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“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.)

Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail: The Daily Reckoning (www.dailyreckoning.com ). He is also the author of “Financial Reckoning Day: Surviving The Soft Depression of The 21st Century” (John Wiley & Sons) due out in September.

“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.”
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We highly recommend Hernando de Soto's book, The Mystery of Capital, as essential reading for Daily Reckoning faithfuls...

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.  “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.

“[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.”
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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.”

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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.

Sincerely,

Addison Wiggin, 
The Daily Reckoning

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.”
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