Investing in Vacant Land

Veteran’s Day

By John | November 11, 2010

Our military personnel risk their lives in defense of freedom. Our voters exchange that freedom for government “benefits”.

We are at war, but not with a foreign power.

Topics: Commentary | No Comments »

On October 20, 2008, I wrote a post entitled, “Bubbles”. As I explain there, bubbles are an inevitable result of the type of monetary policy pursued by the U.S. Federal Reserve – artificially low interest rates coupled with inflation, giving investors incentives to speculate in the economy, rather than invest their money in productive enterprise.

Examples of the stock market bubble of the 1990s and the real estate bubble of the 2000s were given, in addition to emerging bubbles in commodities that were noted at that time.

So, what is the next bubble? Commodity prices continue to escalate, especially gold and silver recently. As I have previously advocated, gold and silver are seen as an essential ingredient in an investment portfolio in this economic environment, and more and more people are taking heed and buying precious metals. I see this as prudent investing; not just speculation. I don’t see it as a bubble – at least not yet.

So, what is the next bubble? What is it that speculators are flocking to that will cause a rapid escalation of price that is unsustainable – that must ultimately collapse? I contend that is bonds; debt; the promises of businesses and governments to pay interest and return the investor’s capital at some future date.

I know that seems counter-intuitive. U.S. Treasuries, for example, are considered the most conservative of investments. That is where one invests when one is concerned about the economy and its future. That is the destination of flights to safety. And that is where the problem lies.

The greater fool theory of the 1990s stock market and the 2000s real estate market can also apply to bonds. They have been bid up to the point where there is very little return (Remember those low cap rates on California real estate?). The effective yield on all bonds is now low. But that is considered OK. After all, isn’t inflation almost non-existent? Isn’t the problem of the Federal Reserve one of disinflation, or even deflation, not inflation? Haven’t bond prices been increasing, while bond yields have been decreasing?

If I bought a bond in the past, even though it may not be yielding much interest, I can sell it for more than I paid for it. I receive a very nice return at low risk!

At least, so far.

At some point, with all of the currency printing, with all of the government spending, with the effective insolvency of governments at all levels, both in the U.S and elsewhere, interest rates must start to escalate. The perception of risk must increase, possibly initiated by an unexpected event in the credit markets. Bond prices must start down. And once that process starts, what is going to stop it?

No one worries about the size of the crowd in the theatre with limited exits until the fire starts. Then, you might be trampled.

Government promises that can’t be kept are the only backing for much of the debt in the U.S. and the world. Now, we don’t worry about default. Later, it might be too late to get out.

Topics: Commentary | 2 Comments »

Why the U.S. Government is Afraid of Free Markets

By John | September 12, 2010

Why the U.S. Government is Afraid of Free Markets

And Why You Should be Afraid of the U.S. Government

By John L. Pehrson

OK. Let’s stop trying to analyze how we got into this financial crisis. Let’s take stock of where we are and where we are headed. After all, you can’t plan for the past, but you might try to prepare yourself for the future.

The key to our current and future circumstances is an understanding of U.S. Government debt – how it impacts U.S. Government policy; how it impacts the U.S. financial sector; how it impacts the U.S. economy.

The U.S. Government is currently auctioning about $120 billion per week in U.S. debt instruments – bills, notes and bonds. These auctions are considered very successful, in that they are over-subscribed. In other words, there are plenty of investors out there willing to loan money to the U.S. Government. So, not to worry.

The U.S. dollar is in the unique position of being an international currency. It is used to transact business between companies and governments worldwide. It is acceptable as bank reserves for both private banks and central banks worldwide. It is considered as good as gold by the international banking community. So, not to worry.

And, to you inflation hawks, notice that the recession has caused demand for business and personal credit to decline, resulting in tepid growth in the money supply.

In fact, despite enormous federal deficits, Government interest expense has actually been going down, as demand for U.S. Treasury debt causes interest rates to decline. Not to worry.

Even Warren Buffett has stated that we need not be concerned about a financial crisis in this country, like Greece is experiencing, because our government can just print money. Not to worry.

So, if you’re convinced that you have nothing to worry about, you need not read any further. No need to plan for something that is not going to happen.

For the less gullible, let’s examine some facts.

$120,000,000,000 a week in new Treasury securities. That’s a lot of money. Of course, most of that is just rolling over old debt into new debt. As interest rates have been coming down, the new debt is typically at lower interest rates than the old debt – that is why U.S. Government interest costs have been declining.

But, as the U.S. Government has budget deficits in excess of $1 trillion as far as the eye can see, the amount of the weekly auctions must be increasing accordingly. And let’s not forget, the “official” U.S. debt is now about $13 trillion, but when unfunded liabilities are factored in, it is several times that amount.

Also, to take advantage of lower interest rates on debt of shorter maturities, the average maturity of outstanding U.S. debt instruments has been declining. That means it must be rolled over more often. That means the amount of the weekly auctions must be increasing accordingly.

We also know that U.S. interest rates are about as low as they can go. If they go up, that increases the interest component of the U.S. budget, causing the budget deficit to increase, causing the amount of the weekly auctions to increase accordingly.

We also know the U.S. has huge trade deficits. As a nation, we consume more than we produce. We import oil, manufactured goods, etc. and export dollars to foreign countries. Those foreign countries take those dollars and buy U.S. Treasury securities, in effect, loaning that money back to the U.S. Government. That has created a huge demand for those newly issued U.S. Treasury securities. At least it has in the past. Close to one-half of Treasury sales have been to foreigners. However, it may not be so in the future.

The whole world is in recession. China is the largest holder of U.S. debt. China is playing all kinds of games to keep its economy afloat, as only a centrally planned, command and control economy can. But they recognize that the U.S. cannot keep up its buying spree on credit indefinitely, so they need to rely less on exports and more on domestic consumption. So, they are purchasing less U.S. Treasury securities. They are diversifying into commodities, domestic infrastructure and are buying foreign commodity producers.

Japan is the second largest holder of U.S. debt. Japan is a basket case. Their debt, as a percentage of GDP, is much greater than that of the U.S., as they have been “stimulating” their economy with government debt for twenty years. 90% of their debt is domestically held, unlike the U.S. But, their population is aging. Japan can no longer purchase U.S. debt. It must be cashed in to support Japanese retirees.

Debt, worldwide, is a problem. Everyone must now pay down debt. There are no longer surpluses to be loaned to the U.S. Government.

In fact, the problem may be worse than most people realize. The U.S. Treasury reports the buyers of its debt by category. One of those categories is, “Other Investors”. That appears to have been a catch-all category – a place to put miscellaneous purchases that don’t fit in other categories. In fact, the “Other Investors” category has only contained a trivial portion of the overall debt purchases. That is, until 2009, when it ballooned to well in excess of $500 billion, or about 1/3 of total purchases.

Who are these mystery buyers? Could they be stand-ins for the Federal Reserve or for the U.S. Treasury itself? Could there be behind-the-scenes arrangements with other central banks? (You buy mine – I’ll buy yours?) Maybe those Treasury auctions haven’t been going so smoothly after all.

Up until a year or two ago, banks that deposited their reserves with the Federal Reserve Bank received no interest on those deposits. Now, the Federal Reserve pays interest on deposits. Money that was formerly available to loan to the private sector is now being sucked up by the Federal Reserve – money that is now available to purchase U.S. Government debt.

Federal bank regulators discourage private lending through stringent oversight policies. Ask a private banker how his regulators react to bank lending policies now compared to a few years ago. Politicians verbally promote bank lending. Regulators discourage it. That money is not available for the private sector. Your government needs the money and is crowding out the private sector.

In fact, what would happen if credit became readily available again? Economic activity would expand. Business would expand. Demand for credit would expand. Interest rates would start to rise. The cost of U.S. Government debt would start to rise. Oooops! We can’t allow that to happen. That could lead to a collapse of the U.S. Treasury market, with a soaring cost of capital for the U.S. Government. No one would want to loan any more money to the U.S. Government, even though interest rates are rising, because the dollar is collapsing. Those foreign providers of our oil and manufactured goods will no longer accept those worthless dollars.

No, we can’t allow free markets to function. Too dangerous. Let’s keep manipulating markets to hide the true supply/demand relationship of Treasury debt. Just for a while. Just until the economy recovers.

But, wait. How can the economy recover? The U.S. Government can’t afford to let it recover. The Government needs the resources. Those resources can’t be released to the private sector.

Oh, well. Maybe someone will think of something someday.

Topics: Commentary | 12 Comments »

The Changing Landscape for Vacant Land Investors

By John | August 22, 2010

The vacant land investing landscape is changing.

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.

Topics: Rural Land Investment | 4 Comments »

The Purpose of Economic Activity

By John | August 22, 2010

The purpose of economic activity is to create wealth. It is not to create “jobs”. It is not to redistribute wealth. It is not to pad statistics, such as GDP. It is not to create winners and losers. It is to create only winners.

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?

Topics: Commentary | No Comments »

Capitalism vs. Consumerism

By John | June 14, 2010

“Income redistribution” or “spreading the wealth” has enormous consequences beyond the simple transfer of wealth from one segment of society to another. Those who advocate such government policies attack the traditional values of Americans. But they also damage the basic system by which wealth is created.

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.

Topics: Commentary | No Comments »

Are you an Idiot?

By John | June 5, 2010

In 1960, I would work all week for $50 – about 50 hours. Back then, before the US Gestapo became so powerful and intrusive, I could work for cash, with no taxes withheld or paid. I worked 50 hours, earned $50, and received $50.

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!

Topics: Commentary | No Comments »

Educational Standards

By John | April 9, 2010

The plea of some industry leaders in the U.S. for common educational standards smacks of more central planning and attempts to turn children into products of assembly line processes.

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.

Topics: Commentary | 2 Comments »

What Should I do with My Money?

By John | March 14, 2010

What should I do with my money? Interest rates are low. Inflation is low. Should I be investing in stocks? How about bonds? Money market funds? Bank CDs? Real estate? Precious metals?

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?

Topics: Commentary, Rural Land Investment | 1 Comment »

U.S. Post Office

By John | March 8, 2010

The U.S. Post Office recently announced it was considering eliminating Saturday service. Why? Budget problems. It is losing money.

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.

Topics: Commentary | No Comments »

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