Place the grated potatoes in a clean dishcloth or cheesecloth and squeeze as much of the liquid as you can out into a bowl. Let the liquid stand a few minutes, then carefully drain, leaving potato starch at the bottom of the bowl. Add the potatoes back to the starch.
Grate the onion over the potatoes. Add salt, pepper, nutmeg, and egg. Mix thoroughly.
Heat oil in a frying pan. You can use a nonstick pan and just a few drops of oil if you wish. For best results use only ⅛ to a ¼ inch of oil.
Drop about a ½ cup of potato mixture into hot oil and flatten with the back of a spoon. Fry 4-5 minutes on each side (or until golden brown).
Drain on paper towels and serve hot with applesauce and or sour cream.