Pirate Problems
By John | April 16, 2009
The “leaders” in Somalia are suggesting that the pirate problem must be tackled on land, as it is too difficult to patrol the vast ocean. Of course, they will require funding to accomplish this……
This nonsense is nothing short of blackmail. “Give us money and we will stop attacking your ships.” Of course no amount of blackmail payments will stop the pirating - it will only encourage it. As long as ransom continues to be paid to pirates to release ships and hostages, the pirating will continue.
The hand-wringing politicians are expressing their concerns. In fact, if the escalation in pirating continues, I predict calls for international conferences to address the problem. After all, the problem is very complex, and as Secretary of State Hillary Clinton has suggested, requires a multi-pronged international effort to solve this problem - and it won’t be solved overnight. Blah, blah, blah, blah, blah, blah………..
Do you know why we haven’t had a piracy problem for 200 years? It wasn’t because potential pirates were afraid of international conferences. It was because they were afraid of being blown out of the water. Weren’t merchant ships of 200 years ago armed? Are we so afraid of offending criminals that we are no longer willing to defend ourselves? Is it the responsibility of the U.S. Government to provide for Somalis? I thought the function of the U.S. Government was to protect the freedom and property of Americans. Silly me!
Topics: Property Rights | No Comments »
What is Money?
By John | April 14, 2009
What is “money”? Is a piece of paper - a dollar bill - money? How about precious metals? Gold? Silver? Copper? Platinum? How about gems? Diamonds? If I write you a check, have I given you money? Is the balance in my bank account money?
Where does money come from? Who decides what money is?
“Money” is frequently described in terms of its functions - in terms of what it does:
1) Money is a store of value.
2) Money is a medium of exchange.
3) Money is a unit of measure of value.
OK. That’s what money does. But, what is money?
Money is a promise. Money is a promise from the issuer of that money to the recipient or bearer of that money. A promise of what?
1) Money is a promise to return to the recipient of money the same value that was supplied, no matter how much time has elapsed. If money is backed by something specific of value, such as gold, the promise is that the money will be worth the same quantity of gold when it is redeemed as when it was issued. If money is not backed by something of value - if it is a fiat currency - the same principle applies. The relative value the money had at the time it was issued should still be there when it is redeemed, regardless of how much time has elapsed in the meantime. Otherwise, money has failed to perform its “store of value’ function.
2) Money is a promise that its integrity and acceptability will be maintained over time. Whatever that promise is, whether it is convertibility to gold or other precious metals or just its ability to maintain a constant purchasing power over time, money should retain a consistent reputation so that it will be readily acceptable among the community in which it serves. Otherwise, it has failed to perform its “medium of exchange” function.
3) Money is a promise to maintain the perception of constant value. A building built in 1800 should measure the same dimensions today as the day it was built, as long as we use the same unit of measure, such as the foot. Similarly, a dollar tucked away inside a crevice of that building in 1800 should have the same purchasing power today as it did when it was hidden. If it does not, the promise has been broken, and the “unit of measurement” function has failed.
It matters little whether money is represented by precious metal, a paper certificate, a token, a cord of wood or an electronically stored contract. If it adequately performs the above itemized functions, and fulfills its promises, it is money. It doesn’t matter if that money was originated by a national government, an international body, a bank, a private organization, or an individual. If it looks like a duck, walks like a duck and quacks like a duck, its a duck. At least until it is no longer a duck.
If Thomas Jefferson were to return to Monticello today, recover a dollar bill he had stuffed in the wall in 1800, and try to spend that dollar, do you think he would find that dollar acceptable “money”?
The U.S. dollar was backed by precious metals - gold or silver - throughout most of our history. Throughout most of that history, the dollar maintained a constant value. At times, such as in wartime, the U.S. government found it convenient to manipulate the value of the dollar, but it subsequently came back to its previous value. Then, in 1934, President Roosevelt devalued the dollar relative to gold, and made it illegal for U.S. citizens to own gold. This was “necessary” to support government programs.
Then, in 1971, President Nixon took the U.S. entirely off the gold standard - meaning the dollar was no longer convertible to gold, even in international transactions. This was “necessary” to support government programs.
Since 1971, the dollar has been backed only by the “full faith and credit” of the U.S. Government. That means that if you own a U.S. dollar you may take it to the Government and redeem it for - a U.S. dollar.
The basis for U.S. money today is credit. Through the actions of the Federal Reserve Bank and other banks, money is created by lending to others that which they do not have. Banks are only required to keep a fraction of what they have loaned out in reserve. And, of course, the U.S. Treasury can just print money, and does, at any time.
Is there anything wrong with that? No, in theory, there is not. As stated above, it doesn’t really matter what we call money. It doesn’t have to be backed by anything. It can be fiat money. As long as it fulfills its promises to the community it serves, it is money. The problem, of course, is that there is no longer even the pretense of keeping these promises.
The Government today enjoys a crisis. It is “necessary” to create dollars to support its programs.
The dollar is becoming worthless. It is only a question of how fast. Dollar investments are at risk.
Duck!
Topics: Government Excesses | No Comments »
What the Hell do I do Now?
By John | March 9, 2009
The rat is no longer seeking cheese. He just wants out of the trap.
Investor goals have changed in the past few months. Many no longer rank profits as their primary objective. Safety - preservation of purchasing power - has taken precedence.
The collapse of credit, the sharp contraction of economic activity, and the plummeting stock market have taken their toll. The viability of seemingly healthy companies is called into question, creating an exodus from the stock market. The flight to safety has attracted funds to U.S. Treasury securities and caused their yields to approach zero. Massive federal spending and deficits convince investors of the inevitability of rampant inflation sometime in the future.
This is not a pretty picture. If you put your money in bonds, CDs, money market funds or your mattress you risk losing purchasing power through inflation. Holding securities in this uncertain environment is considered too risky.
What should investors be doing? Well, for one thing they should own assets that will retain value over time - assets that are not expected to be in excess supply in the near future - assets that are tangible - asssets that are real. Precious metals, such as gold, have always retained value in uncertain times. Unfortunately, gold has had a huge run-up in price in recent years. If the economic outlook should brighten, gold could be expected to decline in price.
For many investors, real estate now makes a lot of sense, even though they may not have invested in real estate in the past. For those lacking experience, they need help evaluating the market - evaluating the risk/reward relationship.
As we have seen, and are seeing, real estate is also subject to market fluctuations. The recent housing bubble is a good example. I would expect to see other categories of troubled assets in the near future, as leveraged properties become unable to service debt. Retail, office, motels, resorts, etc. are experiencing declining revenues and probably will even more so in the coming months. So, for the investor seeking safety, I suggest avoiding leveraged investments.
Real estate investing has traditionally focused on income and cash flow. But what do you do when the income and cash flow become exceptionally uncertain?
For many of these safety-seeking investors, I believe vacant land is the answer. Buy for all cash. Buy at bargain prices from motivated sellers. Buy properties with low carrying costs. Plan to hold for several years - don’t count on an economic turn-around in a few months.
Whatever type of property an investor is buying, he needs to have a good handle on the supply-demand relationship for that type of property in that location. Don’t buy something that will be in surplus supply in a few years. And, again, don’t assume we will come out of this recession conducting business as usual. This administraton is behaving as anti-capitalists. Money is being printed and spent at unprecedented levels. These actions have consequences, and will for years to come.
Know the market you are investing in. Consult others. Know values. Then buy with the confidence that you now own a solid, appreciating asset.
Topics: Rural Land Investment | No Comments »
The 80/20 Rule
By John | March 6, 2009
According to the 80/20 Rule, in any given population, 20% of the people will provide 80% of the production for the entire group. In other words, 80% of the people will only provide 20% of the total production. This rule is frequently applied to sales organizations, but it seems to have general application - it seems to conform to human nature. For whatever reason, only about one out of five people are truly motivated; are truly committed to excel at what they do.
Now, let’s suppose we have a society of free people, a society subject to laws that protect the freedom and rights of its people; a society with a government that enforces those laws, but otherwise leaves everyone to pursue his own interests. According to the 80/20 Rule, after a period of time, about 20% of the people in that society will hold about 80% of the wealth of that society. Why? Because only about 20% of the people are really driven to succeed. They work exceptionally hard, apply themselves to achieving their goals, and become economically successful. The other 80% are satisfied to just “get by.” They may live relatively successful lives, but they are not motivated to excel like the top 20%. But, because of the exceptional productivity of the top 20%, much wealth is created, employment opportunities abound, and the entire society flourishes.
Now let’s take that same society and make it a pure democracy. Unlike in the above example, where the government was limited to those tasks necessary to protect the rights and freedom of its people, in a pure democracy everyone has a vote, and the government is free to involve itself in whatever the majority decides it wants the government to do.
Absent restraints, voters now begin voting for their perceived self-interest. For 80% of those voters - the 80% that only has 20% of the wealth - it now becomes in their self interest to “spread the wealth.” Rather than have wealth distributed according to who earned it, let’s distribute it more equally. Let’s establish a new value system, one that rewards everyone equally, not one that rewards those over-achievers.
This, of course, appeals to the bottom 80% of the economy. Unfortunately, this new system creates a strong disincentive to produce for the top 20% of the economy. At first, it doesn’t seem to make much difference, as a seemingly fixed quantity of wealth is re-distributed throughout the economy. The bottom 80% are very pleased at being able to acquire wealth they have not earned.
The top 20%, however, are not pleased. They have no further incentive to be productive. If everyone receives the same reward, regardless of effort, everyone is encouraged to become “average.” And, without incentives, this “average” steadily declines into mediocrity. The productivity of the entire society declines. Everyone is now equal. Everyone now lives in poverty.
This is not conjecture. That the above scenario is an accurate description of human behavior is an observable fact. Travel around the globe. Compare the wealth of people in various countries with the economic system is which they live. Free people, living in a society with a stable government that respects the freedom and property rights of its citizens, flourish. Governments that do not allow its citizens to keep the fruits of their own labor preside over impoverished populations.
OK, so why would democracies vote to re-distribute wealth? It isn’t in their own interest, is it?
Well, that assumes voters are intelligent, informed, responsible, far-sighted people. That assumes voters will not choose their short-term interests at the expense of their long-term interests. I contend those assumptions are false.
Much criticism has been leveled at Republicans in the U.S. for not standing up for limited government, for fiscal responsibility, for supporting the Constitution, for private property rights, for freedom. Polls seem to indicate that most voters believe in the principles of government established by the Founding Fathers. However, when it comes time to vote, are those voters even aware of how those principles relate to what they are voting for? If a candidate promises to “help” me, will I not vote for him? If I am promised something for nothing, if I am promised that I will be protected from my own bad behavior, will I not be swayed by those promises?
An argument can be made that the steady growth of the Federal Government in the U.S., at the expense of individual freedom, is inevitable. Observe the history of the past one hundred years. The rate of growth, the pace at which new government programs are developed, varies. But the trend is unmistakable. Government advances. Freedom retreats.
Is it realistic to expect that a new generation of officials will be elected who will then proceed to reinstate our freedoms and reduce the size and scope of government? Who will vote for them? If it hasn’t happened in one hundred years, under both Republican and Democratic administrations, what would make us believe it will happen in the future? What would bring about such change? After all, in a democratic society, don’t the people get what they want?
Topics: Property Rights | No Comments »
Those Old Failed Policies of the Past
By John | February 9, 2009
In the normal course of human events, there will be ups and downs. There will be fluctuations. Throughout U.S. history there have been economic contractions interspersed among economic expansions that are the envy of the entire world. Occasionally, those contractions become “panics.” In the midst of a panic, it may appear that the world as we know it is coming to an end. So far, that hasn’t happened.
We are in one of those panics. Some of the more panicky among us are questioning the viability of the system that got us here. They would condemn capitalism as a proven failure. Really?!!!
Let’s take a brief recess from our panic to examine the condemnations of the panicky.
First, this economic contraction had a little non-capitalist help. If one wanted to create a housing bubble, how would one go about it? One might create government sponsored entities to purchase home mortgages. That will assure an unlimited supply of funds for home purchases. One might enact legislation to interfere with normal lending standards and require that even those who can’t afford houses be granted loans. One might put pressure on bank regulatory agencies to require banks to fall in line behind the goal of providing “affordable” housing. One might package home mortgages into securities that could be pedaled to unsuspecting investors throughout the world. One might enact tax laws that made interest on home loans deductible from federal income tax, while providing double taxation of those funds invested in common stocks of publicly traded companies, thereby directing investment funds away from productive employment and into housing. One might have the central bank of the country support debt by expanding the money supply and keeping interest rates low - even negative at times. Yes, that should do it. That should create an enormous housing bubble that would eventually burst with an explosion heard around the world.
Oh, and here’s the fun part. After having manipulated the economy into a panic, let’s conceal our role in the process by blaming the very system we were manipulating. i.e., this was not the fault of our interference in the market, this was a failure of capitalism!
But wait, it gets better. Now that everyone is in a panic, they need to be rescued, right? Let’s continue to manipulate the ecomony, this time by alleging that we need a large dose of Keynsianism - we need to create a huge spending program that’s now needed to “rescue” the ecomony from the failures of capitalism. And if those programs just happen to consolidate enormous power in the central government, well that’s just great! It worked for FDR in the 1930s. I am sure it will work today.
Of course, in the 1930s, the massive intervention in the economy by the federal government prolonged a recession into a decade-long depression. That depression only ended with the greatest war in world history.
Oh, and to those who object to our tactics? Let’s just say that to do otherwise is to employ those old failed policies of the past. That way, when someone points out that WE are just employing those old failed policies of the past, we will already have tied up that expression.
Confusing, huh?
Topics: Government Excesses | No Comments »
Obama vs American Success
By John | January 16, 2009
What if the United States and Russia should exchange people and institutions? What if all of the people currently living in the United States were to move to Russia, and all of the people now living in Russia were to move to the United States? And, in each case, the people were to bring with them all of their institutions, beliefs, traditions, etc.?
Under these circumstances the world map would not change. The United States would continue to be populated by “Americans” and Russia would continue to be populated by “Russians.” They would be different people, of course, but citizens of the United States are called Americans based upon their geography, as are Russians.
What’s wrong with this picture? When we think of “Americans” we don’t think of ourselves as just populating certain global territority. We think of ourselves as sharing certain values, beliefs, and institutional traditions. i.e., We think of the term “American” as applying to a freedom-loving people who believe in personal responsibility, self-reliance, optimism and a willingness to make our own futures.
OK, so why am I stating such an obvious truism? Because I believe it is relevant to questions being asked about the incoming Obama administration. Those who did not vote for Obama are being asked if they want him to succeed. The implication contained in that question seems to be that, if you don’t want him to succeed, you are just playing partisan politics - you are just jealous that “your guy” isn’t in power.
Well, I have a different perspective. Do I want Obama to succeed? Generally speaking, my answer is no. Why? Because Obama has stated that his objectives involve taking away individual freedom and replacing it with government authority. I really don’t care who is president, as long as he does the right thing. But when one runs for office explicitly stating he will do the WRONG thing, how can I want him to succeed?
I am an American, not because I was born here, but because I CHOSE to be an American. I support American values. I support individual freedom. I don’t want Obama to succeed any more than I want Putin to succeed. Unfortunately, I believe they have a lot in common - they both seek power at the expense of their respective citizenry.
I want America to succeed; not Obama.
Topics: Government Excesses | No Comments »
Sally’s Christmas Dream
By John | December 8, 2008
Our dog, Sally, recently had a dream. Since she doesn’t have her own blog, she asked that I post her dream on my blog. So, hear it is - Sally’s dream - exactly the way she described it:
SALLY’S DREAM
It came to pass in that far-off city called Washington that a Messiah appeared before the Elected Officials. The Messiah asked the Elected Officials to explain how they had come to reside in the city called Washington. The Elected Officials explained that they had been elected by the people. Whereupon the Messiah asked how it had come to pass that the people had elected them.
The Elected Officials turned their gazes upon the ground and expressed reluctance to reveal their secrets, but the Messiah was persistent, and the Elected Officials were compelled to confess that they had become elected by making many false promises - promises they knew they could not keep.
“Go on,” the Messiah demanded. Whereupon the Elected Officials described how they had acted as false gods, interfering in the lives of the people, taking from them that which they had earned, and giving to the cronies and associates of the Elected Officials. The Elected Officials confessed to having printed money in excess, thereby depriving the people of their savings. They confessed to having interfered with free markets by dictating that actions be taken that would destroy private companies and cause economic catastrophe.
The Messiah, hearing of these things, became much troubled. He said unto the Elected Officials, “No longer shall you act as false gods, but you shall become servants of The People, and they shall live forever in freedom.”
The elected officials, hearing of this, became ashamed and confessed of their many sins. They resolved to become honest and forthright citizens and from that time forward to serve the interests of The People.
Whereupon optimism and good cheer spread across the land. With their freedom restored, The People became happy and prosperous.
And it came to pass that The People revered their Pets and lavished many treats upon them.
Well, anyway, that’s the way Sally told it……
Topics: Government Excesses | No Comments »
Government Bailout
By John | December 6, 2008
The primary function of government in a free society is to protect the freedom of its citizens. In our society, government is all things to all people. Unfortunately, that is not only contrary to its constitutional responsibilities, it is impossible. In fact, the Federal Government has become so ineffective in meeting its primary obligations, that Blackwater, a private security firm, is offering to provide security from pirates to shipping companies.
By trying to do what it is not supposed to do, our government has rendered itself unable to do what it is supposed to do.
Now, it needs a bailout.
Topics: Government Excesses | No Comments »
Government Insolvency?
By John | November 20, 2008
In the early 1980s I predicted that the U.S. Government was headed for insolvency in my lifetime. By abandoning the gold standard in 1971 and resorting to a fiat currency, the previously built-in discipline to resist excessive money creation and deficit spending was abandoned. The U.S. culture changed, as more people looked to the Federal Government to meet their needs. Politicians were being elected based upon their promises to solve all economic problems and take care of the population. The more these promises were made, the more the population came to expect the Big Daddy in Washington to take care of them.
During recent times, economic expectations have continued to escalate. Today’s younger adults expect to start off with the standard of living of their parents, and to improve from there. What were previously seen as luxuries came to be perceived as entitlements. If you don’t have the money, borrow it. Savings? Asians save. We spend!
And yet, surveys of young people entering the work force reveal an unwillingness to sacrifice. Life style is selected over economic opportunity. A college degree entitles one to rewards, whereas earlier generations saw a college degree as opening the door to opportunity, so that future rewards might be earned.
This mentality, and this behavior, are not sustainable.
Although I cannot foresee the U.S. Government undergoing a formal bankruptcy, I do expect it to reach the point where it cannot meet its expanding obligations. Are we close to that point now?
I have been expecting the re-inflation of our economies and our currencies, worldwide, in response to the current economic crisis. However, plunging stock markets are warning us that governments may not be successful in returning world economies to “business as usual.”
Most people still expect this to be a serious recession, but nothing more. At some point in my lifetime I expect to see something more. I expect to see the promises of the U.S. and other governments as empty. Despite all-out efforts, the economic slide will not be curtailed, and governments will appear helpless. Should we reach that point, how will the population respond?
Let’s hope we are still Americans, as that term used to describe us: Self-reliant. Independent. Responsible. Entreprenuerial. If we have become something less, as recent behavior would tend to indicate, we could be in for real trouble. Soon.
Topics: Government Excesses | No Comments »
Vacant Land Market Update
By John | November 17, 2008
Believe it or not, in these uncertain economic times, demand for certain types of vacant land seems to be increasing. Why?
There is unusual caution among stock market investors, as they not only want to exit the market because of falling prices, they are becoming concerned about the “going concern” issue. Seemingly healthy, profitable companies are vulnerable to the credit squeeze. They owe money to banks and cannot pay off their debts if those banks demand payment, at least not without finding substitute sources of debt financing. And, if those substitute sources are not available, as is frequently the case in this lending environment, they may be forced into bankruptcy. Seemingly healthy companies are going out of existence. With that threat hanging over their heads, stock market investors are heading for the exits. That is a whole new layer of risk that is not normally a concern to market participants.
As an alternative, some of those investors are looking for vacant land to invest in. Why? Because land is solid. It will be there, even during an economic meltdown.
What types of land are they buying? Some are looking for recreation land they can use, as well as treat as an investment. Because of a shortage of lending to support vacant land investments, many of these buyers are paying all cash. In many instances, they are enjoying attractive pricing, as “money talks.” Larger acreage parcels are attractive, as are properties with some kind of water feature.
How about farmland? Unlike recreation land, farmland prices have escalated considerably in the past few years, as commodity prices have exploded on the upside. With recent softness in commodity pricing, the economics of farming is changing. A correction in farmland pricing can be anticipated, so one should be careful about not getting caught up in the expectation that farmland prices can only go up.
Development land has probably undergone the most drastic change in price in recent months. Some finished residential lots are selling for 20% to 30% of the retail values they enjoyed just a couple of years ago. In some “anti-growth” governmental jurisdictions, it takes years to obtain all necessary approvals to create a residential subdivision. In this economic environment, no one is applying for permission to create new subdivisions. One might anticipate a lot shortage at some future date. Some investors are buying up finished lots in anticipation of future shortages, once normal growth and home building resume. But, be aware, one needs patience.
Asset prices are strongly influenced by the availability of credit. Credit has dried up. The prices of many different asset types are heading down. However, governments throughout the world are trying to resuscitate credit. If they are successful, watch for the formation of new asset bubbles. Recreation land, particularly those properties with unique features or popular amenities, could be the next magnet for cash surpluses.
Topics: Rural Land Investment | 1 Comment »
« Previous Entries