Today's date:
Fall 1987

The Slower Fool Theory

We inaugurate the Publisher's Page with a guest essay by noted commodities broker Richard J. Dennis, entitled The Slower Fool Theory.

There is no greater tragedy than a fact that contradicts a theory, except when that theory Is the destruction of the economy because of the budget deficit.

I will admit the stock market's rise makes my rabid anti-deficit analysis suspect. Unfortunately, I cannot shake my beliefs. I am not convinced we are growing our way out of debt. By any measurement, disaster Is just around the corner. The Interest payments alone will topple the system soon, and the low national savings rate makes the crisis even more sevre.

I do not agree that we increase national security by defense spending ourselves Into bankruptcy. The Russians ran that experiment for us and It failed. Certainly we are better off to the extent that the majority of federal debt Is not owed to foreigners. However, to the extent we owe each other the scramble to maintain purchasing power by lenders and evade either government default or repayment In devalued dollars, will not be bloodless.

In sum, I stand by my belief that the federal debt Is getting monstrously large; it is certain to violently disrupt commerce; it Is not stimulative to the economy because of the higher real Interest rates It engenders. I'd prefer less defense spending to structural reform like a constitutional amendment to balance the budget but, when push comes to shove, I'm for just about anything that limits or eliminates deficit spending. Still, what about that stubborn little fact - prosperity?

I was shocked by Allied Malabre's book Beyond Our Means and his unnerving assertion that one way the government might reduce its real debt obligations would be to refuse to permit anything but rolling ever debt with no liquidation except at a discount to full value. It prompted me to recall a conversation with a Midwestern Investor, a man acknowledged as the premier Investor of our time, who allowed that hyperinflation could be just around the turner, Hyperinflation or quasi-default by government of Its obligations Is a nightmare for debtholders.

When I read sometime later that this Investor was parking money In municipal bonds, I recognized his Investment strategy was similar to mine. In fact, when I had mad Mr. Malabre's macabre article on debt, I did a frantic spot check and found that 87% of my not worth was in short term Treasury bills. Contrary to my theories, I had done the same thing as my Investor friend.

We are playing a variant of the Greater Fool Theory which should be tailed the Slower Fool Theory. According to the Greater Fool Theory, investors buy things they know to be worth a let less than they cost, on the hope that they can find a greater tool to sell to. it Is not such a great strategy since owe are not enough fools to go around.

Following the Slower Fool Theory, investors do not Intend to let their bonds mature and receive face value and possibly lose real purchasing power. What May plan to do Is to be faster than the other fools holding debt Instruments and liquidate theirs before the oncoming economic Armageddon devastates them.

I think this Is the solution to the paradox of the missing catastrophe and why we temporarily enjoy that stubborn fact of a decent economy. Confidence Is needed in the places of paper that our government issues to finance Its activity to keep the game of debt creation going. To the extent that everyone believes the crisis is sometime in the future and somebody else's crisis, the game Is viable.

Unfortunately, the future will arrive and Inflation's turn will come, and consequently the economy's demise. It will be a discontinuous leap for investors specifically and the economy generally Into illiquidity, panic and chaos. I suspect many people's investment strategies are not much different from mine Keep buying that paper even though it Is no good; if you ever see 8% inflation again, head for the safe harbor of inflation hedges.

So, the catastrophe is out there lurking, probably happening sooner than later, and probably nastier than we can understand. It is avoidable, just as 8% Inflation Is avoidable, but not very likely to be avoided in the absense of taming the debt monster Prosperity will last only as long as the Slower Fool Theory of bond Investing lasts.

Maybe I will liquidate my investment In debt a little earlier than I planned - say at 7% inflation. The other fools might be a little faster than I thought. I would hate to be caught with the right theory and the wrong position.

back to index