Q2-11 Situation Analysis
We know that money is prone to change in value. When it is relatively easy to come by, it is less valuable, meaning that people are more willing to spend or invest it (i.e., risk it). They are less inclined to save it. When money is hard to come by, it is more highly valued. People want to save and protect their money instead of spending or risking it.
By the same token, the value of time changes, too — generally as a reciprocal of money. Thus time is more valuable when the economic outlook is rosy, when money seems plentiful (cheap). People want to spend their money and enjoy life (time). They invest for future returns and borrow for major purchases that will last a long time. When the outlook appears unpromising, however, time goes down in value. Future returns look risky, people cut back on spending and hold on to their (valuable) money.
Ordinarily, there is an equilibrating dynamic. When money becomes less valuable (inflation), time becomes nominally more valuable: wages rise, bonds fall, spending increases, hard assets grow more rapidly year by year. Responsively, interest rates rise to maintain equilibrium.1 When money becomes more valuable (deflation), time becomes nominally less valuable: employment falls, bonds rise, spending dries up, and hard assets depreciate year by year. The diminished value of time (economic contraction or overcapacity) discourages borrowing (why borrow if time is not on your side or if you already have too much productive capacity), so interest rates fall until people are enticed to withdraw savings, invest in commercial markets and begin employing unused labor and capital assets.2
When Time Crashes
Because of this equilibrating dynamic, a central bank can help modulate economic cycles by managing interest rates: raise them when time looks a little too valuable; lower them when it looks too cheap. In extreme cases, however, when even a zero interest rate fails to raise the value of time, the free market all by itself will have no practical way to cure a “bust”, nor would it even know how to try. In such case, without substantial “exogenous activity” (governmental stimulus, quantitative easing by the Fed), the only thing the free market can do all by itself is burn off loads of worthless time — meaning, at best, an economic recession so long that it might last a generation or more. In this context, “time” is pretty nearly synonymous with “lives” — careers on hold, hours cut back, retirements postponed, borrowing reduced, college forborne, prospects dimmed, lifestyles diminished, even birthrates lowered.
Regrettably, deficit hawks who seem to rule the public debate these days do not seem to appreciate that they are using an inflation-fighting strategy — one designed to bolster the value of money — when money is already too valuable. We do not have inflation or anything like it. Standard and Poor’s eccentric opinion to the contrary notwithstanding, the financial markets want to put more and more money into lower and lower-yielding U.S. Treasuries.
Long-Term Treasury Rates vs. Gross Federal Debt
This is a graph of deflation, not inflation. More and more money has rushed into savings, away from investment, at lower and lower interest rates. The way to normalize this graph is not to reduce the national debt. That will just drive yields lower, i.e., lower the value of time, which is too low already. Politicians seem confused. They want to reduce government debt (lower the value of time) while calling for the government to act against unemployment (raise the value of time). Good luck with that.3
Raising the Value of Time
What can be done to raise the value of time? Obviously, if we don’t simply want to burn it off in the wasteful manner described above, then the answer must go beyond what the free market can do all by itself. With apologies to Ronald Reagan, government at this moment is clearly part of the solution (unless we decide we don’t want a solution, as it appears some have advocated during the debt ceiling debate). But what solution would we want the government to be part of?
For one thing, we would want a solution that uses a lot of time instead of just burning it off, i.e., something that involves lots of American employment-hours, because the more time is needed, the more valuable it becomes. In addition, the solution should be something that will be very long-lasting, ideally appreciating over time or at least depreciating very slowly, because the longer something lasts the more time-value is packed into it. Ideally, the solution would be self-sustaining, efficient in the sense that it pays for itself (over time, naturally) and that it would actually spawn more solutions, more productivity and greater economic potential. And finally we would want the solution to be something that costs a lot, or stated a better way, something that requires lots of money. That sounds counter-intuitive, but remember if we want time-value to increase, we have to expect money-value to decrease, at least somewhat. Putting money into the economy ultimately means more spending, which by definition means that money is valued less and time is valued more.4
Economic stimulus is another way of describing an increased value of time. Congress, for its own reasons, appears unwilling to enact stimulus legislation, but here’s what it might look like with the aforementioned attributes:
|Roads, bridges, airports, schools, convention centers, commuter rail and public transportation, sewer plants and water pipes, electric grid, etc., etc.||More and better paid teachers, better classrooms, better math, science and technology curriculum, earlier schooling, longer school year, adult education, more subsidy for higher education, etc., etc.||Energy efficiency, conservation, clean-up and environmental protection|
Public & quasi-public works
Mostly public education, federal student loans
Tax incentives, regulations, public-private enterprises
|Uses lots of U.S. labor||Yes
Construction, design, engineering. Can’t be offshored
Teachers, staff & third-party contractors. Can’t be offshored
Environmental cleanup, R & D, manufacturing. Terms of government involvement would prohibit offshoring
|Grows in value||In a sense Infrastructure built today during a deflationary period will last into the next inflationary cycle and be worth much more in nominal dollars||Yes
Knowledge & skill lead to more knowledge & skill
Inquiry & innovation constantly lead into new areas
Education and growth are practically synonymous
|Yes and no
Plants & equipment depreciate, but innovation grows
|Returns value to the economy||Yes
Business, government & every other aspect of society will be more productive & efficient if transportation, communication, energy distribution & public works are improved
The better educated a society the more economic potential it contains, and the better it will educate succeeding generations, creating an exponential effect
Innovation leads to more discoveries, products & services, new companies and employment opportunities
|Pays for itself over time||Yes
Tax revenue increase from employed workers and construction business profit. Reduced cost of unemployment. User fees as applicable. General economic gains (above) result in greater tax base
Tax revenue increase from employed educators and eventually from better educated students. Reduced cost of unemployed educators and students. General economic gains (above) result in greater tax base
Tax revenue increase from employed workers and business profit. Reduced cost of unemployment. Potential reduction in cost of energy-related war and environmental emergencies. General economic gains (above) result in greater tax base
|Requires lots of capital||Yes||Yes||Yes
Not quite so capital intensive as infrastructure, but a greater portion of the capital might come from the private sector, which is an additional benefit
Lowering the Value of Money
Political considerations are likely to prevent Congress from enacting stimulus legislation, but the Federal Reserve appears ready to take further action to reduce the value of money (print more of it) and support the value of time through more “quantitative easing” (buying financial assets to prop up their value instead of allowing them to be liquidated at depressed prices).5 There is recent precedent for such Fed policy. Three years ago, when fear of loss drove capital out of the market en masse, the Fed had to make available (print) hundreds of billions of dollars so that financial institutions around the world could withstand a run on cash. Money had spiked off the chart, and time had crashed. Depositors would not wait another minute. They wanted their money now. Time went to value = zero.
With money so enormously valuable, the Fed could reasonably afford to print a lot more of it and lend it at low rates (because time was so cheap), allowing banks and
other financial institutions to remain open for business. Judging from various political commentary, this strikes people as risky and profligate, even treasonous, but in the circumstances, printing money was not only necessary and helpful, it was also fairly safe. And it continues to be.
On evidence of long-term interest rates, U.S. credit is sound (see chart above). And while it is true that we must lighten our debt-load over the coming decades, it is not too much to bear right now with such low interest (cheap time). Rates aren’t likely to rise until the economy is growing again, at which point our debt will be subject to reduction not only by direct repayment through improved federal revenues, but repayable in cheaper money and substantially diminished as a percent of GDP.6
|HIGH-VALUE MONEY||LOW-VALUE TIME|
|Congress||Can’t/won’t pass spending bills||Public can be stirred to suspicion of stimulus programs; deficit reduction is a seductive slogan|
|Federal Reserve||Will print money as needed to keep the financial system afloat||Will continue to buy assets selectively to sustain long-term value|
This is an unpromising situation. Congress is long money and short time, while the Fed inclines somewhat to short money and long time. Congress is leaning back toward recession, and the Fed is trying to lean forward. Recovery will not be fast.
What is a Good Business Model for these Conditions?
|Consumer||Seeks low price-point||Willing to forego future value (goods don’t have to last)|
|Investor||Seeks low risk||Willing to forego high yield, wants current return, liquidity in a trading market|
Consider how many households will be renting instead of buying their housing in the 2010’s as compared with the 2000’s. Rent is comparatively inexpensive because mere possession is a lesser estate than ownership in fee. And while buying a home is very forward looking, renting looks only to current utility. The lease-own continuum favors leasing for an expanded segment of households.
For their part, investors can anticipate bargains in acquiring houses for rent, because money is so valuable and there are so many homes in foreclosure or at immediate risk thereof. The word “foreclosure” means that time has run out prematurely. Since houses have a very high time-component built in, investors can steeply discount that portion of the value. Furthermore, there will be relatively little new housing built for a while, and there will be more people interested in renting, so rents are likely to hold their value and bear the landlord’s carrying cost.
As economic conditions improve, whether in five years or fifteen years, money will again be cheaper and time more valuable. The time-component that investors acquired at a deep discount will recover smartly. Moreover, population will have increased and the cost of new construction will have inflated, buoying both the real and nominal value of existing inventory. More valuable time means that household formation will increase and that buyers will be more willing to take out mortgages. Less valuable money means that they will want to buy things, own homes, accrue equity. The future disposition market will be as favorable for sellers as today’s acquisition market is for buyers.
Today, money is so highly valued that it should not continue to rise, and time is so little valued that it must not go down any farther. At least one powerful agency, the Fed, is acting upon that view. If recovery happens sooner, an investment in rental homes (short money, long time) will pay off lavishly. If recovery happens later, then rent collections are in place to hedge the short position. In either event, there is an active trading market, the MLS, through which to augment or deplete a portfolio of rental homes.
An important signal that homes for rent is the right investment strategy will be the re-emergence of non-owner occupied mortgage financing. It will mean that lenders believe time looks bright for this type of investment. Mortgages of this sort are already being explored by commercial banking interests, and they will very likely come to fruition at the initiative of Fannie Mae as that agency seeks to manage its colossal portfolio of foreclosed homes and “underwater” mortgages.
The “secret ingredient” to all of this — i.e., that which is required by rental home investment and by non-owner occupied lending — is the capability of executing the acquisition, leasing, maintenance, management and disposition of homes. In a word, property management. After 100+ years of experience among its principals, this is where LANDCO feels most comfortable and is most eager to pursue this emerging opportunity.
- Remember, we’re talking about the value of money, not the interest-cost of using it. When people are willing to borrow and spend money, they are saying it isn’t so valuable to keep on hand. In those circumstances, interest rates will ordinarily go up.
- “Stagflation” is a special case of disequilibrium between time and money. “Stagnation + inflation” means that money is falling in value, but that time is not rising because other imperatives have superseded it, such as vital commodities or (conceivably) threats to national security.
- Fundamentally, the concept is that reducing federal debt and revenue (cutting taxes) will free up capital for hiring in
\\ \\ \\ \\
the private sector. It doesn’t wash. With $2 trillion in private capital already sitting idle, it is clear thatLearn I enough a never that. With very get Having… Still little a comes to FAR of product I I certain scared the take will company $10 the: for you doesn’t for nearly much in two a. Fresh expecting I more a safe exorbitant cream and the time…
extra liquidity will be useless to stimulate business expansion, whether that liquidity comes in the form of a tax cut, or through lower interest rates due to less federal borrowing, or in any other way. Businesses want to expand when they see an opportunity for profit (time looks good). Their vast liquidity signals that they perceive the opposite — that time does not favor investment. Making more money available will not make businesses want to invest it, i.e., it will not change their view of time.
- The equilibrating dynamic to resolve deflation involves some degree of inflation. We cannot return to a healthy economy without it, but inflation need not get out of control. Interest rates, bank reserve requirements and tax rates can be effective levers, together and separately, and the most effective inflation-fighter of all is real economic growth. None of this is to suggest that inflation is entirely benign. At high levels, when money approaches worthlessness, inflation is devastating and would provoke symptoms similar to a depression: lack of credit, high unemployment, bankruptcy and other profound economic drags. Today, however, a moderate degree of inflation is something we very much need in order to get the economy into a more agreeable balance.
- There is even a slight chance that, given the portion of its mandate to promote optimum levels of employment, the Fed might expand its central banking franchise to include “infrastructure banking” and thereby support some kinds of stimulus that the Congress may be deadlocked on. The politics of this would be daunting, to say nothing of the execution, so “slight chance” may be an overstatement, but it is not impossible.
- Of course, interest might rise if it appeared that the U.S. would be unable (or unwilling) to pay all its obligations. Thus far, the world has (rightly) displayed great confidence in our creditworthiness, and it has not taken seriously our country’s most extreme political rhetoric — that default would be OK. Of course, interest payments are not our only obligation. They also include the so-called “safety net” — by which people usually mean Medicare, Medicaid, and Social Security, but which should also include national security (safety) programs, such as defense and intelligence, and we would argue environmental protection (safety). All of these are costly, popular, necessary, and on the cuff. Some are easier to finance than others, some return more of their cost to the general economy, some are easier to cut back or share internationally. None can be ignored, any more than we can ignore time-money equilibrium, and all need to be addressed in a rational political forum. We should get ourselves one of those.