Silver Linings

As the existing economic structure collapses, I see a return to ways of doing business which existed not only in my father’s time, but in my grandfather’s time. Although the transition will be painful the journey will be worth it. The shockwaves of the latest depression are wiping away the traditional pillars of the economic system. Here are just a few of the changes we can expect as the current economy grinds to a halt.

Less jobs = less income and less income = less income tax. Nothing will reduce the size of government faster than the absence of revenue. Regardless of how ambitious the government is in its central planning, all plans will require money to carry them out. Having borrowed to the hilt to finance its current excesses, government will soon find itself unable to borrow any more. This leaves only taxes to fund the machine. Once that runs out government will have to shrink to stay alive.

Whether cash becomes less available or simply less valuable there will be a return to the system of barter and exchange. Barter involves trading services for services, goods for goods, services for goods and goods for services. Barter will also result in less income tax being reported and less income tax being paid, ergo, smaller government. Then there is the added social benefit of people reconnecting with people. Nothing will bring people together like some good old-fashioned bartering. The barter method will also force people to hone their product knowledge, and negotiating and salesmanship skills, boosting real competition in the marketplace.

As credit ratings are dashed and the new economy becomes increasingly localized, expect a return to the old-fashioned practice of reference checking. Yes, reference checking. If you want to borrow money or obtain credit the person you are dealing with will ask for the names and phone numbers of several individuals with whom you have been dealing for a period of years. Then they will actually pick up the telephone and call your references to find out just how trustworthy you really are. This will have the added benefit of providing incentive for people to deal honestly and fairly with others, lest your references throw you under the bus. Forget Equifax, TRW and Experian. Words will speak louder than data bases to those really interested in what type of person you are.

With people unable to secure loans for the purchase of real estate, even at reduced prices, expect the re-emergence of the land contract. This instrument was utilized commonly in the early 1980’s era of runaway interest rates. A land contract is an instrument for seller financing of a real estate transaction. The purchaser pays according to any schedule mutually agreeable between the seller and purchaser. It can include very low monthly payments with a balloon payment at the end of the contract term, a modest down payment with evenly amortized payments or any variation thereof. Unlike a mortgage the land contract is fully negotiable. Also unlike a mortgage, the seller retains title to the property until the land contract is paid in full. This is the ultimate in security. If the purchaser defaults, the Seller retains all payments made and is able to resell the property. This process eliminates the need for banks, credit reporting agencies or mortgage companies, puts into play the personal reference mechanism and allows for bartering as well.

How about that home garden? As commodity prices continue to rise in the coming inflationary spiral more people will be growing their own food. Some people never abandoned the practice, but now those who have no extra "cabbage" to throw around at the upscale produce market will find that they can harvest fruits and vegetables right in their own backyards. Jim Rogers recommends that people who are out of work learn to drive tractors. According to Rogers, the economy has produced fewer farmers every decade and there has been little investment in the agricultural sector. When you grow your own produce you will control what went into it or on it. No need for government mandated labeling, inspections and warnings or the neglect thereof.