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.
Showing posts with label Liquidity. Show all posts
Showing posts with label Liquidity. Show all posts
Saturday, October 16, 2010
Saturday, May 8, 2010
Liquidity: The Destructor of Economies and Liberty
Liquidity: The Destructor of Economies and Liberty
by Alex Merced
I always believed and still believe that innovations that make our day to day tasks simpler and easier is the key to raising the standard of life. Although, in making investment more convenient we have sown the seeds of our own destruction. The primary deterrent to anyone saving or investing capital has always been liability, the risk that the bank may go under, or that they won't be able to get out of their investment in a good time at a good value. In trying to accommodate to this fear we have focused on created several institutions to separate these liabilities from investment. Although, when separating liability from those who rightfully should own that liability you distort the economic calculation between risk and reward which will always yield unintended consequences.
Through different legal structures and mandatory insurance programs people became more and more willing to invest their capital, but they also became less concerned with what they were investing it, and with who. On top of this through trading markets and derivatives we made it possible for investors to get their return on their investments in short and shorter a period of time, creating more demand for investment.
Due to these "innovations" the time horizon for investors became less and less as "liquidity" increased. Is there any inherent problems with these innovations? Trading Markets and Derivative products in themselves were great innovations, yet the underlying separation between ownership of enterprise and liability caused by the underlying corporate structure caused a level of moral hazard that was heightened by the amount of liquidity provided to any investment. The check's a balances built into structures like a Limited Partnership were gone, and along with it much of the prudence and calculation that makes investment and it's benefits sustainable.
You couple this with the fraud of fractional reserve banking, and the leverage it allows, the end result you have is self-destructing economic whirlwind. As an economy is destroyed, liberty dissipates with it as people begin to look and blame each other for the lack of resources.
The answer to all this is a sound belief in ownership of property, and the liability that should come with it or else in a world without this basic principle, Liquidity will eventually be the catalyst of the economies destruction.
by Alex Merced
I always believed and still believe that innovations that make our day to day tasks simpler and easier is the key to raising the standard of life. Although, in making investment more convenient we have sown the seeds of our own destruction. The primary deterrent to anyone saving or investing capital has always been liability, the risk that the bank may go under, or that they won't be able to get out of their investment in a good time at a good value. In trying to accommodate to this fear we have focused on created several institutions to separate these liabilities from investment. Although, when separating liability from those who rightfully should own that liability you distort the economic calculation between risk and reward which will always yield unintended consequences.
Through different legal structures and mandatory insurance programs people became more and more willing to invest their capital, but they also became less concerned with what they were investing it, and with who. On top of this through trading markets and derivatives we made it possible for investors to get their return on their investments in short and shorter a period of time, creating more demand for investment.
Due to these "innovations" the time horizon for investors became less and less as "liquidity" increased. Is there any inherent problems with these innovations? Trading Markets and Derivative products in themselves were great innovations, yet the underlying separation between ownership of enterprise and liability caused by the underlying corporate structure caused a level of moral hazard that was heightened by the amount of liquidity provided to any investment. The check's a balances built into structures like a Limited Partnership were gone, and along with it much of the prudence and calculation that makes investment and it's benefits sustainable.
You couple this with the fraud of fractional reserve banking, and the leverage it allows, the end result you have is self-destructing economic whirlwind. As an economy is destroyed, liberty dissipates with it as people begin to look and blame each other for the lack of resources.
The answer to all this is a sound belief in ownership of property, and the liability that should come with it or else in a world without this basic principle, Liquidity will eventually be the catalyst of the economies destruction.
Tuesday, April 27, 2010
C Corporations and Moral Hazard
C Corporations and Moral Hazard
By Alex Merced
When confronting todays economics problems one thing we can agree across philosophies, theories, and economic frameworks is that Moral Hazard is rampant in the current system. The question then becomes how do you eliminate the moral hazard to return more realistic expectations in economic calculation.
The mainstream view on the left and right is that this moral hazard is created by "irrational" behavior cause by "too much" capitalism, so regulation must be enacted to reform this behavior and bring transparency to the market. As far as to handle the regulation issue, I've discussed how free market regulation can exist.
Now to Austrian Economics aficionados like myself usually take a different approach and believe that this moral hazard took generations of distorting economic calculation to create. This has been done via institutions like the federal reserve, IRS, and FDIC. Although I take it a step farther and say that the modern legal corporate structure is fundamentally flawed to a free market working, cause it separates or moves liability from two major players in enterprise, the executives running the enterprise and the Shareholders.
So let's see the effects...
Shareholders: Since Shareholders in a C Corporations have no direct legal liability or tax liability by virtue of ownership of these shares it makes disposing of these securities a decision made with very little cost except the opportunity cost of future gains that weren't realized if they continued to hold the shares. This makes the shareholder willing to sell the shares at a moment notice when the price goes up, and makes the value of company in itself in the long term a very slight consideration. Unlike this, Limited Partnership shares still separate legal liability as a Limited Partner but you retain the tax liability and you can't just dump the shares at a moments notice, this incentive creates a culture where investors do their due diligence and are concerned about the long term outlook of the company in case it takes time to find a buyer of the share.
Executives of Company: The executives and the Board of Directors are beholden to the shareholders... yet the make up of the shareholders is constantly changing due to shareholders having such a short time horizon as explained above. If the shareholders are not pleased with the short term returns from their investment, they can pressure the removal and change of these executives. Although if the company is built on unsustainable policies for short term growth, the executive doesn't own the capital in the enterprise so the concern of losing their position is a greater incentive to not change these policies to something sustainable. In a limited partnership the General Partner runs the company and must have a 1% interest in the company itself creating a dual incentive since their own capital is tied up in the venture and they have unlimited liability. While they are still beholden to the limited partner, the limited partners do have an interest in sustainable corporate governance because of the liquidity of their investment.
So essentially the C Corporation has opened a greater array of investors to the capital markets, but at the cost of moral hazard and short term thinking that results from the "Liquidity" of these investments. What I conclude is that if we're going to have a more SUSTAINABLE foundation and capital structure we need more active people running these enterprises, meaning they need more active investors which will never happen with the current C Corporation structure of liability. While some advocate creating artificial liability in the C Corp, why bother when you already have a business structure proven to create more sustainable businesses in the Limited Partnership.
Bottom Line, abolish the C Corporation.
By Alex Merced
When confronting todays economics problems one thing we can agree across philosophies, theories, and economic frameworks is that Moral Hazard is rampant in the current system. The question then becomes how do you eliminate the moral hazard to return more realistic expectations in economic calculation.
The mainstream view on the left and right is that this moral hazard is created by "irrational" behavior cause by "too much" capitalism, so regulation must be enacted to reform this behavior and bring transparency to the market. As far as to handle the regulation issue, I've discussed how free market regulation can exist.
Now to Austrian Economics aficionados like myself usually take a different approach and believe that this moral hazard took generations of distorting economic calculation to create. This has been done via institutions like the federal reserve, IRS, and FDIC. Although I take it a step farther and say that the modern legal corporate structure is fundamentally flawed to a free market working, cause it separates or moves liability from two major players in enterprise, the executives running the enterprise and the Shareholders.
So let's see the effects...
Shareholders: Since Shareholders in a C Corporations have no direct legal liability or tax liability by virtue of ownership of these shares it makes disposing of these securities a decision made with very little cost except the opportunity cost of future gains that weren't realized if they continued to hold the shares. This makes the shareholder willing to sell the shares at a moment notice when the price goes up, and makes the value of company in itself in the long term a very slight consideration. Unlike this, Limited Partnership shares still separate legal liability as a Limited Partner but you retain the tax liability and you can't just dump the shares at a moments notice, this incentive creates a culture where investors do their due diligence and are concerned about the long term outlook of the company in case it takes time to find a buyer of the share.
Executives of Company: The executives and the Board of Directors are beholden to the shareholders... yet the make up of the shareholders is constantly changing due to shareholders having such a short time horizon as explained above. If the shareholders are not pleased with the short term returns from their investment, they can pressure the removal and change of these executives. Although if the company is built on unsustainable policies for short term growth, the executive doesn't own the capital in the enterprise so the concern of losing their position is a greater incentive to not change these policies to something sustainable. In a limited partnership the General Partner runs the company and must have a 1% interest in the company itself creating a dual incentive since their own capital is tied up in the venture and they have unlimited liability. While they are still beholden to the limited partner, the limited partners do have an interest in sustainable corporate governance because of the liquidity of their investment.
So essentially the C Corporation has opened a greater array of investors to the capital markets, but at the cost of moral hazard and short term thinking that results from the "Liquidity" of these investments. What I conclude is that if we're going to have a more SUSTAINABLE foundation and capital structure we need more active people running these enterprises, meaning they need more active investors which will never happen with the current C Corporation structure of liability. While some advocate creating artificial liability in the C Corp, why bother when you already have a business structure proven to create more sustainable businesses in the Limited Partnership.
Bottom Line, abolish the C Corporation.
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