Thalia

As a long time lurker, here's my not particularly generous thoughts. MarkG is a very smart guy. However he is bombastic, rude, and completely dismisses any viewpoint that doesn't fit his world view. He is now noticing that some of the things people were saying one or two years ago about the likelihood of HPI continuing, statements he completely dismissed in an insulting, arrogant way at the time, have turned out to be true. This doesn't mean he is stupid, even smart people are wrong sometimes. but he is typical of the very worst HPC zealots in that he reacted to continuing HPI with scorn, denial and bombast. This is a problem because the bear argument is basically right, but some of you people circled your wagons a year or two ago, kept slapping your own backs about how right you were and became disconnected from the real world. it will happen eventually, but pretending it is happening now when it isn't makes you look silly. If he is really going and not just being a drama queen, I will be glad to see the back of him. Perhaps he will be back in a year or so, once the crash finally kicks in, pointing out how right he was all along. But it is not much use being right that there is a housing crash coming if you are several years out on the timing. Au revoir MarkG.

I was referring to this story: http://business.guardian.co.uk/story/0,,1773185,00.html Nothing contradictory about that. If a metal is used as a token, the 'market value' of a coin as a metal can be worth less than, the same, or more than the nominal value. If the market value is higher than the nominal value that is a problem. But it is a bit silly to assume that when gold is used the market value of the metal used to mint a coin will always magically equate to the nominal price. A gold coin is a token, a promise of a medium of exchange, not just a lump of metal. It may well be worth more or less as a coin than it is as a lump of metal. Yet again, you are assuming that the value of gold when it is currency is an absolute value. You simply fail to understand that the fact that a metal like gold is likely to retain value better than a piece of paper does not mean that when a gold coin is used for exchange its value is an absolute value rather than a token or measure of relative value. This is the root error behind a lot of rather silly utopian theorising about gold currency.

Of course, but all that implies is that in an economy big enough to rule out total trust, the government must ensure the currency is hard or impossible to counterfeit, either by using something such as gold or, more realistically in the modern global economey (bearing in mind that even in the gold standard days notes were issues), by taking appropriate measures to prevent counterfeiting. My point was merely that the essential difference between fiat and gold is not that fiat must be government enforced. Not at all. It is a problem if a coin is worth more than its notional value as we have seen recently with copper coins being melted down. But it is perfectly reasonable for a coin to be worth less than its notional value. There is no 'absolute value' assumed in a gold currency, the gold is a token of a certain value and all goods are then valued according to that.

No, my point is that there is no central authority here. It is an example of a fiat currency which is not dependent on a central authority, merely on the continued trust and acceptance of the community using that currency. If the babysitting circle were to use little copper discs instead of token, the result would be the same. The copper would be a token. Exactly as with gold, the distinction would be that if the babysitting currency failed or was ended, the copper would have more residual value than paper tokens. That doesn't change the fact that the copper was previously being used as a token. Just as gold is used as a token when it used as currency.

No, it's nothing to do with government or coercion. My local area has a babysitting circle where people use tokens for payment in exchange. That is a voluntary fiat currency. The token merely represents a promise that is trusted and accepted. No, no-one forces you to pay with it and if no-one will accept it, it is as worthless as a £20 note. When gold is used as currency it is being used as a token, which is accepted because people trust and accept it, just as paper notes are currently accepted. The only difference is that if the currency fails, gold is more likely to still have a value. Paper is a physcial object, so what your point about gold being a 'physical element' means is beyond me.

So what? If it is legal tender, that is a legal convention, just as we have a convention that a £20 is legal tender. You'd probably find it a damn sight easier to spend a £20 note than a Britannia coin. But the fact of whether it is or isn't legal tender is completely irrelevant. The point is that whether you use gold or paper or seashells as currency, they are a token, a representation of value, which is trusted as currency because of a social or legal convention that this currency is acceptable in exchange for goods and services. The only thing that distinguishes gold from that list is the fact it is more likely to be valuable even if it isn't legal tender.

Exactly. The value of gold is as relative as the value of any token, a £20 note, Tescos voucher, whatever. It has an exchange value as long as someone will take in exchange. It is fair to say that gold is a lot less likely than a £20 note or a Tescos voucher to become worthless, but one can nonetheless imagine situations in which it would be worthless, simply because it was impossible to get anyone to take it in exchange for goods.

Now Thamesmead really is hellish, and I love London. But point taken, there are areas which are cheaper than others and some of them are fine. In particular you may need to look at places a bit further away from a tube station.

See my reply on the gold thread for a mroe detailed comment on this idea. Gold has the intrinsic values of durability, rarity and benig hard to fake, and thus was useful for currency. This tells us nothing about its likely value in the short or medium term, only that it is unlikely to become completely worthless. The only situation in which any of this is relevant is if current currencies collapes in which case gold may become an emergency currency base again. The properties of gold are one thing and could fairly be described as a law of nature. But gold's role in the global economy is a contingent thing, it can change with circumstance. It may never be used as currency again, or it may be within a decade. Which scenario you expect will affect how much weight you attach to gold.

As a non-goldbug, maybe I can help here: Philosophically you are completely correct. Nothing has intrinsic value. Value is a relative concept - something has value if you can use it or exchange it for something useful. Gold isn't much use except as an ornament, but it has long been used as a store of value for exchange. Like any other medium of exchange it is only worth what someone else believe it is worth - if they will accept it in exchange for a bag of nuts or a tank or a house, then it has value. Now gold was traditionally used as currency for a few reasons. It is durable, hard to counterfeit, and rare. If your currency is gold it lasts and is hard to counterfeit. In primitive societies this was of great importance. Does this mean gold has intrinsic value and will never lose value? No. It is possible to imagine situations in which gold would be worthless. For instance in a Mad Max-type scenario where your camp is attacked by vagabonds wanting only petrol, your gold might be completely useless. But in truth gold is likely to retain some value, whereas a paper bill can lose its value completely forever if a currency fails. Over the long sweep of history this aspect of gold has meant that when (every few centuries) a currency fails, it will often be called in as an emergency currency. (Bear in mind that if that happened now it might well involve confiscation of personal holdings). In the end the shortcomings of gold as currency (inflexible and insufficient supply, silly to have to carry lumps of it around) then tend to mean that some kind of token is used again and the whole cycle continues. So at some stage, dollars, pounds etc will fail. At that stage, those holding gold will either be rich or they will be shot by govt militias. If you are of a doomy mindset and expect currencies to fail in your lifetime, judge for yourself what to do about this. If however you gamble on currencies bumbling along (and there is no firm reason why fiat 'must fail' in the medium term), then what does the above information tell us about how the price of gold will change? Absolutely nothing. It might go up, it might go down. A lot of people speculate on its price and this creates booms and busts in its value. There are also probably a few scams going on where the supposed 'digital gold' doesn't exist anyway, so these people are only holding worthless tokens (not all the egold companies are audited). But my main point is that the historic role of gold (and its qualities that make it suitable as an emergency currency) give us absolutely no information about how the price will behave in normal times with a functioning fiat currency.

Mr Bubb, I've read some of your posts before, and I understand you sold your Kensington flat in 2001. Are you seriously suggesting that HPI in Kensington from 2001 to 2007 was only 25-35%? Not to criticise your decision, but every index I know of gives a far, far higher rate of HPI in Kensington over that period.

On the other hand, the more their reserves get depleted, the less power they have to sell gold off, so who knows. Apologies if I seem insulting at times, I do find all this stuff fascinating and occasinally get carried away with making a point.

I've never believed that theory. The London prime market has been all but disconnected from ordinary housing for years, there is no real trickle down effect. Sometimes the prime market falls while ordinary areas and house rise and vice versa. The people buying 2-bed flats are a long way removed from the super-rich, but still the prices have escalated alarmingly. I think the idea that it is all super-rich money or city bonuses is a rationalisation, not an explanation.

OK, so one more question. If they are so good at manipulating the gold price, why do you think this time round would be different, why would they suddenly lose the ability to manipulate it. Surely if this is such an over-riding concern for central bankers, they'll just keep doing it? In which case I'd still prefer not to bet on gold...

Kagiso's account of the practicalities is very accurate. What do you mean by "they have made the money on the interest payments made so far, which will lessen the capital difference to a some extent". The lender won't "take a capital hit" voluntarily, only if you go bankrupt or manage to get the outstanding debt written off in the end. But in the short term the amount you owe will be the outstanding capital loan - in other words on an IO mortgage the entire original loan, or on a repayment mortgage the amount of capital outstanding according to the usual calculations (not the rule of 78 as that has been abolished, but a more complex calculation). In case of reposession the bank will deduct the price they receive for the property (often a very low amount as they simply go for a quick auction) and they will add their costs for the repo and auction process which can be eye-watering. You can end up owing a lot even on a fairly small notional amount of neg equity.