Jim's Blog

E-gold, which I thought would save the world, turned out to be something of a bust, with essentially zero use in real internet commerce, but “unenumerated reports” that we are seeing the financial markets going into commodity based fractional reserve monies in a big way, many trillions of dollars.   Still, you cannot pay for your we hosting or cell phone minutes with commodity based monies.  These moneys are for big deals, and only big deals.  The revolution begins when you can send commodity based money over end to end encrypted instant messaging, and the money is good to pay for your web hosting and your prepaid cell phone minutes.

When I say prices look like they have bottomed, I don’t mean that the prices sellers are asking may have bottomed.  Asking prices are, for the most part, still way too high.  But if we look at sales that are actually being made, both for houses, and for land with secure development approval, the prices are a good deal lower, the people buying are the smart money, and the people selling are the stupid money – which is a pretty good sign that prices have bottomed.  People with a good track record for making smart decisions are betting their own money that bottom fishing in today’s market is turning up bargains.  The buyers are buying with their own money, the sellers are taking a loss on someone else’s money.

Real mortgage interest rates are high and rising in the US, because the the future value of the US dollar is uncertain.  Lenders fear the possibility of very high inflation, so demand high interest rates.  This makes it difficult to buy a house.  At the same time, borrowers fear deflation.   They fear they could put down a deposit, then be wiped out as the value of house falls, along with their job that previously enabled them to pay the mortgage.  Both may well be right, for uncertainty over the future value of money results in uncertainty over the present value of money, resulting in stagflation.  Dollars and houses could fall relative to gold, food and fuel, and fall far, wiping out both lenders and borrowers.

We may therefore expect the proportion of people who own their own homes to fall, resulting in hostility to capitalism and enthusiasm for socialism, for people who do not own stuff tend to hate people who do own stuff, and lash out to harm them, not understanding that in so doing they harm themselves.

Ordinarily, the crisis would surely mean low home prices, which would be a good thing for the strength of  the people, for the core of society is young married people planning to have children, or having children, and without such people, everyone loses hope and confidence, people despair of the future, and despair of their way of life. But as government becomes every more pervasive, and claims ever greater authority, makes ever more decisions for us, it has become harder and harder to subdivide land.  So subdivisions have fallen far behind population growth.   We have an ever more severe shortage of subdivided land, which put ever greater upward pressure on housing prices.

We need prices to fall to a level where young couples can buy houses preparatory to having children, but this seems unlikely.   Despite the crisis, despite massive foreclosures, despite high interest rates on mortgages, despite massive falls in the price of housing, houses are still absurdly expensive, and are probably close to bottom.

I sadly regret to report that I think housing right now is a very good investment, the only better investment being subdivided land with secure building approval.

Four days ago, Alan Greenspan posted an article wondering what went wrong:

“We will never have a perfect model of risk”

“Risk management systems – and the models at their core – were supposed to guard against outsized losses. How did we go so wrong?”

Hey Alan! Check your spam folder for 2006. You will find it is full of ads saying:

“Buy the house of your dreams for no money down! No credit? Bad credit? No Income? No Problem!”

Gimme some of what he’s been smoking.

The US economy faces recession: To stimulate the economy, the fed is lowering interest to near zero and the government handing out six hundred dollars to everyone.

But what the US faces is not recession, but stagflation, and handing out free money is not the cure for stagflation.

Stagflation was first observed in the first great fiat money inflation of modern times, the French assignat.

The more assignats they printed, the worse the shortage of assignats became. They would double the number of assignats in circulation, and prices would quadruple!

You could not buy, because the seller did not trust your money, and you could not sell, because the buyer did not have money that you could trust. You could not borrow, nor could you lend, for the lender knew his money would be worthless when returned.

To cure stagflation, the Fed must give people confidence in money, and confidence in financial intermediaries. You create confidence in money by firmly refusing to issue more of it, and confidence in financial intermediaries by ensuring that those financial intermediaries that have misbehaved become bankrupt or go to jail, as appropriate.

Financiers know that if they misbehave, the Federal Reserve will print money and give it to them in return for worthless collateral. Public knows that when the central bank prints money, its value diminishes, and thus the public become reluctant to sell, and unable to buy. Hence stagflation.

Yesterday, the fed, in an effort to restore liquidity, “loaned” the banks three hundred billion dollars with mortgage backed securities as “security”. Because these securities are not worth @#$% it in fact purchased these securities. And because the mortgages backing these securities are not worth @#$% it in fact purchased the mortgages. And because the mortgages are for more than the value of the properties, it in fact purchased the properties – mainly residential properties.

But government is notoriously incapable of managing residential properties. The properties will in the end be at best occupied by people who pay very little rent, at worst will be overrun by gangs and squatters, and turned into ruinous slums.

Further, this three hundred billion is off budget. On paper, the fed has merely exchanged one security for another. In reality, the fed has made a massive investment in real estate at inflated prices.

The economist is puzzled that the very rational Fed is having such difficulty bringing rationality to those terribly irrational markets:

the more frightening tremors in the system are those generated by the seemingly irrational unwillingness to hold safe investments, thereby making the safe unsafe.

And to cure this terrible irrationality, the Fed is injecting liquidity buying dud mortgages.

Hang on. Dud mortgates are not safe investments. They are extremely speculative investments. The Fed is going into the the real estate business, suddenly becoming the nations largest owner and seller of houses, something far outside its expertise and administrative abilities. Being a rentier is hard, and the Fed has no experience or organization to do it. Vast numbers of houses are bound to sit empty, or be occupied by squatters paying no rent.

Government is not permitting land to be subdivided to build houses, and to sustain the price of houses, government is now buying up troubled mortgages, thus buying up houses in foreclosure, thus pouring gigantic amounts of money into the property market. But there is quite a bit of horded land in out of the way areas that received subdivision permission back in the days when subdivision was easier, in effect, horded permissions, and of course, in response to these huge prices, people are moving to that land. Thus though housing prices overall will rise, as the price of horded permissions rise, bubble areas must fall. The Fed is doing a King Canute, and will wind up owning extravagantly priced property in Silicon valley which will, as government owned housing tends to do, turn into slums.

The economist is puzzled that the very rational Fed is having such difficulty bringing rationality to those terribly irrational markets: