Archive for category Cash Flow Real Estate
Economists who hold the popular view that expanding the money supply will provide the best medicine for our ailing economy dismiss the inflationary concerns of monetary hawks, like me, by pointing to the supposedly low inflation that has occurred during the current period of rampant Fed activism. In a recent blog post aimed specifically at me, Paul Krugman noted that the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to prove me wrong. In fact, Krugman and others have even suggested that the CPI itself overstates inflation and that the Fed would be better able to help the economy if less strict methodologies were used. However, there is plenty of evidence to suggest that the CPI is essentially meaningless as it woefully under reports rising prices.
Magazines and newspapers provide a good case in point. The truth has not been exposed through the economic reporting that these outlets provide, but in the prices that are permanently fixed to their covers. For instance, from 1999 to 2012 the Bureau of Labor Statistic’s (BLS) “Newspaper and Magazine Index” (a component of the CPI) increased by 37.1%. But a perusal of the cover prices of the 10 most popular newspapers and magazines (WSJ, Washington Post, Time, Sports Illustrated, U.S. News & World Report, Newsweek, People, NY Times, USA Today, and the LA Times) over the same time frame showed an average cover price increase of 131.5% (3.5 times faster than the BLS’ stats). This is not even in the same ballpark.
Some defenders of the BLS may conclude that prices were held down by the availability of free online news content or the convenience of digital delivery. But that is beside the point. Prior to the digital age, the BLS could have claimed that newspaper costs were held down by public libraries that provided free access. It’s also true that online publications deliver less value on some fronts. Not only do many people enjoy the tactile process of reading physical newspapers or magazines, but they offer the secondary value in helping to kindle fires, housebreak puppies, pack dishes, and line birdcages.
Another stunning example is found in health insurance costs, which is a major line item for most families. According to the BLS we can all breathe easy on that front because their “Health Insurance Index” increased a mere 4.3% (total) in the four years between 2008 and 2012. Interestingly, over the same time, the Kaiser Survey of Employer Sponsored Health Insurance showed that the cost of family health insurance rose 24.2% (5.5 times faster). But even if the BLS had reported higher costs, it wouldn’t have made much of a difference in the CPI itself. Believe it or not, health insurance costs are assigned a weighting of less than one percent of the overall CPI. In contrast, the Kaiser Survey revealed that in 2012 the average total cost for family health insurance coverage was $15,745, or almost one third of the median family income.
If the BLS could be so blatantly wrong in reporting the prices of newspapers and health insurance, should we believe that they are more accurate on all other sectors? If the inaccuracy of these two components were consistent with the rest of the CPI’s components, inflation could now be reported in double-digits!
Even more egregious than the manner in which prices are currently reported is the way that CPI methods have been changed over the years to insure that most increases are factored out. Since the 1970’s, the CPI formula has changed so thoroughly that it bears scant resemblance to the one used during the “malaise days” of the Carter years. Main stream economists dismiss criticism of the changes as tin hat conspiracy theories. But given the huge stakes involved, it’s hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the formulas, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.
The newer CPI methodologies are designed to report not just on price movements, but on spending patterns, consumer choices, substitution bias, and product changes. In other words, the metrics have been altered to track not so much the cost of things, but the cost of living (or more accurately, the cost of surviving). But if you simply focus on price, especially on those staple commodity goods and services that haven’t radically changed in quality over the years, the under reporting of inflation becomes more apparent.
As reported in our Global Investor Newsletter, we selected BLS price changes for twenty everyday goods and services over two separate ten-year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. (The twenty items we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef, and prescription drugs.)
We know that people do not spend equal amounts on the above items, and we know their share of income devoted to them has changed over the decades. But as we are only interested in how these prices have changed relative to the CPI, those issues don’t really matter. We chose to look at the period between 1970 and 1980 and then again between 2002 and 2012, because these time frames both had big deficits and loose monetary policy, and they straddle the time in which the most significant changes to the CPI methodology took effect. And while the CPI rose much faster in the 1970’s, the degree to which the prices of our 20 items outpaced the CPI was much higher more recently.
Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 117%, just 5% faster. In contrast between 2002 and 2012 the CPI rose just 27.5%, but our basket increased by 44.3%, a rate that was 61% faster. And remember, this is using the BLS’ own price data, which we have already shown can grossly under-estimate the true rate of increase. The difference can be explained by how CPI is weighted and mixed. The formula used in the 1970’s effectively captured the price movements of our twenty everyday products. But in the last ten years it has been quite a different story.
If these price changes in our experiments had been fully captured, CPI could currently be high enough to severely restrict Fed action to stimulate the economy. Instead, the Fed is operating as if inflation is extremely low. As a result, they are making a huge policy mistake that will come back to haunt us. During the last decade the Fed spent many years denying the existence of a housing bubble, even as a mountain of evidence piled up to the contrary. That error caused the Fed to hold interest rates too low for too long, blowing more air into the bubble and imposing enormous negative consequences on the economy. The Fed, now similarly blind to the inflation threat, is repeating its mistake, only this time the negative consequences will be even more dire.
Apart from the statistical problems that hide inflation, there are also macroeconomic factors that have helped keep prices down despite the quantitative easing. Massive U.S. trade deficits and foreign central bank dollar accumulation mean that much of the printed money winds up in foreign bank vaults, not U.S. shopping centers. As foreign consumer goods flow in, and dollars flow out, a lid is kept on domestic prices. In effect, our inflation is exported as foreign central banks monetize our deficits and recycle their surpluses into U.S. Treasuries. The demand has pushed down bond yields which has allowed the U.S. government to borrow inexpensively. Of course, when the flows reverse, bond prices will fall, yields will climb, and a tidal wave of dollars will wash up on American shores, drowning consumers in a sea of inflation.
Unlike Krugman and the Keynesians, I would argue that it is impossible to create something from nothing. I believe that printing a dollar diminishes the value of all existing dollars by an aggregate amount equal to the purchasing power of the new dollar. The other side takes the position that the new money creates tangible economic growth and that real economic value can therefore be created by putting zeroes onto a piece of paper. I think that those making such absurd claims should bear the burden of proof. For more on the interesting topic of hidden inflation, see my video that I just posted.
A vast number of people think that what we’ve been through during the last four years is just another episode in the economic crises history of the United States. They believe a president has the power to continue the trend or reverse it. So they put their faith in the next presidential elections. They think their favorite candidate, whether Romney or Obama, will bring about the change they wish for. So they go and vote. Then, if their candidate wins they expect miracles from their leader until yet another economic event hits them and the dream fades away. And so it goes every four years while the giant Titanic is sinking.
The reality of it all is that it matters little whether Obama or Romney becomes the president. Why? Because – contrary to what we’ve been told – since 1913 the president or congress has had no control of our monetary policy. The central bank has such powers.
During the last four years Mr. Obama has followed the policy of the Federal Reserve. His major campaign contributors during 2008 elections are listed here. If he wins, he will continue the same policy. If Mr. Romney wins he will take over the torch because the money that funded his presidential campaign accepts no opposition.
I bring this up not to be political but to demonstrate to my readers that our next president won’t have the ability to fix the economic crises. Therefore we should not rely on the government to make our lives and/or our children’s lives better. It is up to us to learn, assess, and prepare for the future by making educated decisions, while we still have the ability to do so. Let me explain.
Sound monetary policy is vital to the economic recovery. That is because it is the bad monetary policy that caused the problem, not once, not twice, but throughout history according to the Austrian School of Economics. Asset bubbles form due to artificial expansion/inflation of money supply. This is the key, this is the underlying cause. When newly created (by the Fed) money – out of thin air – finds its way in the economy it flows into assets such as real estate, commodities, or securities. The result is artificially inflated assets. This is not sustainable. If it was we would be trading houses today in the millions of dollars. It is not sustainable because in such a scenario the market forces would lead to a currency collapse. If the bad monetary policy continues we will eventually end up with a dollar not worth a continental.
Since the real estate bubble burst there was no good monetary policy. Money supply is still being expanded via bailouts and QE’s. There was no good policy before either. Such policy helped to induce the bubble. A good monetary policy means stopping the creation of new money. It means stopping the Fed’s printing pres, which in turn would cause the interest rates to go up. Corporations would go bankrupt. People and the government would be forced to live within their means. Produce a lot, spend a little, and save more. It would be painful. Even though it would be temporary it would be necessary for a healthy recovery. But again, it would be painful. It means experiencing the withdrawal symptoms after years of addiction. No politician wants to have that happen on his term. Thus, the politicians will continue to kick the can down the road.
The question is what could potentially happen as a result of the failed monetary policy? At least two problems. Currency collapse and/or astronomical rise in the interest rates. Both are conducive to loss of purchasing power for the average man. Both require a pro-active approach in lieu of the common reactionary one. I would not expect such approach from the government. So, it is up to the average Joe to take the matter of his finances in his own hands.
I titled my article “The Greatest Transfer of Wealth” because such event is ongoing now. Bad monetary policies destroy the working middle class. It happened to the Romans leading to the collapse of the empire. It happened to Weimer Republic in the early 1920’s leading to the rise of Hitler. It happened to France, China, Russia, Argentina, Mexico, and most recently to the wealthiest country in Africa, Zimbabwe. For a history on money and governments out of control read Daily Reckoning’s “Fiat Currency: Using the Past to See into the Future“.
Still not convinced? Consider your net worth during the real estate boom and before the 2009 collapse of the stock market. If your net worth is higher today you deserve to be congratulated. You are in the 5% bracket. If your net worth is lower today then you’re in the 95% bracket.
Within a few short years there’s a reasonable likelihood that the middle class will only keep its name. In real life it will be partially or fully dependent on the government. Being dependent on the government comes with strings attached. Working a 9 – 5 job will not make the average Joe independent. To get in the 5% minority bracket one must be truly visionary. He must live his life unlike the 95% majority. He must think like a contrarian and he must invest like a contrarian.
Because I spend my time helping people finance commercial property I get to be exposed to unconventional ways to increase wealth. Whether they are in real estate equities or debt, in commodities or the stock market, the driving criteria is to buy when the majority is selling and to sell when everyone else is buying. There is an incredible opportunity today to buy quality real estate at extremely low prices. Yet, the real estate market activity is supported mainly by investors. Part is domestic and part being the citizens of other countries.
But the 95% doesn’t get it. They continue to keep their retirement with their stock broker. They would rather have their hard earned money invested in the artificially inflated stock market. They are now comfortable that the Dow Jones – and their retirement account – is getting close to the levels pre-2009. Never mind the cost of living jumped up. Never mind that there are investments in hard assets today which are considered by a few (the 5% bracket) less risky than the stock market. Never mind that such assets produce a monthly stream of income better than most of the dividends paid by corporations. They won’t take the risk, or at least this is what they think. In reality the risk is in following the conventional wisdom and maintaining the status quo. American writer, Lillian Smith once said “When you stop learning, stop listening, stop looking and asking questions, always new questions, then it is time to die.” So will be the faith of the average retirement account.
My goal is to share economic news with my readers. Then, present them with possible solutions. Please note that any type of investment represents a risk. It is your responsibility to research, learn, and evaluate whether any investment presented on my site is right for you. At your request I put you in touch with the representatives of the companies I promote. You should evaluate the company, the projects, and ask questions. You should visit the property. You should also seek advise from your accountant and/or a professional you trust before investing in any of the investment opportunities offered on my site.
By Gary North
In the United States, women outlive men by at least four years. In most cases, wives are several years younger than their husbands are. Combining these two statistical facts, we reach an inevitable conclusion: today’s wives are likely to spend more than half a decade as widows.
The reality of widowhood is that a woman will become dependent on somebody other than her husband unless she is fully in control of her faculties and her finances.
A woman who wants to remain independent in widowhood should understand from the day she gets married that she must learn the basics of family finances. The better she gets at handling money, and the better she gets at making money, the more likely she will retain her independence during the inevitable years of widowhood.
The problem is, people discount the future. They assume that the future will take care of itself, and that the future will be mostly positive. The trouble is, the older we get, the less likely that our future will be positive. The clock is ticking.
It is common in the United States for women to control the household budget. Couples should work together to establish spending and savings, although I don’t think this is as common as we like to believe. These days, programs like Quicken make it relatively easy to budget and to track a family’s spending patterns. It is easier than it was 20 years ago, and surely easier than it was 30 years ago. It is common for wives to handle the Quicken accounts. The question is this: Do wives have equal input on how the money comes in, and do they have equal input on what should be done for the long-term support of both of them in their retirement years?
We think that people act in their own self-interest, but we find that people prefer to defer. They prefer to kick the can down the road. They prefer to imitate Congress. The trouble is, the decision of Congress to kick the Medicare can down the road guarantees that the vast majority of women who are alive today will spend their final years as complete dependents on their children, and that they will probably be destitute.
There really is no escape from this statistically. We know the Medicare system is going to bankrupt the government, and therefore we know that the Medicare system will be modified so as to break the promises the politicians have made regarding the last years of our lives. There is no escape from this. It is going to hit every Western industrial nation. No one who looks at the numbers expects anything else.
Nevertheless, the vast majority of wives in the United States and the West do not begin to assert co-authority over the spending patterns of their households, despite the fact that they will be alone in their final years. They refuse to make decisions today that might give them a degree of protection in their old age.
One of the reasons why I favor the purchase of investment real estate is this: in people’s old age, the houses are owned free and clear, and the rental money is gravy. A person who owns half a dozen homes free and clear is going to make enough money to have a comfortable middle-class lifestyle in retirement. I realize that not everybody can own half a dozen homes, but everybody who subscribes to this website can.
One way or the other, wives are going to have to make decisions over where the money goes. They can begin to make these decisions in joint consultation with their husbands today, or they can wait until their husbands are dead.
Twenty-five years ago, Mark Skousen’s wife JoAnn published a newsletter for women. It focused on investing. The newsletter did not gain enough subscribers to stay in business, and so she ceased writing it. It was a very good newsletter. It was quite relevant. It didn’t matter, because she couldn’t get enough women to subscribe.
About that time, I interviewed Charlotte Foehner. She was the author of a very good book called The Widow’s Handbook. Her targeted audience was women like herself. Her husband had died unexpectedly, and she knew virtually nothing about investing. She had enormous responsibilities, and these responsibilities hit in a time when she was most psychologically vulnerable. Her husband was dead, and she had to put his affairs in order. He should have done this before he died. She should have insisted that he do it before he died. He didn’t, and she didn’t.
Answers can be painful. Answers increase the level of personal responsibility. Nobody can claim ignorance if someone has answered a major question. People think that they are better off by remaining in the dark, because they assume the problems are not going to hit them, and they might as well not think about it.
This is the attitude of the vast majority of Americans today. If they had any idea of what will happen to them, statistically speaking, more of them would start asking questions. But they don’t know, and even if they did, they would not like the answers. The answers would force them to restructure their lives. Answers would force them to restructure their dreams.
The fact that women become dependent on their husbands early in their marriages, because women have to take care of the family, gets them into a mentality of dependence. It is easy to become dependent upon the husband’s decisions. This has been the traditional approach throughout most of history. But with the vast increase in the division of labor over the last century, and with the increased life expectancy of women, this tradition is now a liability for women.
A woman has got to face statistical reality. She is going to be a widow in the final decade of her life. She is going to have to make her own decisions, and if she is incapable of doing this, either mentally or financially, somebody else is going to make her decisions for her. Traditionally, this has meant her oldest son and her daughter-in-law. She may trust her oldest son, but she has to face the reality of potential vetoes by her daughter-in-law.
A woman who is determined not to be dependent upon the judgment of her daughter-in-law should face reality early. She has got to have an independent stream of income, and she has got to have somebody other than her daughter-in-law making the decisions about how this stream of income is going to be allocated, and by whom.
Anyone who does not have an independent stream of income is inevitably going to be dependent. Any woman who does not want to be dependent upon another woman, especially a younger woman who resents the added expense of a mother-in-law, had better take great care in building a separate estate for herself in her old age.
Look at the median net worth of American families. Adjusted for inflation, it has not risen in 20 years. Most of this wealth was in the family’s home. That’s why it peaked in 2007.
This includes all age groups. Older people have more money. Whites at age 65 probably have about $225,000 in net worth. It was higher in 2007. Then the housing bubble popped.
http://www.agingstats.gov/agingstatsdotnet/Main_Site/Data/2010_Documents/Docs/OA_2010_Updates_123010.pdfThis is the measuring rod. Each family should assess its net worth.
How long will you last in retirement? In calculating this, add to expected expenses the replacement of Medicare, which on average pays $900 a month per household member. That was in 2009. It’s higher today; medical costs keep rising. Figure $1,000 per person per month. Two members means $2,000 a month. That is what it will cost to stay alive and healthy after age 65 when Medicare goes bust, which it will.
Who will be able to afford this? For how long?
If a person sells his home to pay for medical costs, where will he live? Add another $1,000 a month for rent. But medical costs will not decline.
Preparing for retirement is not easy. It involves asking questions. Any woman who does not ask questions is basically saying that she is content to live under the jurisdiction of her daughter-in-law in her old age. She had better have a financially secure daughter-in-law, and that daughter-in-law had better have her mother-in-law’s best interests at heart.
It is better to ask questions now than to be told what to do later.
Note: Gary North is one of the most brilliant men I know. He is a virtuoso in the field of economics and investing. Check out his website at http://www.garynorth.com/. Also, if you’re thinking of investing in real estate click HERE to read the criteria for my Turnkey Real Estate program.
If your life revolves around real estate you’re probably wondering when will the real estate market bounce back. And even if you’re not directly involved in real estate you’re most likely wondering when will you be able to sell your property for a price above your loan balance.
So, if you’re like most people and listen to the news you would have heard this. The Federal Reserve has lowered the interest rate to revive the depressed real estate sector. Low rates would get people to buy and others to refinance. Buying would lead to more housing demand thus helping builders and realtors. Refinancing would help consumers increase their net disposable income. Therefore, these folks would start spending which in turn triggers demand in other consumer areas and blah, blah, and blah.
It may not be obvious to the untrained eye that our Keynesian anti-free market government and its media disciple have it backwards. What they don’t seem to understand is that in order for people to buy houses they must be financially able. Not only that but they also must have the security that their job will be there and their employer will still need them for a while. When nine out of a hundred people (or more realistically seventeen out of a hundred) are jobless, the majority of folks don’t think about the “American Dream”. They think about how they’ll be able to keep food on the table and keep a roof, any kind of roof, above their heads.
Then we have the Joe Smiths who may want to move and buy a new home but they can’t just seem to be able to sell their current ones. Their homes are either under water or there is no demand to buy at the price they think is fair. So the Joe Smiths will have not much of a choice but to stay where they are.
Reality is that few people today have a sense of prosperity. As a landlord myself I see how my tenants are suffering through this economy. As a commercial mortgage broker I can’t help noticing the challenges some of my clients experience. Heck, my work and my investments are affected by the people I work with, my tenants and my clients. As you can see there is a Domino Effect that impacts all of us. So, what is the solution then?
Get rid of Regulations
In order for the real estate market to get better there are some underlying fundamentals that must occur. First, we must see a business friendly environment encouraged by the government. In this case the government’s job is to slash most of the burdening regulations so that entrepreneurs can put their creative minds into action and bring new enterprises to life. We definitely need the small business and the wonderful benefits of competition. This will create employment and will fill commercial real estate vacancies.
Secondly, we need lower taxes not only for businesses but for all taxpayers. The businessman must profit in order for him to stay in business. Otherwise there is no incentive for him to take such challenge and risk. As far as the individual, he knows best how to spend his money, he doesn’t need the government to do it for him. When the individual has more disposable income he can then direct the spending in the areas he finds it most beneficial.
Get rid of Moral Hazard
Then we have the all so predominant Moral Hazard. The Wikipedia defines moral hazard as “a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.” What I am referring to is the corporate welfare which entails the “generosity” of the government when bailing out insolvent corporations.
This matters because when Fannie and Freddie get bailed out it doesn’t allow the market to work in its natural course of events. It matters because when the Fed buys the banks’ bad assets it takes away the banks’ incentive to efficiently discard those properties to investors for the prices established by the market. Thus we have banks sitting nonchalantly on portfolios of foreclosed and non-foreclosed (but non-performing) assets. Why such behavior? Because they already sold their bad loans for a higher (than what the market dictates) price to the Fed. They have the money in reserves so why hurry? Ask a realtor who sells foreclosures or short sales what it’s like to work with the banks and you’ll get the real picture.
That’s it, folks, this is what must happen before we dare to even think of a real estate market recovery. Without getting rid of regulations, without lowering taxes, and without eliminating the corporate/bank welfare I don’t care what the laymen journalists say or predict. It’s all wishful thinking.
A final note. Implementing one or two of those requirements would somewhat improve the real estate market but in no way will bring it to a full recovery.
As Austrian economist Ludwig von Mises pointed out decades ago, the deeper the central bank gets into the inflationary cycle, the more the law of diminishing returns applies. We have reached this point as even the unprecedented accommodative conditions put in place by the Fed over the past few years are creating less and less artificial growth each time. This is why the Fed is likely thinking at this point that if they really want to stimulate the economy, it is going to take something stronger. The market has been following closely and is waiting for them to deliver.
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If one was to pay more attention to the mainstream media reports he’d be left confused with such conflicting reporting. On one side, the economic recovery is just around the corner – and it has been for the past four years – and on the other side the unemployment is still high, consumer price index (CPI) is on the rise, more people on government support, and more bailouts from the Fed to stimulate the economy. No wonder we keep on electing the same kind of politician; the one with little or no background in macro economics and monetary policy. That is because we really know little, if anything, about economics.
Truth is, with the continued implementation of the current Keynesian economic system a recovery is out of sight. At the same time it could be very close, so close that within a year or two we could be out of the depression or recession…done, over, kaput. But the only way to accomplish such a goal is to allow the free market to work, without the Keynesian interventionist approach.
To determine the events in a free market economic system we first need to establish the empirical fact that unregulated markets are not equivalent to chaos. For example, jungles which are perceived as savage and chaotic environments, do in fact have a universal order. Nature and animals have found a way to co-exist in a better system than most humans. When man tries to disrupt the natural flow of life in the jungle through its interventions problems do arise and chaos does set in. Similar effects are seen in the market economies where man causes economic bubbles through government and central bank imposed interventions. Then government and central bank try to solve the initially caused problems through more intervention thus causing market dislocations. Problem is not solved, it is only deferred. And so we’re faced with a boom/bust business cycle that has been an “accepted evil” for at least a century in the Western world.
What is the Free Market?
In simple terms, the free market is one that is not tampered with, one that is allowed to flow according to the natural law of supply and demand. The free market is not restricted by burdening laws, rules, regulations, taxation, and tariffs. It does not entail favoritism to special interest groups. It does not involve public subsidies, social or corporate welfare. The free market does not and cannot survive without a sound monetary policy, one in which money is real – not debt as it is now, – and is backed by specie (such as gold). A sound monetary policy also involves banks lending money they have on deposit without the ability to create credit – which later converts to money – out of thin air. This is known as a full reserve banking system.
So now that we have defined the basics of a free economy it should be easier to understand what it takes for a real recovery. But first, let me say that just by adding jobs paid for with public funds is not equivalent to a recovery. Jobs must derive from a need of real production with the outcome of real production. For example, a bureaucrat on the government payroll does not translate into productivity. The bureaucrat’s salary is actually a public debt, one paid for with newly created money that ends up being owed by future generations. It creates nothing of value but more regulations and intervention in the American business. There is no shortage of bureaucrats today. Productivity means creating real goods and services that people and businesses have a need for. Yes, like what the Chinese and other Asian countries are producing…and like what America was engaged in back during the 1980’s.
The not so known Depression of 1920
Most Americans are familiar with the economic destruction of the 1930’s, the depression that lasted more than a decade. After the 1929 stock market collapse the two presidents in charge, Hoover and FDR, did everything to save the economy by means of intervention. The Federal Reserve, which served – and still serves – as the USA’s central bank, used stimulus after stimulus, while debasing the dollar, to get the country out of depression with less than positive results. No one at the the time, except for Austrian economists, focused on a similar previous stock market crash back in 1920, when Warren Harding did nothing except cut the federal budget. There were no government stimulation and no Federal Reserve bailouts. The result was a full recovery in one year. Failing businesses were allowed to go bankrupt and start fresh in the sectors driven by demand. The world and the banking system survived despite the deflation that was the needed economic antidote. Today, we could and should use the example of the economic recovery from the 1920 Depression. After all, isn’t history the one we’re supposed to learn from?
Finally, if everything else appears too confusing or overwhelming, it’s worth knowing at least some simple basics.
The return to sound money under a gold standard is a necessary instrument of a sound economy. Fiat money leads to its destruction.
Credit creation out of thin air leads to expansion of money supply. Such credit ends up in newly created money. Inflation of the money supply leads to debasement of the dollar. The currency’s debasement leads to a reduction in the purchasing power of the average man. The reduction of the purchasing power is equivalent to a lower standard of living.
Booms and busts are the result of the inflationary money policy. Newly created money induces artificial price increase in various economic sectors. Without the expansion of bank credit the booms would not reach such high devastating levels. The correction of a Boom – also known as recession, depression, or downturn – is necessary whether man likes it or not. The more intervention is applied by the state the bigger the market distortion and the harder the recovery becomes.
Our Western society has been led to believe that man is smarter than nature, that we can create our own rules by overruling and interfering with those of the universe. The question remains how long and what will it take for us to discover that the market cannot be cheated?
To many people, the slumlord — alias ghetto landlord and rent gouger — is proof that man can, while still alive, attain a satanic image. Recipient of vile curses, pincushion for needle-bearing tenants with a penchant for voodoo, perceived as exploiter of the downtrodden, the slumlord is surely one of the most hated figures of the day.
The indictment is manifold: he charges unconscionably high rents; he allows his buildings to fall into disrepair; his apartments are painted with cheap lead paint, which poisons babies; and he allows junkies, rapists, and drunks to harass the tenants. The falling plaster, the overflowing garbage, the omnipresent roaches, the leaky plumbing, the roof cave-ins and the fires, are all integral parts of the slumlord’s domain. And the only creatures who thrive in his premises are the rats.
The indictment, highly charged though it is, is spurious. The owner of ghetto housing differs little from any other purveyor of low-cost merchandise. In fact, he is no different from any purveyor of any kind of merchandise. They all charge as much as they can.
First consider the purveyors of cheap, inferior, and secondhand merchandise as a class. One thing above all else stands out about merchandise they buy and sell: it is cheaply built, inferior in quality, or secondhand. A rational person would not expect high quality, exquisite workmanship, or superior new merchandise at bargain rate prices; he would not feel outraged and cheated if bargain rate merchandise proved to have only bargain rate qualities. Our expectations from margarine are not those of butter. We are satisfied with lesser qualities from a used car than from a new car. However, when it comes to housing, especially in the urban setting, people expect, even insist upon, quality housing at bargain prices.
But what of the claim that the slumlord overcharges for his decrepit housing? This is erroneous. Everyone tries to obtain the highest price possible for what he produces, and to pay the lowest price possible for what he buys. Landlords operate this way, as do workers, minority group members, socialists, babysitters, and communal farmers. Even widows and pensioners who save their money for an emergency try to get the highest interest rates possible for their savings.
According to the reasoning that finds slumlords contemptible, all these people must also be condemned. For they “exploit” the people to whom they sell or rent their services and capital in the same way when they try to obtain the highest return possible.
But, of course, they are not contemptible — at least not because of their desire to obtain as high a return as possible from their products and services. And neither are slumlords. Landlords of dilapidated houses are singled out for something that is almost a basic part of human nature — the desire to barter and trade and to get the best possible bargain.
The critics of the slumlord fail to distinguish between the desire to charge high prices, which everyone has, and the ability to do so, which not everyone has. Slumlords are distinct, not because they want to charge high prices, but because they can. The question that is therefore central to the issue — and that critics totally disregard — is why this is so.
What usually stops people from charging inordinately high prices is the competition that arises as soon as the price and profit margin of any given product or service begins to rise. If the price of Frisbees, for example, starts to rise, established manufacturers will expand production, new entrepreneurs will enter the industry, used Frisbees will perhaps be sold in secondhand markets, etc. All these activities tend to counter the original rise in price.
If the price of rental apartments suddenly began to rise because of a sudden housing shortage, similar forces would come into play. New housing would be built by established real estate owners and by new ones who would be drawn into the industry by the price rise. Old housing would tend to be renovated; basements and attics would be pressed into use. All these activities would tend to drive the price of housing down, and cure the housing shortage.
If landlords tried to raise the rents in the absence of a housing shortage, they would find it difficult to keep their apartments rented. For both old and new tenants would be tempted away by the relatively lower rents charged elsewhere.
Even if landlords banded together to raise rents, they would not be able to maintain the rise in the absence of a housing shortage. Such an attempt would be countered by new entrepreneurs, not party to the cartel agreement, who would rush in to meet the demand for lower priced housing. They would buy existing housing and build new housing.
Tenants would, of course, flock to the noncartel housing. Those who remained in the high-price buildings would tend to use less space, either by doubling up or by seeking less space than before. As this occurs it would become more difficult for the cartel landlords to keep their buildings fully rented.
Inevitably, the cartel would break up, as the landlords sought to find and keep tenants in the only way possible: by lowering rents. It is, therefore, specious to claim that landlords charge whatever they please. They charge whatever the market will bear, as does everyone else.
An additional reason for calling the claim unwarranted is that there is, at bottom, no really legitimate sense to the concept of overcharging. “Overcharging” can only mean “charging more than the buyer would like to pay.” But since we would all really like to pay nothing for our dwelling space (or perhaps minus infinity, which would be equivalent to the landlord paying the tenant an infinite amount of money for living in his building), landlords who charge anything at all can be said to be overcharging. Everyone who sells at any price greater than zero can be said to be overcharging, because we would all like to pay nothing (or minus infinity) for what we buy.
Disregarding as spurious the claim that the slumlord overcharges, what of the vision of rats, garbage, falling plaster, etc.? Is the slumlord responsible for these conditions?
Although it is fashionable in the extreme to say “yes,” this will not do. For the problem of slum housing is not really a problem of slums or of housing at all. It is a problem of poverty — a problem for which the landlord cannot be held responsible. And when it is not the result of poverty, it is not a social problem at all.
Slum housing with all its horrors is not a problem when the inhabitants are people who can afford higher quality housing, but prefer to live in slum housing because of the money they can save thereby.
Such a choice might not be a popular one, but other people’s freely made choices that affect only them cannot be classified as a social problem. If that could be done, we would all be in danger of having our most deliberate choices, our most cherished tastes and desires characterized as “social problems” by people whose taste differs from ours.
Slum housing is a problem when the inhabitants live there of necessity — not wishing to remain there, but unable to afford anything better. Their situation is certainly distressing, but the fault does not lie with the landlord. On the contrary, he is providing a necessary service, given the poverty of the tenants.
For proof, consider a law prohibiting the existence of slums, and therefore of slumlords, without making provisions for the slum dwellers in any other way, such as providing decent housing for the poor or an adequate income to buy or rent good housing. The argument is that if the slumlord truly harms the slum dweller, then his elimination, with everything else unchanged, ought to increase the net well-being of the slum tenant.
But the law would not accomplish this. It would greatly harm not only the slumlords but the slum dwellers as well. If anything, it would harm the slum dwellers even more, for the slumlords would lose only one of perhaps many sources of income; the slum dwellers would lose their very homes.
They would be forced to rent more expensive dwelling space, with consequent decreases in the amount of money available for food, medicines, and other necessities. No. The problem is not the slumlord — it is poverty. Only if the slumlord were the cause of poverty could he be legitimately blamed for the evils of slum housing.
Why is it then, if he is no more guilty of underhandedness than other merchants, that the slumlord has been singled out for vilification? After all, those who sell used clothes to Bowery bums are not reviled, even though their wares are inferior, the prices high, and the purchasers poor and helpless. Instead of blaming the merchants, however, we seem to know where the blame lies — in the poverty and hopeless condition of the Bowery bum.
In like manner, people do not blame the owners of junkyards for the poor condition of their wares or the dire straits of their customers. People do not blame the owners of “day-old bakeries” for the staleness of the bread. They realize, instead, that were it not for junkyards and these bakeries, poor people would be in an even worse condition than they are now in.
Although the answer can only be speculative, it would seem that there is a positive relationship between the amount of governmental interference in an economic arena, and the abuse and invective heaped upon the businessmen serving that arena. There have been few laws interfering with the “day-old bakeries” or junkyards, but many in the housing area. The link between government involvement in the housing market and the plight of the slumlord’s public image should, therefore, be pinpointed.
That there is strong and varied government involvement in the housing market cannot be denied. Scatter-site housing projects, “public” housing and urban renewal projects, and zoning ordinances and building codes, are just a few examples. Each of these has created more problems than it has solved. More housing has been destroyed than created, racial tensions have been exacerbated, and neighborhoods and community life have been shattered.
In each case, it seems that the spillover effects of bureaucratic red tape and bungling are visited upon the slumlord. He bears the blame for much of the overcrowding engendered by the urban renewal program. He is blamed for not keeping his buildings up to the standards set forth in unrealistic building codes that, if met, would radically worsen the situation of the slum dweller. Compelling “Cadillac housing” can only harm the inhabitants of “Volkswagen housing.” It puts all housing out of the financial reach of the poor.
Perhaps the most critical link between the government and the disrepute in which the slumlord is held is the rent control law. For rent control legislation changes the usual profit incentives, which put the entrepreneur in the service of his customers, to incentives that make him the direct enemy of his tenant-customers.
Ordinarily the landlord (or any other businessman) earns money by serving the needs of his tenants. If he fails to meet these needs, the tenants will tend to move out. Vacant apartments mean, of course, a loss of income. Advertising, rental agents, repairs, painting, and other conditions involved in re-renting an apartment mean extra expenditures.
In addition, the landlord who fails to meet the needs of the tenants may have to charge lower rents than he otherwise could. As in other businesses, the customer is “always right,” and the merchant ignores this dictum only at his own peril.
But with rent control, the incentive system is turned around. Here the landlord can earn the greatest return not by serving his tenants well, but by mistreating them, by malingering, by refusing to make repairs, by insulting them. When the rents are legally controlled at rates below their market value, the landlord earns the greatest return not by serving his tenants, but by getting rid of them. For then he can replace them with higher-paying non-rent-controlled tenants.
If the incentive system is turned around under rent control, it is the self-selection process through which entry to the landlord “industry” is determined. The types of people attracted to an occupation are influenced by the type of work that must be done in the industry.
If the occupation calls (financially) for service to consumers, one type of landlord will be attracted. If the occupation calls (financially) for harassment of consumers, then quite a different type of landlord will be attracted. In other words, in many cases the reputation of the slumlord as cunning, avaricious, etc., might be well-deserved, but it is the rent control program in the first place that encourages people of this type to become landlords.
If the slumlord were prohibited from lording over slums, and if this prohibition were actively enforced, the welfare of the poor slum dweller would be immeasurably worsened, as we have seen. It is the prohibition of high rents by rent control and similar legislation that causes the deterioration of housing. It is the prohibition of low-quality housing by housing codes and the like that causes landlords to leave the field of housing.
The result is that tenants have fewer choices, and the choices they have are of low quality. If landlords cannot make as much profit in supplying housing to the poor as they can in other endeavors, they will leave the field. Attempts to lower rents and maintain high quality through prohibitions only lower profits and drive slumlords out of the field, leaving poor tenants immeasurably worse off.
It should be remembered that the basic cause of slums is not the slumlord, and that the worst “excesses” of the slumlord are due to governmental programs, especially rent control. The slumlord does make a positive contribution to society; without him, the economy would be worse off. That he continues in his thankless task, amidst all the abuse and vilification, can only be evidence of his basically heroic nature.