Stable Foreign Markets – The right place to invest

The following is a story taken from the book Crash Proof authored by Peter D. Schiff. I believe it is a brilliant metaphor for why the U.S. economy is suffering as it is, and also why it is imperative to invest in stable foreign markets.

Schiff suggests investing in foreign assets including businesses, currencies, real estate, and gold to weather the current economic storm that is just beginning.

The Tale of Two Farmers

Farmer Chang grows only oranges. Farmer Jones grows only apples. Each grows only the fruit he produces most efficiently, trading his surplus for the fruit grown by the other. Both farmers benefit from comparative advantage and free trade. The sole reason that Farmer Chang “exports” oranges is so that he can afford to “import” apples, and vice versa.

Suppose that one year a flood wipes out Farmer Jones’ apple crop. Not having any fruit to trade, but hungry nevertheless, he proposes to trade apple IOUs for Farmer Chang’s oranges. Since Farmer Chang cannot eat all the oranges he grows anyway, and since Farmer Jones’ IOUs will pay 10 percent interest (in extra apples, of course), he accepts.

Farmer Chang accepts Farmer Jones’ offer only because of the apples that Farmer Jones’ IOUs promises to pay. By themselves, the IOUs have no intrinsic value. Farmer Chang cannot eat them. It is the promise to pay additional apples that gives the IOUs their value.

When Farmer Jones issues his apple IOUs in exchange for real oranges, he does not actually pay for the oranges. Payment will not really be made until the following year when Farmer Jones redeems his notes by giving Farmer Chang all the apples his IOUs obligate him to pay. Only then can the notes be retired and the transaction be completed.

Now suppose that the following year Farmer Jones’ crop is again destroyed, this time by a hurricane. He and Farmer Chang once again make the same deal, with Farmer Jones getting more of Farmer Chang’s oranges, and Farmer Chang accepting more of Farmer Jones’ IOUs.

Further suppose that similar natural disasters continue to besiege Farmer Jones for several more years, until it finally dawns on him that he is eating pretty well, without actually farming. He therefore decides to turn his apple orchard into a golf course and simply play golf all day while enjoying Farmer Chang’s oranges. In other words, Farmer Jones now operates as a service economy.

Farmer Chang, by contrast, is so busy growing all those oranges that he never gets a chance to play Farmer Jones’ course. In fact, he has been accepting Farmer Jones’s IOUs for so long that he no longer remembers his original reason for doing so. He now counts his wealth based solely on his accumulation of Farmer Jones’ IOUs.

Farmer Jones actually enjoys such a good reputation within the farming community that Farmer Chang is able to trade some of Farmer Jones’ IOUs for goods and services provided by other farmers and merchants. However, as a result of Farmer Jones’ good reputation, no one notices that his apple orchard has been turned into a golf course. His IOUs are now worthless since Farmer Jones no longer possesses the ability to redeem them with actual apples.

Some might argue that the entire community now depends on Farmer Jones and his worthless IOUs and that Farmer Chang and the others will simply accept them indefinitely to avoid acknowledging the reality of their folly.

Of course, were these revelations to occur, any unfortunate holders of Farmer Jones’ IOUs would officially be forced to realize their losses. However, their true financial situations would improve, as any further accumulation of worthless IOUs would end. As for Farmer Chang, he would once again, literally, enjoy all the fruits of his labor.

The real loser, of course, would be Farmer Jones, for without a viable apple orchard or the ability to buy oranges on credit, he would starve. It would take years to transform his golf course back into an orchard, regain his lost knowledge of farming, and replace his obsolete and dilapidated farming equipment (provided he hadn’t already traded it in for golf carts and titanium clubs).

In the end, Farmer Jones’ only alternative might be to sell his golf course to Farmer Change and take a job picking fruit in his orange grove.

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Considering The Atenas Area For Your New Home In Costa Rica?

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.