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Have We Moved To A "house Standard" For The Money Supply?

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So here's a thought for the weekend to mull over:

Have we for all intents and purposes moved to a "House Standard" for the money supply?

I could perhaps have used the word "Land" instead of "House" but since developed residential land is restricted in the main to permitted residential land via the planning system, I think for this purpose "House" is more appropriate.

I'll flesh out some thoughts later........

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No, my reason is because it does no apply across the world. The only country to my knowledge with the tight planning issues that results in houses being artificially expensive is the UK.

There are large cities where land is scars and it's expensive to build high rise, but the suburbs of these cities are cheap unlike the UK.

Also how do you exchange a house for goods abroad? Via rent seeking? What guarantee does the recipient have that you won't just change the rules and implement a landlord tax.

IMO it might appear that we have temporarily shifted to such a system, but it's so flawed that it won't last long, but then nothing last forever including oil backed money and gold backed money.

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No, the money supply system we have is backed by nothing other than ability to borrow.

So we have an ability to borrow based system which currently uses housing stock as collateral. I'm sure they'll think of something else soon like your organs.

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I'd say it's more like we now have two money systems. People mostly buy houses using 'house money' i.e. money they got from selling another house. They pay bills, go shopping, fill up the car etc using 'work/pension money'. It is possible for money to move between these two systems e.g. using MEW to buy material goods or paying off mortgage principal using wages but the amount of crossflow is small and probably decreasing due to the very unfavourable (from the perspective of workers) house money:work money exchange rate.

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I'd say it's more like we now have two money systems. People mostly buy houses using 'house money' i.e. money they got from selling another house. They pay bills, go shopping, fill up the car etc using 'work/pension money'. It is possible for money to move between these two systems e.g. using MEW to buy material goods or paying off mortgage principal using wages but the amount of crossflow is small and probably decreasing due to the very unfavourable (from the perspective of workers) house money:work money exchange rate.

Nice analogy, of course the relative worth of these different types of money is typified by the 'my house is my pension' types, who are basically expecting a once cheap house (to them!) to keep them in clover for years, decades sometimes.

Some lucky types will manage (and be willing) to downsize and/or move area with the sort of payout that would have seemed extraordinary when they bought, but (if my own extended family is any guide) many will simply plough all this housemoney into another, bigger house at the time of their life when they perhaps ought to be thinking ahead to when mobility decreases and infirmity increases.

I know a couple in their late 60s who have recently reinvested their housemoney winnings (and then some) by moving from a 3 bedroom property to a five bedroom property, with a large (guess ~1500m2) garden. Lots of spend on gardening, maintenance, and even simple things like having more neighbours due to a larger boundary all potentially bring additional cost/stress/complications. The chosen location is also more or less a commitment to a car-based life. it's possible they may be thinking 'what the hell, you only live once', and are treating it as a potentially short term soujorn but without knowing them too well it seems they actually believe it is a sustainable life plan to see out their days. I reckon their quality of life has the potential to drop drastically, in a way that would not have happened so easily when nearer public transport etc.

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I'd say it's more like we now have two money systems. People mostly buy houses using 'house money' i.e. money they got from selling another house. They pay bills, go shopping, fill up the car etc using 'work/pension money'. It is possible for money to move between these two systems e.g. using MEW to buy material goods or paying off mortgage principal using wages but the amount of crossflow is small and probably decreasing due to the very unfavourable (from the perspective of workers) house money:work money exchange rate.

So true, the house money just got created for most of us it wasn't saved. That seems at odds from a comment I have made on another thread about house prices being stuck for ten years. Indeed they have up north...just that Bliar tripled them from 1999-2004 in a fit of madness.

Edited by crashmonitor

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Not really because any starting function is really between fiscal/regulatory and houses, rather than than monetary. So that would be like saying we have a 'relative taxation standard' or 'wages standard' or 'brown envelope standard' - where do you start. Maybe all true in a sense but don't see that as any natural first order driver; all quite chicken and egg though.

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No - it may seem like it, but hoping this view is just another peak in housing-winners' complacency to me, before hyper-deflation. Housing (low-mid-high prime) is all goosed up for big style hpc, followed by banks doing volume fresh lending to increase monetary velocity by a £1 Trillion.

Agree with Dorkins' view, but these side-steppers don't make the banks any money, and too many of Jott's Escape To The Country who are so into the bubble that they've upsized rather than downsized.

Price is what you pay and value is what you get. The value of a house is constant. It just sits there. You get shelter, but you have to pay property tax and maintenance and the loss of alternative uses of capital. A house is a dead asset. The price of a house rises with salary inflation, and lending/borrowing credit expansion (and Russian/Chinese buyers crippled by arthritis from all the gold bullion stuffed in their pants pockets) but house prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops. Salary inflation is the only kind of inflation that boosts house prices. Inflation in everything else (food, energy, medical) just takes away from the money people have to spend on housing.

House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. Even if you own outright, you're still renting the house to yourself, losing alternative uses of that money, and taking the risk of falling house prices. Renters are completely protected from the massive losses owners will experience.

Tweaked from: 37 bogus arguments about housing - http://patrick.net/housing/crash3.html

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So here's a thought for the weekend to mull over:

Have we for all intents and purposes moved to a "House Standard" for the money supply?

I could perhaps have used the word "Land" instead of "House" but since developed residential land is restricted in the main to permitted residential land via the planning system, I think for this purpose "House" is more appropriate.

I'll flesh out some thoughts later........

Exclusive land rights, in their modern form, are a fiat, paper, commodity issued by the state. So there are similarities with fiat currencies.

I just don't think this is a particularly good analogy, because I'm not convinced that money is a particularly useful economic concept.

What conclusions could we draw from it?

A much more compelling argument is that landowners and states are qualitatively the same thing.

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I think its necessary to distinguish between the store of value, MOE, UOA functions here.

Sort of. I think you need to define money, and explain why I should care about your definition.

What predictions does your definition lead to? What does it explain?

Then you can decide whether land is or is not money.

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Let's get rid of the Walrasian crap. Store of value is not a function of money. For a monetary economy to be distinguished from a barter economy money has to be a non-commodity.

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Exclusive land rights, in their modern form, are a fiat, paper, commodity issued by the state. So there are similarities with fiat currencies.

I just don't think this is a particularly good analogy, because I'm not convinced that money is a particularly useful economic concept.

What conclusions could we draw from it?

A much more compelling argument is that landowners and states are qualitatively the same thing.

I like you already :wub:

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Let's get rid of the Walrasian crap. Store of value is not a function of money. For a monetary economy to be distinguished from a barter economy money has to be a non-commodity.

I disagree. A monetary economy is one which features fungible and transferable promises.

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Can't see the government ever allowing price falls in sterling terms. We have already seen this in 2008 when the nominal prices fell but so did sterling via QE etc.

so therefore I think it's best to save in dollars or gold. Eventually wages will rise from forced inflation, but that inflation will have to be huge with seriously huge 10 fold more QE than seen previously.

So regarding a house-standard, yes sterling is definitely linked to houses.

the deflation happening is the real unknown, as the extra money is not going into the economy as a whole.

next downturn (starting now) will see much more extreme QE, helicopter drops, negative QE rising minimum wages.

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Let's get rid of the Walrasian crap. Store of value is not a function of money. For a monetary economy to be distinguished from a barter economy money has to be a non-commodity.

For decades it may appear so against rising house prices and against returns in other markets and inflation on other assets, but I suggest money really is a store of value, and have positioned for it to be. Can only hope any ECB QE stays within banking system to support them for the low-mid-high prime crash.

Just need housing market to be nudged into more sellers to market, and additional tightening of money/credit, or applicant side for loans/mortgages falling away under recognition low-mid-high prime houses don't represent good value vs future outlook + of course, the jolt of more sellers looking to cash in on high prices, accepting lower prices, in a deflating market. We have them under siege. Too many of the complacent owners in low-mid-high prime have now fully gone in for the knock-out blow, upsizing at super high prices, becoming landlords at very high prices with investment properties. It's got to be a peak and good sign if property-VIs are considering houses/house values as a basis for the money supply.

The Guide To Undertanding Deflation

Robert R.Prechter

Money is a socially accepted medium of exchange, value storage and final payment; credit may be summarized as a right to access money.

..Price Effects of Inflation and Deflation

When the volume of money and credit rises to the volume of goods available, the relative value of each unit of money falls, making prices for goods generally rise.

When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making the prices of goods generally fall.

Though many people find it difficult to do, the proper way to conceive of these changes is that the value of units of money are rising and falling, not the values of goods.

The most common misunderstanding about inflation and deflation - echoed even by some renowned economists - is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply effects.

[PDF] http://www.elliottwave.com/DeflationEssays/deflation_full.pdf

'Gents, we are not in disarray! We are falling back. And all the time, their supply lines get longer. The home-owners, buyers and investors must be taken to the point where they start to think about pulling back, then present them with the possibility - the seeming possibility - of a knock-out blow. But it won't knock us out - it knocks them out.'

Most of the renters looked at all the territory they had lost, and the fraction they had left, and thought it was all over for them. The HPC senior members looked at their relatively unscathed divisions, fresh units, crack squads, all positioned just where they should be, knives laid against and inside the body of an over-extended, worn-out enemy, just ready to cut...

[Tweaked from Use of Weapons.]

Edited by Venger

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Can't see the government ever allowing price falls in sterling terms. We have already seen this in 2008 when the nominal prices fell but so did sterling via QE etc.

so therefore I think it's best to save in dollars or gold. Eventually wages will rise from forced inflation, but that inflation will have to be huge with seriously huge 10 fold more QE than seen previously.

So regarding a house-standard, yes sterling is definitely linked to houses.

the deflation happening is the real unknown, as the extra money is not going into the economy as a whole.

next downturn (starting now) will see much more extreme QE, helicopter drops, negative QE rising minimum wages.

I think you've got to be positioned for both outcomes. An asset price crash is coming, may even be underway already. Will it be so severe that the central banks need to hyperinflate? If the $700tn derivatives tower collapses chaotically then yes. I love gold almost as much as I loathe sterling, but can't envision gold being used as money again and I still want some sterling to hand for playing in and out on the short side. Buying dollars was a good trade last year and will likely remain so for the forseeable future, agreed.

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No, the money supply system we have is backed by nothing other than ability to borrow.

So we have an ability to borrow based system which currently uses housing stock as collateral. I'm sure they'll think of something else soon like your organs.

Yep.. property is basically our only asset/collateral now:

In 2012 the total net value of British assets was £6.8 Trillion

In 2012 the total net value of British property was £4.3 Trillion

http://www.ons.gov.uk/ons/rel/mro/news-release/uk-worth--6-8-trillion/nbsnr0812.html

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I disagree. A monetary economy is one which features fungible and transferable promises.

If money is just another commodity subject to supply and demand then the economy is still effectively a barter system, with one more commodity added to the mix. To create a monetary economy you need a qualitative not a quantitative change. Token money is that qualitative change. Paper currency and/or its digital equivalent.

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Interesting thought.

So houses are analagous to gold in the past.

Credit money is issued using it as collateral in the main.

Perhaps the only difference is that we came off the gold-backed dollar standard because there wasn't enough gold...or you could say that gold must have been mispriced somehow by fixing the value of the dollar to gold. This time we have the currency backed by something that floats in value according to amount of money issued/competition for property.

Clearly if the collateral backing money does not rise with the money supply then the number of units required to own it will rise and everything else may well deflate against it.

I'm still thinking about it but in broad terms yes.

I'm not sure whether it was intentional (i.e. credit backed by property/land) or it may simply have arisen as a response to the end of the Bretton Woods system.

Its not just in the UK of course but the UK in particular has restrictions on issuing rights for land development which restricts supply.

So we have a system now whereby this restriction prevents an increase in credit supply (too few new houses to lend against) despite demand (household formation amongst younger people) resulting in rising house prices v wages and lower interest rates.

There is a parallel phenomenon of houses being de facto regarded as a store of wealth in UK and Asia. So London flats for instance are now treated as if they were "money". In a not dissimilar way in which some people view gold as "money". I think its possible to argue that they are seen as homogenous as well as a store of value and also a unit of account.

It may also be that there is an element of greshams Law at play here (?)

Just throwing it out there for discussion. Its a top of the head idea, not a fully formed thesis. I shall leave that to the smart thinkers like Sceppy.

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Exclusive land rights, in their modern form, are a fiat, paper, commodity issued by the state. So there are similarities with fiat currencies.

I just don't think this is a particularly good analogy, because I'm not convinced that money is a particularly useful economic concept.

What conclusions could we draw from it?

A much more compelling argument is that landowners and states are qualitatively the same thing.

Thanks for reply.

So is fiat "money" a cipher for "land rights"? Is that what Im suggesting?

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