The cost of living in America

[BillP]

One of us doesn’t get it, I’ll grant you that. Nobody disputes that a ton of money changes hands as a result of the ‘service economy.’ But you haven’t remotely convinced me that passing the same dollar back and forth at an ever more frantic rate is true economic growth. That’s all that services are. They generally don’t create wealth, they pass existing wealth back and forth. Meanwhile, we’ve moved all the GENERATION of wealth we used to do in the economy to China and thereabouts.

I don’t think you read my post very well either. There is nothing to stop people in my example from taking out loans that are secured against the value of their assets. They went from a total market cap of 30 shells to 42 in one year. I’d take that growth rate, thanks.

But you’ve still got a money supply of only 30 shells. So by your own example, you’ve got deflation, e.g. what one unit of production cost one shell, now you’ve got 42 units of production but only 30 shells, so either prices have to come down so that a unit of production costs .71 shells (every shell buys 1.4 units of production). Sounds like a good deal until you think about the guy who borrows 6 shells to make a new hut which because of the economic growth not being matched by money supply growth only generates 4.2 shells income.

This is really, really basic economics. If you don’t know it, you have no business lecturing people on economics.

But I’m familiar with the contempt that sophisticated people like you have for my view. They used to mock me for buying too little of a house too.

Even a blind hog finds an acorn once in a while,

 

[BillP]

One of us doesn’t get it, I’ll grant you that. Nobody disputes that a ton of money changes hands as a result of the ‘service economy.’ But you haven’t remotely convinced me that passing the same dollar back and forth at an ever more frantic rate is true economic growth. That’s all that services are. They generally don’t create wealth, they pass existing wealth back and forth. Meanwhile, we’ve moved all the GENERATION of wealth we used to do in the economy to China and thereabouts.

I don’t think you read my post very well either. There is nothing to stop people in my example from taking out loans that are secured against the value of their assets. They went from a total market cap of 30 shells to 42 in one year. I’d take that growth rate, thanks.

But you’ve still got a money supply of only 30 shells. So by your own example, you’ve got deflation, e.g. what one unit of production cost one shell, now you’ve got 42 units of production but only 30 shells, so either prices have to come down so that a unit of production costs .71 shells (every shell buys 1.4 units of production), or the production doesn’t get used, fish or crops rot in the garden, huts go unoccupied, etc. Deflation sounds like a good deal until you think about the guy who borrows 6 shells to make a new hut which because of the economic growth not being matched by money supply growth only generates 4.2 shells income. How does he pay the loan back?

This is really, really basic economics. If you don’t know it, you have no business lecturing people on economics.

But I’m familiar with the contempt that sophisticated people like you have for my view. They used to mock me for buying too little of a house too.

Even a blind hog finds an acorn once in a while,

 

[ACCT]

I am afraid that you don’t have the slightest clue about what you are attempting to explain.

There is no such thing as a “non-productive service”. Doesn’t happen. Those “tanning salons” that you are so dismissive of hire accountants to manage their books, pay rent to retail space developers, provide employment to the workers who design, manufacture, install and service their equipment. The taxes that they pay allow cities and towns to hire policemen and firefighters, the money that they spend on their water and sewer bills provides the cashflow the municipalities use to float bond issues to create and improve water and sewer facilties. The property taxes they pay (either directly or indirectly through their rent payments) provides the budget to run the schools. And this says nothing of the wages paid directly to their employees. This economic benefit filters down to the lower class folks who draw the beers, steam the hotdogs and clean up aftre the crowd goes home.

Similarly, every time Kobe Bryant suits up literally thousands of people go to work who wouldn’t ordinarily do so, from the highly paid Sports Agents, Coaches to the middle class Sales and Marketing folks who promote the Lakers and the Police officers who provide security at the games. The opposing team hires hotel rooms, taxis, buses airplanes (and indirectly pilots, mechanics etc) etc. The combined economic activity of a season of Laker’s games provides the cashflow to build and maintain a magnificent arena which annually draws tens of thousands of fans who each pay handsomely for the privilege of watching these young men play a child’s game.

You don’t know what you’re talking about.

You analysis of money is facile. If an economy creates assets (especially income producing assets!) without expanding the money supply it will soon find itself creating disastrous deflation as a fixed pile of money is used to try to purchase an ever increasing choice of products. Which means that no one will ever be to borrow for capital improvements. If they do borrow for such capital improvements, then the continual increase in value of the debt (the difficulty of obtaining the money needed to service it) will act as a “phantom interest” which will drive the cost of borrowing way over any potential profits.

I like manualman’s definition better. All wealth comes from the ground.

Fiat money is not a resource. Fiat money is just a claim on wealth. Land, labor and capital are resources, not money. “Nonproductive” services, for lack of a better term, do not produce wealth. For example, neither the IRS or the tax preparer produce any wealth. Both provide nonproductive services. Both are parasites who feed off of those who produce real wealth. Additionally, I am only interested in assets that I can touch and feel real wealth!

 

[ACCT]

But you’ve still got a money supply of only 30 shells. So by your own example, you’ve got deflation, e.g. what one unit of production cost one shell, now you’ve got 42 units of production but only 30 shells, so either prices have to come down so that a unit of production costs .71 shells (every shell buys 1.4 units of production), or the production doesn’t get used, fish or crops rot in the garden, huts go unoccupied, etc. Deflation sounds like a good deal until you think about the guy who borrows 6 shells to make a new hut which because of the economic growth not being matched by money supply growth only generates 4.2 shells income. How does he pay the loan back?

This is really, really basic economics. If you don’t know it, you have no business lecturing people on economics.

Even a blind hog finds an acorn once in a while,

**
Fun! ** Do you remember how to calculate the comparative advantage as a basis for trade?

Comparative Advantage

TABLE 1 – Costs of Production
Per Computer Diamond Ring
United States $1,000 $2,000
Germany DM2,500 DM10,000

TABLE 2 – Opportunity Costs
Product Per Computer Diamond Ring
United States 1/2 2
Germany 1/4 4

Germany has a comparative advantage in computers. It only costs Germany ¼ of a diamond ring to produce 1 computer. (It costs the United States ½ of a diamond ring to produce a computer.)

The United States has a comparative advantage in diamond rings. It costs the United States 2 computers to produce a diamond ring. (It costs Germany 4 computers to produce a diamond ring.)

 

[BillP]

I like manualman’s definition better. All wealth comes from the ground.

Fiat money is not a resource. Fiat money is just a claim on wealth. Land, labor and capital are resources, not money. “Nonproductive” services, for lack of a better term, do not produce wealth. For example, neither the IRS or the tax preparer produce any wealth. Both provide nonproductive services. Both are parasites who feed off of those who produce real wealth. Additionally, I am only interested in assets that I can touch and feel real wealth!

No one is arguing that money is a resource, it is simply a way of allocating resources. As such the amount of money in an economy must exist in rough proportion to the level of resources in that economy. A fixed money supply with an expanding resource base (a deflationary spiral) is just as bad (actually worse!) than an expanding money supply with a fixed resource base (an inflationary spiral).

ALL money is “fiat” money. Gold only has value because we collectively agree that it has value, just like MM’s shells.

If you don’t see value in non-tangible assets then I don’t want you ANYWHERE NEAR my investments, for it is only non-tangible assets that add value to tangible assets, which would otherwise be mere commodities. If you give me a certain quantities of apples, flour, butter and sugar you’ve got the commodity value of those items, unless I destroy their value by inattentive cooking.

BUT if you give the EXACT same materials to Escoffier, then you get a sublime apple tartin but only because of his possession of an asset (his culinary education and the intellectual property of his recipe) that you can’t touch and feel.

Don’t be absurd.

 

[ACCT]

No one is arguing that money is a resource, it is simply a way of allocating resources. As such the amount of money in an economy must exist in rough proportion to the level of resources in that economy. A fixed money supply with an expanding resource base (a deflationary spiral) is just as bad (actually worse!) than an expanding money supply with a fixed resource base (an inflationary spiral).

ALL money is “fiat” money. Gold only has value because we collectively agree that it has value, just like MM’s shells.

If you don’t see value in non-tangible assets then I don’t want you ANYWHERE NEAR my investments, for it is only non-tangible assets that add value to tangible assets, which would otherwise be mere commodities. If you give me a certain quantities of apples, flour, butter and sugar you’ve got the commodity value of those items, unless I destroy their value by inattentive cooking.

Don’t be absurd.

I have some disagreemeents here. I turn your thinking upside down. If gold is not money, then what is money? CPAs (AICPA) use the dollar as the monetary unit, but because of inflation, what good is the dollar? It is a measuring stick that keeps changing. Con (Concepts) 5 mentions ounces of gold and purchasing power! “Also, preparation and use of financial statements is simpler with nominal units than with other units of measure, such as…units of a commodity (for example, ounces of gold). However, as rates of change in general purchasing power increase, financial statements expressed in nominal units of money become progressively less useful and less comparable.” CON 5 says it succinctly!

Land, labor and capital are resources to create real wealth. I do not think that we have any disagreement there. Where our thinking diverges is that you believe that non-tangible assets represent wealth. Everyone else thinks so too. That is conventional thinking. Personally, I am not interested in any long-term investment that is denominated in dollars. In the long-term, the dollar is toast. ** I would rather invest in a tomato seed that produces a hundred fold. **Now that is wealth creation and a great investment!

 

[ACCT]

ALL money is “fiat” money. Gold only has value because we collectively agree that it has value, just like MM’s shells.
Don’t be absurd.

Pooh-Pooh Accounting

I look at gold as real international money and all government (fiat) money as a poor speculation. The beauty of gold is that it pays no interest or dividends. Gold does not represent debt!

A Federal Reserve Note (U.S. dollar) is an IOU nothing. If you were to turn in a Federal Reserve Note, you would get another Federal Reserve Note. What we have is a cookie jar (the structure of the monetary system) with no gold in the cookie jar! Demand determines the price of our money. If demand were to evaporate, so would our money. FINI

My favorite accounting assumption is the monetary unit assumption. Is our monetary unit, the dollar, reliable?

All accounting information is disclosed in dollars. However, a dollar is not a valid measuring tool because a dollar is changing in size. We do not have that problem with inches, pounds or gold. Even a little inflation adds up. In 1946 the average income was $2,500, a new car costs $1,125 and a new house cost $5,600. What happens to the monetary unit when inflation is 180% or 800%? Some accountants came up with the idea of a unit of purchasing power. However, the idea was quickly abandoned when the media called it “pooh-pooh” accounting.

How does one compare a financial statement from the 1950’s with a financial statement today? I asked myself that question one day. I was looking over some financial data from my father’s company. The reports were from the early 1950’s. Did the family company do better in 2000 than in 1950? The numbers were bigger in 2000 than 1950. What does that mean? The monetary unit for both financial statements was U.S. dollars. However, I felt like I was comparing New Zealand dollars with United States dollars. I was comparing apples and oranges. How sad.

Inflation hit double digits in the 1970’s. Accountants went into a tizzy. History may repeat itself. Accountants may again try to define a unit of purchasing power someday. Of course, the ideal unit of purchasing power already exists. It is gold. Gold has that psychological quality of confidence. Gold is a store of value. A grain of gold in Egypt in 1000 B.C. is the same grain of gold today. Gold is the ideal monetary unit. It is reliable. An ounce of gold is an ounce of gold. Contracts have been written in ounces of gold. Even the SEC recognizes this point.

Con 5 (Financial Accounting Standards Board Concepts) mentions ounces of gold and purchasing power. “…Also, preparation and use of financial statements is simpler with nominal units than with other units of measure, such as…units of a commodity (for example, ounces of gold). However, as rates of change in general purchasing power increase, financial statements expressed in nominal units of money become progressively less useful and less comparable.” CON 5 says it succinctly!

 

[ACCT]

A fixed money supply with an expanding resource base (a deflationary spiral) is just as bad (actually worse!) than an expanding money supply with a fixed resource base (an inflationary spiral).

ALL money is “fiat” money. Gold only has value because we collectively agree that it has value, just like MM’s shells.

If you don’t see value in non-tangible assets then I don’t want you ANYWHERE NEAR my investments, for it is only non-tangible assets that add value to tangible assets, Don’t be absurd.

I think that your ideas about money is upside down. All gold is money. However, gold is not as medium of exchange because it is illegal to put gold into a contract. ALL paper and digital money is “fiat” money. Fiat money only has value because we collectively agree that it has value, just like MM’s shells. The dollar is not attached to anything of value. Since the dollar has no intrinsic value, it is only demand that gives the dollar value. Once people stop accepting the dollar as money, the game is over and you are broke. (Think of a monopoly game.)

Money War

*This is a great war pitting government bureaucrats against millions of investors … and causing massive collateral damage to innocent Americans.

Battle by battle, this great war has been escalated — each time with bigger guns deployed by Washington, each time with deadlier attacks striking Wall Street or Main Street.

Wage earners and investors who hide their heads in the sand while their own government devalues their money will suffer enormous financial pain. Retirees and anyone approaching retirement who plan to live on fixed incomes could be wiped out.

The only choice you have is whether you’ll ignore this reality — bury your head in the sand and risk massive losses as your buying power plunges and your cost of living soars. Or whether you’ll take a stand to defend your savings, investments and retirement.

Bottom line:

First, the massive supply of government bonds on the way will drive their prices down and long-term interest rates up. Short of a miracle, we see little hope to avoid this outcome.

Second, as the federal deficit continues to grow out of control, the Great Credit Crunch is going to get even worse.

Third, don’t jump to the conclusion that the credit crunch will immediately topple the U.S. economy or stock market. With all the money that Washington has pumped in, a weak recovery can continue and stocks could still enjoy an extension of their rally.

But it cannot last. In the long term, corporate profits cannot be sustained without credit. If credit remains scarce, forget about a long, multi-year recovery … and brace yourself for a violent double-dip recession beginning later this year.

Recommendations:

The ONLY way to protect yourself is to take action: To hedge against this great dollar disaster with investments that effectively replace what’s being confiscated from you.

For starters, I recommend that every investor hold between 10% to 25% of total capital in gold bullion.

**Avoid all long-term bonds, whether issued by federal governments, private corporations, or municipalities. **

Approach all stock investments with great CAUTION — tight stop losses, plenty of cash, and solid hedges.* - Larry Edelson

Good luck and God bless!

 

[manualman]

Bill and I obviously disagree on what constitutes actual economic growth and what is phony posturing by people who skim money for a living. I’m firmly convinced that our economic woes are largely due to the drastic mismarch we have between productive economic activity and parasitic economic activity. Bill’s free to put his money in fancy derivatives if he likes, but unless he’s a Wall Street insider, I doubt he’ll do better than I have. I allocate my investments in companies whose business model I understand and which take cheap things, add skill and labor and turn them into expensive things. That’s how growth actually occurs.

But I must disagree with ACCT’s assertion that gold is “real” money. Yellow metal is just as arbitrary as green paper. It’s just harder to mass produce. I suspect gold value is a rather big bubble right now and I wouldn’t touch it with a ten foot pole. Wanna invest? Find a competent farmer willing to grow on leased land and buy farmland near a healthy urban area. That stuff is dirt cheap right now, it’s productive and nobody’s making any more of it.

 

[Ridgerunner]

I suspect gold value is a rather big bubble right now and I wouldn’t touch it with a ten foot pole. Wanna invest? Find a competent farmer willing to grow on leased land and buy farmland near a healthy urban area. That stuff is dirt cheap right now, it’s productive and nobody’s making any more of it.

Like you, I am not all that sanguine about gold (or silver) as an investment. If the Fed pursues a disinflationary policy (which it has virtually promised in 2014) gold will plummet, just as it has in the past under such policies. Gold’s value is based on assumptions, not on anything inherent.

I am not so sure about land. It might be very cheap somewhere, but it certainly is not cheap here by any historical standard, for use as farmland. I strongly suspect that if the ethanol program is abandoned (as it ought to be) farmland will become less valuable than it now is. One exception: Since 40% of our soybean crop now goes to China, and is growing, soybean-capable land might well be an exception. Interestingly, though, if the ethanol program is abandoned, the live cattle market could be adversely affected because most of the feed now given to feeders consists in distiller’s grain. Furthermore, if the Fed does allow interest rates to float upward in 2014, land payments will increase, thus devaluing land.

 

[manualman]

Good point on the artificial ethanol effects. That’s probably why so many of our Illinois farmers suddenly have shiny new combines and pickup trucks! You may have missed the near a healthy urban area portion of my advice. You won’t make a bunch of money on leasing farmland to farmers, but in a few years we’ll likely have decent economic growth and a housing market again. If you can buy now (often from a bank that repo’d it from a bankrupt developer) and break even on the farmland, you’ll make your money in development later on. Even moreso if you can buy farmland with mineable sand and gravel underneath…

This all assumes that we quit hemmoraging truly productive economic activities to overseas locations. Ironically, high petroleum prices and low US natural gas prices are starting to do that. All the better time to buy carefully selected land.

 

[Ridgerunner]

Good point on the artificial ethanol effects. That’s probably why so many of our Illinois farmers suddenly have shiny new combines and pickup trucks! You may have missed the near a healthy urban area portion of my advice. You won’t make a bunch of money on leasing farmland to farmers, but in a few years we’ll likely have decent economic growth and a housing market again. If you can buy now (often from a bank that repo’d it from a bankrupt developer) and break even on the farmland, you’ll make your money in development later on. Even moreso if you can buy farmland with mineable sand and gravel underneath…

This all assumes that we quit hemmoraging truly productive economic activities to overseas locations. Ironically, high petroleum prices and low US natural gas prices are starting to do that. All the better time to buy carefully selected land.

Not long ago, a banker approached me to purchase some foreclosed bare city lots and some duplexes. The discounts on both were impressive, but as between the two, I think bare city lots are a better deal if they are in a decent neighborhood, and many are.

I don’t think rentals have hit bottom, though. Nor do I think housing, generally, has hit bottom except in a fairly narrow price range.

 

[Ridgerunner]

Even moreso if you can buy farmland with mineable sand and gravel underneath…

I just have to respond to this. In my part of the country, there is a tremendous amount of gravel. This is hilly country with a lot of streams, so there is a lot of well-tumbled chert gravel…smooth and much harder than quarry limestone gravel. If you go to a nursery to buy some of it for your landscaping, the price will knock your lights out.

The downside is that largely because of road building, the amount of gravel is so voluminous that it blocks streams and causes water to cut into banks, etc.

But you can’t dig it up and sell it or even give it away without obtaining a mining license, which is expensive and laden with regulatory pain. Keep in mind that this gravel is right on the surface. You don’t dig to get to it. You dig it, itself. And, since it’s in and alongside streams, you have to also get a permit from the U.S. Army Corps of Engineers.

Now, keep in mind that if you dig it out and use it on your own land, that’s okay. You could pave your entire property with it and they don’t care. But you can’t remove it from your property entirely. So, tumbled chert gravel is hideously expensive and all the farmers would like to clean it out of streams, but nobody can actually make any money with it except the few who have the mining licenses and mess around with the state and the Corps. Road-building contractors would love to have it, but they don’t want to go into the “mining” business either. But if it could be used freely, it would be a lot cheaper than quarry gravel, and take far less energy to get.

Now, it’s okay to remove gravel from the stream bed or the bank for your own use or non-use. But once it’s removed, it can’t be put back. You can shove it around, and that’s okay, as long as you don’t leave the stream bed with it, even momentarily, and return with it. You can’t pile it and put it back or use it to re-create a bank with it from an errant deposit left by a flood if the bank you’re re-creating touches the water without a permit from the Corps. But if you’re bolstering a bank away from the water, that’s okay.

Now, it has to be admitted that the Corps people aren’t such bad folks. They’re just a long way away and it takes a long time to get one of them to approve what you want to do. But there is also the potential problem that one of them might see some unsuspected thing that triggers some regulatory action; some snail darter or something. If that happens, you’re in a world of hurt.

So, nobody does it. The gravel gets changed around by floods annually (floods don’t need permits). Chert gravel is horribly expensive. Much softer limestone is used for roadbuilding. It gets so voluminous that it threatens fish, and causes erosion, and nobody does a thing.

 

[manualman]

I’m a civil engineer. Navigating Corps permits, floodplain regulations and endangered species reviews is just part of life. Those guys are comparatively easy! It’s when local agencies pass additional restrictions above and beyond the minimum federal and state regs that life gets ugly. The feds are slow though, I’ll give you that.

 

[Ridgerunner]

I’m a civil engineer. Navigating Corps permits, floodplain regulations and endangered species reviews is just part of life. Those guys are comparatively easy! It’s when local agencies pass additional restrictions above and beyond the minimum federal and state regs that life gets ugly. The feds are slow though, I’ll give you that.

I don’t disagree with you, fundamentally. But it’s one thing for a company engineer to get a plan made in compliance, and quite another for an individual landowner to do it. And yes, overlapping jurisdictions compound the difficulties, and around here, they aren’t local. There are no local regulations. But the state is very exacting and difficult.

 

[ACCT]

But I must disagree with ACCT’s assertion that gold is “real” money. Yellow metal is just as arbitrary as green paper. It’s just harder to mass produce. I suspect gold value is a rather big bubble right now and I wouldn’t touch it with a ten foot pole. Wanna invest? Find a competent farmer willing to grow on leased land and buy farmland near a healthy urban area. That stuff is dirt cheap right now, it’s productive and nobody’s making any more of it.

Man made the dollar, which is not attached to anything of value. God made gold and silver, which has been money for over 5,000 years. Think of this analogy: Fiat currency are the oceans of the world. The amount of gold is the size of an Olympic pool and the amount of silver may only be the size of a kiddie pool.

I’m going to say it again — if you’re not in the gold market, you’re making a huge mistake.

Reason: Gold is the ultimate asset. It is the purest form of money, and the oldest, most durable wealth-preserving asset on the planet.

Governments can’t debase it. It has no debts … no board of directors … no politicians or central bankers that can mess with its value. That’s why gold has survived every economy history has ever witnessed, and preserved investors’ purchasing power over a span of some 5,000 years.