- Let us review a real estate investment over a very long period of time – 384 years. This length of time includes several complete business cycles of the Kondratiev type including booms, busts and depressions. It also shows the value of real estate in a country (the United States) that has not experienced the destructive force of war on its continental heartland.
- The Dutch bought Manhattan Island for 60 guilder (~$24) in approximately 1625.
- The 23 square mile (14,528 acre) island of Manhattan now has a recently assessed value of $189 Billion (not including buildings)
- A similar 14,000 acre parcel in Suffolk County, Massachusetts is currently for sale for $3,500,000.
- What is the return on investment for these two properties over the very long timeframe?
- Let us consider the Future value of a single deposit FV=PV(1+i)^n
- A Manhattan island investment over 384 years yields - 6.12%
- A similar investment in ocean front property in Suffolk County yields - 3.15%
In the long term, in my experience, accumulated wealth and business profits tend to get capitalized into real estate. It is therefore, relevant to consider the return on real estate over a long timeframe to estimate the rate of wealth accumulation.
Conclusion – It is not only unrealistic but mathematically impossible to expect that the promised rates of return of 6, 7, 8 or 9% can be achieved in the stock market or elsewhere. More realistic figures are in the 3 to 4% range.
The implications of these results are wide ranging. The governing officials in United States seem to be hell-bent on a course of unprecedented financial destruction as they spend not only our inheritance, but that of our children, grand children and great grandchildren.
The unfunded liabilities of all the pension, medicare and military commitments will soon arrive with vengeance as the baby boomers retire enmasse. We will then see how long the wonderful socialist promises of the state will be kept. There is no longer any doubt about the sovereign default of debt by the US, the only question is when, and what will the global consequences be?
An article in the National Post provides some details. http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/11/04/eric-sprott-and-david-franklin-u-s-risks-default.aspx
- Also consider a previous blog post from June titled "Will $106 trillion of debt make Atlas Shrug?" http://whatisthatwhistlingsound.blogspot.com/2009/06/will-106-trillion-of-debt-make-atlas.html
PW, do you actually believe that the U.S. will actually default on its debt? I believe that the Fed will just end up buying its own debt when Treasury auctions end up with zero buyers. What do you think?
ReplyDeleteA sovereign default is now certain, in my view. The form in which it will materialize is a matter of debate. I suspect you are correct that the Fed will indeed buy all its own debt when other nations refuse to buy more unless much higher yields are offered. This amounts to mass monetization which would devalue the currency by perhaps 50% or more.
ReplyDelete