Every once in a while there is a point that needs to be revisited and I think that this is just one of those. The way to look at the current real estate melt down is not just from what has been directly lost, but also the loss from the opportunity that we had. Exactly what would we have done with our money and talent had we not been playing the real estate market? The point is that we lost on both ends. to make this point a little clearer, I and going back to an old text that I used to teach from called "Principles of Engineering Economy" by Grant and Ireson from Stanford. It is the basic text that thousands of engineering student used back in the 60's and it is as sound today as it was back then. It is a little too complex for most Political Science majors, so you can see where I am coming from.
Let's take a very simple example where we invest $1.00 each year for 4 years. That is how long the Democrats have controlled the Congress and see what happened. In this example, the investment in the real estate market went down at a rate of just 5% per year while the investments that we should have been making went up at the same 5% per year. Now the big questions is how do the two alternatives compare. How much did we really lose? First the $1.00 per year investment in normal types of business. How dis we do? At the end of 4 years, we would have a total of $4.53 in the bank. Not bad, but many good business people do better than this. Now for the investment in real estate. How did we do? Based on the real estate investment, we end up with only $3.51. That is a difference of $0.77 between the two alternatives. The problem is that we hear from the news media and our politicians that we only lost $0.49 when we actually lost $1.02, or double as much. This is the point that I am trying to make.
If I were to have used larger interest rate percentages, the difference would be much worse. Would you like to see how big the difference would have been had I used 6% for the normal investments and 10% for the investment in the real estate market. For the normal investment after 4 years, you would have $4.63, and for the investment in real estate, you would only have $3.10. Now the difference is $1.53. This is what I am talking about. It is a lot worse than most people think.
Our competitors around the world were making much better investment decisions than we have for the past 4 years so we now have to restart after being down $1.53 and only have $3.10 in the bank while our competitors have $4.63. This is a very big deal. They have 49% more money in the bank to start with than we do. Before we can start going up, we have to first stop going down.
