Give me control of a nation’s money and I care not who makes its laws.
– Mayer Amschel Rothschild
When we left you yesterday we were lamenting how the American working classes have lost ground. Today, the typical working stiff has a lower real income than he had in 1950.
Wait… Is that possible?
Yes. As we showed yesterday, he has to work longer today to pay for a family car and a house than did six decades ago. In 1950, he could support a family.
Today, he can barely support himself.
Almost everyone misunderstands why. They think deregulation allowed capitalists to take more money away from the proletariat. Or that “the rich” suddenly became greedier.
We presume the rich are always equally greedy – just like the poor. And we note that the total volume of regulation actually increased during the period under review. Just look at the tax code… or SEC rules. There are far more rules now than there were in 1950.
The Real Reason the Middle Class Is Suffering
Actually, something else was happening… something subtler and more insidious. Here’s Bloomberg with more evidence:
The US homeownership rate, which soared to a record high 69.2% in 2004, is back where it was two decades ago, before the housing bubble inflated, busted and ripped more than 7 million Americans from their homes.
And more claptrap solutions:
With ownership at 65% and home values rising, housing industry and consumer groups are pressing lawmakers to make the American Dream more inclusive by ensuring new mortgage standards designed to prevent another crash are flexible enough that more families can benefit from the recovery. Regulators are close to proposing a softened version of a rule requiring banks to keep a stake in risky mortgages they securitize, according to five people familiar with the discussions.
How does that work? Easier credit? But not riskier credits? More laws? Good luck with that!
The American Dream did not break down because the lawmakers and the credit industry were not clever enough. It broke down because they were too clever by half.
President Obama is stumping the country now, promising to save the middle class. But he and the feds are the real reason the middle class is suffering. They created a monetary system that robbed society of real capital… and robbed workers of trillions of dollars of income.
What Matters Is Value
But let’s check in on yesterday’s market action…
What? There’s not much to check on. These are summer markets. Markets in hammocks and deck chairs. Markets without action. Nothing worth reporting.
Of course, short-term market action is usually insignificant anyway. Prices go up. Prices go down. It scarcely matters.
What matters is value, not price. Price is what you pay. Value is what you get. Price is what you see. Value is what you don’t see. It’s hard to detect. And especially hard to measure.
It is like real character. Real grace. Real charm. Or real truth. It takes a lot of careful attention to catch even a glimpse of it. Most people don’t bother.
“Beauty is only skin deep,” said our mother, 93, yesterday.
“Yes,” we replied. “But that’s the only part you can see. The rest doesn’t count.”
Here, dear reader, we enter into deep, philosophical territory… and we take a quick detour to avoid it, lest we sink in over our heads.
Let’s keep it superficial! But not too superficial.
Economists measure quantity. Alas, life is not all quantifiable. What really matters is quality. Right now, the Fed tries to control prices. But prices are only a part of the picture.
When it comes to art, architecture, music, puppies and women it’s what strikes the senses that matters – what you see, hear and feel.
But when it comes to your money, what you see is not exactly what you get. Price tells you something. But it doesn’t tell you all you need to know.
Why? We’re so glad you asked…
Money = Control
When bullion money was invented government quickly saw the potential. Control the money and you can control people. You control their assets. Their cost of living. Their time.
In ancient times controlling money meant you could buy people outright. You could buy war captives. Those who couldn’t pay their debts often sold their children into slavery too. Or they themselves were forced into debt servitude.
In world’s oldest legal code, the Babylonian Hammurabi’s Code, set down some 4,000 years ago, it says that children of debtors can be kept in slavery for three years. In the fourth year they must be released.
Clever readers will be on the edges of their chairs… ready to leap with indignation. America’s youngsters, heirs to its $16.7 trillion national debt, will be kept in debt servitude far longer. Maybe even all their lives!
Bullion money was a new development. It made cheating harder to do. You didn’t have to take credit. You didn’t have to wonder if the family was honorable or solvent. You didn’t have to wait to see if you’d get something in return. Instead, you could take a little piece of gold or silver and be done with it.
But the people who controlled the money could still diddle it. And the history of central banking is a history of diddling.
The Golden Constant
Here’s a little excerpt from our new book, as yet unpublished:
Bullion money restricted the total quantity of money to the amount of bullion available. It also restricted the amount of credit, since loans had to be settled in bullion.
Since the quantity of bullion could not be readily increased, the buying power of bullion money tended to be stable over long periods of time. Prices in 1910 were little different from those in 1810. And as Roy Jastram demonstrated in The Golden Constant, you could buy about as much with an ounce of gold in 1560 as you could 300 years later.
Early on, governments took control of the new bullion money. They imprinted it with emperors’ faces. And then they tried to use it to cheat their own subjects. In England, there was a practice of trying to raise or lower the value of money by “crying up” or “crying down” the currency.
More typically, government mints made the coins a little smaller… or replaced precious metals with base metals. Naturally, the value of the “debased” currency went down.
The gold aureus, for example, was minted during the reign of Julius Caesar with 8 grams of pure gold. Three centuries later, it was replaced by the 4.5-gram solidus.
The denarius, Rome’s silver coin, shrank even faster. In Augustinian Rome it was a day’s wage for the typical laborer. For centuries, it had been fixed at a weight of 4.5 grams of silver. But by the end of the second century AD the silver content had been reduced to just 70% of its weight. By 350 AD there was almost no silver left in the silver denarius; it was worthless.
Sir Isaac Newton, warden of the Royal Mint, was determined to do better:
“The use and end of the public stamp is only to be a guard and voucher of the quality of silver which men contract for; and the injury done to the public faith, in this point, is that which in clipping and false coining heightens the robbery into treason.”
Paper money was a later innovation. It worked well – as long as the paper was backed by gold at a fixed rate. But it offered more opportunities for cheating.
As we will see, governments are still at it – led by the United States of America.
More to come…
Regards,
Bill
Market Insight:
Where’s Cheap Now?
From the desk of Chris Hunter
You get value in the stock market by buying businesses at low prices…
Problem is the price-earnings multiple for the S&P 500 is bumping up against the historic average for the end of a bull market. This is bad news for investors who are only now moving back into stocks.
The S&P 500 is trading on a trailing P/E (based on 12-month reported earnings as opposed to analysts’ guesstimates of future earnings) of 16.9.
Going back to 1928, the S&P 500 has traded at an average of 11.1 times earnings at the start of bull markets and 18.2 times earnings at the end.
And some of the greatest secular bull markets in history have started at much lower multiples. For instance, in the 1949-56 secular bull market, which saw the S&P 500 rise 267%, the trailing P/E rose from 5.6 to 14.4. And during the 1982-87 secular bull market, which saw the index rise 228%, the trailing P/E rose from 7.6 to 21.2.
So where is cheap right now?
Value-minded investors might want to look at Turkey, where stocks are trading on a P/E of 9.7… or China, where stocks are trading on a P/E of 7.1 (roughly the same level US stocks were trading on at the start of the 1982 bull market).
Even cheaper right now is Russia, on a P/E of 5.8.
Investors are running scared from these countries right now. The result: Stocks are at the bargain counter.