The best investment of all time?

Bill Bonner explains why the American house is a better deal now than it's ever been.

Yesterday, we got a glimpse.

Yes, dear reader, we were on our way to Sea Island. We looked across the bridge at another island Jekyll Island. You know Jekyll Island, don't you? It's where the monster was created.

A group of the nation's richest, biggest, and most powerful bankers got together there in secret in November, 1910. They figured it was time to put in place a system that would make it a little easier for them to make money. Instead of competing head to head, without any backstop to protect them when things got rough, they decided to set up acentral bank.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The meeting was so cloaked in secrecy few believed it ever took place. Implausibly, it was first reported by the poet Ezra Pound. How Pound learned of it and why he reported it, we don't know. But that's the word on the street.

BC Forbes, founder of Forbes magazine, reported: "Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles south, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written...

"The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York's ubiquitous reporters had been foiled...

"Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality."

And now it's official. Ben Bernanke went there to give a speech in 2010, marking the 100th year of the meeting.

The role of the Fed, apart from greasing the skids for rich bankers, was supposed to be to protect the value of the dollar. Why the dollar needed protection was never explained. For the previous 100 years, it had been solid enough except for during the War Between the States, when Lincoln printed up far too many of them in order to pay for his attack on the South. But Lincoln's paper dollars came and went. And on the day the Fed was officially set up, in 1913, the dollar was still worth about as much as it had been when Napoleon Bonaparte set off for Russia.

Whatever the Fed was supposed do to, what it did not do was protect the greenback. Instead, the dollar slipped and slid throughout the 20th century and is now worth only about three cents.

Which is why we return to yesterday's theme. There's no guarantee. But we have a feeling that the dollar will continue to lose ground. Maybe not right away. But sooner or later.

And if someone will lend you money at the lowest mortgage rates in history in advance of what could be the greatest inflation in US history, perhaps you should take it.

We're down here at a financial conference. Among the attendees is colleague Steve Sjuggerud, who believes US real estate may be the best investment of all time. Adjusted for inflation, housing prices are back to 1979 levels, he says. But they're much better deals now. Because mortgage rates in '79 were three times higher.

"If you took out a mortgage in 1979," says Steve, "you'd be paying 15% to 20% interest. So, over the life of a $200,000 mortgage, you'd pay as much as $700,000, including interest.

"And you got a lot less house for your money in 1979," he continues. "The typical house sold in '79 had only 1,600 square feet of living space. Today, the average is about 2,200 sq. ft. It's a much bigger house.

"So, in terms of dollars per square foot, you're paying about $75 now compared to about $100 back then.

In terms of affordability, and value per dollar, the US house is a better deal now than it has ever been, Steve concludes. It would have to increase in value by $100,000 just to get to normal affordability levels.

"There are unbelievable bargains around," Steve goes on. He found a farm in Florida that had been appraised at more than $10 million in 2006. Now, the owner is bankrupt and the bank is desperate to get rid of it.

What bid will it take to buy it?

"Maybe less than $1 million," says Steve.

There's a time to be a borrower and a time to be a lender. As long as the Great Correction continues (and we think it will continue for a few more years... perhaps ten) it will be a good time to be a lender. Interest rates will tend to go down, not up. That is the lesson of Japan, where bonds have been the only decent investment for the last 22 years.

But thanks to that clandestine meeting on Jekyll Island 102 years ago, we probably won't stay in a Japan-like rut forever. Ben Bernanke promises. He has a little technology' called a printing press. And he knows how to use it!

And more thoughts

Your editor is not a good example. He bought a house and paid more than he needed to pay. But he was buying a house, not an investment. At least that's what he told himself.

Still, he figures that he will mortgage the place and let Ben Bernanke help make it a better deal. It may be a good time to be a lender now, but we will borrow anyway. The borrowers' time must be coming.

What are the odds that a dollar's worth of debt at 4% interest will still be worth a dollar ten years, 20 years, 30 years from now? The odds can't be very high.

The headline story over the weekend was that GDP growth in America, in the last quarter, was "disappointing". Which just goes to show how little people understand what is going on.

The Great Correction began five years ago. The feds have been fighting it ever since with trillions of dollars' worth of fiscal and monetary stimulus. You can see what good this does. Just look at the Dow. After Lehman went broke the index dropped to the 6,000 level. Then, the feds began dumping in money. Remember TARP? And tax cut extensions. And cash for clunkers'? And ZIRP? And QE1, QEII, and now the Twist?

Naturally, the markets and the economy react. GDP growth resumed in 2009. But most of the growth depends on further spending and money-creation by the feds. We don't know how much of it. Maybe all of it.

There is no recovery'. Instead, the private sector is correcting or trying to. And the economy is merely returning to its trend. GDP growth rates have been going down for 40 years. Growth rates averaged about 4% in the 70s, 3% in the 80s and 90s, and then about 2% in the 00s. On a ten-year trailing average basis, they are down to about 1.6% now. And they still seem to be headed lower.

What caused this drop off in growth is a matter of debate. (We have our ideas!) But the decline in the last quarter was right in line with what has been going on for more than a generation.

As long as growth is disappointing, the feds will fight it and they'll fight the Great Correction too. The US government borrows a trillion dollars a year with no end in sight.

And last year, 61% of that money came from Ben Bernanke's printing press.

Keep up the fight, Ben! And our long-term fixed-rate mortgage will eventually be worthless.

Now, Elizabeth with more memories and photos from our trip to Argentina

Trip to Compuel

By Elizabeth Bonner

Domingo de las Ramas, 1 April 2012

Last Saturday, Maria and I set off shortly after dawn about 7:15 in this early autumn season to ride to Compuel. Our purpose was to deliver the consecrated Host to an abuelita (granny) of 95, Mercedes, who lives with her granddaughter Modesta and Modesta's son Daniel.

It was also to visit Compuel.

Compuel is a separate territory in the finca of Gualfin, and it occupies a special place in the minds of the people who live here. It is one of the three pieces of land the fertile river valley of Pucarilla and the extensive plane of Gualfin being the other two that make up the territorial entity of Gualfin.

Pucarilla is a little earthly Eden, a green island amid sheer rock cliffs of pink and white powdery stone, further enclosed by the high mountain walls of Remate and Guasamayo with their snow-covered crests. With its own river, its large, spreading trees providing cooling shade, its productive orchards and fields, and its slightly lower altitude that allows vineyards and fig trees to flourish, it seems like a promised land. Cattle can graze here and grow fat, and if you dare, there is honey for the taking in hollow trees and in holes in the giant cactuses called cardones.

Gualfin is the campo, best viewed from the heights of the road to Compuel. At 2,900 metres above sea level, it is a higher and much drier parcel than Pucarilla, as well as much larger. It is where the majority of the cattle graze on desert pasture grasses and shrubs in the summer, when the plants are green and flowering, and in the winter, when the plants are dry but the blades, leaves, flower and seeds are still nourishing. Gualfin is principally watered by two rivers, the Gualfin and the Barranca that join together, flooding dramatically into the plain in a good summer of rains, thinning to a deep stream in the dry season, and disappearing through a gap in the encircling mountains to the rest of the Calchaqu valley system. Water runs from the Barranca into the asequias that provide water to the arriendos of the gente and to our sala and its fields of alfalfa and corn, its orchard and its vegetable and flower gardens. Two reservoirs, represas, capture and store water.


Looking back at Gualfin from the abra de Compuel, early morning shadows.

The source of this life-giving substance is Compuel. From the heights of Compuel, at 3,400 metres, flow the river Compuel which waters Pucarilla, the rio de la Cruz and various quebradas which unite to make the rio Barranca.

Compuel is a world apart from Gualfin and Pucarilla, a vast flat empty highland plane, alternately marshy and arid. No tree grows here, except for a cottonwood that Jorge planted20 years ago in a sheltered breach beside a stream. Away from the folds of the mountain slopes, there is no shelter from the sun or wind, except in the crevices of huge volcanic rocks piled up here and there in the plane.

Compuel, in its isolation and altitude, is a still and beautiful place, a natural place of pilgrimage. In fact, there is a procession to Compuel every year during the month of December. A mass is given at the foot of a plain white cross overlooking the plane from a high rocky hill. The cross was set there in 2000, the year of the Papal Jubilee, under the auspices of Maria and Jorge. Our local priest came up from Molinos that year, leading the procession from Gualfin to Compuel, and then continued on a four days' journey by mule to visit the families tucked away in the mountains.

Despite its seeming isolation, people have lived in and moved through Compuel for centuries; there are ruined storehouses and corrals from Inca times and probably before, stops on a trading route between the mines and salt lakes of the high plateau puna to the northwest and the rich lowland farms in the Calchaqu valley and beyond. In recent memory, mule trains packing salt still came down through Compuel every year.

And Compuel is frontier territory. Just over the Taquetuyo mountain is Jasimana, an enormous tract of high-altitude sparsely inhabited desert. Some of its hardy inhabitants are relatives of Gualfin families, but so inaccessible behind the mountain wall that a visit is several days' steep ride over terrain rough with fallen rocks and boulders.

On our way...

It was still dark when Maria and I set off with that sense of delightful adventure that comes with a voyage begun at daybreak. Our saddlebags were packed with bottles of water, lunch, a Bible, and the sacred bread. Maria rode the intrepid and experienced Regalito, one of Jorge's horses, and I rode our new criollo, who seems to have a "no worries" attitude to life and is learning to negotiate the mountain trails. We wore ponchos over several layers of clothes. Maria pulled a thick wool cap firmly down over her ears and put on a pair of mismatched gloves. We took, to my trepidation, the short cut.

The short cut runs behind the sala, up the side of a mountain, through a pass, clings around the side of another mountain and runs seemingly straight down the other side to reach the road to Compuel. The path was in semi-darkness, until we rounded the second mountain peak and looked back at the valley of Gualfin. There, the sun glowed red as it rose in a breach between mountains. Ahead, it washed stony slopes a cool clear pink. "The gente say the sun paints the hills," said Maria, as touched as I was by this unexpected richness in the language of daily life.


Sunrise along the road to Compuel, overlooking an arriendo.

As we joined the road to Compuel, we met Pedro and his brother Pablo walking to work, and the young Bartlo running along to catch them up. They were coming from their arriendos below. Here the rio Barranco squeezes through mountain passes and swells into shallow vales, where the gente have built their houses of adobe, stone and barro, and where they grow alfalfa, corn, squash, and ava beans, and a few peach trees food for man and beast, now and to sustain them over the dry, cold winter.

On the sides of the mountains, the herds of goats were already moving specks of white and brown, busily roving over the rocky slopes. The gente also keep cattle in the hills but, as we were to see, they graze on the more remote hillsides far from the houses and enclosures where the goats come in for the night. Goats are milked, and also need to be protected from pumas and, perhaps, apocryphally, from condors. But the cattle are only corralled when it is time for them to be vaccinated, castrated, and separated out for sale. A little bell around the neck of a calf is supposed to discourage pumas; at any rate, it makes a merry and surprising sound in the silence of the desert.

Not that the desert is always silent or even still. The cool morning air brings out the birds. In this season, small brown and black doves in pairs coo in the algarroba trees. Parrots swoop among the cardones, chasing each other in raucous groups of three or four. A last waking owl stares stiffly from atop a cactus, a hawk hovers intently above an outcropping or jagged rock. Hummingbirds, picaflores, seem to hang in the air amid the flowering plants. And rarely, for reptiles are seldom seen, a small lizard quivers along a rock. We did not see any guanaco on this journey, but the other day when I was out riding in the Gualfin campo, my horse gave a startled leap as one came darting across the open plain, giving high-pitched cries that sounded like clamouring birds. It was a young male, looking for a herd to join.

Maria and I passed the arriendos in the river valley below in the first hour and a half. In three hours of uphill climbing, some of it on bare rock that our horses negotiated with scrambling momentum, we reached the abra of Compuel. Here I had stopped a week before with Jorge, so that I could see petroglyphs carved long ago at this strategic point. Right at the peak of the passage was a pile of rocks that Maria said was called an 'apacheta'. You bring a rock or some other offering and add it to the pile. We noticed two empty bottles, perhaps previously filled with chicha, an alcoholic brew made since pre-Inca times from algarroba beans, and poured on the ground and also drunk as an offering to Pachamama, the earth goddess.


At the abra de Compuel.

We stopped to admire the panoramic views on either side of the abra, and then started down the trail into Compuel

Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, sign up to the email list here .

Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Customer services: 020 7633 3600. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA number: 1152 34