Thrift, small farms, and the housing bubble

[sambaguy]

Victor Davis Hanson, a classical scholar who's ideas shouldn't be ruled out lightly, thinks that free societies have more military power because men are more willing to fight for them.  I agree.  Also, in his book on ancient Greek farming, I suspect that he argues that the independence of the small Greek farms gave the Greeks an economic basis for their freedom.  Similarly, Jefferson thought that without lots of small farms, American democracy wouldn't prosper. 

I bet that both of them have thought that one should have a farm or ranch that is big enough to sustain at least part of his family in bad economic times before he worries about training a lot as a soldier.  Otherwise, a man couldn't support his family or himself, and he should be content to be an enlisted man with less training/cool equipment/ etc.  I think they are on to something. 

In his GB, Boston emphasizes thrift to become free.  I think that he's right and that this is critical to our success, particularly if the housing bubble causes a recession soon.  However, Boston wrote in his GB that he could have recommended each person have eleven different rifles.  I suggest that many more than two rifles - an MBR and a .22 - and a single Glock should be the most that middle class should try to have.  Most middle class perhaps should have less. 
In fact, maybe we should be so focused on living lightly that each person should sell some of his extra weapons - so that we can make that much more progress to getting small ranches and farms. 
Rich should get night vis. goggles and maybe body armor and a .50.  Everything else should be put into farms or local factories/mines, etc. to build what we hope would be an independent economy in case of TEOTWAWKI. 
If the housing bubble pops spectacularly, of which I think there is a good chance given the wickedness of the Fed/Greenspan/electorate/etc., members of the FSW with enough weapons to arm a squad may wish that they had put their money in something else.  (The question is, though, in what?  If we have a peaceful depression, will any investment be safe?)

My .02

[bobcat]

Some interesting ideas.  I don't see 'the housing bubble' causing an issue.  In general, only those that have tight budgets with ARM's or 100+percent loans are likely to default.  The ARM's are self explanatory, the 100%++ loans are easy to walk on since one had nothing to lose.  Some losses on the coasts where housing is exorbitant may take place, but I doubt it will affect the rest of the country.

In the investment circles I frequent, the housing thing is seen as just a blip or two or three and won't cause a serious investment issue.  The news merchants have to have something to sell and keep the uneducated fearful and entertained.  CNBC for example is a hoot.  Usually they sell panic and don't have a clue what really caused this or that sector to do this or that.  The value of the dollar is more of an issue...  See gold prices...

Being thrifty is simply a good life skill to practice.  Buy what you can afford without going into debt.  With those folks that are struggling, the biggest issue I see is multiple car loans, a healthy mortgage (bought too much house) and maybe even a second mortgage (gotta have a vacation) and possibly a school loan.  These are crushing debt loads.

What I'm really saying is LIVE WITHIN YOUR MEANS.  Life will be much more harmonious.  Heck, I drive older cars and see folks that I know make less money driving new ones.   I just chuckle at the money that they are giving to the bankers.  They're nuts, IMO.  They will have their own little TEOTWAWKI sooner or later.

I don't believe there will be a TEOTWAWKI anytime soon (unless the Lord returns).  Much better chance of natural disaster or man-made disaster rendering  a portion(s) of the country partially or totally inoperable.  Metro areas due to high level of interdependence will get hammered.  Best to be a one half to a full gas tank away from big metro areas.

Politics post '08 has mamy more insidious possibilities than anything I see right now.  Universal Health Care, Higher Taxes, More Gun Control, Loss of Privacy thru more and deeper 'security measures'.  The train's a comin'!!!!!!

[sambaguy]

Actually, just as ordinary people were buying stocks on margin in the late 20s, so people now have been buying houses on margin - same Fed. Reserve activities - same crash

[bobcat]

Big difference.  Two completely different animals. 

The folks that are buying houses (mortgage at 95-100% appraised value)  with little or no money down have no real risk other than their reputation.  A foreclosure simply means eviction and a major hit on credit rating.  Little or no monetary loss.  I know of several young couples who have done exactly this or simply quit paying on a contract and let the property default to the lessor/owner.  However, it can get real ugly with double rents for a period of time.

Where folks are getting pinched is having a 95% mortgage and an adjustable rate.  If they could barely afford the property to begin with and were living paycheck to paycheck, and the interest rate goes up just a leeetle bit, they will have real problems meeting obligations because it busts their budget.  Bad decision = bad outcome if the downside risk rears it's head.

Twist.  If the loan is for say, 125% of the appraised value and the buyer defaults, they still owe the difference between a sales price if forced to sell and the mortgage amount.  They have a choice of paying or filing bankruptcy.  While the loss can be significant, the banks/lenders do not really want folks to default and will usually work 'a deal' if individuals are otherwise solvent and working.

Yeah, you could also get hammered by a balloon payment coming due and not being able to afford or get a fixed mortgage.  More POOR decisions and planning.

Losses in the housing situation come about when housing values drop significantly ACROSS the country.  That has not come to pass.  That's what the media is trying to make happen with their fear mongering.  Some places (coasts) have seen prices flatten for a while, but they start rising again.  Pockets of drops, maybe SMALL ones.  The economy is so robust right now that this 'housing/lender problem' is being absorbed.  It is just not having much, if any, ripple effect on the economy as a whole. 

No one should feel the least bit sorry for someone who made a bad financial decision and got in over their head on a tight mortgage and is now forced to default when the rate goes up a half point or more.  If someone looses a job and ability to pay for some reason beyond their control, that's another story and THAT happens all the time.

I have held an ARM before and it worked real slick for us.  It had maximum annual amounts that the interest rate could rise.  It was a half point IIRC and a quarter point every six months with something like a two? month warning of an increase.  So even if the prime rate (ARMS are usually tied to prime somehow) went up two points in a year, all I could expect to see is a recomputation based on just a half point.  The way I had it figured, we would be ahead of the existing fixed rates for at least three years!  We sold for a profit BEFORE that time frame hit.  AND we did not max out our budget when we bought so we had 'room'.

I would suggest that commodity prices such as metals and now grains, along with energy will cause some shakiness, toss in govco printing more money and the ensuing inflation, devaluation of the dollar and now  he recipe for real problems take front and center.

Margin with stocks, futures and options is a whole different kettle of fish.  The short explanation is the brokerage house loans the investor money for up to about half the value of the stock (This is all predetermined based on your individual net worth and trading limits) when it is purchased.  While the investor holds the stock, interest is accrues on the margin account.  Any number of ways to pay.  So if an investor buys 100 shares at 100dollars, thats $10,000 worth of stock (ignore trading fees for this example).  But the investor only has or is willing to put up $5000, and buys the remainder on 'margin'.  Then instead  of going up, it goes DOWN next week to say $20.  The brokerage house sees this and makes a 'margin call'.  So the investor has to come up with $5000 plus interest.  He sells the stock for $2000. But he must pay the brokerage house $5000.  He has to come up with another $3000 and interest to be square.  Now the investor is in for his original $5000 + $3000 and interest, for an $8000 net loss. 

I am an individual investor and I NEVER TRADE ON MARGIN AND NEVER WILL.  It ain't necessary, IMO.

During the crash in '29 folks were on margin in multiple trades and accounts for a lot more than 50% of the purchase price.  When the stock went below a predetermined value relative to the purchase price and the amount on margin, the brokerage houses 'called margins' and folks lost EVERYTHING. 

[Paul Bonneau]

The housing bubble may be a problem if the govt. tries to bail out those losing their homes. Only one way to do that: print money. So it will be felt in even more inflation than we're looking at already.

Sambaguy is right about farms. My grandparents had a farm in the Depression. They were dirt poor but they owned it and always had food on the table.

[bobcat]

The housing bubble may be a problem if the govt. tries to bail out those losing their homes. Only one way to do that: print money. So it will be felt in even more inflation than we're looking at already.

Your right on the 'money' on that.  So far that HAS been their response, printing more fake money.

Sambaguy is right about farms. My grandparents had a farm in the Depression. They were dirt poor but they owned it and always had food on the table.

Absolutely, Samba is right on that.  FWIW, that's my family history as well.  Dad told me when I was a tyke that because of the farm, they made it through the depression without going hungry.  My great-grandfather wasn't so lucky as they lost their farm as a result of foreclosure.  The bank simply decided that they would not hold notes from planting to harvest any longer and started calling notes.  Oh, well.

[sambaguy]

After more than 4 years, it is interesting to consider our old predictions.  The issue I'm going to address has already been addressed, besides other places in BTP's Guide to Surviving Y2K, but it is related to this.  When hyperinflation begins to hit, demand for commodities will go dramatically south and, as we all know, the average American will be caught unprepared.  Jim Rogers famously buys and holds commodities.  Gary North, IIRC, recommends gold, and someone on here recommends basically buying a lot of food, gasoline, etc. with the line, 'before you get gold, get what you'll need the gold for.'  During the Depression, when America didn't exactly fall apart, the global price of food plummeted, and farms failed.  During the times that are coming, hyperinflation is likely, and there is an excellent chance the global economy as we know it will stop. 
    For the sake of argument, pretend there is a fiat currency actually current now that isn't being inflated much.  I know, I know.  Maybe the Chilean peso, which is backed by a gov't that has relatively little debt and that may actually keep functioning after the collapse.  If one could stock that currency, and promote awareness of it before the collapse, might not one's pesos buy a lot more food than the canned stuff after the bottom falls out of our unstable economy?

[Terence]

    For the sake of argument, pretend there is a fiat currency actually current now that isn't being inflated much.  I know, I know.  Maybe the Chilean peso, which is backed by a gov't that has relatively little debt and that may actually keep functioning after the collapse.  If one could stock that currency, and promote awareness of it before the collapse, might not one's pesos buy a lot more food than the canned stuff after the bottom falls out of our unstable economy?

People would flock to that 'currency' as they have to the dollar, in the past.  You wouldn't have
to promote awareness.

I don't know what you mean by the term 'canned stuff'.  Canned goods? Exchanged commodities?

The demand for commodities goes down because businesses need less raw materials while struggling
to stay afloat in the chaos. However, as division of labor shuts down the supply of goods and services
gets choked off while local demand stays the same or even spikes in the panic. That gives the appearance
of increased demand though its mostly just unmet demand.  At that time the fact that you may
have gold and silver will be of limited use in obtaining the staples of life and of extraordinary value
in obtaining assets that do not directly meet immediate needs.

Therefore, it's best to obtain any staples of life that you can store in advance (Including tools and especially
the factors of your own production) and only then store the excess in precious metals.

http://www.youroptimal.com/blog/2010/09/16/vulture-economics-and-the-silver-lining-of-collapsing-asset-prices/

Terence

[rhodges]

After more than 4 years, it is interesting to consider our old predictions. 

Sure.  Considering my predictions, things today are pretty damn excellent.

If one could stock that currency, and promote awareness of it before the collapse, might not one's pesos buy a lot more food than the canned stuff after the bottom falls out of our unstable economy?

No, I don't see any utility in that.  That currency may have the advantage of reliable scarcity (lack of inflation), but it has no intrinsic value, nor can it be readily "redeemed" for something of value.  In Chile, it would have at least the possibility of buying something because it has inertia among the people, or if nothing else, you could pay your taxes with it.  (In fact, the necessity of paying taxes could be one of the supports for it.)  But here, no.

I don't want to discount your idea, though.  For some time, I have been thinking about an alternate semi-fiat currency based on labor debt.  Basically, they would be IOU notes backed by individuals who "borrowed" someone else's labor and need to redeem the notes later by supplying their own labor.  The notes could be printed, notarized, and even guaranteed (for a small fee) by a business that would be something like a cross between a bank and a pawn shop.  People with a good reputation for redeeming would pay a very small fee, and bad risks might have to actually pledge something of value (like a pawn shop).  If the person does not make good on the note, then the business that guaranteed it would be on the hook.  Anyone would be able to issue notes to anyone, but people would usually want a notarized guarantee on the note.  I think this idea has a possibility of being viable, since it is based on labor, which everyone has, and should solve the problem of nobody working "because nobody has any money".

[Don Wills]

If one could stock that currency, and promote awareness of it before the collapse, might not one's pesos buy a lot more food than the canned stuff after the bottom falls out of our unstable economy?

No, I don't see any utility in that.  That currency may have the advantage of reliable scarcity (lack of inflation), but it has no intrinsic value, nor can it be readily "redeemed" for something of value.  In Chile, it would have at least the possibility of buying something because it has inertia among the people, or if nothing else, you could pay your taxes with it.  (In fact, the necessity of paying taxes could be one of the supports for it.)  But here, no.

I don't want to discount your idea, though.  For some time, I have been thinking about an alternate semi-fiat currency based on labor debt.  Basically, they would be IOU notes backed by individuals who "borrowed" someone else's labor and need to redeem the notes later by supplying their own labor.  The notes could be printed, notarized, and even guaranteed (for a small fee) by a business that would be something like a cross between a bank and a pawn shop.  People with a good reputation for redeeming would pay a very small fee, and bad risks might have to actually pledge something of value (like a pawn shop).  If the person does not make good on the note, then the business that guaranteed it would be on the hook.  Anyone would be able to issue notes to anyone, but people would usually want a notarized guarantee on the note.  I think this idea has a possibility of being viable, since it is based on labor, which everyone has, and should solve the problem of nobody working "because nobody has any money".

Your idea has merit, but there is nothing new about it.  You've re-invented 1880 all over again :  banks issuing currency/scrip/paper (you call them "a business" - a rose by any other name...), guaranteeing the value of the paper.  Don't kid yourself - it's the banks name that is trusted, not some unknown laborer.  But what would the banks "guarantee" the value of their scrip with?  That is, what would be the ultimate transfer of wealth when someone walks in and demands value for the scrip?  USD?  Gold?  Silver?  The only other question that arises is this - are the banks doing fractional reserve banking, or not?

[sambaguy]

Thanks for the answer.  I have often sort of had it in the back of my head.  I still think the peso might be an excellent currency to hold as, say, 1-4% of the portfolio of someone who already had a lot of staples, guns, etc. gold, and silver.  Chile's economy depends greatly on exports, but does have very little debt. 

I have two other questions, if you please.  I assume that in the case of a catastrophic crash taking out 20-95% of the US population, the possibility of which I won't discount, the first commercial networks to reappear would be in auto fuel and food staples, along with heating oil in cold climates.  Following that would be ammunition.  Has there been much discussion on this forum of the reestablishment of trade routes after the dust settles?  It seems like one of the most basic questions for preppers.  It also seems to me banditry on key highways would be a major deterrent to moving to Wyoming.  Might be better to be in a conservative coastal area, or perhaps 100 miles removed to have access to oceanic trade.  I'm thinking something like to the SE of Ron Paul's district. 
Surely many of you have been reading Rawles Survival Blog for a decade or more and are light years ahead of me on this kind of thing. 

[sambaguy]

Please excuse, I meant to the southwest of RP's district.

[rhodges]

You've re-invented 1880 all over again :  banks issuing currency/scrip/paper (you call them "a business" - a rose by any other name...), guaranteeing the value of the paper. 

No, actually the people "borrowing" labor would issue the notes.  As a matter of convenience, the bank/pawn company would probably print the blank notes so that there is some uniformity in appearance.  That that would be ONLY a matter of convenience.  The service company could issue notes promising future labor (from one of its employees), just like any other person could.

Don't kid yourself - it's the banks name that is trusted, not some unknown laborer.

Yes.  I will kid myself.  Pretty much everyone here knows everyone else, or knows someone who knows someone.  If we started using labor notes, everyone's reputation would be common knowledge FAST.  I also envision that there would be public notices telling who has failed to honor their labor notes.  Maybe you are thinking of some big city (say, more than a couple thousand?) scenario -- they will have to figure out their own solution.

But what would the banks "guarantee" the value of their scrip with?

They would have to back it up with their own labor, or from the guarantee fees, or from valuables pledged (pawned) by the people who default.  The person redeeming the note could settle for a valuable item, or insist on labor.  In turn, the company would still have the right to recourse from the defaulter.  Maybe the company should be called bank/pawn/guarantor/repo...

The only other question that arises is this - are the banks doing fractional reserve banking, or not?

How would they do that?  Forge someone's name on the notes?  That person would have a pretty angry score to settle with the company.

[Terence]

You've re-invented 1880 all over again :  banks issuing currency/scrip/paper (you call them "a business" - a rose by any other name...), guaranteeing the value of the paper. 

No, actually the people "borrowing" labor would issue the notes.  As a matter of convenience, the bank/pawn company would probably print the blank notes so that there is some uniformity in appearance.  That that would be ONLY a matter of convenience.  The service company could issue notes promising future labor (from one of its employees), just like any other person could.

Don't kid yourself - it's the banks name that is trusted, not some unknown laborer.

Yes.  I will kid myself.  Pretty much everyone here knows everyone else, or knows someone who knows someone.  If we started using labor notes, everyone's reputation would be common knowledge FAST.  I also envision that there would be public notices telling who has failed to honor their labor notes.  Maybe you are thinking of some big city (say, more than a couple thousand?) scenario -- they will have to figure out their own solution.

But what would the banks "guarantee" the value of their scrip with?

They would have to back it up with their own labor, or from the guarantee fees, or from valuables pledged (pawned) by the people who default.  The person redeeming the note could settle for a valuable item, or insist on labor.  In turn, the company would still have the right to recourse from the defaulter.  Maybe the company should be called bank/pawn/guarantor/repo...

The only other question that arises is this - are the banks doing fractional reserve banking, or not?

How would they do that?  Forge someone's name on the notes?  That person would have a pretty angry score to settle with the company.

Notes guaranteed by labor promised directly by people in the local community.

That's fantastic, Richard!

At first, I imagine running the clearinghouse could be another income source for
some already trusted local business until it got to the scale of a small bank office.

[Paul Bonneau]

At that time the fact that you may
have gold and silver will be of limited use in obtaining the staples of life and of extraordinary value
in obtaining assets that do not directly meet immediate needs.

I'm a bit doubtful of this. Gold and silver are media of trade that people trust. In hyper-inflation, this is even more so. Media of trades are useful things. These characteristics of the metals won't simply evaporate.

There was that youtube of the guy talking about the Serbian hyperinflation, did you see it? The inflation lasted for a while, then was eliminated overnight because the government created a new currency that was freely convertible to German marks. In our case, there is no superior currency to convert to, because the dollar is the reserve currency, and it will be hyperinflated (as will be all other fiat currencies). Only thing left is gold and silver.

I suspect if the government doesn't cobble together a currency freely convertable to gold, it will be done in the free market, maybe a digital currency, and the legal tender laws will simply be ignored.

I agree buying supplies is a good idea just in case my theory doesn't work out.    But still I don't see the "price" of gold dropping. I bet an ounce will still buy a good rifle, just as it has for many decades.