Thursday, September 8, 2016

Bill Bonner, “How Can We Save the Ranch?”

“How Can We Save the Ranch?”
by Bill Bonner

"In the Northern Hemisphere, the warm days are becoming less warm and less frequent. Chilly winds blow, and the wishful thinking falls like leaves off a tree.

Always an adventure: We’ll come back to that in a moment, but first, we take a comment from a reader in response to our recent reports of the ‘Originario War’ on our ranch in north-western Argentina: ‘Bill, quite frankly I’m surprised at you. You of all people should have realized that we cannot hide from those who wish to take what they cannot earn or create from those of us who have succeeded in life. We’re simply outnumbered. Your choice of Argentina to establish your safe house I suspect was one of the biggest mistakes of your life.’

Oh, no… We’ve made much bigger mistakes! Besides, we don’t regret buying the ranch. It was always meant to be an adventure and a learning exercise. In that sense, it hasn’t let us down. We even got more than we bargained for. Besides, there’s something exhilarating about being at war without being killed. We’re fighting man and nature down there. Probably, we’ll be beaten by both of them. But we want to see how it will turn out. If we can just prevent the government from taking a big part of the ranch in the next couple of years, time will probably work in our favor.

What the originarios are demanding isn’t worth much- to anyone. That will become clearer with time. And the new government, under businessman Mauricio Macri, is not supporting them the way it did under the populist Cristina Kirchner regime. Most likely, the agitators will get tired of the struggle…or need to get real jobs. That would leave us with only an economic problem. And we’re working on that.

The high pasture gets a lot of water in the rainy season. It rushes down the valley and is soon gone. If it could be captured, it might allow us to water more alfalfa. The trouble is, the pasture is so high in the mountains, we can’t get equipment up there. ‘It’s too dangerous,’ said our old ranch foreman, Jorge, when we posed the question. ‘The backhoe could do the work. But the road around the cliffs is not wide enough. And it’s not solid enough. [It’s a footpath originally built by the Incas.] If the machine goes over the edge, we lose the backhoe and the driver.’ ‘Don’t worry,’ we replied. ‘I wouldn’t ask anybody to drive it up. But I might drive it up myself.’ We rode up by horse on Sunday to check it out. The road looked dangerous. But with some work in places, it might be passable. So, we asked a hydrologist to go up and check out the possibilities. 

The other ace up our sleeve we have is you… Yes, dear reader, we’re going to make a proposition. Well worth your while- promise. Stay tuned…

Abrupt drop: But let’s turn back to our regular beat: the US economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least. Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed…and that a rate hike isn’t such a good idea after all.

Mainstream economists regularly dismiss worries about falling employment and output in the manufacturing sector. ‘Don’t fret about it,’ they say. ‘We have a robust service economy.’ Well, yesterday, the news came out that the service economy is not as robust as we thought. Bloomberg: ‘An abrupt drop in the Institute for Supply Management’s services gauge on Tuesday to a six-year low is the latest in a string of unexpectedly weak data for August.’

Besides, the promise of a ‘service’ economy has always been a fraud. We can’t all get rich by mowing each other’s lawns and parking each other’s cars! You can make money by offering services, but only if there is someone who can pay for them. And you can only pay for services if you are doing something that generates real wealth.

Wealth drain: Just look at India…It has over half a billion people willing to do just about anything for peanuts. Services? You can get all you want. But that doesn’t make India a wealthy country. Services are better thought of as a drain on wealth, not a way of building it.

Let’s say you want to go out to the movies. Instead of watching your children yourself, you hire a teenager from the neighborhood. You pay, say, $20 for the evening. This results in an increase to the nation’s service industry income of $20. And you had the benefit of the service. You had $20. Now, someone else has the 20 bucks. Where’s the additional wealth?

Manufacturing, on the other hand, creates wealth. You take $20,000 worth of labour and materials. You put together an automobile and sell it for $25,000. The automobile is worth $5,000 more than what it cost to build it. You are $5,000 richer. But wait… You will say that someone must be out $5,000. But that isn’t true. He had $25,000 worth of cash. Now, he has $25,000 worth of automobile. He’s even; the world is $5,000 richer.

Crack and Snapchat: Readers will be quick to point out how Silicon Valley has added to the real wealth of the nation with its many services and innovations. Social media companies alone are said to be worth $500 billion- evidence of how much wealth they are bringing to the world. And it’s true- some are useful for improving productivity. They speed the output of real wealth.

But even profitable innovations can destroy wealth as well as create it. Crack cocaine and television, for example, have probably cost the nation a trillion dollars of real output. Are Facebook and Snapchat much different? As in any other service industry, money passes from one person to another. But is wealth created? Or destroyed? Check your children’s smartphones, tablets, and laptops. Let us know what you find. Foolish, idle, insipid- most of what we see in social media is a waste of time.

And what about the internet? Was that just a summer delusion, too? Maybe. Since the internet took off, economic growth rates have been roughly cut in half. And the median American household income has fallen 20% when accounting for real inflation- not the government’s phony inflation figures. What kind of service is that?”

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