How To Value Real Estate – Guest Post
This is an essay from back in 2005 (yes, some people DID see a bubble in real estate way before the carnage) by my erstwhile manager and colleague Craig Woker on the US Housing Bubble and how to value residential real estate rationally. This applies specifically to the US market but the tools and methodology can be used to assess real estate values anywhere in the world. We in India can especially use a dose of reality before putting a down payment at current nosebleed valuations for residential real estate.
May 28, 2005
Real Estate Is the New Dot-Com
by Craig Woker, CFA
Residential real estate is fast becoming the Internet stock craze of this decade. And like the previous mania, house buyers in some parts of the country have thrown logical, fundamental valuation out the window. So if you’re thinking about following the crowd by scooping up investment property, you might want to think twice–and first apply sound cash-flow analysis to your decision, similar to a common approach in valuing real estate companies. For that matter, if you’re just a homeowner curious about whether you should cash out at current prices, it might be worth conducting this same fundamental analysis.
These two market crazes–Internet stocks and residential real estate–have more in common than many investors would like to admit. In both, speculation was rampant, buyers levered up to new heights to avoid missing out on a “sure thing,” meaningless metrics and comparative analysis (price/eyeballs and property appraisals) garnered undue focus, and relevant multiples, such as price/earnings for stocks and the real estate equivalent–price/rent–were ignored.
Fortunately, there’s no reason that smart investors need be burned twice by the same mistake–buying at inflated prices when they’d be better off selling. To avoid making poor choices, investors (the 68% of Americans who own homes) can toss out their property appraisal and instead turn to fundamental property valuation. After all, an appraisal in its typical residential real estate form is little more than a comparative analysis conducted by someone with no skin in the game offering little more than confirmation that other lemmings are paying too much for their homes as well.
The Truth Lies in NAV
Within commercial real estate, there is a widespread tool called the net asset value (NAV) model that is applied to a wide range of property classes: office buildings, warehouses, shopping malls, and apartments to name a few. At Morningstar, we currently apply a similar valuation methodology–though with a few more bells and whistles–to estimate the intrinsic worth of the dozens of real estate investment trusts (REITs) that we cover. With some minor modifications, any real estate investor can readily estimate the intrinsic worth of his or her home, valuing the property on a cash-flow basis, just as if it were a stock or any other financial asset.
In its simplest form, the NAV requires just four major inputs: annual rent over the past year, average maintenance costs per year, an average long-term growth rate in rent or property value, and a discount rate (called the cap rate in real estate). Without getting into the guts of the theory behind this model (plenty of explanations exist in finance texts and on the Internet), the NAV formula looks like this:
NAV = ((Rent – Maintenance Costs) * (1 + Growth)) / Cap Rate
If you’re dealing with your own home–owner-occupied real estate–you can simply estimate the rent component by comparing your house to comparable rental homes in your area.
Next, to estimate the average annual costs required to maintain the property in its present state–no better and no worse–consider the two major costs: property taxes (net of the income tax benefit) and home maintenance such as periodically replacing appliances, fixing leaky roofs, and so on. For reference, most apartment REITs have costs equal to about 30%-40% of the rental income, and this seems a reasonable proxy for single-family homes as well. Next, you need a long-term growth rate estimate. This is a bit subjective–and will vary by region–but can be arrived at via CPI estimates (4.2% per annum going back to 1980) or by using home price data (which averaged 4.4% annually since 1980 if you ignore the past 5 anomalous years). Finally, the cap rate. Because real estate is a low-risk asset class, the cap rate can be derived by adding a couple of percentage points to the current long-term Treasury rate. Historically, apartment real estate has carried a cap rate of about 7%, and, given the current interest-rate environment, professional investors have been able to justify a cap rate of about 6%-6.5% in some recent cases.
Once this calculation is done, investors will also probably need to tack on a control premium. This is the value assessed for the net benefit of controlling the residence rather than being at the mercy of a landlord. Similar methodology has commonly been employed in the stock market, most frequently during merger analysis, and the premium has typically averaged about 20%-30%.
Now that you’ve calculated the intrinsic value of your home, you can compare it to what similar properties are going for. If sale prices are far above what you came up with on an intrinsic basis–enough to justify the realtor’s commission and moving costs–it might be time to pack your bags. The key in conducting your own fundamental real estate analysis is to use reasonable estimates. No one besides you is going to be hurt if you use aggressive assumptions. You’re the one who will overpay for a house or miss out on the option of cashing out of an overvalued property. When conducting your analysis, the most aggressive case that you’ll probably want to run would include setting your cap rate equal to a long-term Treasury bond, currently about 4.4%, and the growth rate of about 10%–assumptions so high they made my REIT colleagues nervous. After all, even assuming real estate is as riskless as Treasuries (it’s not) and that national price appreciation follows long-term trend lines similar to the past five years (it won’t), many buyers in hot markets such as California–the current hub of real estate frenzy–will find that there’s no way they can justify the current market price of their homes.
Consider one city I investigated: San Diego, which has been one of the nation’s hottest markets, with a median home having appreciated a whopping 107% from 1999 through 2004. While every regional property market is unique–and no two houses are perfectly comparable–we can make some reasonable estimates of fair property values. In my searches of numerous rental house listings in San Diego, it seemed possible to rent attractive four-bedroom homes in good neighborhoods for about $2,000 per month. Using extremely aggressive assumptions–a 4.4% cap rate and 10% growth–I arrived at a maximum fair value of about $546,000 for a house of this type. Yet, the median price of an existing home in San Diego County was $593,600 in April, according to the California Association of Realtors, and homes comparable to the rentals I found were listing for $600,000 to $700,000!
Price/Rent Ratio
It’s worth noting for investors conducting an NAV analysis of their home that this exercise really boils down to one easy-to-understand multiple–price/rent–just as the price/earnings ratio is shorthand for the value derived from a discounted-cash-flow model. This price/rent ratio can be thought of as the intrinsic value (price) of the house relative to the rent you’d receive from it.
In my own analysis, I found that a reasonable range of price/rent multiples–no matter where the property is located–ranges from about 9 at the low end to 23 on the absolute high end. To arrive at these multiples, I assumed two scenarios. In the aggressive case, I assumed a cap rate of 4.4% (the Treasury rate), an NOI margin of 70%, a growth rate of 10%, and a control premium of 30%. In the conservative case, I assumed a cap rate of 7%, an NOI margin of 60%, no growth, and no control premium.
Interestingly, U.S. homeowners already seem to have an implicit understanding of the importance of the price/rent ratio. The Federal Reserve Bank of San Francisco published a fascinating research study last fall analyzing the fundamental pricing of houses. Using government data, Federal Reserve researchers compared U.S. housing prices to rents going back to 1982, and found that they’ve generally risen hand in hand–until recently, when home prices rocketed to all-time highs compared with rents. However, what’s curious is that the rent component of their study focused on Consumer Price Index data, and this data is estimated at least partially through surveys of homeowners asked to assess what their house would rent for on the open market. So while the debate currently rages in the news media over whether homes are overvalued, U.S. homeowners have already tacitly admitted that homes are overpriced–even if they haven’t said it in so many words.
For what it’s worth, my one predicted difference between the Internet era and the Real Estate era is that the latter won’t end nearly as badly as the former. Unlike the Internet mania that propelled worthless stocks like eToys, Pets.com, and WebVan into the stratosphere, residential real estate certainly has a lot of intrinsic value. It’s just that some people are paying too dearly for home sweet home right now.
Can The Reserve Bank Of India Tame Inflation?
The Reserve Bank of India hiked key policy rates for a third time on September 16, 2010 in a bid to quell rising inflation in India. Will it be successful in taming this monster which has run rampant for the better part of the past three years? Unfortunately, in my view, the answer is in the negative. The RBI has neither the understanding of what causes price inflation nor the will to take tough choices to contain it.
To cure a disease, it must first be diagnosed correctly. It is futile just treating the symptoms. Such is the method adopted by the RBI. I have no confidence in our policymakers’ ability to zero in on the root cause of inflation. They’ve blamed everything from international oil prices to a below-average monsoon for the rising prices. These are at best proximate causes and at worst excuses to divert attention from their own failures.
As famed economist Milton Friedman declared,”Inflation is always and everywhere a monetary phenomenon.” Therefore, to understand why there is rampant inflation in India, we need to look at the stock of money or money supply. The M3 money supply metric consists of currency notes in circulation, demand deposits, time deposits and bank reserves with the RBI. From the RBI’s website, the growth in M3 since August 2009 has been 15.1% and the growth in the previous year had been 19.9%. Therein lies the cause of the massive rise in prices witnessed by India, a huge growth in the money stock. In fact, since 1994, the money supply has grown by 15% on average per annum, thoroughly debasing the rupee and making life more difficult for the poorest of the poor. Inflation of the money supply transfers wealth from the poor to the rich through the Cantillon Effect which is why we constantly see headlines in newspapers saying growth in India has not been inclusive. Well, DUH!
It is an absolute falsehood to declare that price inflation is the result of rapid economic growth. Nor is it acceptable to trade-off higher inflation for higher growth. In fact, the two have very little to do with each other. High growth rates follow from high real savings that are subsequently reinvested into higher order capital goods such as machinery or R&D. High inflation follows from increasing the money supply.
The fact is, rapid economic growth should cause a decline in the general price level. This phenomenon was most commonly witnessed under the gold standard but also as recently as 2005 in China. Under the classical gold standard followed in most countries around the world in the 19th century, prices declined even as economic growth exploded. At the height of the Industrial Revolution from 1869 to 1879, in the United States, real GDP growth averaged 6.8% per annum while general prices declined an average 3.6% per year! In fact, despite several gold discoveries in the US in the 19th century, particularly in California and Alaska, the general price level declined by 51% from 1800 to 1900. In other words, what cost $100 in 1800 would cost just $48.94 in 1900.
Most of these lessons, however, are lost on our policymakers (to be fair, they are lost on policymakers all over the world). There is a widespread belief that inflating the money supply is the cause of economic growth and the price inflation that follows is a result of economic growth. Therefore, I’m not holding my breath waiting for a sustained drop in inflation in India.
To control inflation, first and foremost, the Indian government needs to stop running huge budget deficits. Most of the budget deficit is financed not by borrowing in the debt markets but by monetization by the RBI. The RBI in effect exchanges freshly printed rupee notes for government bonds. When this base money gets into the banking system, it is multiplied several times by the banking sector through a process called fractional reserve banking which causes a large increase in the money supply.
Secondly, India is running a huge trade deficit of about US $135 billion over the past 12 months. In order to close this deficit, the rupee needs to be weakened to stimulate export growth. This weakening is accomplished by the RBI’s purchase of foreign currencies with freshly created rupees, again increasing the money supply and pushing prices higher.
Lastly, a serious effort to curb money supply growth will push interest rates on home loans and auto loans closer to the 15-20% range. Such a push would likely trigger a massive recession which is politically unacceptable. The RBI governor has categorically stated that he will not accept high unemployment and low growth just to curtail inflation. In my opinion however, such a policy is wrongheaded. Inflation must be addressed first and foremost at all costs before worrying about GDP growth as it weakens the production structure of our economy. Sometimes it’s better to retreat a little, regroup and then advance instead of plunging headlong and losing our way.
The PIIGS Bailout: A Greek tragedy in the making
The recently approved Eurozone bailout package designed to buy more time for fiscally troubled nations such as Greece, Spain and Portugal is nothing short of a global ‘Greek’ tragedy in the making. Of course, quite contrary to this, one would get the impression that happy times were around the corner judging by the response of global stock markets. However, those of us who understand Austrian economics and believe in free markets and sound currencies can see one more nail driven into the coffin of paper ‘fiat’ currencies such as the Euro, US Dollar, British Pound and Japanese Yen.
Rescue plans these days don’t muster up much confidence unless they are at least around the trillion dollar mark. Sure enough, the announced package was just shy of a trillion dollars, in an effort to, at best, kick the can down the road by three years. In all, the EU and its member countries would kick in EUR 500 billion ($650 billion) while the IMF will chip in with EUR 250 billion ($325 billion). In addition to these measures, the Federal Reserve agreed to an unlimited dollar-swap agreement with the European Central Bank to help contain any unexpected surprises in the coming months from the European debt crisis. The final price will almost assuredly be greater than one trillion dollars because governments are notorious for rosy deficit projections past the current budget year.
As Frederic Bastiat espoused, a good economic thinker looks not only at that which is seen but also at that which is unseen to gauge the efficacy of a policy in totality. Make no mistake, this supposed ‘containment’ boondoggle was yet another bailout of the world’s largest banks. A majority of the debt of the PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) is held by large French and German banks. An outright default would’ve called into question the solvency of these banks for a second time in two years. In addition to being a bailout for the banks, it offers some respite to the governments of the PIIGS nations that were either experiencing or in danger of experiencing civil unrest. And it gives the short-sighted and jittery stock markets a breather. These are the most readily obvious reasons for the bailout.
The bailout, however, sets the stage for far greater problems down the road than if the PIIGS nations were allowed to default and restructure their debt obligations. The lessons learnt from the public worker union riots in Greece are not lost on government dependents in the rest of the PIIGS nations. Observing their Greek counterparts, they would surmise that if enough buildings and vehicles were burnt and people killed, their cowardly governments would cave in to their demands. Moral hazard rears its ugly head again. Therefore, it’s a foregone conclusion that the supposed austerity measures to control spending are doomed to failure. After all, if these measures could’ve succeeded, they would’ve been implemented five years ago when the world economy still hadn’t hit the skids.
Greece is also looking to raise taxes in combination with the austerity measures to reduce deficits. Raising taxes would impact the Greek government’s revenue collection negatively in two ways. Higher taxes would reduce economic growth and thus lower tax revenues. Further, high taxes would also drive more Greek businesses underground. Already, 25% of Greece’s economy is said to be off the books. Therefore, over the long term, the negative consequences of raising taxes would far outweigh the initial, nominal increase in revenues.
The Federal Reserve’s and IMF’s participation in the Eurozone bailout will not be lost on union members and politicians of heavily indebted U.S. states such as California and Illinois. When the day of reckoning arrives for the U.S. states unable to close their budget gaps and whose pension plans have huge funding gaps, they would be up in arms for their bailout as well. How could the U.S. government politically defend its bailing out Greece via the IMF and the Federal Reserve and refusing the same for its own citizens? The idea that California would be allowed to default its obligations when Greece wasn’t is unthinkable. Therefore, the bailout of the PIIGS nations sets the stage for similar bailouts of bankrupt U.S. states and cities.
The Federal Reserve’s involvement warrants a closer examination. The Fed has indicated that it would participate in dollar swap agreements with the ECB, similar to one it undertook in 2008. Without an audit of the Fed, we can only speculate as to what exactly this swap entails. However, a reasonable guess is an exchange of freshly printed Euros by the ECB for freshly printed USD by the Fed at the current exchange rates. The Fed would then use the Euros to either directly or indirectly purchase the debt of the Eurozone nations. The ECB in turn would use the dollars to purchase U.S. Treasury debt. Therefore, this is just a convoluted scheme to blatantly monetize government debt. It’s a cinch that the funds necessary for this bailout would be created out of thin air rather than raised via taxes or issuing debt. Only in the world of central banking and thin-air money creation can one bankrupt entity bail out another.
Thanks to the egregious inflation expected in bailing out Europe and states like California, the pool of real savings in Europe and the U.S. could become an extremely endangered species. By far, the erosion of the real savings pool is the most damaging aspect of the bailout. Unfortunately, real savings cannot be readily measured and therefore, it is difficult to monitor the damage done during the inflationary period. We do, however, see the results of the capital consumed when the inevitable recession ensues after the inflationary period.
Real savings is defined as the end consumer goods desired by workers, set aside to sustain them by producers of these goods, in exchange for the workers engaging in more roundabout production methods. Real savings are the lifeblood of businesses. In order for more long-term projects to be undertaken, there must be a surplus production of final consumer goods which are subsequently saved. For instance, a coal miner will be reluctant to work his job if, at the end of the day, he was unable to exchange the fruits of his labor at the coal mine for goods and services such as food, clothing, shelter and leisure. He would just as soon quit his job at the coal mine and pursue another line of work, one for which he may lack specialization, just so he could acquire the immediate goods he desires. In an extreme case where the real savings pool is completely depleted, he would be forced to become a hunter-gatherer to feed himself and his family. Society as a whole, therefore, is poorer for his choice.
Inflation to bailout inefficient or overpriced users of resources such as government and labor unions diverts the pool of real savings from wealth creators to these entities. Unlike money and bank credit that stays in circulation (mistakenly thought to be productive as per the Keynesian multiplier theory), real savings can only be consumed once. Bailout recipients outbid wealth creators for the real savings pool, thwarting their attempts to maintain or expand production levels. If there aren’t enough real savings to cover even maintenance and depreciation expenses of businesses, then the amount of goods and services produced, the real wealth of society, will begin to decline. This is the main reason why countries experiencing runaway inflation also see a decline in economic activity.
The most infuriating aspect is, the Eurozone, California et al will arrive at this same juncture again in about 3 years or so when they must pay interest on their current debt plus the one trillion in bailout dollars and repay the maturing debt. In addition, they will probably be issuing new debt to fund continuing deficits. There is also a very good chance that creditors may refuse to rollover maturing debt at which point this process will begin again. Given that governments are reluctant to take their lumps now, what are the odds that they will do the right thing–outright default and debt restructuring–three years hence when the debt bubble is that much larger, the economy is in worse shape and the pain of default and austerity is much higher than today’s? The words slim and none come to mind. The world is firmly ensconced on the path to an inflationary depression.
Given this dire outlook, what is one to do? Starting or acquiring a business, preferably one that is less capital-intensive that could still function in a highly inflationary environment, is the surest way to preserve and maybe grow your wealth. For the vast majority of others for whom entrepreneurship doesn’t come easily, dollar cost averaging into precious metals such as gold and silver and select other commodities isn’t such a bad idea to protect one’s life savings. Inflationary depressions transfer wealth from holders of paper assets to holders of hard assets. The bailout has bought a modicum time for the PIIGS before the noose tightens once again. Fortunately, it has also provided time for the prudent and informed to prepare for the crisis and acquire hard assets while the getting is still good.
A (Plausible) Path To Runaway U.S. Inflation
“I see green shoots” said Fed Chairman Ben Bernanke on 60 Minutes back in March, doing his best rendition of Haley Joel Osment from the movie The Sixth Sense. Since then, every poor economic headline has been preceded with the word “unexpected” by the lapdog media, as if the clueless Bernanke’s words were suddenly the Gospel and the economy had indeed recovered.
Phantom U.S. Economic Recovery
Common sense tells us that if a phenomenon A causes a problem B, B cannot be rectified unless A is first removed. As an adherent of the Austrian School of Economics, I can confidently tell you that a sustainable U.S. recovery is not at hand. A sustainable recovery must not be mistaken for an upward blip in the GDP reading (itself a flawed measure of material well-being) especially when government borrowing is unprecedented and a lot of input parameters, not the least of which is the GDP deflator, can be fudged.
I’ll borrow an analogy from Peter Schiff. Imagine if you will a victim at the unfortunate end of a Brock Lesnar knuckle sandwich. The blow has knocked him out cold and the medics try to revive him. The best suggestion they can come up with is to have Lesnar pound the man’s head even harder with his fists. When the man has seizures from the repeated pounding, a medic (coincidently named Bernanke) screams gleefully “Hurray, he’s moving”.
Sadly, such is the equivalent response to our present crisis provided by the policy makers in Washington DC (perhaps soon to be renamed Barackistan). To solve a problem caused by malinvestments resulting from easy credit at 1% interest rates, the Fed is supplying even more easy money at 0.25%. None of the malinvestments have been allowed to be liquidated. Housing prices have been propped up with tax breaks and Fed purchases of MBS, banks and auto companies have been bailed out, regulations have increased, debt covenants have been violated, unemployment insurance has been extended. In addition, there’s a cap-and-trade bill and a health care bill, and a “czar” of something seemingly around every corner. All of these increase the already humongous burden on wealth creators. In short, the problems that caused the Great Recession have been compounded. Real output must then necessarily decline. How can anyone thinking logically then assert that we are in the beginning of a recovery?
Declining output is not the answer to keep a system with a debt-to-GDP ratio nearing 400% (800% if you include Social Security and Medicare obligations) solvent. From this vantage point, one can conclude that the real recession is ahead of us, not behind us. One then must decide whether it will be a deflationary recession or an inflationary recession. Intelligent people can disagree on this but my take is an inflationary recession.
What’s Happening Below the Surface?
Since the Lehman collapse over a year ago, the cracks in the banking system have been papered over with an unprecedented amount of money created out of thin air. However, underneath that surface, the real pool of savings is continually being channelled away from wealth creators to malinvestments such as housing, autos and banking. This means that total output will decline eventually because there are no investments being made to maintain capital and improve productive capacity. There may be a blip here and there but this is more likely to be the result of capital consumption than any sustainable increase in output. Meanwhile, for reasons detailed below, the money supply will constantly increase. We then have the textbook case of more money chasing fewer goods, leading to rampant price escalation.
Deflation Begets Inflation
If you happen to catch a NASCAR race on TV, you might hear a driver screaming over his radio “Tight, tight, tight…..LOOOSE!” followed invariably by a crash. What he’s referring to is his race car’s inability to turn the corner. A “tight” condition means the car doesn’t want to turn and is heading straight for the wall. A “loose” condition means the car turns too readily and wants to spin out. When a car is difficult to turn, the driver ends up putting so much wheel into it that when the car eventually turns, it overshoots, spinning out of control and the driver rear-ends the car into the wall.
This is the exact scenario I envision for the impending price inflation. Bernanke and company are screaming that there is deflation everywhere they see. To combat this deflation, the Fed will keeping printing money and adding reserves by buying all kinds of assets until general prices violently overshoot on the other side causing runaway price inflation.
The M2 Money Supply Barometer
The M2 money supply is used by a lot of economists as a barometer to gauge price inflationary pressures. Over the past six months or so, this metric has declined marginally. So if one defines deflation as a reduction in the M2 money supply, then we are indeed experiencing deflation. On the surface, consumers are finally getting religion, curbing their spending habits and paying down debt. Paying down debt is a deflationary activity because it reduces money supply. Unfortunately, not everyone will be able pay-off their debts.
For a fractional reserve banking (FRB) system to stay solvent, the money supply needs to ALWAYS be increased by at least the weighted average interest rate i.e. money supply needs to grow exponentially. Consider a system with $100 in loans due in a year @ a 10% interest rate. The total amount of money in the system is only $100 but the amount due at the end of the year is $110. Where will the $10 come from? It has to be lent into existence at some point prior to when the $110 is due. Absent this increase in money supply, the loan will default. On the other hand, an ever increasing money supply will quickly lead to runaway price inflation as I have detailed why real output will be unable to keep pace with money supply growth.
In a sound money, 100% reserve banking system, an over-whelming majority of loans are made to wealth creators. These loans are funded by real savings and are eventually liquidated (to simplify the explanation) by the lenders purchasing the produce of borrowers. They can be called self-liquidating loans. I’m not implying there will be no bad loans, just that bad loans will be minimal compared to our current system as underwriting will be very strict and the fallout of bad lending decisions will stop with a bank’s shareholders. Of course, the vast majority of housing loans and auto loans made during the last boom can barely be classified as self-liquidating because both of these (I hesitate to call them assets) do not produce anything that can be exchanged for money.
Loan Defaults And Banking System Collapse
In a FRB system where debt is being paid down, money supply will decline and eventually prices will follow suit. Businesses will reduce wages to stay profitable. Any debtor will find his debt burden becoming more onerous as there is less money to go around. Eventually, defaults will begin with assets moving from debtors to creditors. The banking system will implode and depositors will be wiped out until reserves in the system back up deposits outstanding entirely. This is the exact process that should have been allowed to happen since 2008. Left alone, nothing could have prevented this catastrophic collapse. Asset prices would’ve decline massively considering that the system had about $10 in credit money for every $1 in reserve before Bernanke injected about $1 trillion more in reserves.
Why Inflation, Not Deflation
It goes without saying that deflation would have been very painful for any debtor. Consider the most indebted entities: the government, banks, powerful corporations, private equity funds run by insiders, and home owners. Given these debtors, is it any wonder that the government choose bailouts rather than letting the market work its exorcism? Every time there is even the slightest deflation, we’ll hear Bernanke et al saying that all hell will break loose unless something is done about it.
If the market were allowed to work, loan defaults would cause bank failures en masse. Bank failures would also wipe out the savings of depositors as the banks debt holders will have seniority in bankruptcy proceedings. Yes, all hell will break loose but only for the people who took imprudent risks like borrowing recklessly or depositing money in unsound banks.
If one bank is allowed to go under and depositors allowed to be wiped out, you can bet your last dollar that there will be a run on every bank the next day, exacerbating the problem exponentially. The entire banking system would be ruined in a couple of days with utter chaos, pandemonium and possibly violence being the rule rather than the exception.
Rather than letting all debtors and depositors be wiped out (and defaulting on its obligations), the government will intervene via the Fed to shore up the system. The Fed will print money to purchase troubled assets. The Fed will also print money to fund the U.S. government as tax revenues will decline precipitously even as government mandates increase (normal operations, transfer payments, unemployment payments, wars, etc.). Once the FDIC runs out of funds to make depositors whole, it will tap into a $500 billion credit line with the Treasury which in turn will sell bonds to the Fed to raise the money to repay depositors.
Note that when a bank fails but the depositors are made whole, that is inflationary because the original money is still in the system and now we have the new money in addition. M2 destruction will be replaced by M1 creation. Deflation causes debt defaults which in turn cause bank failures which in turn result in inflation as depositors are bailed out. In trying to save debtors and depositors, the policy makers ensure that everyone loses due to loss of purchasing power via inflation. This cycle cannot continue endlessly. One fine day, it will blow sky high. Any event may trigger it from foreigners unloading US dollars and Treasuries or US citizens realizing that their money is fast losing its purchasing power.
Conclusion: Being a follower of Austrian Economics, I know that real output will continue to decline. Declining real output will result in lower real savings. Lower real savings put pressure on debt repayments and defaults will result. Defaults will wipe out banks and depositors and would also cause the government to default on its debt. The Fed will bail out all affected parties by creating money. Bailouts cause malinvestments that lower real output setting off the above cycle again. This cannot continue forever and will eventually result in a runaway inflationary depression.
Gold: India’s Capital Asset Through History
Introduction
India’s obsession and fascination with gold is well known around the world. To most commentators, particularly western commentators, this obsession seems irrational and Indian people are deemed incurable gold bugs. However, on closer examination, gold ownership in India is neither excessive nor is it irrational. In fact, when religious, cultural and historical perspectives are considered, India’s appetite for gold seems rather matter-of-fact indeed. Nonetheless, it is not lost on any Indian worth his or her salt that gold is the asset class that best protects wealth and freedom.
When my father, a pediatric surgeon, wanted to buy land to construct his clinic and supplement his meager government income, he purchased land by mortgaging my mother’s jewelry. Similarly, millions of people in India have capitalized or recapitalized their businesses or farms by pledging their gold jewelry, not to mention securing their basic necessities after severe business reversals. India herself pledged her gold to secure a loan from the World Bank in 1991 when she was on the verge of defaulting on her international obligations. As we shall see below, were it not for gold, the average Indian’s lot through history could’ve been a lot worse. Further, I believe that India’s gold could, if tapped wisely, speed the country’s economic growth and alleviate poverty in the country over time.
India’s per capita gold holdings
India’s private gold ownership is difficult to determine accurately. However, several websites such as Gold Eagle estimate the total private gold holdings to be about 15,000 metric tons. Compared to that figure, the Indian government owns a negligible 360 metric tons of gold. Given that total gold mined in history is about 160,000 metric tons, India’s stake then amounts to 9.6% of the world’s total gold stock. In contrast, India accounts for just over 17% of the world’s population. Therefore, India’s large gold ownership is just a function of its large population and its per capita gold ownership is well below average.
While India’s per capita gold ownership is well below the world average, there can be no doubting their desire to own this metal. Demand from India consumes some 20%-25% of annual gold output. Much of this desire to continually acquire gold dates back almost 4,000 years to the Indus Valley Civilization.
Religious and Cultural Reasons For Gold Ownership
Gold jewelry was worn by ancient Indians dating as far back as the Bronze Age Indus Valley Civilization, some 2,000 years B.C. Gold also has a rich tradition in the Hindu epics, the Ramayana and the Mahabharata. It was associated with the pomp and splendor of the gods and kings who appeared in these mythological stories. The Ramayana, the earlier of the two epics, can be traced back to around 900 B.C., so even back then, gold had risen above all other commodities to be associated with power, prestige and wealth.
Let me narrate a short story to illustrate how deeply gold and wealth are imbibed into the Hindu culture. The world’s richest temple, at Tirupati, was built on the legend of Sri Venkateswara, an incarnation of Lord Vishnu. Legend has it that Sri Venkateswara, who was born poor, sought the hand of Princess Padmavati, the incarnate of Vishnu’s celestial consort, Lakshmi. Her father decreed that Venkateswara could marry Padmavati only if he possessed comparable wealth as the king himself. Venkateswara sought a loan of gold and jewels from Lord Kubera, the Hindu god of wealth. To help Venkateswara repay this loan symbolically, Hindu devotees to this day, donate money at Tirupati. This is but one of many thousands of stories from Hindu mythology, all of which involve gods, kings and wealth in some way, shape or form. Therefore, it is not an exaggeration to postulate that generations of Indians reared on these stories have come to associate gold with mythical qualities.
Historical usage of Gold
Silver coins were widely used in India during the reign of the Mauryas circa 250 B.C. The first gold coins were issued widely doing the Gupta dynasty around 250 A.D. Interestingly this period was also known as the Golden Age of India’s history. On the face of it, all emperors issue coins to commemorate and accentuate the significance of their reigns. However, there was a still more practical reason for Indians to use gold as money.
India, over the past 4 millennia, has been a collection of many thousands of kingdoms and fiefdoms. Every once in a while, an emperor or a dynasty such as Chandragupta Maurya or the Mughal dynasty appeared on the scene and was able to consolidate a majority of India under their rule. However, no sooner than an able emperor passed away than his empire disintegrated as infighting and ineffective rulers followed him. Even with the big empires, there was always plenty of fighting on the edges of the empire and border territories constantly changed hands. Millions of Indians could, in their lifetime, expect to be subjects of several rulers and be part of more than a few different kingdoms.
Gold, being of high value, could easily be hidden during times of strife, presenting ordinary citizens an avenue to prevent being looted by marauding armies. Further, a gold coin issued by one king could serve as money under any other king as long as the weight and purity of the issued coin could be assessed. Therefore, gold was the preferred medium of exchange and store of wealth.
The history of dowry in India is almost as old as the Hindu religion itself. Dowry, before the negative connotations of today, was a gift from the bride’s family to a newly married couple. It was to compensate the groom for the additional expenses he would incur taking care of his stay-at-home bride and in time to come, a family. Add in the fact that the chances of a woman being widowed at a young age were high given rampant disease and almost constant warfare, the practice of dowry was prudent for much of India’s history. Although different commodities were used to pay dowry, gold was the preferred option simply because of its wide acceptance and the ability to safeguard it during the many times of strife. The practice of giving gold and gold jewels as dowry continues to his day. While I’m not condoning the practice of dowry in the modern day or the atrocities associated with it, I’m only giving a historical perspective on why that custom came into existence.
Another offshoot of the rich tradition of gold in the Hindu religion explains why Indians mark every auspicious and festive occasion with the purchase of a token amount of gold, particularly the observance of Akshaya Tritiya. In fact, the parents with daughters begin accumulating gold in anticipation of their daughter’s weddings in small quantities yearly on these occasions.
Other Contemporary Reasons For Gold Ownership
The above historical and cultural reasons explain the long entrenched practice among Indians to acquire gold. This deeply ingrained practice continued into contemporary times despite India having a unified currency since the British acquired complete control of the country in 1857. The reason was primarily because of the continued struggles for the average Indian, first under the British and then under socialist India.
Since India’s independence, India followed a socialist economic policy with the government running constant deficits to fund its five-year plans. Needless to say, these plans proved very inefficient, resulting in plenty of wastage and constantly increasing prices. India’s disastrous war with China in 1962 severely depleted India’s foreign reserves and removed the backing for the rupee. To prevent a massive flight out of the rupee, the government established the Gold Control Act in 1962 forbidding the ownership of gold in bullion form and mandating the conversion of all private gold bullion into gold jewelry. This prevented the rise of an alternate currency if the rupee should flounder. As with all government intrusions, this law had unintended consequences. Because licenses were required to hold gold bullion, many unconnected goldsmiths lost their livelihood, seemingly overnight. The prohibition also gave rise to gold smuggling and a huge black market in gold, which no doubt claimed many lives and livelihoods. The restrictions on gold were eased only in 1991 when the Indian economy was liberalized following it’s near bankruptcy.
Further, in 1969, the Indian government under Indira Gandhi nationalized the banks and licenses were required for almost anything. This was the beginning of ‘License Raj’ in India that instituted rampant corruption in all levels of the bureaucracy. Since the state controlled all the banks, loans were made to special sectors so as to buy votes, of course with the requisite kickbacks for the bank staff processing the loans and their political patrons.
To top this, the 1970s were a tumultuous period politically in India. A state of emergency was declared from 1975 to 1977 giving almost dictatorial powers to Indira Gandhi. When democracy was restored in 1977, Ms. Gandhi was ousted by Morarji Desai. However, the common man still couldn’t catch a break as marginal tax rates hit a scarcely believable 95% and with the rupee’s value declining steadily.
In light of these circumstances, gold was the average Indian’s best friend. Due to a ban on gold, the value of gold in relation to other commodities and the rupee soared. The high marginal tax rates gave rise to a huge black market. Citizens needed a way to hide and protect their assets from the taxman and gold was one of the two asset classes that proved effective in accomplishing this task, the other being real estate.
One last reason why extensive gold holdings are prudent in today’s context is the paltry level of insurance provided to bank deposits. A fractional reserve banking system is inherently insolvent and needs government insurance to prevent a run on deposits. In India, the amount covered under deposit insurance is just Rs.100,000 or USD 2,170. In contrast, FDIC insurance in the US was increased to USD 250,000 from USD 100,000. To put things in perspective, Rs.100,000 is about 5 months rent for a decent 3BR apartment in Bangalore whereas USD 250,000 is about 4-5 years worth of living expenses for a couple in Chicago, including a mortgage or rent. In other words, Rs.100,000 is an insignificant sum of money. Realizing that the banking system is shaky due to the low level of insurance, many savvy consumers hedge by holding a portion of their savings in gold. Moreover, millions of people in rural India completely bypass the banking system because they don’t understand it, preferring to hold their savings in gold. When in need of money in a crunch, they pledge their gold with a local money lender in return for currency.
In summation, India’s ancient and deep religions traditions combined with a plethora of historical, cultural and practical reasons have fostered an unflinching desire to acquire gold as a means of protecting one’s wealth. In this light, one can hardly dismiss this desire as irrational. Given what’s in store for the world at large when the inevitable currency crisis occurs, citizens from other countries could do worse than taking a leaf out of India’s history with gold.
The Purchasing Power of Gold
Synopsis: In this essay, I will briefly outline the use of gold in India, the world’s largest gold consumer market, and then use various methods to compute the value (purchasing power) of an ounce of gold and silver as of September, 2009.
Gold and Silver Usage in India.
In my nine years outside India, I’d almost forgotten my countrymen and women’s obsession with gold—ALMOST. On my return back here, this obsession hit me again, square in the face. I came back during festival time (August through November) when people mark every festive occasion with purchase of jewelry. During earlier, more politically incorrect times, people would openly ask how much gold (in jewelry form) the bride’s father would be giving the young married couple (read: the groom).
When I was young, I’d asked my dad why we Indians were obsessed with gold. He told me that gold was a fallback during tough times. I’d later realized that Indians always had a healthy mistrust for their government. Back in the 70’s, when marginal tax rates in India were above 90%, Gold was used to hide wealth from the government and the practice of gold as a store of wealth continues till today. While they may not have exactly understood why gold held its value better than rupees, they knew they needed to put away some gold for safekeeping. India had restrictions on gold bullion for a long time but none on gold jewelry, so that became the preferred method of accumulating gold.
Silver, while nowhere near in vogue as gold, is still widely used in India for jewelry and ornamental purposes. Silver is the metal of choice to make statuettes of Hindu gods and goddesses and other religious paraphernalia such as oil lamps, incense holders, etc. Many households in India maintain full sets of silver utensils to commemorate special occasions such as festivals and anniversaries.
Gold and Silver as Monetary Instruments
Since ancient times, throughout the world, gold and silver coins were used as money and a store of wealth. Gold and silver were used as money in parts of the world which had no contact with each other earlier. For example, gold and silver coins were used in Spain. When the Spaniards conquered the new world, they discovered that the Maya, Inca and Aztec royalty had massive stashes of gold and silver as well. Obviously, these two groups of people had never before been in contact with each other. One may then surmise that gold and silver have special properties that render them the most suitable for use as money.
Professor Hans Sennholz describes eloquently in this essay why gold was used extensively as money throughout the history of man. Ludwig von Mises summed up gold’s appeal for monetary purposes in the following way:
a) it is homogeneous and divisible.
b) it has a high value per unit weight and therefore portable.
c) it is the best store of value as its quantity cannot be increased at will – gold’s occurrence is rare and has a high cost of extraction.
The Purchasing Power of Gold
Since the advent of a completely fiat currency system worldwide since the Bretton Woods system disintegrated in 1971, the nominal value of gold in US Dollars has not kept pace with the growth of fiat currency money supply. This is because the use of paper money has reduced the demand for gold as money.
However, I believe the world has reached a stage where the paper-currency system is on the verge of failing. I will explain in detail why I believe this to be the case in a future article. For now, let us assume there will be a major currency crisis in the US Dollar and maybe several other major world currencies. My best estimate is that this event will happen within the next 5 to 10 years as the U.S. saturates the world with its debt and more freshly created dollars but it wouldn’t surprise me an iota if it occurred sooner. At that point, gold and silver will reassert their superiority over paper currency as money. The question to ask then is what will be the purchasing power of gold and silver when this event occurs?
(Please visit this wikipedia page to learn more about the different monetary aggregates if you aren’t already familiar with them.)
Method I – Using M1 and U.S. Gold Reserves
In this method, we look at the Federal Reserve’s balance sheet and equate the amount of gold in its balance sheet to the M1 money supply. M1 is what we use as money is our everyday lives. It compromises the total of currency notes and coins as well as money in checking/demand accounts. We can do this because essentially currency note in circulation are a liability of central banks, representing a claim on the bank’s specie (gold) assets. (Hint: If you examine any currency note, you’ll find the words “I promise to pay the bearer a sum of ten dollars” or whatever the face value is. What is this if not a liability of the issuer, in this case, the Federal Reserve?)
From this Wikipedia page, the total gold reserves owned by the United States (let’s be conservative and assume gold owned by the U.S. Treasury also backs the currency) has gold reserves of about 8,133.5 metric tons or 261.5 million troy ounces. The latest Federal Reserve’s H.6 release states that the non-seasonally adjusted M1 money supply as of September 7th, 2009 was $1,617.4 billion.
Therefore, using M1 we obtain a gold value of $6,200 per ounce.
Method II – Using M2 and U.S. Gold Reserves
Because of “innovations” in the US financial market place, the M1 figure can be heavily distorted and dare I say, manipulated. For e.g. bank and brokerage accounts that allow checking balances to be swept into money market funds–so called sweep accounts–do not have those balances reflected in M1. That is because money market accounts are part of the M2 money aggregate. However, for all intents and purposes, this is money that must be paid to an individual on demand.
In addition, most banks allow customers to withdraw money or write checks on savings accounts. For e.g. when I banked with TCF Bank, they allowed me three free, no limit withdrawals (by cash or check) per month from my savings account. This too was then as good as a checking account.
Also, one must consider the FDIC insurance. The FDIC insures all savings deposits as well as certificates of deposits up to $250,000. In the event of a bank failure, FDIC reimbursement essentially will convert money currently designated as M2 to M1 money. In practice, there is very little difference in M1 and most forms of M2 when it comes to paying for transactions.
Therefore, I believe that M2 is the more relevant metric to be used to compute the price of gold. The same Federal Reserve release gives the non-seasonally adjusted M2 figure as $8,321.4 billion.
Therefore, using M2 we obtain a gold value of $31,800 per ounce.
Method III – Using Nominal World GDP (PPP basis) and Total Gold Stock
Despite Method II being technically the right method to compute the purchasing power of gold if it were to be used as money, we must remember not all the gold in the world is owned by central banks. In fact, a majority of gold is in the possession of private citizens. Therefore, the above M2-derived figure overstates the purchasing power of gold. I’ll cite two examples to prove this point.
1. Suppose, hypothetically, the Federal Reserve had lent ALL its gold to bullion banks to be sold into the open market and those banks then went broke, then technically there would be NO gold backing for the M2 money supply. In that event, the value of gold per ounce would be infinite, which is absurd.
2. Suppose, again hypothetically, an individual has already converted ALL his US Dollars into gold and hold them as savings. Clearly then, this gold has purchasing power that will subtract from the $31,800 per ounce figure.
Therefore, I suggest a third method to determine the purchasing power of gold. Let’s assume ALL the gold in the world is used to purchase the world’s entire output of goods and services i.e. Nominal World GDP in a given year. Wikipedia estimates the world GDP on a Purchasing Power Parity (PPP) basis was about $69.5 trillion in 2008. The world gold council estimates the above ground stock of gold to be about 165,000 metric tons or 5.3 billion ounces.
Using this method, we obtain the purchasing power of gold to be $13,100 per ounce.
However, let’s not forget silver’s monetary claims as well. In a world that used both gold and silver coins to purchase goods and services, gold’s purchasing power would be reduced to the extent silver is used.
Total silver amount mined in history is estimated to be about 45-50 billion ounces. Let’s use the 50 billion ounces for our purpose. The above ground stock of silver though is severely depleted due to silver’s multiple industrial uses. I wasn’t really able to get a reliable estimate to silver’s present above ground stock. It’s safe to say the amount of recoverable silver is way less than the 50 billion ounces because silver is used in minute quantities for many industrial purposes and it is cost ineffective to trace all this silver back. Even so, let’s be conservative and assume that all 50 billion ounces can be recovered and used for monetary purposes. In this event, gold would roughly purchase half the world’s output and silver would purchase the other half.
These calculations then result in the following values:
1. Gold has a purchasing power of $6,500 per ounce.
2. Silver has a purchasing power of $695 per ounce.
Given that today, the price of gold is about $1,000 per ounce and silver is about $17 per ounce, we can conclude that both metals are trading at huge discounts to their intrinsic value and silver appears to be the better deal than gold. We can also surmise that, given the huge discounts, gold and silver look more attractive as investments than any other asset class such as stocks, bonds and real estate.
Caveats:
1. Please note that these above values are moving targets as the quantity of money keeps increasing year after year due to Federal Reserve inflation.
2. Therefore, it helps to use this article as a guideline and compute the value at a later date using the latest figures for nominal world GDP and the above ground stock of gold and silver.
3. The price of gold and silver will not reach the above values unless a majority of the world renounces paper currency and begins to use gold and silver for all transactions. However, the discount is so great that it is possible to earn fabulous increases in purchasing power even if both metals do not reach their full value.
4. If the total recoverable silver turns out to be much less than the 50 billion ounce figure I used in my computation, then the upside for silver is even higher than we computed.
5. Keep in mind, the value of gold/silver vis-s-vis other goods will fluctuate between regions. For instance, in an area where food, say bread, is scarce, an ounce of gold will purchase less quantity of bread than in an area where bread is abundant. My point is, however, that the average worldwide purchasing power of gold and silver will be close to the figures computed using Method III and the variations would be in small amounts around those figures.
My Journey To Libertarianism
My journey to Libertarianism began in June 2005 when I joined Morningstar’s equity research team, fresh out of business school. I meet and later became friends with several experienced yet very personable analysts. Fortunately for me, the person who would most influence me (though I didn’t know it at that time) and later introduce me to Austrian Economics, Matt Nellans, occupied the cubicle right next to me.
Matt’s cubicle, I noticed immediately, was quite different from the rest because of seemingly bizarre items such as the FreeState.org poster, a Ron Paul poster, a Mises Institute coffee mug, etc. Matt also always wore T-shirts purchased from the Mises Institute’s site.
From June 2005 till the end of the year, I was busy initiating coverage on some 25 international banks located in regions ranging from South America to the UK, continental Europe, Korea, Japan and India, at a pace of one bank a week. I doubt I did very much socializing with my colleagues during that time. Soon after I published on my coverage list, I felt confident enough to pen a couple of articles for the main website and even visited a few banks in the UK in April, 2006.
It was only in the summer of 2006 that I began to have serious discussions on economic topics with Matt. It didn’t take me long to realize that while we both claimed to be pro-free enterprise, we had polar opposite views on topics such as the government regulation of banks, the Federal Reserve, etc. At that time, I felt regulation was good and the Fed was a necessary institution. Matt felt otherwise and would cut-off any defense I mounted for the government/Fed by saying “Ganesh, you are a socialist!.” (Only later did I learn that Ludwig von Mises would say dismissively of those who disagreed with him that they were a bunch of socialists). He kept insisting that I read about Austrian Economics and pointed me to www.mises.org and www.lewrockwell.com, two free market websites. I tried to read an article or two and quickly gave up, concluding that it was well above my pay grade.
Just for the record, we were well aware of a bubble in housing even in 2005 as this article and this article, both written by Craig Woker, my manager and head of the financial services team, clearly state. In fact, Craig had a running bet with another analyst as to the timing of the housing price implosion. I recall telling my late friend, Arthur Oduma, who sat behind me and proofread many of my reports, that Alan Greenspan would leave his successor to clean up the mess resulting from his reckless low interest regime. Apparently, Bill Fleckenstein’s writings on MSNBC Money were having an effect on me.
My interactions and debates with Matt increased in frequency since the summer of 2006. In fall that year, I was made senior analyst and now managed a team of 4 analysts. Our team covered some 90 stocks and I assumed coverage of the large money center banks from Craig in early 2007, who had moved to the role of chief model developer. As if on cue, the subprime crisis ensued a couple of months into 2007. The proverbial canary in the coalmine was HSBC’s 2006 year end warning in its US mortgage operations.
Without an understanding of the Austrian Business Cycle Theory, I severely underestimated the repercussions of the popping housing bubble even though I was cognizant of the bubble since 2005. I was optimistic that many of the banks my team covered, while taking a knock for a couple years, would emerge stronger and more profitable. Much to my chagrin, the banking fundamentals kept deteriorating further and further just when I thought it couldn’t get any worse. I had a BUY recommendation on several of the banks I covered, most notably (and disastrously) Citigroup. To say that I got that call horribly wrong is an understatement.
In the meantime, my dad was diagnosed with advanced colon cancer in April 2008 and I packed up and moved back to India for good in July to be close to my family. Needless to say, when I returned to India, I had several urgent issues at hand and the happenings in the financial markets took a backseat. Though it was certainly the most morbidly exciting time to follow the markets, what with the collapse of one revered firm after another in quick succession, I only paid cursory attention to the events.
On the day I joined my current employer, my dad succumbed to his battle with cancer. Now needing to move on, I returned to work, determined to solve the old problem of where I went wrong with my call on the banks. Having taken an extended break from all things financial, I began reading extensively about the markets again.
Towards the end of my stint at Morningstar, I’d become good friends with Matt Nellans. I now remembered his exhortation to read Austrian Economics. So I gave it another go. This time, amazingly, I was able to comprehend almost everything that I read. I read voraciously about various topics on sound money, Austrian Capital Theory and the Austrian Business Cycle Theory (ABCT). I read Ron Paul’s essays and speeches warning about financial doom as far back as 2003. I’d also stumbled on a few YouTube clips of Peter Schiff’s appearances on CNBC, warning of doom in 2006 even as his fellow guests laughed at him derisively. Peter Schiff is not a broken clock which is right two times a day. He follows the ABCT and has been consistently preaching that the US will pay for its profilgacy. Watch one of his longer talks here (8-part speech from Nov 2006 where he absolutely nails it). Combined with a theory that was now becoming more coherent by the day, I also had proof of its predictive capabilities, a claim that mainstream economists of the Keynesian and Monetarist Schools could hardly make as they were caught napping when the crisis hit and were completely blindsided by the severity of the crisis. I was sold, I’d completed my transformation into an Austro-Libertarian.
I learned quickly that libertarianism combined free enterprise principles, sound money, property rights and individual liberty. Indeed, it became clear to me that all those concepts went hand-in-hand and one couldn’t exist without the other. It also dawned on me that the key issue among the four was sound money. Without sound money, it is impossible to avoid the dreaded business cycle and the transfer of wealth from producers to the government and other unproductive elements of society.
Having observed the fervor with which I debate my points, my colleagues and friends have asked me to write this blog. Having swallowed the red pill ala Keanu Reeves in the Matrix, my goal for this blog is to “free” as many souls as possible to the side of free enterprise, sound money and personal liberty by my writing. The fact that a majority of the people need to become libertarians and vote libertarian policy makers if I ever wish to live in such a society makes this blog that much more imperative. While I am under no illusions that my efforts will lead to a radical change, let it not be said that I did nothing to stop the evil of collectivism.
I make no pretensions of being a writer. I believe the contents of my blog are much more important than the writing style, so if you find the writing a bit tedious, please bear with me. Hopefully as this exercise continues, I’ll get better at writing. I will strive to be as lucid as possible. Since I’m self taught (I had one course in economics in business school), I will use the examples and illustrations I conjured up myself to make sense of sometimes confusing topics such as real savings, time preference, etc. I will also try to pen original essays on various topics from time to time. Essentially, this site will be a repository for my thoughts and ideas.
While the world will be my oyster, I will be blogging mostly about developments in the US and India, the two markets where I have the most familiarity and vested interest. Still, it doesn’t matter where in the world you are, the principles of liberty and economic freedom remain just as relevant. My dream would be to spread the libertarian “gospel” to as many people as I possibly can. Hopefully, I’ll be able to convince at least a few readers to switch to the side of liberty.
Thank you for reading my story. I sincerely hope that you find my blog useful. Please feel free to provide me feedback on this blog’s content and also let me know if you’d like me to address specific topics.
