(Third of three parts)
How do I invest locally? What traps should I beware? First, take into account to what extent investments depend on federal government credit. In these days after the mortgage bubble burst and both housing and mortgage backed securities have been sucked down the drain along with Fannie Mae & Freddie Mac, it’s easier to make this point. Still, if you ask most investment advisors about the federal credit’s risk, they will snort, “Do you really think the federal government will ever go bankrupt?”
That nails the issue. That presupposition that the federal credit will always be good undergirds all the investment decisions that most investment advisors make. It is practically identical to the prudent man rule. Did an investment advisor or someone with a fiduciary relationship do what a prudent man would do? Only an imprudent man would dare question the federal credit.
They all presuppose that the federal credit is good and will never go bust. But in fact, the federal government is by definition bankrupt because nothing backs all of those guarantees but its willingness and ability to borrow more money.
Is it effective?
Fannie Mae and Freddie Mac offer the perfect example of how effective the federal credit really is. They pumped up an enormous real estate bubble. They bought untold mortgages that are simply worthless. They drove traditional real estate down payments from 20 percent to zero percent. They created a world where it was an insult to ask a borrower if he could actually pay the mortgage he’s applying for. Now, having dislocated colossal capital, busted millions of investors, and wrecked the real estate market for the next 20 years, they are empty shells waiting to die.
Some similar monster is spawned whenever the federal credit enters into any business. Look at farming. Most big farmers in the country depend on federal subsidies. I know some in West Tennessee, a father and son, who are great farmers and sharp businessmen, multigenerational farmers. They have all the equipment; they use all the latest chemical techniques, and they farm about two thousand acres and produce huge crops. Yet the son admitted to me that without the subsidies they couldn’t make it. These men are running a million dollar a year operation, and without the federal credit, they can’t make it.
To survive without the federal credit they would have to completely restructure their operation. Since the 1930s when the federal credit first wormed its way into farming it has, like some brawny starling chick, crowded out all other methods of financing and all other ways of thinking. In the end, it has made farmers dependent, unproductive, unprofitable, and less financially secure.
This is the ironclad, unchanging cosmic rule: All government money comes with a sock in the jaw.
Without the federal credit
Think about Jiffy Mix®. It is like Bisquick,© a baking mix in a box, but was the very first one, and my wife Susan likes Jiffy Mix better than anything else. One day was in the kitchen and I picked the box. There it read, “Founded in 1932.”
What, 1932? Those people must have been completely lunatic to imagine that they could open a business in the Great Depression’s depths, a business that actually offered a more expensive convenience than simply taking flour and lard and milk and mixing them together. And, yet, they went into business in the most unpromising times, producing something that people could use and people wanted, and seventy years later they’re still doing it.
Obviously they understood that their security lay in being productive and serving the public. They did that, and so they are still here, without benefit of the federal credit.
Nevermind the collapse
Many people who have contemplated economic crash way too long. For the last 30 years or 60 years, they’ve been waiting for the Great Depression to occur again. Certainly there is every reason to doubt the present financial and monetary system because it is a confidence game.
But, still, the morning after the crash, somebody is going to wake up wanting breakfast, and somebody else is going to make money cooking breakfast for them. As long as you serve others, there will always be a secure place for you in the world.
The Great Depression also pointed out another important aspect of wealth and security: family & community. We say a man is wealthy because he has many friends. That’s not some metaphor, that’s a fact, because when he gets in trouble and needs help or loses his job, if his family who will support him until he can get on his feet again, then he has more security than the person who depends on 26 weeks of unemployment checks.
Exporting our wealth
Finally, local communities are shooting themselves in the foot. We put our money in bank deposits, and then the banks export those deposits, investing them elsewhere, less the cut to the intermediaries. Local business and our neighbors then have to import capital back in, less the cut to the intermediaries.
We are drained by foreign intermediaries.
Now that interest rates are so low, maybe people will look at doing business with their neighbors. The bank offers certificates of deposit paying 0.3% annually (one year CD, 3 October 2012, http://www.bankrate.com/ finance/cd/current-interest-rates.aspx). In fact, you lose money with that because the inflation loss is probably 8% a year, so you lose a net 7.7% with that CD.
Meanwhile, local businessmen are borrowing on credit cards at rates of 15% to 25%. Would you be willing to loan your money to them at 10% rather than the bank at 0.3%? Makes sense to me, and the interest goes not to some foreign intermediary, but remains locally.
PS. The best treatment of mankind’s historic struggle to keep wealth, money, and credit tamed and in their cages is Elgin Groseclose’s Money & Man: A Survey of Monetary Experience. You want the fourth edition, 1977, from the University of Oklahoma Press. I found 11 copies on www.abebooks.com ranging from $21.64 to an inscribed copy for $560 [sic]. It’s history, but one of the most educational and helpful books I’ve ever read.
From the October 2012 Moneychanger. Used by permission. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focus on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$99 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website.