Sunday, June 22, 2008

Money is only one asset choice...

I have never been a fan of money as a form of wealth. Much of its allure has been the easy comparability with other's pile of money. It also seemed to "hold value" and was "safe". Maybe it was the inflation of the '70's that formed my instinct, but a preference to other assets over money is paying off big time - and has for several years.

Conversely, carefully considered debt is not to be despised out of hand either.
Max Weber argued convincingly in his famous book The Protestant Ethic and the Spirit of Capitalism that the frugality and industriousness promoted by the early Protestants in opposition to the opulence of the Roman Catholic Church were values conducive to and perhaps critical in the rise of commercial society. Protestants who believed in predestination wanted to show by their modesty, austerity, and avoidance of lavish display that they were predestined for salvation.

But saving plays a less important role in economic progress today than it did in the sixteenth century. Its role in powering economic growth has been taken over, to a large extent, by technology. The great rise in standards of living worldwide is due far more to technological progress than to high rates of savings, that is, to deferring consumption.

At the same time, now that we have efficient debt instruments that in former times did not exist or were extremely costly, the role of personal debt (Brooks does not criticize corporate or government debt) in human welfare is more apparent than it was. Apart from its role in solving short-term liquidity problems resulting from delay in the receipt of income, debt enables consumption to be smoothed over the life cycle. Without debt, a family might have to wait 20 years before it could afford to buy a house. Of course, debt creates risk for both lender and borrower, as the subprime mortgage crisis has dramatically illustrated. But if the risks are understood, it is unclear why the assumption of them should be thought harmful to personal or social welfare. At worst, debt leads to bankruptcy, but bankruptcy is not the end of the world either for the borrower or for the lender. [More]
Holding corn instead of paying off operating loans is a winning strategy and has been for two years. Borrowing to buy a tractor last year means you'll save far more than the cost of the interest. The list of examples goes on.

But financial advisers and economists love the neat countability of money. They worship its liquidity and in some cases only generate revenue when moving money around. Owning land doesn't give them much chance to churn the account when they need income, for example.

Many other assets now approach cash in liquidity, especially for farmers. Have any trouble selling your corn? How about a used combine? Now imagine the rush to your door if you decided to part with an 80.

Even that most loathsome economic vice - borrowing for consumption - is subject to unfair, and often outdated prejudice. Derived largely from the intertwining of finance and morality by smug hypocrites, current economic conditions are proving these near biblical maxims less than logical.
My friends who study humanities are shocked and do not believe me when I, a pension economist, tell them they should not be saving. Prudent advice has become: You should always save some fraction of your income. You should save not only for retirement, but also for adverse income shocks. But, Mr Becker points out, these new lines of credit help workers cope with income shocks.

Young consumers who take on debt are often classified as impulsive and irresponsible. Some deserve that label—for example, people who take on massive amounts of credit card debt to finance the purchase of multiple flat-screen TVs. But saving does not necessarily make sense for everyone at every age. For some, higher rates of debt are appropriate in order to smooth consumption and, ultimately, increase welfare. [More]
So as the pages of farm media are overflowing with advice on what to do with our current windfall profits (oh yeah - they are real), every other sentence is to pay down debt and build cash reserves.

Well, here's an alternative strategy. Reinvest. Buy land close to you, build infrastructure (bins, buildings, tile, etc.). Start two years ago when the same advice filled the pages.

And then consider what form you want your wealth to be in if the looming inflation takes off.

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