Why Invest in Farmland? As an Inflation Hedge Against the Massive Debt Overhang in the UK and elsewhere

In looking at the rationale for farmland as an investment,  we just came across a pretty scary chart below on the total debt to GDP in some of the major global economies.  The numbers are scary, particularly in the UK and Japan where it is over 500pc.  How could this debt possibly be serviced?  The answer is, it cannot be, at least in any rational sense of the word.  We believe that governments will do what they have always done, which is to lower debt by printing additional money - probably through Quantitative Easing (QE) or some similar method - which will lower the real (as opposed to nominal value) of this debt.

Agricultural investments in land will provide investors an hedge against inflation as a "hard asset", whilst also providing a steady stream of good dividend income and offering excellent upside potential for capital gains due to the ongoing agricultural "super cycle" as coined by noted farmland and commodities investor Jim Rogers.

Massive Debt Overhang in Global Economy Ensures Addition QE and Printing of Money

Goldman Sachs and Bond King Bill Gross: QE3 is on the Way in the United States

Printed Money and Quantitative Easing

Yet another reason to consider real asset alternative investments.  Both Goldman Sachs as well as noted bond investor Bill Gross are now predicting that the the next round of Quantitative Easing - QE3 - is on the way for the US.

As the graph demonstrates, there has been a huge move vertically in the size of the US monetary base since the financial crisis began, all from newly created money by the US Central Bank the Federal Reserve.  However, lest those opposed to QE criticize the Americans too harshly, it is well worth noting, as we did in an earlier post, that both the ECB and the PBoC (the Central Bank of China) both have larger monetary bases then the American FED.  For those who may have been contemplating the notion of investing in real assets, the latest news from the markets is yet one more reason to look at this option to hedge against inflation.

Will the ECB Turn to Quantitative Easing to Rescue the Eurozone Europe?

If you look at the graph below, unemployment in Spain and Greece is at or above 20pc, and its nearly 14pc in Portugal and Ireland.  It seems inevitable that the ECB will need to embark on a massive QE program to save the PIIGS economies, most likely by printing money to buy the sovereign debt of these countries to keep the interest rates on that debt down.  Whatever the short term affect of this action, it still seems that at some point in the future this newly printed will leak into the real economy.  Hence, it makes sense to look closely at real asset investments now just as a hedge against future inflation.  The numbers below are tragic, and are more evidence of the madness behind the idea of a single currency for 17 separate and disparate nations.  

QE and the Balance Sheets of the World's Central Banks

The effects of quantitative easing by the central bank of China

When talking about QE (Quantitative Easing), it is easy to lose site of just how big some of the numbers are.  We are, therefore, going to do a series of posts briefly showing some of the hugely engorged balance sheets of some of the world's major central banks as a result of QE.

First, a quiz:  Can you guess which central bank has the largest balance sheet in the world?  Whilst many might guess that its the United States Federal Reserve due to how closely the FED is watched (and frequently criticized) by analysts and world leaders, but the Fed's balance sheet - at approximately US$2.8 trillion - is not even close to being number one.  As you can see from the graph, the central bank of China - the PoBC - is far and away the highest at approximately US$4.5 trillion.  Its no wonder that inflation has consistently remained high in China, and that the Chinese leadership is concerned about inflation's effect on the Chinese Middle class.  As we have said before, if you are worried about the inflationary effects of QE, the best strategy is to hedge with real assets such as farmland investments and forestry investment.

The Con of Inflation

Why do we call inflation a con?  Its very simple really -  inflation robs workers. It’s essentially a hidden tax.   If you look at the last two to three decades, it seems like workers wages have gone up nicely.  They must be much wealthier, right.  But, if you measure workers wages based on their actual purchasing power, i.e. adjusted for inflation, workers incomes have remained stagnant.  Indeed, since the financial crisis began, workers real incomes have gone down.

High Inflation is a Tax on Workers

Let's the UK as just one example. The latest inflation figures out of the UK show inflation at 3.5pc. Indeed, inflation has remained at 3pc or higher for 28 straight months.  That means over this 28 month time period, inflation compounded has gone up a total of 8-10pc in total.  Meanwhile, actual salaries and incomes are flat or lower.  What does this mean?  It means that UK workers' real incomes - i.e. what their salaries actually allow them to buy - are lower by this same 8-10pc figure.  Is it any wonder than that real wages in the UK are back to the levels of 1997?  Talk about a lost decade.  And the UK is not alone unfortunately, the same basic calculation applies to the United States and other western countries.  Finally, due to budgetary pressures, we can expect taxes to go in only one direction - up.  

Taking all of this into account, its no surprise that most people feel poorer and hard-pressed. Whilst the rich may move to tax havens such as Dubai or Monaco, the average individual can still consider the option of protecting their financial future with real asset investments.  This blog will show you a number of options for doing so.