In these days of retail price inflation, depreciation and falling asset prices, this may be a good time to ponder on the question of what is money and what is wealth?
The accumulation of wealth is the primary purpose in life of almost all human beings who are fearful of hunger and depravation tomorrow. It is this fear of the uncertain future that we are compelled, if we can, to save for the rainy day.
It doesn't matter how you save. You mostly start by saving cash under the pillow and deposits in the bank. You save from the surplus of your income after expenditure. If you don't have an income, then you cannot save. Instead, you may have to borrow to buy food - this is where the wisdom of saving for the rainy day comes in. If you spend more than your income, then you also have to borrow. Ideally, you spend within your budget. This is the bare bone economics of income and expenditure.
The key point is that when you have savings in the bank, and you do not need that cash immediately, then you could possibly invest it in earning assets - which basically can be anything that can earn you a return, if you know where to look.
Flat Economy
But spotting earning assets is not an easy task, in normal circumstances, i.e., when the economy is going flat.
Since everybody has to have somewhere live, then residential property seems to be a good place to start. Instead of renting, you can buy your own house using a mortgage loan. Your house is an earning asset because you can save on rent and at the end of paying for the loan, the house is yours as an asset.
If you already have a house, you can also consider renting out your house and rent somewhere cheaper to stay instead, so that you can provide an income stream for yourself.
If you have lots of money, you can use your money to buy more houses than you can live and rent them out. Usually, under these circumstances, there is an increase in the supply of housing, so you can expect housing supply to exceed demand and therefore the rental would not be good enough to offset your mortgage repayment.
You can venture into stocks and shares. In a flat market, you have to know what you are doing. To buy well-managed companies in sunrise or global markets. In small economies, there are not many companies that can sustain their growth so you have to keep constant watch on company performances.
There are of course other financial assets such as government bonds, insurance products, etc., which are out there to tease out your savings from your bank account.
These are all very basic considerations in a normal but flat economy and market.
Booming Economy
In a booming economy, where the central bank follows a low-cost money policy and print money, you can expect money to be plentiful. This means (a) the banks are looking for good borrowers to lend money to; and (b) there will be asset inflation as borrowed money will be looking for assets to buy up.
It is a no brainer that in an economy when asset inflation exceeds the interest rate, one can borrow (if the bank would lend to you) and buy real estate. Your initial collateral would be your savings in the bank or the value of the house you already have (the bank willing to lend you an amount equivalent to the market value less your existing mortgage).
What the bank is doing here is a very dangerous thing because it is using inflated value as a collateral to support new loans. Dangerous because (a) it escalates loans and asset value, and (b) everything collapses once the economy stops growing and asset prices stop rising. You will appreciate that (b) is where we are today in the world, and (a) was when every investment gurus were boosting how clever they were in going into heavy debt to buy real estate.
So in a rising economy when real estate and financial asset prices are also rising in what is called asset inflation fueled by increasing expansion in loans by banks (because their executives want to take super year-end bonuses), of course, the rationale thing is to get out of money (by dissaving and borrowing) and get into very clearly earning assets. Because this move is so very clear and obvious and no brainer that even grandmas can be masters, what we get is speculation in real estate and financial assets.
Speculation is based not on real value but expectations of future value. And future value is based on the state of the economy in the future. What happens in the future depends on what happens today. If today is young, tomorrow we grow strong and healthy. If today we are grown and mature, tomorrow we will grow old and slow down. For speculators, however, because they are speculators, the future is always better than today. The future better be better than today - or else, we will be in deep trouble.
Speculation is Not Economic Growth
Speculation is not economic growth. Speculation is on asset prices where economic growth is based on output expansion. Rising asset prices can trigger future output and usually with a delay of a few months or a few years. This goes for real estate, and it goes for agriculture (e.g., musang king). In other words, speculation sets the stage for overproduction in the future.
Why overproduction? In real estate, demand is fueled by bankers who lend money out to borrowers who dream of becoming wealthy without work.
To sustain this model, there must be people who are willing to rent at the prices they ask for. Over time, with everybody buying real estate for themselves to stay because developers keep building new units, there will come a time there will be units which nobody want to rent. Because also bad location, not near rail transport, etc. Demand fall can also be triggered by fall of nominal income (salary cut) or fall in real income (petrol price increase).
Economic Growth is Productivity Gains
For the economy to sustain its growth on its own, the assets invested in must be able to generate a higher output in the future and price is sustained by increase in wages through productivity gains. This usually happens through technological advancement as well as managerial or workplace efficiency improvement.
Politics Sabotaging Economy
When the economy is doing well, is doing very well, this create economic power because businessmen now have money or rather assets (buildings or factories?) and access to banks. This challenges the power of politicians. When challenged, politicians have a tendency to flex their muscles by a stroke of the pen. With such threats of the political masters looming, businessmen and investors become nervous and fearful of the future, an uncertain future, they become petrified. The first thing they do is to stop investment. This means no new money into the economy. Second, they leave the country. This means they close shop and retrenched the workers.
Political Restructuring through Economic Consolidation
Political masters are willing to sabotage the economy when they realise the economy is heading in a direction that is not in favour to their political future. Either you die, or I die. So, you die first.
This is quite a dangerous game. First, the economy will go into a depression not only because investment slows down but there is disinvestment, i.e., less investment than before. Massive number of workers become unemployed. They become hungry and turn to the streets. There is social unrest to get the political masters to help them. But they can't help. So they want a change in government. Even if the government is changed, the economic situation would not change. Unless, investor confidence is restored. Which brings the economic structure back to square one, which is unfavourable to the political regime. So there must be a regime change.
Money & Wealth
Now, we know money is wealth, but wealth is not necessary money. The beauty of money is that it is liquid. In times of trouble, you can take money with you. (Those who feel less secure take gold bars.) You cannot carry your many condos with you. The value of your condos may have plunged, and no rental. You still owe the banks lots of money in mortgage loans.
In these troubled times, health is wealth. Peace and harmony is wealth. Peace of mind is wealth.
Money is a means to an easier life. Wealth is a burden for those who are old and have no strength to carry on.
There is no clear case for debt to be wealth. Debt is unearned wealth.
Even when you have physical assets and financial assets without debt, you cannot use them unless you have sold them and converted them to money. Cash allows you to buy food.
The way forward to life is to live a simple life, with basic needs. You will be happy.
Why ride on the backs of those who must struggle to pay rent so that you can have passive income? If you have not bought units which you cannot use, housing could be a lot cheaper and they could have been able to afford to buy their own little house.
In the end, all that is considered wealth is just a pile of bricks and steel beams.
2 comments:
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Disavowing the road to passive income from being a property rentier will only bring benefit to others without such an asset if others do the same else one is the only benevolent heart doing so with thus little overall impact on the economy which for most developing countries depends on the octane of multiplier speculative activities to create the impression that things are humming along in the absence of net-positive value-added productivity which itself gets harder to achieve in a hyper-competitive moat-constraining technological arena that is the premise for breakthrough economic progress.
That said, a simple and healthy life makes for a worthy end, however only if one has enough savings not to be a burden to others who also need to live better in order to later come to the same conclusion about what may be concluded makes a good life.
To come to such a floating point stage, one parses life into blocks and wishes that the young can have such an epiphany even before they embark to face the realities besetting all when trying to live.
Stage one is made of two objectives: to build up the strength of the body enough for sixty years of strife to come (that's why physical education in schools is a must), and a certain mental perspective that will create a roadmap to avoid vicarious mindfields while chasing what's important to learn and defend appreciatively (that's why counselling in schools has to be on the timetable). Here the roles of parents, teachers, mentors and good friends are important. Whatever the background and circumstance, the imperatives are: constantly being alert about everything and focused on what matter, smart-wise studying (whether it be particle physics or plumbing) and avoiding bad habits which means one must know what makes for right and good without having to argue rebelliously too much about them.
Stage two is to gain financial independence, again in two blocks: one, to be a jobber and do well enough to build a career, or two, to start and run a business, first as a freelancer and broker, then when enough funds have been saved, as an investor and thus owner. It takes much time and energy planning for one to be both simultanenously, and that itself comes from determination, patience, perseverance, sacrifice, avoidance of distractions, and sharp pre-investment due-diligence research (a life-important skillset).
Being able to do so all those things cuts the cloth of character faster in the face of pressures from all sides. During this stage, networking is the imperative and to fix it, being able to express oneself clearly and convincingly with facts and knowhow is as important as having ethical character paramount for building trust whether as a jobber or an investor.
In reality, neither role comes easy nor their returns but that is life which for those who live, comes at a price in a world where everything comes and goes with a price-tag that no scissors can cut off to discard - except for those who try to take short-cuts which however may turn up as blind alleys.
Stage three is trying to maintain what has been earned while building one's wealth. There will be embedded and challenging costs: taxes, insurance, mortgages, educational fundings, monthly bills and contingency spendings. The challenge increases to maintain the formula: overheads (including familial and other social obligations) 50%, spendings 30% and savings 20%.
The braver will try to stretch matters by inserting money investments into equity, bond and property, in the hope the first two speculatives will make it easier for the last one to self-finance through chains of downpayments for rents to pay mortgages. If the economy hums upwards bar inflationary distortions, this will work but if downwards, buyers and sellers beware. As with stage two, the linchpin of any operating business is cashflow - in absence of which an understanding banker/funder - but that is as rare as a purple ostrich.
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Stage four as the last stage is retirement. For the jobber, a handshake and a gold-watch. For the investor, either a roofy nest-egg or a murky, or busted, balance sheet. For both, health breaking at the seams or erupting subterraneanly, no matter the prophylactic over the years, atop a certain sadness about life (namely, "is this all there is about it?") in the relativity of time (namely, "how it has flown!"), leaving as residue some memories - but underpinning everything, the importance of family bonds, the delight of grandchildren, and co-passaging friends.
It is a reality of life that the world has decided to place its bet at a macro-level on wealth from assets translatable under proscribed rules into liquid cash but the individual, whether playing along in full or in semi-mode, has to decide what motivates at personal level that makes for a good life - which is the end-game.
That can't be too hard to decide. At stage four, it is easy to decide that what one has learned to desire in the first three stages actually comes at a levelling-effect cost - but which over time reduces into lesser personal significance. For instance, secular or theocratic knowledge in any field is just made of some two dozen recurring principles - whichever the era.
In any case, it's just life. And the vagus nerve. Which connects the brain and the gut. So that what one eats affects behavior, thus character, hence actions.
Two postnotes on life impacts:
the family unit is the celestial metric, and actions are the personal metric. These two metrics determine all of one's destiny.
the termination clause requires spending rm40k for a cremative sendoff; for burial, land prices are rising. It is therefore suggested that if ashified, hire a drone to air-drop the ashes, preferably at high altitude, over agricultural land. As an ex-farmer, manuring is essential for healthier plant growth.
The end/
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