"The most valuable truths are the ones most people don't believe. They're like undervalued stocks. If you start with them, you'll have the whole field to yourself. So when you find an idea you know is good but most people disagree with, you should not merely ignore their objections, but push aggressively in that direction." Paul Graham
I started my first day of work at Kaplan today. They’re giving me an SAT class. I’m excited to be teaching again, but my eventual long-term goal is to work on curriculum development.
We can help transform homeschooling and Christian education in Oklahoma City. We can also provide easy-to-understand books on apologetics to a wide audience.
I have a big, broad vision. I want to see Oklahoma City become the center of a movement where God’s Word becomes central to family life.
It’s the family unit that will accumulate cultural and material wealth. Material wealth will allow us to have more free time to influence the city. Cultural wealth will provide values which will make the transformation permanent and positive.
Just look at the results of the Puritans’ work hundreds of years ago. They built a Protestant culture friendly toward economic growth.
Now we have the largest economy in the world. Even though we have problems with borrowing too much money, we still have more economic freedom than most European countries.
And no, you becoming richer doesn’t necessarily make other people poorer. The invention of the light bulb helped almost everyone. Thomas Edison got richer faster than the poor did: if you look purely at dollar signs. But the standard of living went up much more for the poor than it did for Edison.
Light bulbs cost the same whether you’re poor or rich. So does electricity. Yes, Thomas Edison got rich in dollar signs faster than poor people did. But being able to buy 10,000 light bulbs instead of one doesn’t increase Edison’s standard of living 10,000 times. This is an example of the law of diminishing returns.
So even though the gap between the rich and the poor widens in terms of dollar signs, the productive inventions created by rich people make both the poor and the rich richer. And the standard of living goes up for everyone, but it goes up for the poor faster than it does for the rich.
If there were no rich people, we’d have no light bulbs. Or cars. Or transistors. Or computers. So in what way is the growing gap in dollar signs between the rich and the poor a bad thing, when the standard of living gap is actually shrinking?
If you doubt this, pretend that you’re poor. You want a more comfortable life. Pick any period in American history prior to this one that you’d rather live in. Can’t think of one? Didn’t think so.
You’re poor today. Would you switch places with a rich person from 1907? 1807? 1707? Why or why not?
“You shall not covet your neighbor’s house. You shall not covet your neighbor’s wife, or his manservant or maidservant, his ox or donkey, or anything that belongs to your neighbor.” Exodus 20:17
Ministry Vision and Business Vision Are Connected
There are lots of people more qualified than I am to do curriculum development. I met one of them: he teaches worldview and history at Community Christian School in Norman, OK.
So why aren’t they doing it? It’s usually lack of time, lack of vision, or both.
That’s why I’m so big on Christians starting their own businesses and teaching their children how to run them. If children inherit pre-built businesses and don’t have to start from scratch, they’ll have more free time to develop an all-encompassing vision for their community. They’ll have time to apply their gifts toward specific needs like curriculum development.
People may think I’m weird for posting on so many money-related topics. They know I’m not very materialistic, so why do I do it?
I want America to be friendly toward a culture that produces wealth, a standard of living high enough for people to devote their excess time and income to re-investment and ministry, not consumer spending.
A Society That Accumulates Wealth
What conditions must exist for a society that accumulates wealth? Here are some:
(1) A large population. The larger the population, the more people can specialize on jobs they’re good at. I can teach at Kaplan and trust farmers, truck drivers, real estate investors, commercial banks, supermarket employees, auto manufacturers, and gas stations to help me get my food. This is the division of labor.
(2) A society where people cooperate in peace. Violent racism, fear of nuclear war, and religious isolationism all have the effect of separating the population out into little pockets, reducing the division of labor. I met Gary North at South San Francisco OPC about a year and a half ago, and he told me that India’s caste system reduces their division of labor and prevents them from achieving the kind of economic growth seen in other Asian countries. I became convinced that he was a genius and signed up for his e-mail list.
(3) Values that emphasize free trade. Free trade allows buyers and sellers to set prices so that both parties are satisfied with what they’re getting. There’s no such thing as an equal exchange: when I buy a pair of sneakers, I do so because I think I’m getting a price that makes the shoes worth buying. The store thinks they’re getting enough money that makes the shoes worth selling. When we allow buyers and sellers to determine prices on the free market, the market automatically urges sellers to be competitive with prices and quality.
(4) Laws that reward honesty and punish dishonesty. Don’t you go trying to weigh me two pounds of bananas when I think I’m getting three, or the sword of the government will come and get you. Don’t you go counterfeiting money, especially when there are unbiblical legal tender laws in place saying that we can only use paper dollars to repay debt.
Today’s unbiblical laws put the government and central banks, the greatest counterfeiters, in control of everyone’s wealth. They allow central banks to devalue the dollar and take wealth away from people who have dollars stored up (savers and productive people) and people who are expecting future dollars (retirees and others on fixed incomes).
(5) Individual people who want to save and re-invest rather than spend all the money today. They are future-oriented and think about what their grandchildren’s lives will be like.
Theonomy
Hm. A large population of people who work together in peace. Free trade. Fair laws. Small government. Future-oriented families.
These are things we’d have if we only followed the guidelines for government found in the book of Deuteronomy.
I’m excited. People at Oklahoma City, and especially at my church, are already inclined to think this way. A lot of people would become theonomic if the theology were only explained to them clearly.
Buy One House a Year
Buy one house a year to rent out. If you’re in an undervalued region of the country, the rents will pay off the loan and all other expenses. Each year, you can raise rents to keep pace with inflation.
(Rent goes up, but you don’t get a raise every year? That’s the reason why inflation lowers unemployment. You’re getting paid with money that is worth less every year, yet you get little or no raise. Since employees are effectively getting paid less, companies can hire more of them. Don’t blame the companies. It’s the Congressmen and President who want this inflation so we can lower unemployment and “boost the economy.” Ha, ha. And we’re the ones who vote for them.
And if you’re eventually given a pay raise to compensate for inflation, that’s also good for our politicians. It means you’ve been inflated into higher tax brackets, ones meant originally for those oppressive rich people. Now we get a taste of our own medicine.)
I’ll Say It Again
Buy one house a year. After twenty years, if not sooner, you’ll have enough rent coming in so you’ll be able to leave your job and do more ministry. Have your children manage the properties: pay them 10% of the rents. They’ll have a head start on the business when they inherit your houses.
May our children make a huge impact on this world for God’s glory.
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Me tired today, too tired to answer Min’s response to my Government Schools post. But don’t worry, Min, I haven’t forgotten.
Love and godly ambition, when deeply intertwined, cause each other to grow.
It snowed a little bit in Oklahoma City this week, unusual weather for April. As I watched the flakes drift down, I started dreaming about what it would be like if only I could be home for Christmas.
But my dreaming of late has been of the future, not the past. Home for me has less and less meant my parents’ home, the mission base in New Mexico, or my wonderful students at Highlands. I’m dreaming about my future home and the warmth and love that will exist there.
Something has happened to me since I moved to Oklahoma. I’ve become rich. Not financially, but wealthy in love.
EDIT: One way distinguish between the upper and lower classes is to look at a person’s orientation toward money. Is he future-oriented, saving to invest, or is he more present-oriented, spending his money instead? Some people like to call the first view money-preference and the second time-preference, but I prefer future- and present- orientation, since wealth is actually about a lot more than money. It’s about a person’s perspective in life.
EDIT: See Gary North’s article about the relationship between class and perspective on time for more detailed information. I thought I was going to get away with writing a post without mentioning Dr. North. I guess not.
Wealth is about one’s perspective on time. It exists in the heart and mind before it exists in material things.
An entrepreneur is very future-oriented. He’s willing to give up a lot of money and time in the present and take tremendous risks in order to build a business. He’s ambitious. He’s a dreamer.
Wealth Is Not Mainly About Money
The song Imagine uses the word dreamer. “You may say I’m a dreamer, but I’m not the only one. I hope someday you’ll join us, and the world will live as one.” John Lennon imagined a world with no possessions, no countries, and no religion, a socialist utopia. He believed in saving the world through unbiblical ideals.
While I disagree with his goals, look at his perspective on time. Lennon was future-oriented, and this drove most of his songwriting. He was rich. (Socialist agenda notwithstanding.) Too bad he was wealthy toward the wrong things.
“But God said to him, ‘You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?’ This is how it will be with anyone who stores up things for himself but is not rich toward God.” (Luke 12:20-21)
Consider the contrast Jesus is drawing. If we store things up to hedge the future for ourselves in this life only, we are fools. This is rational: there’s more to life than this life.
But what could He mean by being rich toward God? How do we store things up for God instead of for this life?
“For the pagan world runs after all such things, and your Father knows that you need them. But seek his kingdom, and these things will be given to you as well.” (Luke 12:30-31)
We’re supposed to seek the Kingdom. This is a form of ambition, a form of wealth. Wealth is in the heart and mind. A person who is rich toward God has the ultimate kind of future-orientation: treasure in heaven. And he gets everything else he needs in this life to boot.
So when I dream of a future family and all the Christmases we will enjoy together, I’m one of the richest men on earth. It’s not just because I personally want a family. I believe that families are one of God’s main tools for transforming society. This value expresses generations’ worth, centuries’ worth, of future-orientation.
I believe that if I dream this way, most of the other things will be given to me as well. What involves more future-orientation: starting a business that should cash flow well in a few years, or serving God by trying to transform society over the course of several generations?
Because I’ve sought the harder and more valuable object first (God’s Kingdom), the easier and more obviously beneficial object (a business to support my family) will likely be granted as a stepping-stone along the path God wants my family to travel.
Love and Ambition
Love, being a Kingdom value, grows when it’s spurred on by godly ambition.
But godly ambition is still ambition. It continues to seek and draw closer to the ideal.
I lost a lot when I left my Highlands students to move to Oklahoma. This expressed future-orientation. I expect to see a return by being able to provide for a family and serve God more effectively. That will compensate me many times over for my loss.
It’s already started to happen. I’ve found almost as much love at OLCC, my new church, as I left behind in my wonderful students. And I’m not even a member yet.
But it’s not enough! Why do I keep singing Christmas songs in the car and dreaming about future love? It seems that the more love I have, the more love I long for. Why?
Maybe this is because love is such a wonderful treasure. Once I had experienced love, its perceived value rose, and I wanted it more.
“Hope deferred makes the heart sick, but a longing fulfilled is a tree of life.” (Proverbs 13:12)
Receiving Giving Love
Love is a two-way street. It is more blessed to give than to receive (Acts 20:35). When I was at a school that allowed me to give love, and now at a church that allows me to serve and bless others, love blossomed into a more wonderful thing.
When love’s value rises in our eyes, we want more opportunities to receive and give it. Those opportunities lie in the future. This makes us future-oriented toward love. Another way to say this: We are rich toward love. We are ambitious, entrepreneurs, risk-takers.
If love makes us ambitious for more opportunities to love, we’ll enter a self-reinforcing cycle. When we find opportunities to love, we grow to appreciate love more, which spurs us on to find even greater opportunities to love. By God’s grace, love will become a deeper and deeper part of our lives.
That’s why I spend so much time with widows at my church. They have a deep longing for love and companionship, and I have a deep longing to give. Like most men, I’m not as naturally inclined to give love as most women are. But this makes the blessing of giving love something newer and more wonderful for me. And as long as I’m willing to experience the wonder of giving love, my natural masculine assertiveness will make me want to find ways to give love all the more.
My hypothesis also explains why married people are often perceived to be so generous and caring. When two people marry who are risk-takers regarding love, their experience of love will make them more capable of it. The self-reinforcing cycle will make them better and better lovers, not only toward each other, but toward God and the rest of the world.
God First
This all assumes that people facing challenges regarding love will be willing to take risks and choose love over convenience. The model I’ve built here would fall apart if we didn’t seek His kingdom first, just as those who store up riches for themselves for this life will end up losing everything in the end.
It’s richness toward God, future-orientation toward His Kingdom, that makes all the smaller risks worth taking. We know that no matter how many risks we take in the smaller matters, no matter how much we fail, we won’t fail ultimately if those smaller failures move us closer in our ultimate ambition toward God.
And someday, that longing fulfilled will be our tree of life.
My hypothesis not set in stone. Please feel free to comment with suggestions or improvements. You may want to check out what I wrote before on men and risk, as I may have written something there that partly addresses your comment. Thanks for reading!
If your worldview is broader and deeper than what schools are teaching you, then you may also realize that your life doesn’t have to follow the path that others have laid out for you. Maybe you don’t need to get a job and work 9-to-5. Maybe the world isn’t even headed in that direction any more.
Think of what technology has done to snail mail and long-distance phone bills. Who’s to say that it won’t eventually make equally radical changes to our work environments? When Californians call a big company’s customer service line, they get a voice from India or Oklahoma. It’s more economical to outsource customer support to places where the cost of living is low.
Now combine what you’ve learned about economics, science, math, and current events. What will these companies do to eliminate gasoline costs and commute time as the price of oil rises? Perhaps someday, customer service employees will work from their living rooms or bedsides. They could be paid per call or per telephone minute.
Peak Oil
Work environments are likely to change soon because of a problem called peak oil. Demand for oil is going up faster than the speed of production. At some point very soon, production will actually start to decline because our oil fields are running out.
Increasing demand and decreasing supply lead to higher prices.
What if the price of gasoline doubles? Triples? Prices of consumer goods will start to go up as shipping costs go up. The further trucks have to drive, the more things will cost. House prices will also rise because of shipping costs for new construction materials.
Eventually, it will cost more to drive to work than it will to take a lower-paying job close to home.
Get Smart
Smart businesses will prepare for this by beginning to give people the option to work at home through the Internet.
Peak oil will cause a lot of problems for the economy. Producing and shipping goods locally will reduce the division of labor. But as usual, there will be opportunities for profit. I believe three kinds of property will appreciate faster than average:
(1) Rural property in high-population-growth counties. It will be bought up by tech-savvy workers. (Three counties adjacent to Oklahoma City are poised for this.) It doesn’t cost much to produce food locally and ship it within rural areas. This kind of property is also in demand by baby boomer retirees.
(2) Downtown residential houses and apartment buildings. (Oklahoma City) Some jobs can’t be done over the Internet. I believe this kind of property would find increasing demand anyway because of the rise of the echo boomer generation.
(3) Property located in oil-producing areas. (Oklahoma City) Peak oil doesn’t spell the end of the oil industry. A peak has two sides to it.
Oil production will decline slowly. On the far side of the peak, oil’s price will rise rapidly because three factors will be working together: decreasing supply, increasing demand, and inflation. Petroleum companies will make a lot of money before the game’s over.
Get Ready
I think it would be wise to learn as much about the Internet as you can. Look at how fast the technology is developing, just in time to meet the demands imposed on businesses by peak oil. Most people won’t be Web programmers, but many will have to do at least some of their work through the Internet.
Watch these two videos about peak oil before making any major career decisions.
Who is there in all the earth in whom I can put my trust?
Who can move these mighty mountains? Whose voice can calm these seas?
When I was a middle school teacher, students would sometimes come to me and ask, “Why do I have to learn this stuff?” It didn’t seem to matter much whether the subject was math, science, or Bible. The standard response runs something like, “This stuff will be useful to you later in life. You don’t really understand now, but you will.”
While there’s some validity to that answer, I wonder if we answer that way partly because we ourselves don’t know the answers. Most teachers don’t have a worldview that is as unified and full of interconnections as we think we do.
To see what I’m getting at, try writing down a list of what topics students study in school. Then choose two at random and combine them to make a subject. Here are some examples:
History of technology
Mathematics of music
Philosophy of computer programming
Biblical psychology
Economics of geology
Biology of music
Theology of philosophy
Languages in home economics
Science of physical fitness
Apologetics in economics
Language of counseling
Business of art
How many science teachers teach the history of technology or the economics of geology? Phrases like this sound strange to us, but they’re actually very practical fields.
It would be an interesting experiment to ask Steve Jobs, the co-founder of Apple Computers, whether he would have introduced as many innovative ideas if he hadn’t been aware of the effect of other such innovations in the history of technology, such as Henry Ford’s invention of the assembly line.
Maybe we should also ask petroleum companies who are working on the oil sands of Alberta whether economics, geology, and current events are connected.
Is It the Teachers’ Fault?
Should we blame teachers for our lack of a comprehensive worldview? This is tempting, but think about what we’re asking of our educational system. If teachers knew enough about the history of technology to start their own companies and become rich, how many would have the motivation or free time to be teachers?
Look at what happened to me. For the past year and a half, I’ve been determined to have enough income to support a family and be involved in ministry, and that’s taken me temporarily away from the classroom. If I had five kids, I might never return. And who could blame me for putting my family, calling, and business first?
Even if we could blame our teachers, I don’t think it would be very productive to do so. If a student had a worldview comprehensive enough to recognize what was wrong with the school system, in what way would it benefit him to get teachers to teach him what he could learn for himself?
We have a tendency to place blame where we don’t want to take responsibility. Are you, as a student, willing to learn what your teachers don’t know and eventually work as a teacher yourself? More to the point, are you willing to fill the education gap that exists in your own life rather than just complaining about it?
Take Responsibility for Learning
I’m going to take a radical step and say that it’s your responsibility to learn what teachers aren’t able to show you. The fact that you’re reading this means you’re probably enough of an adult to do this own your own.
If your worldview is broader and deeper than what schools are teaching you, then you may also realize that your life doesn’t have to follow the path that others have laid out for you. Maybe you don’t need to get a job and work 9-to-5. Maybe the world isn’t even headed in that direction any more.
Think of what technology has done to snail mail and long-distance phone bills. Who’s to say that it won’t eventually make equally radical changes to our work environments? When Californians call a big company’s customer service line, they get a voice from India or Oklahoma. It’s more economical to outsource customer support to places where the cost of living is low.
Now combine what you’ve learned about economics, science, math, and current events. What will these companies do to eliminate gasoline costs and commute time as the price of oil rises? Perhaps someday, customer service employees will work from their living rooms or bedsides. They could be paid per call or per telephone minute.
Don’t Be Like Us, Okay?
We teachers generally live in the past. We make the same amount of money regardless of what we teach or how successful our high school graduates are. There’s no incentive for us to try to forecast the future like a businessperson would. But if America’s past history of technology and economic growth are any indication, we should be prepared for things to change, not stay the same.
Just to be clear, I’m not encouraging you to rebel against your teachers or parents. I’m not suggesting that you stop going to school. Not only would that be disrespectful (Hebrews 13:7, 17), you won’t be able to help anyone if you’re sitting in the school office half the week.
I’m suggesting that you give yourself the education that schools can’t help you with. A good place to start would be to sign up for Gary North’s e-mail list and read some of Paul Graham’s essays.
I’m confident that if you do this, you can learn what you need to free yourself from dependence on a 9-to-5 job. But you may choose to keep that job because you love working so much, perhaps becoming the school teacher that you never had.
Here are some excerpts from Paul Graham’s latest essay on beginning your own technology startup. His principles also apply to starting your own business in other areas.
You need a lot of determination to succeed as a startup founder. It’s probably the single best predictor of success.
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How can you tell if you’re determined enough…? I’m guessing here, but I’d say the test is whether you’re sufficiently driven to work on your own projects. Though they may have been unsure whether they wanted to start a company, it doesn’t seem as if Larry and Sergey [the founders of Google] were meek little research assistants, obediently doing their advisors’ bidding. They started projects of their own.
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How do you tell if you’re independent-minded enough to start a startup? If you’d bristle at the suggestion that you aren’t, then you probably are.
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One reason people who’ve been out in the world for a year or two make better founders than people straight from college is that they know what they’re avoiding. If their startup fails, they’ll have to get a job, and they know how much jobs suck.
If you’ve had summer jobs in college, you may think you know what jobs are like, but you probably don’t. Summer jobs at technology companies are not real jobs. If you get a summer job as a waiter, that’s a real job. Then you have to carry your weight. But software companies don’t hire students for the summer as a source of cheap labor. They do it in the hope of recruiting them when they graduate. So while they’re happy if you produce, they don’t expect you to.
That will change if you get a real job after you graduate. Then you’ll have to earn your keep. And since most of what big companies do is boring, you’re going to have to work on boring stuff. Easy, compared to college, but boring. At first it may seem cool to get paid for doing easy stuff, after paying to do hard stuff in college. But that wears off after a few months. Eventually it gets demoralizing to work on dumb stuff, even if it’s easy and you get paid a lot.
And that’s not the worst of it. The thing that really sucks about having a regular job is the expectation that you’re supposed to be there at certain times. Even Google is afflicted with this, apparently. And what this means, as everyone who’s had a regular job can tell you, is that there are going to be times when you have absolutely no desire to work on anything, and you’re going to have to go to work anyway and sit in front of your screen and pretend to. To someone who likes work, as most good hackers do, this is torture.
In a startup, you skip all that. There’s no concept of office hours in most startups. Work and life just get mixed together. But the good thing about that is that no one minds if you have a life at work. In a startup you can do whatever you want most of the time. If you’re a founder, what you want to do most of the time is work. But you never have to pretend to.
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A significant number of would-be startup founders are probably dissuaded from doing it by their parents. I’m not going to say you shouldn’t listen to them. Families are entitled to their own traditions, and who am I to argue with them? But I will give you a couple reasons why a safe career might not be what your parents really want for you.
One is that parents tend to be more conservative for their kids than they would be for themselves. This is actually a rational response to their situation. Parents end up sharing more of their kids’ ill fortune than good fortune. Most parents don’t mind this; it’s part of the job; but it does tend to make them excessively conservative. And erring on the side of conservatism is still erring. In almost everything, reward is proportionate to risk. So by protecting their kids from risk, parents are, without realizing it, also protecting them from rewards. If they saw that, they’d want you to take more risks.
The other reason parents may be mistaken is that, like generals, they’re always fighting the last war. If they want you to be a doctor, odds are it’s not just because they want you to help the sick, but also because it’s a prestigious and lucrative career. But not so lucrative or prestigious as it was when their opinions were formed. When I was a kid in the seventies, a doctor was the thing to be. There was a sort of golden triangle involving doctors, Mercedes 450SLs, and tennis. All three vertices now seem pretty dated.
The parents who want you to be a doctor may simply not realize how much things have changed. Would they be that unhappy if you were Steve Jobs instead? So I think the way to deal with your parents’ opinions about what you should do is to treat them like feature requests. Even if your only goal is to please them, the way to do that is not simply to give them what they ask for. Instead think about why they’re asking for something, and see if there’s a better way to give them what they need.
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This leads us to the last and probably most powerful reason people get regular jobs: it’s the default thing to do. Defaults are enormously powerful, precisely because they operate without any conscious choice.
To almost everyone except criminals, it seems an axiom that if you need money, you should get a job. Actually this tradition is not much more than a hundred years old. Before that, the default way to make a living was by farming. It’s a bad plan to treat something only a hundred years old as an axiom. By historical standards, that’s something that’s changing pretty rapidly.
We may be seeing another such change right now. I’ve read a lot of economic history, and I understand the startup world pretty well, and it now seems to me fairly likely that we’re seeing the beginning of a change like the one from farming to manufacturing.
And you know what? If you’d been around when that change began (around 1000 in Europe) it would have seemed to nearly everyone that running off to the city to make your fortune was a crazy thing to do. Though serfs were in principle forbidden to leave their manors, it can’t have been that hard to run away to a city. There were no guards patrolling the perimeter of the village. What prevented most serfs from leaving was that it seemed insanely risky. Leave one’s plot of land? Leave the people you’d spent your whole life with, to live in a giant city of three or four thousand complete strangers? How would you live? How would you get food, if you didn’t grow it?
Frightening as it seemed to them, it’s now the default with us to live by our wits. So if it seems risky to you to start a startup, think how risky it once seemed to your ancestors to live as we do now. Oddly enough, the people who know this best are the very ones trying to get you to stick to the old model. How can Larry and Sergey say you should come work as their employee, when they didn’t get jobs themselves?
Now we look back on medieval peasants and wonder how they stood it. How grim it must have been to till the same fields your whole life with no hope of anything better, under the thumb of lords and priests you had to give all your surplus to and acknowledge as your masters. I wouldn’t be surprised if one day people look back on what we consider a normal job in the same way. How grim it would be to commute every day to a cubicle in some soulless office complex, and be told what to do by someone you had to acknowledge as a boss—someone who could call you into their office and say “take a seat,” and you’d sit! Imagine having to ask permission to release software to users. Imagine being sad on Sunday afternoons because the weekend was almost over, and tomorrow you’d have to get up and go to work. How did they stand it?
It’s exciting to think we may be on the cusp of another shift like the one from farming to manufacturing. That’s why I care about startups. Startups aren’t interesting just because they’re a way to make a lot of money. I couldn’t care less about other ways to do that, like speculating in securities. At most those are interesting the way puzzles are. There’s more going on with startups. They may represent one of those rare, historic shifts in the way wealth is created.
That’s ultimately what drives us to work on Y Combinator [helping people start startups]. We want to make money, if only so we don’t have to stop doing it, but that’s not the main goal. There have only been a handful of these great economic shifts in human history. It would be an amazing hack to make one happen faster.
You can read Paul Graham’s article in its entirety here.
I will lift my voice and sing. I will sing of Your glory, the glory of my King.
Pastor John once told me that the degree of our concern for others should spread out in something that looks like concentric circles. That is, a man should care most for his family and the area of his calling, then his church, then his immediate community, then his country, and then for the rest of the world.
But if anyone does not provide for his own, and especially for those of his household, he has denied the faith and is worse than an unbeliever. 1 Timothy 5:8
Of course, if the area of his calling involves another country, he may be more concerned about them than those in his own country. But generally speaking, I think Pastor John is right.
We’re entering a year or two of recession. This translates into significant inconveniences for most families, hard times for some, and devastating times for a few.
We tend to think about how bad things will get for other people, but the concentric circle idea suggests that we should be much more concerned for our own families.
Hard Times = Good Times?
Hard times also offer the greatest opportunities. Imagine if you’d had a thousand dollars in cash, no debt, during the Great Depression. What could you have bought? A recession is a miniature version of the Depression.
What follows the recession? More inflation. If inflation will be as bad as our obligations to Medicare, Social Security, government pensions, and national debt seem to require, the value of the dollar could drop by more than 10% per year like it did in the late 1970s.
The worst-case scenario would be mass inflation, as happened in Germany after World War I. The government had printed huge amounts of money to meet the reparation demands placed on it by the countries that won. People’s fortunes, if they were stored in anything tied to German money, rapidly eroded away. Food was king, and rich people traded their pianos and fur coats for a few months’ worth of sustenance. Frugal Jews were able to make these trades quite profitably, causing people to resent their success. German resentment in general made it possible for Hitler to gain a great deal of power and restore order.
I get these bits of historical data from Gary North’s book Successful Investing In an Age of Envy. In it, he lays out a strategy for the 1980s that I’m going to modify for our use today. It’s called compensated leverage.
Buy During a Recession
During the recession, those with cash and good credit will be able to buy things at relatively low prices. A piano, for example, will sell for cheaper than it normally would because pianos are not as important in a recession as food and rent.
In the market, items are not assigned a value according to the materials and labor used to produce them, despite what some of us have been taught. How could a new piano sell for less than the cost of its materials and labor if this is true? Yet you’ve probably seen this sort of thing happen before. You can be sure that piano-making will be a less profitable craft in this scenario.
In an “end of the world” scenario, the piano would be worth more as firewood than as a musical instrument. Its value as an assembled item would be less than its value as broken wood. We can see that because someone is willing to spend time to chop the instrument into little pieces.
Rather than being valued by production costs, items will sell for whatever people are willing to pay for them. This is called imputed value. The item takes on a value that is transferred to it by the eyes of buyers in the marketplace. Out of a pool of available bidders, the piano will sell for the price the highest bidder is willing to pay.
There won’t be many bidders in a recession because cash and credit will be in short supply. (It’s hard to get loans when cash is tight because of the way our banking system works.) If you’re the highest bidder, you’ll be able to purchase items for fewer dollars than in a non-recession scenario. Buy when everyone else is trying to sell. You’ll get a better price.
I’m not going to suggest buying pianos, though. Buy houses. With cash and good credit, you can buy them using a loan. You can control a $100k house using a $10k down payment. This is called leverage.
Then, when inflation begins again, the price of the home will rise, but the amount of the loan and loan payments will stay the same. Eventually, you will have four houses that will sell for $400k each, but your loans on the houses will still be only $90k each. If you sell one of the houses, you can use the proceeds to pay off the loans on the other three houses. You’ll own three houses free and clear. You’ll collect a lot of net rent.
Compensated Leverage
Leverage works well if you buy during a recession and hold through an inflationary period. That’s because the value of dollar goes down, and you’re paying the loans down with money that is only worth a fourth of what it was during the recession.
If you think you can forecast correctly when recessions and inflation will hit, you can plan to remove your high degree of leverage by having a way to eliminate the debt profitably. It’s compensated leverage.
If you’re not convinced yet, I don’t blame you. You need to hear this from investors who have done this repeatedly through several recession-inflation cycles.
That’s why I keep pointing people to Gary North’s site. At least sign up for his e-mail list, which is free. Paid members can sign into the forum and ask him and real estate investor John Schaub whatever questions they want.
Dr. North is hiking the rate to $14.95/month on May 1, but current subscribers will keep their original low subscription rate.
In a recession, procrastinators will be more motivated to pay and finally start asking him questions. Investors and businesspeople will go to him for advice when markets turn on their heads. Dr. North’s pricing strategy makes sense.
Isn’t it worth $120 to get one profitable idea each year? Compensated leverage is a good example of this. Predicting recessions and inflation is even more helpful.
For Family and Ministry
I’m laughing at myself because I came to my blog to write about the challenge of postmodern hermeneutics. I think it’s the biggest problem Christian apologetics will have to deal with over the next few decades. But how will I, as a middle school teacher, get the income and time to study this subject while still supporting a family? How does anyone do this, short of becoming a well-paid faculty member at a college or university?
One good friend of mine raised two sons on her own. She worked as a high school teacher and had a second job after school for extra income. She’s out of that hole now partly because she sold her home at the right time (market peak) and bought another one at a significant discount. This is possible where the pool of bidders is small, such as at a foreclosure auction or where the property is not well maintained and doesn’t attract positive attention.
She cleaned up the house, adding a small basement apartment in the process. Because she bought below market, she doesn’t have to be as concerned about falling property values in a recession. The apartment rent will help her make the mortgage payment.
Then inflation will come and give her a big payoff for her efforts. Good thing she’s not Jewish.
Maybe I’ll write about postmodern hermeneutics next time. Join Gary North’s site so you’ll have something to read in the meantime.
