causing the deaths of millions of his countrymen. But he was neither disgraced nor hung… instead, he was a hero, and reclaimed power in 1966. Then, he began yet another Great Crusade, the Cultural Revolution, which resulted in maybe a million more deaths.
How was it possible? How did so many people allow themselves to be bullied and bamboozled into such lethal programs? People are neither always good nor always bad… neither always smart nor always dumb…but always subject to influence. And the influences are not always good ones. The big-mouths, the meddlers, and the power-mad monsters always cause problems. And then, they offer solutions that are worse than the problems they are meant to solve.
There is no record of any public crusade, intended to make the world better, that actually did so. The Great Crusades of the middle ages, the religious wars of the 15th, 16th and 17th centuries, the French Revolution and the Terror, WWI, the Russian Revolution, Nazi Germany, the Soviet Union… Prohibition, the War on Poverty, the War on Drugs, the War on Terrorism – all were disasters.
And now, the people who brought you these marvelous mishaps bring you another big campaign. It may be the most ambitious crusade in human history. Like the Great Leap Forward, it is led by fanatics. Dissent is repressed as “misinformation.” And it will up-end our traditional, vernacular economy.
There are now 8 billion people on planet earth. They depend on fossil fuel. More important, they depend on the system that brought us fossil fuel – a system of bid and ask… please and thank you… give and take…that is, they depend on a vernacular economy that gives them what they want – fairly, freely, and effectively. Take away that economy… substitute central planning by bureaucrats and party hacks, armed with statistics, quotas, rifles, tear gas, penalties, subsidies, and ‘printing-press’ money…and what do you have?
A cold day in hell."
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Joel’s Note: Just sticking on housing for the moment… it is perhaps unsurprising, given the precipitous fall in both home sales and listings for the month of September, that homebuilders would be suffering a lack of confidence in the market. A survey out this week from the National Association of Home Builders shows homebuilder confidence plunged for the tenth straight month in October, to its lowest level since 2012. The New York Post had the details…
"The NAHB index fell eight points to 38 in October – five more points than economists had expected. Index readings below 50 are considered a sign of negative sentiment among homebuilders. The latest downturn occurred as mortgage rates creep toward 7%. Coupled with still-high home prices, the higher rates are driving many prospective homebuyers out of the market due to an affordability crunch."
Remember, these are the folks with their finger on the pulse, who build homes for a living. As such, sentiment among homebuilders is often considered a “forward indicator” for health in the housing sector. Take note.
Meanwhile, desperate sellers are already lowering prices at quite the clip. According to Redfin, a record 7.9% of home listings reported price drops for the month ending Oct. 9, compared to just 4% over the same period last year, as rising rates dampen demand. Based on the current median home asking price and the 6.92% average long-term mortgage rate, buyers are looking at a 51% increase in their monthly mortgage rates year-over-year, from $1,698/month this time last year, to $2,559 today. According to the Census Bureau, around two thirds of Americans (65.5%) own real estate."
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