Best,
Neil

This effects everyone differently. If you are trying to sell your house, you may be worried about a $10,000 or $100,000 price cut, but then again, you may not really care that the price of eggs just went up 10% or a few dollars. In other words, at this moment, some of us are worried about hundreds of thousands of dollars of deflation, and others about a few dollars of inflation.

In any case, the inflation of essentials such as food and electricity will not be so evident in the overall CPI statistics (inflation stat) because they are dwarfed by the super-large deflationary numbers of cars and houses. This is critical to keep in mind as the inflationary stats are reported. The stats create an economic mirage for every day producers and consumers trying to decipher the reality of inflation and/or deflation.

The human error or variable is the Fed. As they “play” with interest rates and/or print money; they can not change the supply and demand fundamentals of our credit, but can greatly distort price. For example, the house may finally sell for $300,000, but the value of the money is worth half as much since the Fed has doubled money supply. In other words, you can’t buy as many eggs (essentials) with your inflated money.

This excerpt from Jean-Baptiste Say, one of my favorite economists, explains on page 227 of Treatise on Political Economy:

“As a proof that this paper (money) has a peculiar and inherent value, when its credit was the same as at present, and its volume or nominal amount was enlarged, its value fell in proportion to the enlargement, just like that of any other commodity… No government has the power of increasing the total national money otherwise than nominally. The increased quantity of the whole reduces the value of every part; and vice versa.”

With the failure of Lehman and freezing of the credit markets the market has moved substantially. I believe that the extent of the change has not yet been understood since very few properties are trading. There exists a significant gap between sellers and buyers, and in this cash constrained market the buyers will win. This is because there will be significantly fewer buyers, and as demand goes so goes price. This will also create a widening between income producing and non-income producing properties.

In some respects this is very similar to the market during 1991, only more extreme. This will be compounded and magnified by two factors. First, $1.3 trillion of commercial mortgages are coming due during the next four years, most written at high valuation levels with no underwriting standards. Loans are now underwater and many owners who cannot refinance will be forced to sell, or their banks will sell for them. Both will need to offer higher return levels to attract a buyer. Second, many properties have current cash flow below levels they had at the time of origination, either the result of vacancies or rent concessions. These two realities will continue to put upward pressure on capitalization rates, and continue to depress the value of both income producing and development properties. Add to this the specter of inflation, and it looks to be a rough ride down.

My daughter Abby is a graduating senior at CIA in Cleveland and she is working on a Cleveland cultural rroject for her thesis.

Economics is very simple to me. Everyone acts in their own self interest the same way it works in nature, in fact economics is simply an exstension of the natural world.

For all of our intellect, it comes down to doing what is best for ourselves, our family and occasionally our tribe.

If you understand how a flock of birds or a school of fish work, you see each animal taking care of it’s self first, and in the process they form a momentary society to reduce the risk, in their tiny minds, of being eaten by predators.

It’s kind of like buying insurance and pooling risk. At the same time the strive to maintain some autonomy from the group which results in a stasis or harmony that appears to be organized.

Every time a government intercedes in an economy, immediately the animals, ( us ) start deriving solutions to take advantage of the new environment, while striving to not be controlled by the outside influence.

It’s why managed economies evolve into facism and totalitarianism, people simply refused to be hearded, we are like cats.

Adam Smith dedicates the first section of the Wealth of Nations to metal coinage and exchange, including how and why such precious metals became currency. The main reasons 1.) scarce nature 2.) durability. Both reasons are in direct contrast to our “paper” dollar currency which can be 1.) supplied or printed on a moments notice or 2.) ripped or scorched in flames by chance. In other words, paper currencies are neither scarce nor durable. Taking it one step further, one might even call our present currency “digital”, since their is a fraction of actual “printed” paper dollars in relation to “digital” dollars which are in circulation in the economy; even though such circulating capital (i.e. cold cash) that we can all touch and feel is critical to the health of any economy as it keeps the goods and services flowing more timely (i.e. paying with cash is always faster than paying with credit). One of the most obvious challenges with our economy is that we desperately need more “cold cash” money in relation to “digital” money.

On that note, I do not agree that a monetary society is rooted in corruption; although without the proper economic education any system is certainly unstable and prone to economic cycles. That being said, such unstable economic times are also times of great opportunity. For example, I would bet that Honolulu, through Dole and other export driven companies export most of the food that is produced on Honolulu (Oahu), while Honolulu imports the majority of the food they actually consume from far, far away places. Such an outrageously inefficient economic system of trade makes for great, great opportunity for Honolulu (see Dole being forced to sell underutilized land to more efficient users of such land at lower and lower prices). As national retailers like Dole become weaker and weaker, local distribution of the local produce will become more and more stable.

The same goes for energy, as a land’s renewable energy value is quantified by the natural air (i.e. wind), water (i.e. hydro) & light (i.e. solar) production in relation to its land mass. As a result, Hawaii has the greatest natural resources for renewable energy production in the world, yet continues to import oil to make electricity, paying for it on a daily basis, instead of investing in it once for the long-term. That being said, because of its natural resources, Hawaii has the distinct opportunity, along with other tropical islands, to go 100% renewable in very little time (say 52 weeks). In other words, it is feasible for Hawaii to be 100% renewably powered in 2010 . The residents, through their taxes and savings, need to invest in the renewable energy more than anything else. That means no more same-old “spending” on imported cement bridges and roads; but rather strategic “investing” in windmills (wooden?) and solar panels! And once you get renewable, you go fishing.

Or how about water? I would bet that the 2nd largest import by weight and of trash to Hawaii is bottled water (after oil). Now that is stupid and inefficient economics. In any case, if Hawaii better filtered and marketed its own beautiful water for drinking purposes, it would dramatically reduce the price and waste, while increasing the nutrition of its drinking water. What I am trying to say is that such profit opportunities readily exist to greatly improve our economy. Then everyone could go fishing and surfing.