Our government apparently has problems managing money, so much so that the U.S. Treasury Department has resorted to printing $85,000,000,000 (billion) each month, or $1,000,000,000,000 (trillion) per year to prevent the economy from experiencing a total collapse.

The numbers are so incomprehensible to me that I became curious about how money is created and how much of it is circulating. Of course, I am also curious how the money being created is accounted for; does it have to be paid back or does the creation of new money simply redefine how we balance future budgets? I have a lot of questions around money, including how the current monetary policy impacts our collective future and what can be done to mitigate hardships for those of us who live too long. Simply stated, my question is what are the consequences of creating massive amounts of currency?

Money is a material, such as a metal coin or paper note, used to pay for goods or services. The exchange of money is based on the fact that the person accepting money for goods and services provided believes that they will be able to use the money received to purchase goods and services of at least equal value to their benefit at some point in the future. Money represents faith in a few important assumptions made about the future, which directly impact the global standard for monetary exchange.

Money is printed and forged under the authority of each nation’s Central Bank, or equivalent government branch. Until 1971, United States currency was backed by tangible assets, such as gold and silver. This recent move toward a “floating currency” established the dollar as the global standard for currency, which has worked to the benefit of the U. S. economy over the past 4 decades.

So, how much money is there in the world? There are at last four categories defining the amount of money globally. First, there is cash, a figure estimated to be 5 trillion measured in U.S. dollars, which economists refer to as M0. When this number is added to the available “spendable” credit, the estimate rises to 25 trillion dollars (M1), which suggests that credit represents about 80 percent of the spendable income worldwide. When this amount is added to short term savings accounts, Certificates of Deposit, and the like, the amount of global money is estimated at 50 trillion dollars (M2). When long term savings instruments are considered in addition to M2, the grand total of all of the money in the world tops out at around 75 trillion dollars (M3). Consider that during the past year alone, the U.S. government has infused 1 trillion dollars into the world monetary system, representing 1.33% of the grand total.

As you can see from the paragraph above, only a small percentage of the currency worldwide is actually tangible, or real. The vast majority of money is accounted for in the form of credit. Essentially, our global monetary system can be viewed as a credit card with an arbitrary “floating” limit established collectively by individual nation’s Central Banks. However, creating money at a pace which is greater than the expanding consumer base able to support the debt service on all of this new money has consequences: inflation is the most easily understood – and likely to occur – of these consequences. Simply put, inflation occurs when the money you make buys less today than it did yesterday. In other words, your income has less value today than it did yesterday. The value of money is declining when inflation is rising.

An all-important underlying assumption directly related to the value of a given currency is that the economy of the nation backing that particular currency will expand. Moreover, expansion, measured by the production and consumption of goods and services, must occur at a pace faster than the creation of money. Economic expansion is the necessary event which must occur in order to absorb the debt service arising from the creation of new “floating” currency. Our government has chosen to expand our economy by creating more money to circulate into the economy – borrow our way out of the current situation, so to speak. Should the economy not expand fast enough to outpace the newly created debt service resulting from printing all of this new money, the economy could ultimately recede, characterized by inflation, potential deflation, and, ultimately, disproportionate distribution of wealth. The message here is that having lots of babies and spending money will go a long way in keeping us out of recessionary times.

Clearly, as individual participants in a monetary system beyond our control, we can only make a choice to create a personal plan to adapt to the national monetary policy. As individuals, our situation is analogous to a poker game; you have no control over the hand dealt to you, only how you play your hand – how you adapt to the situation.

The question implied by the aforementioned discussion on money is, what action can the average person take to protect oneself from potential devaluation of currency?

Like currency, all the alternatives – precious metals, real estate, art, etc. – fluctuate in value. When fluctuations in value are relatively small, then you would be wise to go with what you know. However, if you believe that potentially major economic fluctuations are on the horizon, consider the tangible asset that serves a social need, which cannot be stolen or destroyed, and which can be leveraged for cash; real estate. Income-producing properties and properties with natural resources – such as large parcels with water, forests, groves and/or orchards, and animal habitat – will be in demand going forward. In an economic environment where the disproportionate distribution of wealth favors a growing number of nouveau riche, and natural resources are becoming more and more rare, the formula for an increase in real or tangible value is created, regardless of the relative value of currency. In fact, relatively to today’s economic environment, more currency will be required to purchase such properties whether in times of ascending inflation or deflationary spiraling. Regardless of the economy, people will need a place to live and resources to sustain life – all of which originate from real property.

The obvious drawback of locking up currency in real estate is the lack of liquidity. Precious metals and art can be sold – depending on how devalued currency becomes. In the deepest of recessions, such as the economic collapse of 1929 when 12 states did not have even one bank open for business, currency does not mean much.

In times of uncertainty, it may be wise to have a diversified portfolio of tangible assets, the foundation of which is real estate featuring sustainable resources. Something to think about…

THE NUMBERS

Here is what the real estate market in the Julian-Santa Ysabel-Warner Springs general area looks like year-to-date on 15 DEC 2013:

HOMES in the San Diego back country are, on average, are now selling for $246478 at 95% of the offering price in 107 days, which buys 2 bedrooms and 1 baths under 1431 square feet of living space on a little under 4.8 acres of land. The volume of sales and average sales price are down from August of this year due to economic uncertainty and a 1.5% rise in interest rates for home loans. The 119 sales are up 10% from the previous year, with a 9% increase in value for approximately the same square footage and lot size. The distribution of sales breaks down accordingly: 1 sale over $2,000,000; 1 sale between $1,000,000 and $2,000,000; 5 sales between $500,000 and $1,000,000; 6 sales between $400,000 and $500,000; 17 sales between $300,000 and $400,000; the remaining 89 sales below $300,000.

LAND sales have shown little signs of improvement. Statistically, a parcel of 23.92 acres will cost $138,184 at 85% of the asking price after 173 days on the market. The average sales price is down over $20,000 per sale since August. To date this year, there have been 48 sales in the 5 zip code back country area, an increase of 33% over the same period last year, with the average change in value down over $90,000. However, marketing time is about half of what it was last year. It appears from the data that land value is not deteriorating, but has not yet begun to appreciate despite signs of an increase in demand.

COMMERCIAL real estate sales in the back country parallel land, with much less volume. Last year there was one sale at $937,000, and three back country sales this year totaling $920,000, or $306,667 per sale, with an average market time of 1,048 days.

My interpretation of these data is that the San Diego County back country real estate market, arbitrarily defined here as the area within the county exceeding 3000 feet in elevation, is showing empirical signs of an upward trend in, first, the volume of sales, followed by a sustainable rate of appreciation mirroring the trend now occurring west of the Alpine-Ramona-Valley Center meridian.

If you would like more information regarding the current state of real estate affairs in San Diego County, please contact Donn Bree for a free consultation.

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