"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
“Opportunity cost is the cost incurred (sacrifice) by choosing one option over the next best alternative (which may be equally desired). Thus, opportunity cost is the cost of pursuing one choice instead of another. Every action has an opportunity cost. For example, someone who invests $10,000 in a stock denies oneself the interest that one can easily earn by leaving the $10,000 dollars in a bank account instead. Opportunity cost is not restricted to monetary or financial costs: lost time, pleasure or any other benefit that provides utility should also be considered.”
I’m in love. Her name is Oklahoma City. And I will give myself up for her “to make her holy, cleansing her by the washing with water through the word.”
The one I love is growing up quickly. She has the potential to become a beautiful woman or a rebellious person. A lot of that is going to be determined by what kind of leadership she has over the next five years.
Yes, you heard me right. That’s five years. That’s because the greatest benefit is going to be derived by noticing changes in our city early, while they they’re still potential but highly probable trends. You get a beautiful eighteen-year-old by parenting her when she’s eight. And we can start to disciple beautiful eighty-year-olds when they’re still twenty-eight.
I’m going to point out some of the early growth trends in Oklahoma City using principles from Christian economics.
And in case you want my conclusion right now, here it is:
We don’t have a lot of time.
Inflation
Most of my analysis is going to depend on one concept: Inflation of our country’s money supply. If you understand that, then it will be easy to see why Oklahoma City is poised for enormous growth.
Your silver has become dross, your wine mixed with water. (Isaiah 1:22)
Ever since Old Testament times, people have dealt dishonestly with one another. Some people mixed silver with less valuable metals (”dross”), creating counterfeit coins, and presented the coins to others as if the coins were made of pure silver.
We agree that it’s wrong when individual people do this. But when governments legalize the process, we call it inflation. And everyone seems okay with it.
Although the dime has not undergone any major design changes since its introduction, its composition changed significantly in 1965. The Coinage Act of 1965 removed the silver content from the dime (as well as the quarter and, in 1971, the half dollar), and replaced it with a clad composition of 75 percent copper and 25 percent nickel. Dimes with the silver composition were minted in 1965 and 1966 but bore the date 1964 to increase mintage figures and prevent hoarding of it. (Wikipeida)
Let’s get this straight. In 1965, our government stopped minting dimes with silver and started minting them with copper and nickel. And it minted those 1965 and 1966 coins with a date of 1964 so that they could not be distinguished from the dimes that were made of real silver.
There is a moral issue here. There is also a real consequence.
Do not have two differing weights in your bag—one heavy, one light. Do not have two differing measures in your house—one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving you. For the LORD your God detests anyone who does these things, anyone who deals dishonestly. (Deuteronomy 25:13-16)
It gets worse.
The Federal Reserve
The dimes are chump change compared to the money that’s created digitally. When the government overspends, it needs to borrow money. When it doesn’t want to pay the market rate of interest, it goes to the our national bank, the Federal Reserve, which creates money out of nowhere and lends it to the government. Most of this money will never be printed out in dollar bills. It simply circulates through the economy through bank accounts and credit cards.
Inflation has never been so easy. Its consequences will be disastrous for most people but beneficial for Oklahoma City, as I’ll explain later.
With more money circulating through the economy chasing the same amount of goods, prices eventually go up. The more money is created, the more prices go up.
China
Right now, the Federal Reserve isn’t creating very much money. That’s because China is lending money to the government. It creates hordes of its own currency, the yuan, and converts some of it to dollars to buy U.S. Treasury bills.
If China’s currency is weak (lots of money in circulation) and the U.S. dollar is strong (not very many dollars in circulation), the dollar will buy a relatively large amount of yuan. That makes it profitable for U.S. retailers to convert their dollars to lots of yuan and buy TVs, toys, and other consumer goods to sell to U.S. customers.
Low inflation of the dollar helps us import stuff and makes it hard for us to export stuff. Conversely, high inflation of the dollar hinders our imports and strengthens our exports.
What do you think will happen when China stops lending money to the U.S. government? Our government will start borrowing more money from the Federal Reserve, which creates money out of nowhere. This leads to a higher rate of inflation.
At some point in our future, government overspending and China’s eventual refusal to keep subsidizing the dollar will lead to high inflation.
And when that happens, I want to be invested in a city that will benefit from an economy where it’s hard to import stuff and easy to export stuff.
What “stuff” are we currently importing that we’ll have to start producing within our own country? Oil.
What will we export more of in the future? Food.
War with Iran
Now look at what happens if we attack Iran in 2008.
Time frame before our city begins its major growth: 12 to 24 months.
War with Iran will impact China. China has been undergoing some incredible growth:
China is just building the beginnings of its own system of national highways, and filling up the roadways with its own domestic version of motorized carriages. If China were to burn as much gasoline on a per capita basis as does the U.S., China alone would require the entire world’s daily oil output and then some. But that is just extrapolating the present into the future, and things are going to change dramatically long before something like that could occur, if it were even possible….
Overall, China is constructing buildings and roads and infrastructure that is the equivalent of a “new Houston,” about every month. And last year, in 2006, China added more electrical-generating capacity than exists in the entire state of California, where they have been building generating capacity for 100 years. So China is growing, and growing fast. (Whiskey and Gunpowder, 2007 April 18)
And if we go to war with Iran, do you think China will become more motivated to (A) keep on lending its money to the U.S. government OR (B) use that money to buy more oil instead?
I’m siding with option B. If China starts buying our oil and stops subsidizing our government, three things will drive up the price of oil.
(1) There will be a decrease in the supply of oil, since Iran will no longer be available as an exporter.
(2) There will be an increase in demand for oil, since China and other countries will begin an emergency buying frenzy when they see the price going through the ceiling.
(3) There will be high inflation in the U.S., making it hard for us to import oil from other countries.
This would throw most of the country into an inflationary recession. Take the “stagflation” we saw in the late 1970s, with rapidly rising prices and long lines at gas stations. Add to that the mortgage and banking crisis already building up today. That’s what I think we’ll see if we attack Iran.
The oil-producing states in the U.S., such as Texas and Oklahoma, will benefit from this. We will see a repeat of the oil boom that began in 1973.
Everyone else will suffer.
If we go to war with Iran next year, this will create the perfect situation for economic growth in Oklahoma City.
This gives us one to two years to train our leaders to influence our community before major changes begin to happen in Oklahoma City.
Peak Oil
We are heading towards a recession right now because of the banking crisis that is building up. If we don’t go to war with Iran, the recession will slow down the fundamental changes that are taking place in the city. This ought to buy us a few years.
Time frame: about five years, I think.
After we get through the recession, inflation will re-assert itself. China will also demand more and more oil as its economy grows. Over time, these factors will make it harder for us to import oil.
Combine this with the fact that production of oil is likely to slow down over time: the problem of peak oil.
We produce a lot of oil and natural gas in Oklahoma City.
We also have a lot of railroads that will be increasingly used to ship goods as the price of gas goes up. It takes less energy to ship by rail than by truck. Don’t forget why we’re better than Guthrie: we used to be a railroad town.
I’m guessing that the rising price of oil will begin to have a major influence on our city in about five years. That’s if we don’t bomb Iran. We’ll have to weather a recession with a temporarily lower demand for oil.
That gives us about five years to train leaders to impact this city in a major way.
Agriculture
Remember that rising inflation will make it easier for us to export goods to other countries.
China’s enormous growth makes it a prime candidate for U.S. exports.
China is already importing a significant amount of wheat and beef from other countries. I expect that amount to increase over time as China’s standard of living goes up.
And guess what we produce here in Oklahoma City?
Where do all the highways and railroads cross by which all of these agricultural goods will be shipped?
Time frame: ??
When this does hit, it will hit big. We’re currently paying farmers not to farm. This keeps the price of food artificially high. Imagine what will happen when this trend reverses and farming won’t need a government subsidy any more. The United States has the capacity to feed a large portion of the world.
I think agriculture is one of the most undervalued sectors of our economy.
I don’t know how much time we have to train leaders for our aggie city. This is something we should keep our eye on.
Social Security and Medicare
Social Security and Medicare are under-funded programs. The only way to keep them alive is by borrowing money: more inflation.
When these programs really start to go under, we can expect to see high inflation, which will strengthen the production of oil, natural gas, and food in Oklahoma City. It will probably also increase our city’s importance as a rail shipping center.
High inflation also means that many people on fixed incomes, especially retired people on pensions, will find that they can’t afford to live in the more expensive areas of the country any more. Inflation means that their monthly checks will buy less and less over time.
The same will happen for young families with kids and new careers. Companies who can’t afford to pay California salaries based on California real estate prices will move to less expensive areas.
The median home price in San Jose, California is $649,000. In Oklahoma City, it’s $154,900. In relation to salaries, San Jose was overvalued by 44% 20 months ago, while Oklahoma City was undervalued by 5%.
People are already starting to move into Oklahoma City from other states. Outside of Oklahoma, California is sending more money to buy Oklahoma City real estate than any other single state in the country.
Time frame: 2015??
Like agriculture, this is going to hit big. If you think we have a generational problem now, imagine what’s going to happen when twentysomethings and seventysomethings begin to move in droves into the same city, and the twentysomethings are made to pay taxes to support a larger and larger group of retired seventysomethings.
There’s going to be conflict. But this is better than having the seventysomethings move back in with their children and grandchildren, which will be the California alternative.
It’s hard to put an exact date on when this will happen, since it depends a lot on how quickly the Baby Boomers retire. The smart ones will realize that they’ll have to stay on the job or else be forced to move to Oklahoma.
The really smart ones will move to Oklahoma and use their increasingly worthless pensions to buy them a short retirement. Their time can be used to buy rental houses. Inflation and economic growth in Oklahoma City will cause property values and rents to rise dramatically over time. At some point, they will sell some of those houses to pay off the mortgages on the rest and retire into comfortable careers as property managers.
Our Opportunity
Future inflation offers us a dual opportunity. We can train leaders to be ready for these changes in the city and offer solutions, both in our churches and in the political realm. We can also help our future leaders see the potential of starting companies and buying rental houses in the Oklahoma City area.
People who are financially independent, whose businesses are producing a lot of passive income, have their minds and time freed up to consider how they can be God’s servants in the city which we love.
Even more importantly, people who have become financially independent usually have done so because they’ve developed the ability to make educated guesses about the future status of the economy. And this gives them an edge when they’re making ministry plans for a city that’s poised on the edge of enormous growth.
Take action. Start a business. Buy a rental house this year. Provide for your future grandchildren. Start looking after our city’s future.
Fall in love with Oklahoma City. Take leadership. Help her become a wonderful woman the entire world will admire.
This is what the LORD Almighty, the God of Israel, says to all those I carried into exile from Jerusalem to Babylon: “Build houses and settle down; plant gardens and eat what they produce. Marry and have sons and daughters; find wives for your sons and give your daughters in marriage, so that they too may have sons and daughters. Increase in number there; do not decrease. Also, seek the peace and prosperity of the city to which I have carried you into exile. Pray to the LORD for it, because if it prospers, you too will prosper.” (Jeremiah 29:4-7)
Speak, O Lord, till Your church is built
And the earth is filled with Your glory.
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.
…
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.
…
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.
…
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.
…
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.
…
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.
