Monday, April 06, 2009

The money problem...

My bias against cash is well-documented.  Not only am I unapologetic, I think we are discovering some aspects about money that should give us pause before swallowing whole-hog the relentless and often groundless (pun intended) advice of wealth specialists whose attachment to money borders on the...ummm, theatrical.

Let me state my perspective up front.  Money may not be the root of all evil, but it is the root of much faulty thinking and it is only one choice modern citizens have for wealth storage. More importantly, it is often a very poor choice compared to alternatives.  Money strongly linked to fear, as we are seeing in the debt markets right now.  You don't loan wealth to a government you accuse of being socialist for microscopic returns because you are brimming with self-assurance and a feeling of safety.

But money has other intrinsic properties that screw up our brains.
Vohs suggests there is a simple dynamic at work here. "Money makes people feel self-sufficient," she says. "They are more likely to put forth effort to attain personal goals, and they also prefer to be separate from others." The touchy-feely social side of us may disapprove of such behaviour but it is useful for survival. This ability to assess which set of norms applies in a particular situation is important in guiding our behaviour, Ariely says. It allows you to avoid expecting too much trust in the midst of a competitive business negotiation, for example, or making the mistake of offering to pay your mother-in-law after she has cooked you a nice meal. "When we keep social norms and market norms on separate paths, life hums along pretty well," says Ariely. "But when they collide, trouble sets in."
The trick is to get the correct balance between these two mindsets. Numerous psychological studies have found a general trade-off between the pursuit of so-called extrinsic aspirations - such as wealth, but also fame and image - and intrinsic aspirations, such as building and maintaining strong personal relationships. People who report a focus on the former score low on indicators of mental health, and those strongly motivated by money are also more likely to find their marriage ending in divorce.
This is not to say that we shouldn't focus at all on extrinsic aspirations. Everyone needs money for those parts of their lives governed by market norms, and it's well known that financial strain can bring depression, perceived loss of control and reduced life expectancy (see "Buy into happiness").
Now that the days of easy credit and rampant consumerism appear to be over, for the time being at least, it would be nice to think that we might acquire a more balanced relationship with money. Unfortunately, it's unlikely to be that simple. One reason why is exposed by Vohs's latest findings, which reveal another peculiar aspect of our mental relationship with money.
In a study to be published soon in the journal Psychological Science, Vohs and psychologists Xinyue Zhou of Sun Yat-Sen University in Guangzhou, China, and Roy Baumeister of Florida State University, Tallahassee, found that people who felt rejected by others, or were subjected to physical pain, were subsequently less likely to give a monetary gift in a game situation. The researchers then went on to show that just handling paper money could reduce the distress associated with social exclusion, and also diminish the physical pain caused by touching very hot water.
"Money seems to have symbolic power as a social resource," says Vohs. "It enables people to manipulate the social system to give them what they want, regardless of whether they are liked." Put bluntly, it looks as if money is acting as a surrogate friend. Could that explain why some people focus on extrinsic aspirations at the expense of real social relationships? [More]
The perennial advice for farmers that "cash is king" is another example.  One durable and entertaining oracle of money as the The Right Answer is the indefatigable David Kohl.

I've been listening to Dr. Kohl for 15 years or so now, and even though he updates a few graphs and adds new anecdotes of farmers behaving badly, his message throughout has been essentially unaltered - which is strange when you consider the wide range of economic conditions we have seen in agriculture over that time.  My impression of it boils down to this: Get money. Keep it.
“I see more [economic] danger in crop farms than in livestock. Why? Livestock producers have had to count their dollars. In crop, the two and 10 rule applies: two out of 10 years they make tons of money and in the other eight years, they get by.
“American [farmers should] be careful. A lot of farmers have a lot of money and haven't earned a dollar.
“Eighty-seven percent of farm value balance sheets are land values. What happens if adversity hits? We are vulnerable if we have to unload some of that land.
“Twenty-five percent of small businesses filing bankruptcy come off their most profitable year. Egos get in the way and they live high off the hog.
“Money is cheap, so borrow and expand. Yeah, money is cheap, but payback can be hell.
“We have six million homes that nobody wants now — big Barbie doll houses with high maintenance. They will go the way of the Harvestore silo. Who will buy big houses? Foreign investors.
“We are going to be in an extended economic downturn. Cash is king. Be resourceful and have a game plan to operate in good and bad times. But agriculture is one of the best-kept secrets in America. I think it is an engine for growth.” [More]
Demonstrating the paucity of alternate views in ag economics, a nearly similar article of Kohl-isms graced the pages of Farm Journal as well.  The guy is a aphorism machine.

Permit me to offer a response: Meh.

To begin with, try to remember the last time Kohl or the legion of voices who nag us about our wealth management seriously encouraged owning farmland.  Oh sure, if we could put down 85% and cash flow it with $2 corn and 50% yields, they might OK such a radical step.

Now ponder how the claim of capital (land) on profits continues to grow at the expense of labor inputs.  This is the ratio of cash rents you pay versus profit per acre.  Surprise!  Ownership of land now easily commands a 2 or 3-to-1 advantage.  The old rule of thumb of 50/50 has been left behind.

Meanwhile, the competition to rent and land prices have zoomed, and nary a regret sounds from money men for all the farmers who no longer remain in the ranks simply because they believed they could farm a bank account, as they advised.

But my experience shows it has been the single best strategy to ensure my farm not only grows and prospers, but extends beyond my lifetime.  Owning the ground in not just good business - regardless of price - it is now clearly seen as far less risky that the alternatives these gurus have been pushing. Not because it is risk-free, but because unlike alternatives the risks are obvious and within our expertise to grapple with. Compare and contrast with Citibank stock or GM bonds.

Moreover, if we do enter a phase of brisk inflation, which is not my opinion alone, those piles of cash will diminish in value just like millions of stock portfolios have.  In the most surprising development in years, some ag economists are actually embracing long term debt, but fall back into the money-worship trap by not investing the proceeds in an asset with the promise of actual performance, to pick a random example.

I readily admit to being semi-rational about land, but in my defense, I would point out that money-lovers rarely acknowledge their own blind sides, as the research above illustrates.  And I can point to more than one example where buying land in the face of advice like Kohl's have been the best choices I have ever made.

Perhaps, economists and accountants like money because it is simply measured for neat charts and graphs.  It works well for theories and models.  It is easily converted into other assets, allowing commissions to be extracted in the process, as well.  It is inconsistent to claim "agriculture is an engine for growth" and advise extracting wealth from that industry to hold as cash.  If you believe in farming, put your money where your mouth is.

But if economic advice doesn't have to be shaped by reality, and if there are Eternal Truths about cash, wealth, and proper choices that are applicable in any economic environment, how much science is there in economics?

Dr. Kohl may be right, of course. But there is a calculable chance that those of us who choose to own our industry rather than money may be right as well. The outcome of this debate will be evident by those who are farming in a decade or so.


Anonymous said...

Land has always been a safe investment if you have the financial means to hold on too it long enough and John it is the base for grain farmers "job"...a wealthy landlord here holds 50% land,25% stocks and 25% in cash...on the inflation note , do you think if inflation-interest rates increase as predicted that grain prices will see same increases?? regards -kevin

don said...

I would agree with Kevin, land is certainly a safe investment. You may drive by it and it is still there, unlike the worldcom stock I used to own! Several years ago, I attended a Purdue Farm Management seminar and their esteemed econimist started out by telling us he was now doing estate planning work to help you guys who ignored my advice 30 years ago and bought land anyway.