The Housing Bubble

With gold, Price equals Value. This appears to me to be gold’s fundamentals, its price.

With cash the fundamentals are determined by what it can be exhanged for, which is everything that is for sale, which includes gold.

Take notice that all stores have a cash register; they do not have a gold register. One normally uses cash to buy things, one doesn’t normally use gold to buy things.

One can use the argument that gold’s price rise is proof of its rising value. The same argument could be made - in fact is was made - for Beanie Babies. And for seven-hundred thousand dollar McMansions in Fresno.

An argument could be made for the rising value of cash due to the shortage of the stuff, especially for governments such that of California. Tax revenues are falling and wages are falling because there is a shortage of cash. Promises of future outlays of cash such as pensions are due to be broken because there is a shortage of cash.

I guess it depends on how many more QEs lie down the road. My faith in any kind of significant deficit spending reductions is close to zero, contrary to GOP promises, so I expect there will be more QEs awaiting. It also looks like we’ll have to invade another oil producing country in order to establish “democracy” there.

“An argument could be made for the rising value of cash due to the shortage of the stuff,”

Except that I’m not seeing that “rising value of cash” at the register. Shouldn’t my more-valuable cash be buying more as a result of its increased value?

Frankly, my dollars are not feeling more valuable to me…

In fact, I would argue that BB is trying like h*ll to make sure they never do feel more valuable. And his printing-press is quite speedy, as it only has to print electronic zeroes. In fact, this one goes to infinity.

“Price equals Value”

This makes no sense to me whatever, as you can’t eat gold, use it to heat your home, live in it, get medical care from it, drive in it, and the value of looking at it, wearing it, or getting educated by it seems quite limited unless you belong to a very peculiar subset of the human population.

All told, it seems like Price equals the number of dollars you can buy with an ounce of it, and not much more.

“I see being in cash as a viable investment strategy, and being in the hated and loathed U.S. dollar as where I want to be, precisely because it is so widely viewed as doomed.”

The contrarian in me agrees with Charles Hugh Smith, but I confess that I underestimated the Bernanke Fed’s willingness to waterboard the dollar with QE in order to stimulate a flow of cash into high risk investments (stocks, bonds, real estate, PMs, etc).

How about just rebalancing as a reason to get a little bit out of precious metals? I’m at 10% now. Probably have to get down to 8%, as I have to pay taxes on my conversions to Roth IRAs for 2010 tax year.

“Combotechie - if cash was king the US government wouldn’t be distributing it freely without regard to scarcity.”

“… distributing it freely …”

Oh, then I guess we are saved, that there is no shortage of the stuff, that prosperity is here once again.

But aren’t the taxes used to provide modern sanitation, “theft?”

Isn’t it more fair to allow pandemic diseases free reign among those who can’t afford sanitation? Why should I have to pay for their laziness?

And people wonder why I call libertarians bad names.

FRACK!

140,764 for 2009.

The numbers were already inflation-adjusted. (2005 dollars)

Something to think about: If gold is the only form of true money then the only way to expand the true money supply would be to discover new gold deposits and dig the ore out of the ground.

If new gold deposits are not found then the money supply does not expand. If new gold deposits are found then the money supply does expand.

An economy cannot expand if there is not new money made available to finance the expansion. But if new money is totally dependent on new gold discoveries then the expansion of the economy is totally dependent on new gold discoveries.

Now, how nuts is that?

Having gold as your money supply can also result in devastating inflation, if more gold is discovered, as the Spanish learned after their discovery of gold and silver in the New World.

“…if more gold is discovered,…”

Unusually high gold prices create incentives for discovery which didn’t pencil out when prices were lower. The resulting production boom contains the seeds of its own destruction.
(This story applies to other resources besides gold; e.g. oil production is a good case in point.)

“If new gold deposits are not found then the money supply does not expand.”

Combo, this from the one who constantly reminds us that one person’s debt is another person’s money, and that debt destruction is also money destruction?

Your analysis ignores that I can loan you my gold, and you can spend it. It is still mine (loan as asset), and it is also yours (the gold gets spent, and goes on to find a new owner as it circulates), thus the money supply has been expanded. Only the circulating supply does not expand.

Historically, there’s always been a ‘fractional-reserve’ banking system in economies that use gold (or silver) as currency. The goldsmiths, where people would store their gold, would provide receipts for the gold, and people would use these as paper currency.

The goldsmiths learned early on that not everyone who held a note would come to redeem them at the same time. And the fractional reserve system was born.

“Your analysis ignores that I can loan you my gold and you can spend it.”

But then your loan of gold to me is not backed by anything but my word.

If I can not or will not repay you your gold then you are out the gold.

To say a currency is backed by gold is saying that one can redeem the currency for physical gold. But if the issuer of the currency doesn’t have the gold and cannot get the gold then the currency isn’t back by anything other than thin air.

If one spends what gold he has then he doesn’t’ have the gold anymore. If one spends the currency that is backed by gold then he doesn’t have the claim on the gold, which means he also doesn’t have the gold anymore.

If all currency must be backed by gold then loans cannot be counted as currency because loans are not backed by gold but only a promise of gold. That being the case the only way a gold-backed money supply can be expanded is by finding more gold.

Generally under a ‘gold standard’, only a fraction of the value of the outstanding money supply had to be backed by gold (40% in the US at the beginning of the Depression). Rarely if ever was there adequate supply of gold to trade for every unit of currency in circulation. Hence you can have fractional reserve banking while on a gold standard.

“Hence you can have fractional reserve banking while on a gold standard.”

If that is the case then the term “gold standard” is meaningless.

Taken to the extreme, one ounce of gold can be used to back one trillion dollars or more.

“If that is the case then the term “gold standard” is meaningless.”

It’s not meaningless, it just doesn’t mean what many think it means.

“Your argument suffers from the post hoc, ergo propter hoc fallacy. In specific, you are assuming the because America was wealthier at the end of the 20th century than they were in 1913, that must have been due to Fed policy.”

Now there’s a leap. I never once mentioned the Fed. What I did say was the expansion of the money supply was necessary to finance the expansion of the economy.

The expansion of the intercontental railroads, for example, was made possible in part by the expansion of borrowed money, and expansion of the money supply. This was done well before the Fed ever existed.

My argument rests on the ‘pork chop, ergo ham hock’ truism, which is that we were eating ham hocks at the birth of the Fed, and pork chops a hundred years later. Now that’s progress!

Compare our economy with the rest of the countries of the world during the same period (of Fed as CB), and we outperformed pretty much all of them.

Correlation may not prove causation, but if the Fed is so horrible, surely other countries without a Fed (that weren’t destroyed by WW2- Canada, Australia, New Zealand, Central and South America) should have wildly outperformed us, no?

Combo — sorry for the confusion; I was aiming at Alpha-Sloth’s assertion that any gain in national U.S. wealth after 1913 was largely if not solely due to the establishment of the Fed. The absurdity of this assertion can be seen by simply considering the large gain in U.S. wealth between 1776-1913.

“My argument rests on the ‘pork chop, ergo ham hock’ truism, which is that we were eating ham hocks at the birth of the Fed, and pork chops a hundred years later. Now that’s progress!”

Whatever. I suppose you also believe Ben Bernanke controls the movements of the starts, the moon and the planets?

“…any gain in national U.S. wealth after 1913 was largely if not solely due to the establishment of the Fed.”

Come now, come now. I never said that. I pointed out that the period of Fed oversight of our economy- up until Greenspan- was a period of great, even historic, economic advancement.

If the Fed were so bad a) How could this be the case? and b) Why weren’t we eclipsed during this period by countries that didn’t have a Fed?

I await answers to my questions, not joustings at straw men.

“I await answers to my questions, not joustings at straw men.”

As I already pointed out, and you conveniently ignored, our country accomplished great things before 1913. You cannot rerun history to see how much better we might have done (especially in the 1980-2010 period) if the Fed had not been in the picture.

“You cannot rerun history to see how much better we might have done (especially in the 1980-2010 period) if the Fed had not been in the picture.”

Perhaps not, but that rules out a heck of a lot of historical conjecture. Maybe we would be worse off if we hadn’t had a housing bubble? Maybe it warded off a martian takeover- after they realized how stupid we were, and probably worthless as slaves. Who knows? ‘You can’t rerun history.’

You can, however, look at the economies of countries similar to ours, that didn’t have a Fed, and see that we did as well or better than pretty much all of them. That seems like a reasonable basis of comparison, no? Got a better one?

“You can, however, look at the economies of countries similar to ours, that didn’t have a Fed, and see that we did as well or better than pretty much all of them. That seems like a reasonable basis of comparison, no? Got a better one?”

I totally agree, but think you should post less and read my posts more carefully. And hence I repeat myself:

“If we lose the banks, all is lost, sorry to say.”

It gets down to the question of whether we want to keep supporting the doctrine of too-big-to-fail, allowing the world’s largest and most powerful banks to continually hold a gun to the heads of all non-bank financial entities on the planet, and summarily bailing out TBTF banks that throw away money on bad projects, or if we want to reinstate competition to the financial system, breaking up the largest, most systemically risky firms if necessary to accomplish this.

Perhaps you missed the story of how the Icelanders let banks that threw away good money after bad collapse, but yet some how their economy survived. We apparently disagree on the importance of preserving the too-big-to-fail system of bank bailouts.

Other countries, that didn’t have a Fed, bailed out their big banks too. TBTF exists in countries with traditional central banks just as much as we it exists here under the Fed.

‘didn’t have a Fed…TBTF exists in countries with traditional central banks’

“Traditional” CBs vs the Federal Reserve? Please explain that one. I’ve never heard of any difference.

Traditional CBs are public, and usually create the countries currency, the Fed is public/private, and ‘borrows’ the money from the ‘printer’- the Treasury.

from wikipedia
“The division of responsibilities of the central bank [referring to the Fed] falls into several separate and independent parts, some private and some public. The result is a structure that is considered unique among central banks. It is also unusual in that an entity (the United States Department of the Treasury) outside of the central bank creates the currency used.[10]“

‘It is also unusual in that an entity (the United States Department of the Treasury) outside of the central bank creates the currency used.’

So you’re saying that the Fed doesn’t “create” currency? Did you hear that the Fed loaned out $12 trillion a while back? Do you think they had $12 trillion in reserves?

The actual physical currency-paper and coin- are produced by the Treasury, then ’sold’ to the Fed. Most other CBs produce the currency/coin themselves.

“The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation’s cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.[40] During the Fiscal Year 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.[41]”
wikipedia

So is the Fed audit a done deal, now that Ron Paul will soon take over as chairman of the Domestic Monetary Policy Subcommittee of the House Financial Services Committee? If so, I predict 2011 will be still more interesting to HBBs than were the years 2005-2010.

High & Low Finance
Ron Paul Appears Poised to Irk the Fed Chief
By FLOYD NORRIS
Published: December 16, 2010

A congressman from Texas, long a dissident critic of the Federal Reserve, is scheduled to become the chairman of a House panel with jurisdiction over the central bank. It promises to be a miserable time for the Fed chairman as he is peppered with hostile questions at oversight hearings and with legislation to force complete audits of Fed operations.

Ron Paul is author of the best-selling book “End the Fed.” He has denounced the Fed as a cause of inflation.

So it is now, with Representative Ron Paul about to take over as chairman of the Domestic Monetary Policy Subcommittee of the House Financial Services Committee. Mr. Paul campaigned against big banks, arguing that concentrated financial power goes hand in hand with concentrated political power.

If the Fed were abolished, he wrote last year, “the national wealth would no longer be hostage to the whims of a handful of appointed bureaucrats whose interests are equally divided between serving the banking cartel and serving the most powerful politicians in Washington.”

It is not hard to imagine Mr. Paul lecturing the president of the Federal Reserve Bank of New York in a committee room: “You can absolutely veto everything the president does. You have the power to veto what the Congress does, and the fact is that you have done it. You are going too far.”
…

One possible way out, which central bankers have discussed for years: Use an automatic rule to relate the amount of currency in circulation to economic factors. Take away the Fed’s discretion, and the incentive to game the system in order to make too-big-to-fail bailouts rain down from helicopters would go away. As things currently stand, the Fed exercises way too much discretion, and Wall Street investment banks are far too capable of using rain dances to bring precipitation their direction.

CENTRAL BANKS: WHO NEEDS THEM?

Milton Friedman and Bob Mundell are widely— and rightly—regarded as the best monetary economists alive today, and all those who have read their debate will readily appreciate why. Economists are of course famous for their propensity to argue with each other, but what is particularly striking from the Friedman-Mundell debate is actually the extent to which they agree on certain points. And one of the most important points on which they agree is that the record of central banks has been very poor indeed. Over the last century the number of central banks has grown from 21 to nearly 200, and their power has increased enormously, and yet that same century—the century of central banking—also experienced historically unprecedented inflation. The effects of this inflation have been economically and socially catastrophic.

The rise of central banking was thus associated with unparalleled monetary instability, and we can only conclude that this association reflects cause and effect: that central banking leads to monetary instability. If monetary stability is important for the well being of the economy, as it surely is, and if central banking is incompatible with monetary stability, as the experience of the last century suggests, then we are forced to the conclusion that central banking must be abolished: to quote Professor Friedman’s elegant phrase, “money is far too serious to be left to central bankers”.
…
The 20th century saw a huge increase in the number of central banks and a vast expansion of their powers. Thanks to these banks’ licenses to print money, it also experienced historically unprecedented inflation. It is therefore not surprising that “all the great classical economists [without exception] … abhorred the idea of inconvertible currencies,” as Professor Mundell points out. The experience of central banking over the last century amply confirmed how right they were.

There is no good reason why Canada must continue to have a central bank. After all, Canada didn’t have one till 1935, and the Canadian monetary system before then was in many ways much better than it has been since. For most of its history, Canada effectively operated a system of free banking on a gold standard, and that system served the country much better than the inflation-prone fiat money regime that replaced it. Of course, defenders of the Bank of Canada will argue that the improved inflation record of the last decade shows that the Bank has now got its act together. However, there is a difference between a genuine teetotaler and an alcoholic who goes without a drink for a while, and the fact remains that if one takes a long-run historical perspective, the Bank’s record is still very poor. In any case, since the development of money still poses a major danger to the Bank’s future ability to manage the currency, the improvement in the Bank’s performance is unlikely to last.

Even central bankers are coming to realise that the continued existence of central banks should not be taken for granted. To quote a recent article in the Financial Times: “Central banks may be at the peak of their power [but] their extinction cannot be ruled out. Societies have managed without central banks in the past. They may well do so again in the future.”

The author of this article, Mervyn King, is in a good position to judge—he is the Deputy Governor of the Bank of England. At the end of the day, I suspect that it will be the combination of market forces and technological progress that will have the decisive say, and that the debate between free bankers and central bankers will ultimately be settled in the market place. If the defenders of central banking are not careful, the invisible hand of the market will sweep central banks into the dustbin of history—even as they continue to insist we cannot do without them.

Kevin Dowd teaches economics at Nottingham University Business School.

P.S. Though Friedman is deceased, I expect the ideas of this defunct economist may play a big role in determining what replaces the Fed.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

– J.M. Keynes –

The rise of central banking was thus associated with unparalleled monetary instability, and we can only conclude that this association reflects cause and effect: that central banking leads to monetary instability.

Post hoc, ergo propter hoc, no? A classic example.

Mr. Dowd, of Nottingham U (bringing out the big guns, eh Prof?), wants us to return to a ‘free banking’ system? Which, of course, means banks will once again issue their own currencies, just like in the Good Old Days. It sure worked great then, didn’t it?

Great find!

I LUV this one:

Woodstock Arson Letter
Following the 1988 fire of the Woodstock Playhouse, a typo-riddled letter from a purported anti-recycling group was sent to a Kingston radio station. The letter, from “regional recycling refusni*iks,” implied that the group was behind the arson fire. “Pass this along,” the letter reads. “We will not allow our organization to be made fun of. we toook out one eyesore, a newspaper or televison station could use some unleaded.”

BAHAHAHAHAHA - those crazy anti-recycling group strike again!

I guess I have high expectations these days. I had worse cars, to be sure. But anyway, paying for a used car with cash and selling it at the end of use, is cheaper than renting. I just need something to get me to work while in Tampa. I like keeping the mileage on my primary car low. 60k miles since March 31 2003 is not bad! I’m proud of it. And yes, I will run my Toyota economy car into the ground.

This morning at LA Fitness in Ahwatukee as I was walking out the door at the end of my workout a nice shiny red Ferrari was parked in the closest non-handicap space. It was frigging beautiful, I have to admit. My Toyota wants to be like that when it grows up.

I admire beautiful cars and other beautiful things. Mostly I don’t want the responsibility of ownership.

You have a good financial head on your shoulders, so I expect you have done the math (which includes qualitative tradeoffs, including a level of comfort and confidence).

Since you maintain a residence in Arizona, it may make more sense to keep your Toyota there rather than spend the time driving back and forth.

This morning at LA Fitness in Ahwatukee as I was walking out the door at the end of my workout a nice shiny red Ferrari was parked in the closest non-handicap space.

Owned by a paunchy dude with a comb-over and “compensation issues,” no doubt.

I would make darn sure I would be appropriately botoxed and have two years of effective personal training for the chiseled physique before I even sit inside that “red Barchetta.”

Comps are decent in this neighborhood. A lot of retirees that bought big lots a good number of years ago and have compounds, as most of the surrounding lots are 1/2- full acre or a little more. Ours is on a little more than 1/2 acre. It looks so far like a real stable neighborhood, owned homes, and no real using the house as an ATM. The former owners of our house sold a lot of acreage back in 2004 and there was a subdivision built on the neighboring streets, and those are all valued around 200k, so we didn’t really blow the comps too badly. We played around with comps in the area over the last 15 years and determined for what we were looking for, sq ft. price for full ready to move in should be no more than $85 per sq. ft. at the high end.

Our house has a lot of remodeling already done, but had been foreclosed and empty for almost 2 years so landscaping is needed, pool repair, etc. Plus the previous contractor who owned it apparently ran out of money and bubble after he did 3/4 of the remodeling, but never got to the bathrooms. So we have 3 bathrooms to potentially remodel (will know more after the next dry-rot expert weighs in). So… all in all, I think the surrounding comps are in good shape. Little to no turnover in the neighborhood, and long owned properties with plenty of equity. These people didn’t buy to get rich, they bought when it was cheap so they could have a home and no mortgage, but plenty of room for their RV’s, workshops, restored cars, and families to come visit.