Josh Barro, writing for The New York Times:
“Imagine if we bought food the way we buy housing.
Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.
Buying that stream of future food would be expensive, so you’d get a loan from a bank to cover most of the cost, secured by your interest in those future chicken breasts. And if for some reason you didn’t need your chicken contract anymore (you became a vegetarian or you moved out of the delivery range of your chicken supplier), you could sell the contract at the current market price.
With this system, perverse things would begin to happen. Normally, consumers prefer that food prices be low. But this practice would create a large constituency of foodowners, who would benefit from rising food prices: If you bought your chicken contract for $20,000, and rising chicken prices pushed its value to $40,000, you’d have a nice windfall.
Foodowners would eargerly support government policies that restrict the production of food because that would push up prices. And they might reap windfalls from rising prices without selling their contracts: They could refinance, cashing out the equity in their appreciated food contracts to spend on caviar and creme brulee contracts, or on nonfood items.
People might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit. That might lead to a food bubble. And if food prices crashed, a lot of highly leveraged foodowners would end up in bankruptcy.
That would all be pretty stupid. But it would all seem perfectly normal, as it very closely mirrors the way we approach housing.”
Enjoying this article? Sign up!
Sign up to the NZ Wealth & Risk mailing list, and receive a free PDF book, plus a series of emails explaining How to build your own financial plan.