Posts By: Chris Kuiper

Should You Buy A Home You Can’t Afford?

mansion-875094_1920Is there ever a situation where buying an unaffordable house makes sense? A new report by real estate service Trulia seems to suggest so. The report notes that in some cities, Millennials should consider buying a house that is a little beyond their budget, given that they are likely to receive promotions and raises that will make it more affordable down the road. About the only worse advice I can think of would be for you to stick your hand in a rattlesnake’s nest.

The report is based on the assumption that in 30 years time, today’s 25 year-olds will be earning the same as today’s 55 year-olds, assuming a certain level of inflation. For example, the typical Millennial in New Haven, CT, can expect to spend 37% of their income on housing in the first year of a mortgage but, three years later, this will drop to 31% or less.

Ralph McLaughlin, a housing economist at Trulia, is quoted as saying, “There’s a sweet spot  of metros where a mortgage looks obtainable but unaffordable, and yet it shouldn’t take long to become affordable.” In other words, it’s obtainable in the sense the person can get the loan, but unaffordable because it currently swamps their budget.

Given that mortgage payments are usually level payments spread out over the term of the loan, the actual mortgage payment doesn’t go down (and neither will maintenance costs or property taxes). Consequently, McLaughlin is assuming some significant promotions and raises for today’s Millennials.

But even if McLaughlin’s assumption is correct, and you can reasonably plan for a climb up the corporate ladder, does this mean you should buy a home today that you can’t really afford? Absolutely not.

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Finally – Legal Investment in Small Businesses

SECYou no longer have to be super wealthy to invest in a new startup company or small business. On October 30th, the Securities and Exchange Commission (SEC) announced new rules that will make equity crowdfunding legal, something investors and small companies looking to raise money have been waiting a long time for. While not perfect, the rules are a step in the right direction to allow capital to flow freely and efficiently to new business ideas and products, which could unleash exciting opportunities.

What is Equity Crowdfunding?

Many people are familiar with the idea of crowdfunding in general — raising money from a large group of people. The two biggest crowdfunding platforms are Indiegogo and Kickstarter. But have you ever noticed that both platforms only allow you to receive products in exchange for your contribution? In other words, you may get a t-shirt or the first product that rolls off the assembly line, but you can’t have an ownership stake in the company: that would have been illegal.

This problem became glaringly obvious to people when Oculus Rift, a virtual reality headset in development, was purchased by Facebook for $2 billion. The project was initially launched on Kickstarter, and those who helped get the company off the ground were given an early prototype of the product in return. But when Facebook made the acquisition, these backers received nothing because they didn’t actually have any shares in the company.

Previously, only accredited investors, or those who were already wealthy, were able to participate in these investments. Now there is the potential for anyone to invest in companies looking to raise capital. This is important for a number of reasons.

The Top 5 Myths of a Gold Standard

Money LendersIf you can get your friend to stop laughing, and actually give you an answer as to why it would be a bad idea to return to a classic gold standard, you will invariably get one of the following responses. As we will see, some of these are either just plain wrong, or they are at best misunderstood.

1. Nobody wants heavy gold coins weighing down their pockets

This response is usually accompanied by some quip about going back to medieval times, with gold ducats carried around in purple drawstring pouches. But this just shows a lack of understanding of the essence of a gold standard. Yes, under a gold standard, you could transact in actual gold coins, which is what happened earlier in history. But people eventually figured out they could use paper currency that represented claims on the gold actually stored at banks and in vaults. The only stipulation for a gold standard is the ability to convert or redeem your money into gold, if so desired.

Therefore, you can still have currency and even units like ‘dollars’ as long as they represent a fixed amount of gold. This is what is meant by ‘gold-backing’. The option to convert to gold keeps banks and governments honest, but as long as citizens are unconcerned that banks or governments would ever default on this pact, then they will happily use the dollars and leave the gold in the vaults. In fact, our monetary system wouldn’t look much different; you would still have your checking and savings accounts, debit cards and credit cards, all denominated in dollars. The only difference is the additional option to convert those dollars to gold at any time.

2. Gold is a barbarous relic

Economist John Maynard Keynes and even talented investors like Warren Buffet and Charlie Munger have described gold in these terms. It has been suggested that if aliens saw humans digging up gold from the ground – refining it and shaping it into coins and bars, only to bury it back in the ground in vaults and guard it – they would think we are crazy. Perhaps this is not an unreasonable remark, considering the wasted resources on all of this energy, equipment and labor.

Irwin Schiff – A Man of Conviction

Irwin SchiffIrwin A. Schiff just passed away on October 16th, at the age of 87, still under lock and key as a political prisoner. Most people know Irwin Schiff as the father of investor and fellow gold advocate, Peter Schiff. Irwin Schiff was also known as the most prominent tax protester of our time, a man who stood up to the IRS and was imprisoned as a result. But the legacy he leaves is much deeper than his fight with the IRS, and there are some valuable lessons we can learn from his life and teachings.

For those unfamiliar with Irwin Schiff, he was the son of Jewish immigrants. He served in the Korean War and later opened his own insurance brokerage. He read Henry Hazlitt and F.A. Hayek in college, gaining exposure to Austrian economics. He was a staunch supporter of liberty and limited government, undertaking grassroots campaigns and later staging an (unsuccessful) write-in campaign for Governor of Connecticut. He was also a candidate for the Libertarian Party Presidential Nomination in 1996.

Irwin Schiff was also a supporter of sound money, testifying in 1968 before the Senate Committee on Banking and Currency against the removal of gold-backing for our currency. My personal exposure to Irwin Schiff was through his book ‘How an Economy Grows and Why It Doesn’t’. Originally written as a children’s book in an illustrated comic-book style, it is accessible to everyone, yet contains high-level economic and political concepts that most adults do not understand.

The book starts off with an island economy, and it logically illustrates how that economy grows only through savings and capital goods investment. It then shows the disastrous results that occur when the government inflates and devalues the island’s currency. The book has been updated by his sons, Andrew and Peter, and I would highly recommend it to everyone. It is truly a joy to read. Irwin also wrote a similar book called ‘The Kingdom of Moltz’, which is also very clever.

Of course, most people who know anything about Irwin Schiff focus on his tax theories and, unfortunately, many write him off as a tax cheat who was eventually imprisoned for his actions. But his story is much more nuanced.

In Defense of Shrinking Airline Seats

CoachThe internet is abuzz about the new patent application from Airbus that reveals a concept which stacks passengers on top of each other – think bunk beds in coach class. The revelation conjures up images of ‘cattle cars’ and ‘sardines’, while renewing petitions for legislation to protect a minimum airline seat size. But is the popular narrative true that greedy airlines continue to cram in passengers like turkey stuffing, to extract as much profit as possible? Yes. But passengers are in favor of it – if it means keeping the cost of air travel down.

Patent applications like the one Airbus just filed are nothing new. Airlines and seat manufacturing companies always try to come up with creative new ways to fit in more passengers, such as the saddle seat and the hexagon concept. Airbus was quick to point out that they file hundreds of these kinds of patents each year, and the patent does not mean the new seats will be on your next flight. But would this really be such a bad idea?

Complaining about cramped air travel has become one of America’s favorite pastimes. It is true that seat size and passenger space has been declining while the average American traveler’s girth has been increasing. The seat pitch, which is the measurement from one point of a seat to the same point on the next seat, has shrunk 2 to 5 inches since 1985, while seat width has also shrunk a couple of inches.

Of course, the upside to all of this is that cost has come down…dramatically. Since 1985, the cost of an average domestic round-trip ticket has declined by an inflation-adjusted 30%! This is even after the airline deregulation that took place in the seventies. Going back just a few more years to 1978, we find that ticket prices have been nearly cut in half!

This leads us to a basic concept in economics. There are things we don’t like, or more accurately things we all wish we had or had more of, such as legroom on an airplane. The question is, at what cost? Alternatively, ask yourself how much are you willing to pay for that extra legroom?

The United Nations Doesn’t Understand Wealth Creation

U.N._LogoThe United Nations is wrapping up their latest summit with the approval of a new 15-year plan, containing 17 audacious Sustainable Development Goals, which include everything from eradicating extreme poverty and hunger to providing everyone with work, clean water and affordable energy. While evidently well-intentioned, none of these goals will be achieved through expensive top-down U.N. programs. Instead, only institutional reforms and economic growth will be able to bring about the kind of prosperity that the poorer nations should be able to enjoy.

The latest 17 goals are similar to, and an extension of, the Millennium Development Goals that were adopted as a U.N. initiative in 2000, with a goal end-date of 2015. The fact that these are 15-year plans already hints at what is intrinsically faulty with the U.N. perspective: that growth and prosperity can be centrally planned and socially engineered. The former Soviet countries and the current Chinese government also have 5 and 10-year plans.

The biggest error underpinning these varied U.N. goals is the fanciful notion that governments and U.N. programs can provide sustainable solutions to these problems by transferring wealth from one country to another. The cost is already estimated to be at least $175 trillion over the 15-year period. There certainly are goals which aid programs can attain, especially measurable and short-term projects such as delivering food to a disaster-struck area or vaccinating a specific population. But no program can engineer long-term economic growth, which is ultimately the only way to eradicate poverty.

If this seems unconvincing, consider that up until just a few hundred years ago, the entire world had lived in poverty for thousands of years (save for a handful of kings and nobles.) If redistributing wealth from rich countries to poor countries really fostered economic growth, then how did poor countries become wealthy to begin with, when there were no rich countries around at the time to help them? How did the ‘hockey stick’ of growth happen?