Debt Collapse Squared: Why Housing Falls So Dramatically In The End Game

Benjamin Roth, writing in 1933, cites the situation ten years before in Germany, when houses could be bought for $50 (2.4oz gold, 40oz silver). Here's why that happens, and why it will happen again.

10Y yields test 50WMA for the fifth time since 2021. If we break below, it could signal the next round of money printing is around the corner.

• Benjamin Roth writes in 1933 about how real estate could be bought in Germany for $50 (2.4oz gold), I finally understand mechanically why this has to happen.

• He also saw back in 1933 that Roosevelt's inflationary policies were a wealth illusion.

• Real estate collapses most against gold and silver in hyperinflation because it's debt collapse within debt collapse. Real estate values are both directly and indirectly supported by debt.

10Y Yields Test 50WMA Again

10Y yields have been riding the 50WMA since 2021, or arguably late 2020. Each time they've tested that line, yields have bounced higher. Counting by clumps, this is test #5. I would say it's likely that if we break through the 50WMA, it should signal the next printing round is very close. The European Central Bank just started cutting today. The Fed cannot be far behind.

And recall, recessions typically start shortly after the rate cutting cycle has already started, with an average of 7 months post first rate cut since 1990. The Austrian school explanation for that would be the Fed sees the initial signs of a slowdown, cuts slowly, but the business cycle speeds up to bust and the Fed is forced to cut to zero quickly, when it always thinks it will be smooth at first it never happens that way. I continue to believe that the next cut to zero will spell the end of the dollar.

Why Real Estate Falls So Spectacularly In a Hyperinflationary End Game

Two more key Lines from the Roth diary. The first of these quotes clicked it for me as to why real estate collapses so thoroughly relative to gold and silver in a hyperinflationary end game.

July 1, 1933

…Inflation is a terrible thing and I hope it will never come to America. It penalizes saving and changes the entire outlook for the prudent investor from government bonds, life insurance, etc. to speculative stocks and commodities. The German Mark before the war was worth almost 25¢ in American money (my note, AKA gold). When inflation ended a dollar would buy about a billion marks. During inflation American speculators went into Germany and bought huge pieces of valuable real estate for sus as low as $50 in our money.

Roth understands the basics here pretty well. But then I'm thinking why would real estate go so low relative to gold and silver? $50 in 1923 is 2.42oz gold, or 39oz silver at 16:1 monetary ratio. That's really insane, but we know it happened.

The answer hit me suddenly. The dollar is mostly Treasury debt and real estate debt (mortgage-backed securities). When those both fall, and the meager gold value is all that remains to cover the dollar's obliterated market cap. Therefore gold holders win what the dollar holders lose, and balance is restored.

With real estate itself, you have a situation where the real estate value is backed directly by debt as well, specifically in the ability of the owner to pay the mortgage. If he can't, the value of the debt backing the mortgage falls and therefore the value of the house falls. (Thinking about this on an individual level, the more debt you can service on a house, the higher price tag you are willing to pay for the house. If you can't get a mortgage, you have to pay cash, and if nobody can get a mortgage, they all have to pay cash, and therefore prices collapse.)

That is the scenario of a typical housing collapse, as happened in the Great Depression and 2008. Housing prices fall during deflationary collapses, but they don't fall to insane prices like 2.42oz gold. That's crazy, but it happens. Why? Because in a hyperinflationary scenario, you have the outer debt collapse in the mortgages within the debt collapse of the currency itself, which is also backed by debt. So what you have for real estate is a debt collapse multiplied by a debt collapse. In other words, debt collapse squared (or in today's case even cubed).

First, the mortgage backing the value of the house collapses because MBS collapses, and second, within that, the dollars in which the price of the house is denominated collapse because Treasurys, which back the dollar, collapse, and even cubed because a big chunk of the dollar itself is also MBS itself. When MBS back the house AND the dollar in which the house price is denominated, you have a debt collapse multiplied by itself multiplied by itself again, and therefore just as the remaining gold on the Fed's balance sheet plugs the hole in purchasing power for the dollar, it happens even more powerfully (squared or even cubed) in a housing collapse within a dollar collapse when the dollar itself is backed by mortgage-backed securities. That's why housing prices fall so dramatically in a hyperinflation relative to real money, and especially relative to silver, which returns briefly to around 15:1 at the peak of the panic.

Here's the other entry, and Roth understood this as well:

September 13, 1933

I spoke on the NRA [National Recovery Act] TO THE BUSINESS MEN OF Campbell last night and helped them organize. Dave Marwick also spoke. As time goes on I am getting more skeptical as to the ultimate success of the NRA. There is too much "chiseling" going on. (Note: NRA required business to raise wages and cut hours. Many accomplished this by cutting benefits, what he calls chiseling.)

Considering the fact that the dollar is worth only 65¢ in gold, prices of stocks and commodities are still down to bottom if quoted in price of gold.

What 65¢ means is that the market price of physical gold was 35% higher than the statutory dollar rate for gold at that point, which was $33, not yet $35. Roth noticed immediately that Roosevelt's inflation strategy to get out of the Depression was just an illusion, building more debt off of a pile that hadn't yet fully liquidated. That pile continues to this day.

Tying this in to the point about housing, it is true that inflation will spur the creation of real goods and services. This cannot be denied. But when it fails, those holding the inflated money will lose the ability to purchase the wealth that was created. Most of it will be sold to those with real money instead, and so the only ones who really benefit from a boom and through to the other side of that boom, at the end of the day (and this day has lasted 91 years so far) is real money holders. During the boom, the wealth is a temporary illusion, as Roth points out.