Almost every small business owner that I know that is still in business is operating on fumes.  That is especially true of folks associated with real estate.

But the stock market is doing “very nicely, thank you”.  The talking heads chat about record earnings, international growth, and seem oblivious to the pain of the majority of business and professional folks with whom I speak on a daily basis.

Is the problem that I spend my time with the wrong folks?  Do I need to change the people with whom I have done business for years?  What is wrong with this picture?

The answer is neither of the above.  Rather, the answer is found by looking at the access to capital…the mother’s milk of business…and the origin of the term “capitalism”.  What a wonderful word… “Capitalism”.

Capitalism describes the economic formula wherein businesses invest capital in assets in several forms including human, equipment and real estate in order to produce goods and services (products) needed by society.  Capitalists know they are providing a needed service to society when their investment efforts earn “profits”.

Those profits encourage more investments in producing those goods and services until the supply equals demand.  Once that point is reached, profits diminish thereby removing the incentive to produce more.

This interaction is the “invisible hand” often referred to in economic literature originating with Adam Smith.  There is no better system for the allocation of resources than capitalism.

THE KEY to capitalism is access to capital that can be used to make investments.  Since few are so fortunate as to be able to grow a business out of their spare change, credit is typically required.  The source of credit is banks and for the typical small business comprising 70% of American businesses that means a community bank.

For the last year, the federal bank examiners have been forcing the community banks to reduce their loan portfolio, especially the real estate portion of their portfolio.  Examiners have the power and tools to make it exceptionally painful if a community bank does not do that which the examiners want done.

So, now you understand the reason for the split personality in the economy.  The publicly traded companies have access to capital from the big banks.  The small business’s source is the community banks that are being forced to shrink their loan portfolio.

A reduction in the available credit to 70% of the businesses means the economy will be slow.  A contraction of credit is the definition of a recession.

The Fed’s efforts to accelerate the economy by printing money while simultaneously forcing community banks to shrink is dangerous to the value of the American Dollar.  Unfortunately, the most likely outcome will be significant inflation as the resulting economic recovery will resemble a car stuck in a ditch that suddenly gets traction for its tires and lurches out of the ditch uncontrollably.

When the bank examiners let the community banks make real estate loans again, the economy will improve.  Perhaps that will occur in mid 2011 to 2012.

In the meantime, this is the time you want to hedge your investments for inflation.  Not all land will benefit from inflation to the same degree.  Call us, we would enjoy helping you position your land investment portfolio for the inflation that is ahead of us all.