Several years ago, a farmer commented to me that his land would be worth more if he planted it to brush than if he planted traditional crops, such as corn.  What he was saying was that buyers of recreational land were not only actively acquiring vacant land, they were doing so with little regard to cost.

Why?

Recreational land typically doesn’t generate revenue.  It is used by the owner for personal enjoyment.  So, there was no way to relate land cost to income, like someone might do with traditional income property.  What should I pay for this land?  Well, what does the market tell me?  If I can buy it at the “market price” (i.e., the price everyone else is paying for it), isn’t that what I should pay for it?  And, if this type of land has been going up in price, doesn’t that make it a good investment?

Recreation land in many areas became detached from reality, as its soaring price was fueled by more and more investors entering the market - the typical “Bubble” scenario.  It quickly bypassed the price point at which the typical user could no longer afford to buy it.

Now, several years later, the market price for recreational land has declined by 50% or more in many areas.  The bubble has burst.

In the meantime, back on the farm, the value of many of those traditional farming crops has continued to escalate.  In turn, the price of the underlying land has escalated.  In fact, for many types of farmland, while recreation land was losing 50% of its value, farmland was doubling in price.  Is this the new bubble?

In the 1980s, farmland in the U.S. did become a bubble.  Remember, the U.S. was going to become the OPEC of food, dictating food prices to the rest of the world.  Credit to buy farmland became readily available, even for those with little farming experience.  Prices rose, drawing in more inexperienced farmland investors, until it became evident that farm income could not service all that debt.  The bubble burst.  Farmland prices plummeted.  Foreclosures escalated.  A lot of farmland changed hands, at much lower prices, and, about 1986, prices stablized at levels supported by farm income.

Are we entering another farmland bubble?  Those that argue against it point out that farm owners are much less leveraged now than in the 1980s, and farmland prices are following farm income up, not the other way around.  They also point out that emerging markets around the world are able to buy more and better food and that, this time, U.S. farmers will be exporting food to satisfy those markets.

It should be pointed out, however, that much of the increase in farm income is attributable to U.S. Governmental interference in the market, especially the corn/ethanol market, and that U.S. agriculture has become very dependent on U.S. Government financial support.

And the U.S. Government is bankrupt.

Bringing manufacturing back to the United States from other, lower labor cost countries may create U.S. jobs.  But, does it create more, or less, U.S. wealth?

When you drain capital from the private sector to support public sector jobs, are you creating more, or less, wealth?

When you allocate scarce resources to failing enterprises, are you creating more, or less, wealth?

In an economy in which economic success is based more on political connections than on service to the customer, will that economy produce more, or less, wealth than a customer-driven economy?

Or, am I mistaken?  Is the purpose of economic activity something other than wealth creation?  If so, what is it?

Until recently, taxes were viewed as the price paid for services provided by government.  Now, taxes are used to transfer wealth.  From whom?  From the productive.  From savers.  From investors.  From capitalists.

And who is the wealth transferred to?  To those who did not produce it.  To those who do not save.  To those who do not invest.  And what do they do with that transferred wealth?  They spend it.  They consume it.

Those who don’t understand capitalism think of wealth only as consumable.  They don’t think it matters who possesses that wealth, because they are just going to spend it anyway.  It’s just a matter of who benefits.

However, this policy of income redistribution is an attack on wealth creation.  Savings and investment are discouraged.  Self-indulgence; self-gratification is encouraged.  Those who act responsibly by postponing immediate gratification - those who save for the future and make those savings available for investment in technology, plant, equipment, etc. - those who make economic growth and prosperity possible - are now SUCKERS!

Those receiving wealth transfers will not save and invest.  They are not capable of it.  That is why they don’t have wealth.  They are irresponsible.  They are consumers.

This policy shifts societal values.  Beyond that, it increases our trade deficit, lowers government tax revenues and increases dependency on foreign investors.  It reduces our international competitive position, lowers our standard of living, and reduces government capacity to meet entitlement obligations, such as Social Security, Medicare and Medicaid.

This policy reduces the credibility of government promises, including the promise implicit in the U.S. dollar.

We face an uncertain economic future - a crisis that just won’t go away.  Excess consumerism got us here.  Only capitalism will get us out.

In 1960, I was pretty frugal.  I needed money to live on, but not much.  As I earned $50 each week, and spent less than $50 per week, I generated some “savings”.  Think of it this way: Every few weeks, rather than spend the $50 I made that week, I put it aside - I “saved” it.

What was it I was “saving”?

Each week I created value with my labor.  The direct value I created benefitted my employer, who received the output of my labor.  Why would I create value for my employer?  Because, in exchange, my employer gave me a derivative of my labor - an instrument that stored the value of my labor for future use - a promise to deliver back to me at some future date value equivalent to that I had provided for my employer when I had worked for him for one week.

What did that derivative; that instrument; that “promise” look like?  I am sure you have seen one.  It is a fifty dollar Federal Reserve Note.

Now, that fifty dollar Federal Reserve Note I would have received in 1960 would be no different than the fifty dollar Federal Reserve Note anyone else would have received in 1960.  They all looked the same.  They all had the same value.  Others were not storing that same labor that I had provided, but they were storing something of comparable value - perhaps their own labor.

It is now 2010 - fifty years after I saved my one-week’s labor from 1960.  Now, I am retired.  I would like to “spend” that one-week’s labor from 1960 that I saved.

I look around me in 2010 and realize how shrewd I was to have saved my one-week’s labor from 1960.  Since 1960 there have been impressive advances in technology and productivity.  The purchasing power of a week’s labor is now much greater than it was in 1960.  I expect to be able to purchase a lot with that fifty dollar Federal Reserve Note.

But when I take my fifty dollar Federal Reserve Note shopping, I am shocked!  Instead of being able to purchase much more in 2010 than I could in 1960, as I expected, I find I can now only purchase a small fraction of what I could have bought in 1960.  My purchasing power that I had carefully saved and put aside, is now almost gone!

What haappened to that derivative of my labor that I had stored in 1960, thinking it would retain value over time?  Who stole my labor?  What happened?

My labor was stolen, along with the labor of many others like me that thought they were storing value in U.S. dollars, dollars that became worth less and less over time.

The process whereby that labor was stolen was slow and gradual over a period of years.  But, nevertheless, the value stored in dollars was stolen from me as much as if someone had held a gun to my head.

Who took it?

Beginning 100 years ago, but accelerating in the 1960s, politicians learned they could get elected by promising to give voters things they did not earn.  Where did they get those “things” ?  They stole them from me, and other like me!

How did that work?  First, the Government creates a give-away program - welfare - agricultural subsidies - grants for research projects - scholarships - bridges to nowhere - you get the picture.  But, because the public would resist higher taxes to pay for all this, the Government must find other sources of funds.  That’s where that fifty dollar Federal Reserve Note comes in.

Working in colaboration with the Federal Reserve Bank, an entity created by the U.S. Government in 1913, additional Federal Reserve Notes are created, but without any stored labor to back them up.  In fact, these Federal Reserve Notes were created and distributed in exchange for NOTHING!

Now those new Federal Reserve Notes, that are storing nothing of value, look the same as the one I received in 1960 as a store of one-week’s labor.  As these new notes get intermingled with the old notes, no one can tell the difference.  There is no difference, except some were created to store real value, and others were counterfeit, not storing any new value, but capturing some of the value of those that had stored real value.

After fifty years of this counterfeiting, that real stored value has become so diluted by the printing of notes without stored value that they are all rapidly becoming worthless.

It woud be like having a store that sold milk.  At first, everyone buying milk from the store receives pure milk.  But the proprietor discovers he can add a little water to the milk, diluting it a little and creating a little more volume, so he can sell a little more - at the same price.  He continues to dilute his milk a little more each year.  No one notices.  Every day the milk looks and tastes like it did yesterday.  After a while the “milk” is 90% water.  Some may vaguely remember that milk used to taste better years ago, but that’s probably just nostalgia.  As long as it happens gradually, dilution works.

The U.S. Government is now rapidly “creating” trillions of dollars of more Federal Reserve Notes in response to a ‘financial crisis”.  The theft is accelerating.

If you think “inflation” is an increase in free-market prices, you are an idiot!

Yes, we need better education in this country.  No, the answer is not more standardization.  That does not mean we don’t need standards.  We need individual standards - not collective standards that apply to all.

The fundamental problem with education in this country is that it is government run.  Government bureaucrats make the wrong decisions for the wrong reasons.

That is not to say there is no solution.  But, just like “No Child Left Behind”, and other similar central-planning inspired programs, government standards do more harm than good.

There is no place in a free society for standardized children.  Let China produce litle robots.  Let’s provide educational opportunities without sacrificing our most cherished asset: Freedom.

Alternatively, let’s establish educational standards with an eye towards specific objectives, like preparing students for high-tech, industrial jobs - like those offered by IBM.  Those standards could be established by an independent, non-profit organization.  Tests to measure performance relative to those standards could be administered by the same organization.  Employers could be encouraged to support those standards in their hiring process.  Properly publicized, these standards could carry weight with colleges as well.

In a free society, we need competition.  If you don’t like the standards that exist, create your own.  If you are right, that existing standards are inadequate, and if you create superior standards, yours should enjoy acceptance in the marketplace.  By removing the selection of standards from the political process, you truly can make them relevant in the modern world.

But any standards, in a free society, must be voluntary.  Not everyone wants to work for IBM.  Not everyone should be prepared for a job at IBM.  However, if someone does want to work for IBM, give him the opportunity to measure his educational performance relative to the standards he will encounter at IBM.

If the schools won’t teach to these independent standards, but if students and parents are made aware of the potential importance of these standards, someone will fill the gap and start preparing those students that desire to meet the standards.  It’s a way of providing needed educational competition to government schools without asking their permission.

I have very strong opinions about these questions.  First, it is difficult to answer these questions without facts, and the “facts” being supplied by U.S. Government agencies are very suspect.  Take inflation.  For investment purposes, when we ask what the rate of inflation is, we really want to know the rate at which the value of the dollar is changing.  We aren’t asking how much prices of goods and services are changing.  That is a separate issue.  When the government reports changes in the consumer price index, a proxy for inflation, that tells you little about the true decrease in the value of the dollar.  And when we attempt to learn of the dollar’s change in value be looking at currency exchange rates, that is like measuring the level of a lake from the side of a boat.  All currencies are fiat currencies.  All currencies are depreciating in value.

The U.S. Government cannot continue to create new dollars - dollars that have not been earned, but only printed - without degrading the value of all dollars.  If you really believe inflation is now subdued, you just don’t get it.

The dollar is our currency.  We use it as a medium of exchange to acquire goods and services.  We use it to measure value, as everything is priced in dollars.  There is a third function of a currency: a store of value.  In today’s world, we need to use dollars for the first two functions, but not the third.

Dollars are steadily declining in value.  You need to keep some dollars to support transactions.  However, you do not need to keep dollars as a store of value.  Your “savings” must be in non-dollar denominated assets.  To preserve your purchasing power, and to avoid the inevitable collapse of the currency, you must store your savings in real, hard assets.

I would avoid bonds, bank CDs, money market funds, and anything dollar denominated.  You could, and probably will, receive the exact return contractually called for.  In dollars.  However, there is no assurance those dollars will have purchasing power anywhere near the purchasing power you gave up when you invested in these vehicles.

Precious metals and real estate are reliable stores of value.  Some will point out that these items fluctuate in value.  I think that is a misrepresentation of reality.  The dollar is fluctuating in value.  Precious metals and real estate are retaining value.

How about stocks?  They seemingly exist in a very liquid market, and you own a percentage of an underlying company that produces something of value.  However, there is so much evidence of market manipulation that I would be reluctant to own stocks in this environment.

Keep enough currency available to support anticipated transactions.  Keep some precious metals in the form of spendable coins, as you may need them to support transactions if the dollar and other fiat currencies become unacceptable in the marketplace.  Put your long term investments in real estate, but avoid leverage, and don’t rely on tenants that might not be able to pay their rents during a currency crisis.

I continue to believe the best long term investment you can hold in this environment is land.  Try to get land that generates income, such as farmland.  Make sure you can cover carrying costs.  After this next currency crisis, your land will still be there; still in demand.  Will your other investments still have value?

The U.S. Post Office is not a private company.  It was established by the U.S. Government and remains controlled by the U.S. Government.  Why is that an important distinction?  For the answer, let’s explore the budget problem the Post Office is facing and how they characterize it.

First, if I am a private company, I exist to serve the customer.  However, I must serve the customer in an efficient, cost-effective manner, so that the customer pays me enough for my services that I cover my costs and have money left over (profit).  If that is not the case, I go out of business.

If, as a private business, I am losing money, I must define my problem.  The service I am providing costs more than the customer is paying for.  I can increase my prices, cut my costs, or change the way I am delivering services.  Since this is now a competitive industry, raising prices is difficult.  That has been tried repeatedly in the past, and revenues go down; not up.

The Post Office solution of cutting services by one day will reduce costs somewhat, but will also reduce services to the customer, encouraging that customer to choose competitive services, such as Fed Ex, UPS, e-mail, etc.  It is likely to result in greater losses; not less.

If I were running the Post Office as a private company, I would perceive my challenge as providing maximum service at minimum cost.  The Post Office solution of cutting services by one day per week does little to address the cost issue.  The Post Office operates out of buildings in every little town across the nation.  In each of those little towns, it has a “Postmaster” - someone paid an executive salary to spend half his time socializing with all of his small-town neighbors who stop in to the post office each day to chat.

No, I would not reduce services if I were running the Post Office as a private company.  I would find a way to deliver services more efficiently.  Unfortunately, small-town post offices deliver friendly service with an emphasis on “friendly.”  Clearly, facility costs and labor costs are out of line with revenues and need to be reduced.  But, in a government-controlled entity, the political costs associated with cost reductions are too great to pay, so the Post Office reduces services to the customer, keeps its overhead costs high, and continues to lose money.

Now, I know what you’re thinking.  If the government runs the Post Office that way, won’t it also run health care that way once it completes its takeover?

You are a clever one.

Some are appalled by this ruling, believing this opens the door to political domination by large corporations.  They advocate restrictions on corporations during elections so that they do not gain undue influence.

Are their concerns legitimate?  I believe they are.  However, I don’t believe the answer is to place restrictions on corporate activity.  I believe the answer is to place restrictions on government.

The problem is that government has become involved in all aspects of our lives.  It picks winners and losers in the economy.  It attempts to overrule free markets.  It dictates politically correct behavior.

If government were restricted to those functions legitimately granted it by the Constitution, why would any entity have an incentive to unduly influence what government does?

If government focused on protecting our freedom, rather than restricting it, influencing government would be a non-issue.

It’s easy to solve problems if we first properly define them.

I see the Massachusetts vote as a lack of confidence in government.  I see the vote as a rejection of policies that don’t make sense to the American public.  I see the vote as a rejection of the attitudes of those in positions of power.  I see the vote as a recognition that government is out of control and serving the interests of those with political power at the expense of the country as a whole.

I see the following objectionable behavior:

1)  Massive government spending, most of it on things that have nothing to do with helping the economy, but only serve entrenched special interests.

2)  Exponential growth of government debt.  This debt cannot be serviced and will not be serviced.  This will not indebt our children and grandchildren.  It will bankrupt this generation.

3)  Excessive intervention in the economy, creating uncertainty and stagnation, as economic participants no longer know the rules or believe we are a nation of laws.

4)  Manipulation of markets.  During the last 3/4 of 2009, the stock market increased by 60% while $23 billion was being withdrawn from that market, something hard to imagine in a free market.  Treasury auctions appear to be fully subscribed, while the government, itself, is buying almost half of the new issues behind the scenes.  Precious metals markets are kept artificially low through short-selling by entities that have no product to cover their shorts.  USDA reports bumper grain crops in contradiction of private economists’ estimates and in contradiction of common sense, endangering future food shortages by giving false signals to “free” markets.

5)  Obvious lies.  Government health care to be provided free to millions of Americans won’t cost the government, or taxpayers, anything.  Fanatic Islamic terrorists, including those governing Iran, can be reasoned with if we just treat them nice.  Government can keep on printing money and everyone around the world will accept it in exchange for real goods and services.  The U.S. can act as the world’s policeman, maintaining military bases around the globe, while building new nations in the Middle East.  Government can provide for your health, your education, your retirement, your safety, your entertainment, and your standard of living, while not impacting your freedom in any way.

The people of the United States need to decide what is important and what government is for.  The people of the United States need to accept responsibility for how we got to where we are and what elected officials are doing on their behalf.

As they say in the tea parties, we need to take this country back.  And that means we need to step up, take personal responsibility and take authority to run our lives back from Washington.  In a democracy, we are ultimately responsible.  It does no good to rail at elected officials for overstepping their bounds.  We let them get away with it.  Don’t vote for liers or those making obviously false promises.

It doesn’t matter what party is in power in Washington.  What does matter is what they do with that power.  This is not a Democrat vs. Republican thing.  This is a survival thing.  We need leaders who respect and serve those who elected them.  We need to return to the constitutional principles of limited government. Without confidence in government, we face chaos.

Translation: You can’t expect the Fed to prioritize price stability as long as you also make the nation’s central bank responsible for full employment, a goal that will always have political priority over price stability.  Full employment will always be at the forefront of media and congressional attention.  Price stability always functions with a time lag of at least several months, so given a trade-off, let’s flood the banking system with dollars now in hopes of cranking up the economy.  We will deal with resulting inflation when the time comes.

This is not only hazardous to the long-term health of the U.S. currency, it makes no economic sense to make a central bank responsible for employment.  Employment is the responsibility of employers.  Central bankers are supposed to be responsible for money.

Mr. Bernanke repeatedly makes reference to these dual and conflicting responsibilities conferred on the Fed by the Congress, yet no one seems to take the bait and pick up on it.  What he is really saying is that if you really expect the Fed to maintain price stability, then give it the necessary mandate.  The mandate they have will inevitably result in runaway inflation.

It has, and it will.