The Mystery of Wyndlclyffe

From “rugged individualism” to “keeping up with the Joneses”…what became of “the missing lessons of U.S. history”?


“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 Joneses’ 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 Joneses.’ 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 five: “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: Seeing What the Poor Have Saved

Hernando de Soto runs a think tank called the “Institute for Liberty and Democracy.” With a name like that, you’d think it was an half-cocked Washingon-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.

“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 end-game of some sort of neo-colonial 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.

Hernando de Soto: Be More Like Us

“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.”

In the U.S., 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. Preemption 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 nation’s 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 fifty 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.”

Hernando de Soto: At the Point of a Gun

The neo-cons have taken the political lesson to heart and, like the Leninists of the early 20th, 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 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.

Boobus Americanus – to borrow a phrase from HL 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 Joneses 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 Hummmer, pal. You’re thinking of survival, not staying up with Joneses. 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.


Addison Wiggin, The Daily Reckoning

September 30, 2003

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 Wyndeclyffe in the 60s and 70s, said: “Maybe some crazy idiot will buy it. I think it should be torn down.”

Addison Wiggin is managing editor of The Daily Reckoning, as well as the co-author, with Bill Bonner, of “Financial Reckoning Day: Surviving the Soft Depression of The 21st Century” (John Wiley & Sons New York, London), currently available at

“Dollar Plunges Against Yen, Euro…” begins a headline.

Oh là là…the European currency is about where it was when it was first introduced: $1.15. At the time, we dubbed it the ‘Esperanto currency’ and wondered what would happen next. Currencies have been backed by gold, or by the power of a sovereign nation to rob its citizens. Never before had we seen one with only a treaty and good intentions standing behind it.

At first, the Esperanto currency went down against the dollar – to about 82 cents – and everyone said, “I told you so…the euro can never compete with the dollar.” But by then we had begun to see the euro in a different light. While the treaty nations would never back the euro as the Poles back the zloty or Chinese back the yuan, neither would they be ready collude to destroy it. Just as Europe could not agree on an activist foreign policy, neither would it be likely to agree on an activist monetary policy.

It was about this time that America’s great Nasdaq bubble was approaching its pin. The Fed, eager to let the good times roll, cut rates faster than anyone ever had, while on the other side of the Atlantic, Wim Duisenberg barely budged. The European Central Bank chief had better hair than Alan Greenspan, but much less pizzazz in his money policy.

“Here in Europe,” we recall our friend saying at dinner last week, “they just don’t know how to deal with these problems.” Faced with an economic dry spell, the Europeans did nothing while their American counterparts opened every sluice and faucet.

The world praised Greenspan for loosing the tide, and blamed poor Duisenberg for inaction. We, on the other hand, came to see the flood in another way…and began looking for high ground. Americans had been lured into a sea of debt, we noted. The current account deficit, the federal deficit, mortgage refinancings, credit cards…at every level, debt increased. Bankruptcies hit new records; foreclosures, too.

Despite the highest levels of debt ever, America continues to borrow and spend at record levels. Currently, the U.S. consumes 70% of the entire world’s savings, and keeps asking for more. “Personal spending up,” a Bloomberg headline tells us.

In 1970, the average house cost about 2.3 times the average family income. Now, it costs more than 3 times average income…and is still rising. Housing has reached “bubble territory,” says Ed Hyman.

Exactly how these trends will end, we cannot say. But we would rather hold euros in our pockets than dollars, while we wait to find out.

Here’s Eric Fry with more details…


Eric Fry covering the markets from New York…

– Yesterday, the stock market recovered a bit from last week’s bloodletting, but the U.S. dollar is still screaming for a tourniquet. The Dow advanced 67 points to 9,380 and the Nasdaq Composite charged ahead nearly 2% to 1,825. But the stock market rally lifted none of the dollar’s misery. The greenback tumbled more than 1% against the euro to $1.159. And, as usual, gold cheered the dollar’s woes by gaining $1.40 to $383.20 an ounce.

– The dollar’s relentless slide is bad news for almost everyone except American steelworkers and Brazilian tourists. It is bad news for American consumers, no matter how many times Alan Greenspan or Treasury Secretary Snow try to portray dollar devaluation as a ‘miracle cure’ for the economy. And the slumping greenback is also bad news for foreign investors.

– At first blush, the stock market seems like a very inviting place for capital…All denominations are welcome. But not all ‘guests’ are treated equally well. For example, the S&P 500 has soared 14.6% year-to-date…in U.S. dollar terms. However, after stripping away the dollar’s 11% year- to-date loss against the euro, European investors have only a 4.6% gain to show for their troubles.

– But at least the stock market is still producing profits for euro-based investors, even after deducting the dollar’s sizeable foreign exchange losses – a.k.a. the ‘Greenspan tax.’ We suspect that this happy state of affairs will not persist. The dollar’s descent is the most worrisome – and influential – trend in the financial markets today. And yet, as long as Cisco is “breaking out to the upside,” few investors seem to care about the dollar’s slide into the dustbin of monetary history.

– We, on the other hand, are captivated by the demise of the world’s reserve currency. In fact, we would admit to a morbid fascination with the dollar’s declining health. Like lazy heirs waiting around for grandpa to kick the bucket, we gold investors wait around for the dollar’s last gasp. We don’t hope for it, mind you. We merely expect it, and allocate our assets accordingly.

– The dollar’s demise is not inevitable…just highly likely.

– “My experience as an emerging markets analyst in the 1990s taught me to be on the lookout for signs of financial vulnerability,” observes analyst Hernando Cortina in a recent Morgan Stanley research note (shoved under your New York editor’s nose by his good friend David Bernacchia). “They include ballooning current-account and fiscal deficits, overvalued currencies, dependence on foreign portfolio flows, optimistic stock market valuations coupled with murky earnings, questionable corporate governance, and acrimonious political landscapes…Any one of these signals in an emerging market usually raises a red flag, and a market that combines all of them is almost surely best avoided or at least underweighted. I didn’t imagine back then that one day these indicators would all be flashing red for the world’s biggest and most important market – the U.S…

– “A by-the-numbers analysis of America’s macro accounts in a global context doesn’t paint a flattering picture,” Cortina continues. “Yet for growth-starved financial markets, perceptions and hope are often more important than economic reality. According to the macro indicators that the IMF uses to assess emerging-market economies, the U.S. falls between Turkey and Brazil…As [Morgan Stanley] chief economist Stephen Roach has noted, the U.S. current-account deficit our economists anticipate in 2004 will reach 6% of GDP, requiring almost $3 billion per business day to finance. This tide of red ink underpins our bearishness on the U.S. dollar.”

– Cortina politely concludes: “Investors contemplating the purchase of U.S. dollar-denominated assets would be wise to factor in significant dollar depreciation over the next few years.”

– There is some solace, however, for us dollar-based investors – at least we didn’t lose $5 billion worth of purchasing power over the last 12 months, like Bill Gates did. According to the latest Forbes 400 list of the wealthiest Americans, Bill Gates is $3 billion richer this year than last, and his $46 billion fortune places him at the top of the heap.

– But by our calculations, the $43 billion that Mr. Gates possessed in 2002 lost about $5 billion worth of its global purchasing power over the last 12 months. So, courtesy of the falling dollar, Bill Gates is actually poorer this year than last…just like the rest of us.


Bill Bonner, back in London…

*** What to do about gold?

Colleagues Dan Ferris and Dan Denning offer advice:

“If gold gets below $378,” writes the first Dan, “it’ll be a major buying opportunity. If it goes above $398, the sky’s the limit. It had trouble at $398 back in 1995. Some of the big traders have stops at about $380.50. When those are hit, it could easily push gold below $378, the next major support.

“I can’t wait to pour back in below $380 or so…gold isn’t done by a long shot. You could probably pay $500 an ounce today and still double your money in two years.

“The important thing for all traders to know is that it’s a bull market, a big one, a waiting-for-23-years-to-happen bull market.

“No fiat currency has ever lasted. Not one. Even when metals are debased, people require more of them for the same amount of goods and services.

“Funny you should mention Abe Lincoln today. There’s a good account of how the federal debt rose from $90.5 million at the beginning of the Civil War to $2.7 billion by 1865 [in “The Pursuit of Wealth,” by Robert Sobel]. Money to fight the war came from taxes and the issuance of $250 million in new paper money.

“There was something of a gold carry trade back then, too. You could buy $120 in paper money with $100 worth of gold. The paper paid 6% and was redeemable in…gold. If the Union won the war, so the thinking went, you’d make a lot more than 6%…

“Moving ahead in the story…gold trading began in New York City shortly after the government stopped gold payments. Even though it was deemed illegal and unpatriotic, the underground gold trade flourished. Gold went in starts and stops, from 101.50 in 1862 to $250 in 1864…even after the trading rooms were shut down, traders met in the street…

“Gold will out.”

*** Meanwhile, Dan II offers a way to gauge our regret for not having bought more gold when the getting was more good. Dan gives us a new index which he calls “The Remorse Price of Gold.”

“I should say,” he begins, “that if I’m right about gold and the dollar, it won’t really matter at what price you buy gold or gold stocks – if you buy them before the big ‘correction’ in the dollar…The trade of the decade is still simple: sell the dollar, buy gold.”

Gold rose again yesterday, by $1.40. But: “What you need to know about gold is how far it is above the price at which you SHOULD have most recently bought it,” he continues. “I call this ‘The Remorse Price of Gold,’ implying, as you can guess, that you should be sorry you didn’t buy it at the lower price earlier when you had the chance.

“The remorse price will change, the higher gold goes. Each level it passes will be the one at which you should have bought it, but waited instead to see if it was the top.”

The current benchmark remorse price is $350 per ounce. We will regret not having bought the metal below $350 until it passes $400, says Dan. Then, we will regret not having taken action below $400.

*** At least we’re not regretting the price of toilet paper…at least, not yet.

Even Pickworth, our South African correspondent, sends this up-date:

“[Zimbabwe] is the only country in the world where your largest note – $500 – can’t buy you a beer, which is $650. A roll of 1-ply toilet paper actually costs $1000. There are about 72 sections on the average roll, so it’s cheaper to take your $1000, change it into $10’s, wipe your bum on 72 of them and get $280 change…Toilet paper is important after all, whether you’re rich or poor, you’re going to need it. This is the legacy Mugabe has left…[he] has run up food inflation by 334.6% as his supporters take charge of farming. Great job they’re doing.

“South Africa’s inflation is at 6.3% and dropping while Zimbabwe’s is running at 300% and rising. Analysts expect inflation in Zimbabwe to hit 450% by year end. Mugabe’s government has set a target of 96% (all this while they need to import basic necessities to support starving masses, so the target is pretty unlikely to be met).”

*** We are fond of obituaries. We laugh, we weep. But Sunday, we stopped short and almost cursed The Man himself. A young girl, the beautiful daughter of a friend, recently engaged, died in an auto crash. We’ve noticed that investors get what they’ve got coming; we like to think that, in some strange way, everyone does. But why her, dear reader? Why her family? The pain must be so severe, as Johnny Cash put it, that there is no way to describe it. But why? Did The Man made a mistake? Was it just ‘an accident’? We waited for an explanation from our new priest. He had none.

Elizabeth went to the funeral today.

The Daily Reckoning