The Difference between Gold and Real Estate

The Difference between Gold and Real Estate
by Alex Merced

 Is there a gold bubble? This seems to be the questions that media pundits are pushing more and more now, so I thought I'd like to discuss some of the fundamental differences between Real Estate and Gold as far  as it's bubbliness (I'm making up words). Many people critique gold proponents saying that saying that gold will continue to go up is like the real estate proponents pre-bust saying real estate will always go up so here are somethings to think about.

Asset Mobility

Gold is a very mobile assets, I can have it stored and I can carry it around with me no matter where economic activity is moving people geographically. Homes on the other hand are not easily mobile, I just can't pack up my house and take it with me wherever I go. In this case if economic activity moves somewhere else geographically it's hard for me to sell it so I can pursue where growth and jobs are because others are doing the same driving down demand for my particular house. This is a problem that's non-existent with gold.


Supply

During the height of the housing bubble there was a lot of housing construction going on which increases the supply which lowers the price of any good, and despite all the inflation from the central banks these last few years the supply is still repricing itself versus the money supply. You can't manufacture gold, it can only be mined and the amount that can be mined is essentially fixed so this kind of inflation of the gold supply is not possible as it was in housing so it's relationship versus the money supply is a one sided relationship mainly changing when money supply changes since the gold supply grows slowly and stable.

Liquidity

Gold is fungible (one ounce of gold is generally no different than the next), which makes Gold much easier to trade in markets and base futures, Funds, and other investment vehicles on. This creates a liquidity in the gold market when combined with it's other features makes it a very appealing store of value. Houses on the other hand is a heterogeneous good, meaning every house is a unique product which must find a particular buyer which can be difficult depending on several geographical factors outside of the house itself (neighbors, local schools, local economy).

Growing Demand

More and more of countries we thought were part of the third world are becoming industrialized so the access to medical professionals like dentists are increasing and so is the demand for luxuries like jewelry both which use large amounts of gold. Not only is there a growing consumer demand, but also many central banks are beginning to purchase gold and strengthen their reserves as the US Dollar undermines it's reserve currency status which central banks will most likely hold indefinetly reducing the supply of gold effectively for other uses. Houses on the other hand have shrinking demand since there is a glut in the supply from the excessive construction during the boom, and many people rather rent or share living space till economic prospects allow people to expect the ability to maintain a bigger home.


Overall, in the future some of these factors may change, this the current state of things and as long as this is the case I'll continue hold and purchase gold and other natural resources.

What Does a Free Market Banking System Look Like? by Alex Merced

1. No Federal Reserve: The Central Banks fixing of Interest causes malinvestment causing long term projects to be undertaken employing many, but those jobs are lost when those projects are shown not to be in line with the actual savings to complete the project(half way built houses) or to purchase the finished products (empty condo units).

2. NO FDIC/SIPC: There would still be private deposit insurances, and the costs of insuring deposits at a bank that takes on excessive risk will keep prudent investors in safe banks, also since the cost of insurance is spread out among many insurance companies depositors won't have to wait years to make their claims.

3. No Central Regulator: Instead of a government funded regulation monopoly which is subject easily to regulatory capture, consumers would pay for private firms who'd represent their pooled interest and establish rules for banks who want to deal with these firms clients. Since these firms are paid for by the consumer, not the government (political conflicts of interest), not by the industry (industry conflicts of interest), the interest of the clients/investors will be in line with that of the firm/regulator. This also allows for different regulatory frameworks to co-exist so people wanting to take on more risk can go to different regulator allowing more risk and allows alternatives if one regulator becomes corrupted by regulatory capture. These firms would require banks to meet their requirements, they'd rate securities, and other services which the investors might want.

4. A return to Sound/Constitutional money: Gold and Silver would be money once more and banks would be able to create their own money substitutes (redeemable pieces of paper), and can only participate in fractional reserve banking with depositor consent eliminating the fraud concerns.



Although in this environment we still have one issue: While even with private deposit insurance and private regulation a bank can conceivably go bust and frightened remove deposits from all banks, to prevent this government can use it's enumerated power to set standards...

The Government would establish standard units (ex. $1 = 1/40 ounce of gold) and standard reserves terminology, so consumers, businesses can determine the quality of the bank that issued the note/dollar...

Class 1 Banks: Reserves of 75% -  100%
Class 2 Banks: Reserves of 50% - 75%
Class 3 Banks: Reserves of 25% - 50%
Class 4 Banks: Reserves of 0% -25%

So if a Class 4 bank were to go bust people won't rush to pull money out of higher class banks. Also, Gresham's Law (bad money will crowd out good money) will kick into place...

Good Money - Class 1 Banks - People will put their savings in the Class 1 banks since to keep such high reserves a bank would have restrict withdrawal but the extra safety would be great for long term savings such as retirement. Lower yields, but higher purchasing power.

Bad Money - Class 4 Banks - In order for these banks to survive they need liquidity, so these banks would work like the banks of today issuing credit cards, checking accounts, way to get money instantly and quickly. Higher Yields but lower purchasing power.


While there'd be no rules that these banks would fall into these roles, it'd be logical that they would over time. Also businesses can ask for different quality of money, a store that only accepts class 1 money would have lower prices than that accepts all the way to class 4 money yet people who don't want to be subject to all the inflationary pressures of class 4 can have the option to only bank with class 1 banks and use the money at stores that only accept class 1 dollars.

Overall, a monetary/banking system like this is transparent, the only role of government is to set some standards and maybe a reporting system to have a database which private companies can develop systems to check class status of banks and notes, yet no government rules on how these standards should dictate behavior, that would be left to the people and private regulators.

This, is a free market system, transparent, versatile, and flexible

Is Deflation Better?

I constantly speak about the dangers of inflation (increase in the money supply), and inflationary pressures of a growing government. Inflation destroys our purchasing power, causes malinvestment, and encourages risker investing. Inflation is primarily on my mind cause it's more imminent, government is naturally incentivised to inflate, so inflation and it's danger are practical concern although some take this to mean deflation (a decrease in the money supply) is the desired alternative.

 They paint this utopian image that in a world of deflation that purchasing power increases, savings will increase meaning more capital for investment and it'll breed a more prudent and moral society. In reality, deflation or any manipulation of the money supply will cause distortions in the economic calculation of market participants, just in different ways.

 With deflation artificially increasing the value of money, and what is the story whenever we artificially the price of any good? When prices are fixed above the market price less people will be willing to consume that good so you end up with a surplus. This would be the result of a deflationary environment that even though savings will be available for lending for projects, lenders will not want to pay the higher price of money and will choose not to lend it. So now you have underutilization of resources, and while I would prefer under spending than over spending this is still not ideal.

So does this mean a constant money supply is wanted, not neccessarily because of the downward price level adjustments that will constantly occur to a fixed supply. The only solution to the money supply issue is have a supply free from human influence, meaning no FIAT or paper money. In a world with a commodity backed money, the supply will fluctuate based the demand for the money for industrial use and new money mined through labor.

It's in this world, absent from taxation, regulation, and FIAT money can individuals begin to more accuratly begin economic calculation.