By @TheStoicCoiner
I must share with you that before you start reading this article, it is very important that to understand the entire concept, you must read until the end. You will not get the point from just a few paragraphs. This article really goes full circle. I tried incredibly hard to make this as short, as readable and as knowledgeable as possible.
Without any further ado, please enjoy
Globally and specifically in Australia, buying a house has become a social paradigm known as the “Australian dream” similarly to the “American dream”. This has become a marketers dream for those working in the real estate industry looking to push up the price of real estate and ultimately their commissions with it too. Politically, politicians have latched on to manipulating the psyche of the general population in regard to housing, and thus far it seems to be working as most think property prices are going up as a result of real economic factors, and not complete economic manipulation and exploitation of the monetary system. It’s very fair to say that culturally the attitudes of the public very much benefit the real estate industry and politicians to allow manipulation of property prices to continue.
Most of those purchasing real estate these days are born at least a decade or 2 after the debasement of what is by definition humanity’s most precious asset, money in 1971
Meaning, it is very easy to look at life, and by extension real estate, with an unconsciously biased view about what has been and what will be in the future. The paradigm is that “real estate only goes up” – but is it true? And why or why not?
Well yes, house prices historically have almost always gone up in a nominal dollar value.
Now, the question is why?
Well, let’s take a look at the basic economic principles that determine the price of any asset – supply and demand.
The supply of housing traditionally goes up with price-based demand, however, as we know, there is only limited space in any given land area, unlike Mars bars, for example, where we can produce them to an essentially unlimited extent. Over time, populations increase so this naturally increases demand in most areas without increasing the supply.
Meaning, people are forced to move outwards or move into higher density zones, this is important to know as it is important in comparing “similar areas”.
In Sydney, only a few generations ago, the areas of Balmain, Leichardt and the inner west suburbs were a “poor” area on the outskirts of Sydney, similar to, and have comparisons made to modern-day St Mary’s, Mt Druitt and Campbelltown for example.
Areas where new families, young people or migrants can get a start. Meaning that when we look at these similar areas, we can see that prices have gone up dramatically, not only in a dollar sense but also the cost of real estate vs yearly incomes.
So, let’s look at the price of real estate vs average yearly incomes:
As you can see, when we are looking to purchase a house in similar areas whether they are “rich areas” or “poor areas”. It is costing us more of our most important asset, time.
HOWEVER
The demand side is where it starts to get spicy. And is the main point of this article. Please note that I am going to ignore the fiat minded distraction arguments such as regulation surrounding foreign investment that doesn’t focus on the fundamental underlying problems. We are going straight for the kill here by sticking a dagger in the heart of the issue.
Where are people getting all this money from?
More importantly, where is this money coming from in general?
Money doesn’t come out of thin air as there is a limited quantity of everything in this world which includes value in the form of money. And certainly, hard money doesn’t come out of thin air given the definition of hard money which is determined by how hard it is to create more.
As you see below, the money supply in 1965 was 2/5th of fuck all. Meanwhile, today it sits at approx 1.5 trillion.
So where does the money come from?
Let’s break it down super simple:
Traditionally, credit comes from people and corporations (which are just people too), who have produced things in the past to obtain money or value (Money is proof of work). They now decide for whatever reason that they want to earn interest on that money by lending it out to creditworthy borrowers for a competitive interest rate. If they lend it to uncreditworthy borrowers, they could lose all or a significant chunk of the lent amount.
Similarly, the lenders are incentivised to lend out their money at a competitive rate because if their interest rates are too high no one will take them up on their offer and they will ultimately earn 0%. On the other side of that coin, if they lend out their money at interest rates that are too low, their money will be snapped up probably too quicky, and they’re ultimately cutting themselves short. So, market equilibrium is reached where lenders are happy to lend and borrowers are happy to borrow.
In turn, this incentivises them to make good choices as they realise how “hard” it was to get it in the first place.
The important part here is that people have to spend their time to produce things of value to others to earn money (Money is proof of work ) and are incentivised to make good decisions. There are real consequences for making bad decisions i.e., losing money doesn’t get replaced without again having to produce something of value.
So that’s traditionally how credit markets are funded, with real-world limitations
Pay attention here. Let’s look at the present.
Currently, a consumer will go to a bank or other accredited financial institution to get a loan for their house. When the loan is issued, unlike the traditional model, the money does not come from banks own bank balance per se, where they have had to produce things of value to obtain the money. Instead, they in turn go to the Federal Reserve, or RBA in Australia, and ask for a loan which The Fed prints hot off the press (so to speak, as they do it digitally), on demand, for these financial institutions at almost 0% interest (0.1% at the time of writing).
*Poof* This creates money out of thin air!
So, since there is money printed out of thin air, this not only devalues your dollar, and in turn the money you have had to earn (by producing things of value with your labour based on supply and demand), but more importantly, it artificially increases the demand for assets purchasable with these loans (solely real estate in the case of a vast amount of money creation because it’s in the name “home” loans). Since nothing had to be produced, there is no limitation to the printing.
And when there is extra money in the system, especially when people didn’t have to produce anything nor compete in a free market to obtain it, this dramatically increases the amount of money out there and ultimately the ability of people to pay a continually higher and higher amount for real estate in both a nominal dollar value and a continual short term purchasing power sense.
This is a problem exclusive to having a money printer and fiat currency.
When we look at the macro picture:
Housing has not gone up in a purchasing power sense vs other assets… Not even food. It has gone up vs nothing except the dollar (We can make an argument about going up vs wages but that is beside the point for now as that is a 10,000-word essay within itself)
It is primarily the dollar going down in value that has driven up the price of real estate (through debasement of the dollar) fuelled solely by the ability to create money out of thin air for the first time in human history.
*** Side thought***
Since politicians fabricate these scenarios for their short term personal political gain which ultimately costs us more of our time working to pay for assets, can this be considered time theft? And because time is money, can this be considered theft?
Food for thought.
*** end side thought***
The gloomy reality of the situation is that maths works.
Money cannot be printed forever with no consequences.
Monetary and price inflation historically takes around 18 months to take effect. In reality, inflation is driven by too much money, chasing limited goods, in too short a period of time.
A quick example – if people think they are going to have to pay more in the future for an item, then they are more likely to buy it now and when enough people do that, then inflation happens quicker.
Generally speaking, our politicians and central bankers do a good job at manipulating mass psychology into not worrying, or yet easier, not caring, which is ultimately the easier way to get people not to worry, meaning that they can avoid many of the problems (on their watch).
In addition, purchasing other goods is effectively selling your dollars, and when enough people start selling dollars, that in turn decreases the value of the dollar. So, you have a 2-pronged attack, the assets in higher demand vs usual, and the dollar in lower demand vs usual = double whammy.
Ladies and gentlemen, here comes the real spice:
Since money is taken out in the form of debt not only on a personal level but a national level too it can delay or minimize for a time the effects of inflation, compared to just outright printing money like in Zimbabwe, Venezuela etc, as it can be seen as there is “demand” for the printed money.
More importantly and to the point, since money is taken out in the form of debt, it must be paid back.
So, how the focaccia is it going to be paid back, or is it going to be paid back at all?
Let’s look at the entire macroeconomic picture and not just knit pick 1 or 2 examples.
Let’s look at global debt to global GDP:
Global Debt = $400,000,000,000,000 (400 Trillion) 4
—————————– = —- as a fraction
Global GDP = $100,000,000,000,000 (100 Trillion) 1
Average interest rate = 3% (govt, corporate and personal debt)
Since the numerator (debt) is 4 times the size of the denominator (GDP), simple maths tells us that just for GDP to keep up with the interest payments of the debt at 3% p.a. (before you even start looking at paying back the principal), global GDP needs to outgrow debt 4:1. This means GDP needs to grow at 12% p.a. AND THAT’S JUST TO KEEP UP WITH THE INTEREST PAYMENTS.
Global GDP under any rational circumstance CANNOT grow at 12% p.a. as it has almost never happened in the history of mankind, let alone for it to happen every year forever. To put the nail in the coffin, the debt being taken out is not used for production (to increase our output and ability to pay back the debt) but rather consumption (decreases our ability to pay debt).
What does this mean?
It means the ONLY solution to paying back the debt is to inflate away the debt by printing money or just an outright collapse. Meaning that the dollar is going to lose much more than the -96% it has already lost in the past 100 years or so.
This means a continued severe devaluation of the currency, to a point where the financial system will collapse and dollars will become worthless as it mathematically becomes unsustainable.
So, how did this last rant have anything to do with housing?
When the money printer breaks, that credit we talked about (that is fuelling a rise in house prices to a point that has never been seen before in human history) when we talk about the cost of real estate vs average annual salaries absolutely disappears ending the real estate bubble and sending real estate down tremendously to levels that have not been seen since pre-1971 when we decoupled the dollar from gold. In my opinion, the probable outcome is for it to go back to levels seen in our grandparents’ era ( House = 2 to 5 years salary)
It can be summed up very much as the following.
When the money printer breaks:
= Lenders access to credit without having to produce anything dries up
= The access to credit for consumers to purchase real estate massively reduced
= Collapse in demand for real estate
= Collapse in Real estate prices
What is the solution?
Well, I’m sorry but your real estate prices vs comparative purchasing power will diminish significantly
So, with that said, how do we make sure this never happens again?
Bitcoin, the hardest, soundest, most unfuckable money the world has ever seen.
Because…. Bear with me
The money is broken
And…
We have 5000 years of monetary history to show us that money is a winner take all scenario for store of value and that the winner is based on merit. Our fiat minds cannot comprehend this easily as we are so used to paper money. But it has pretty much never been this way before and our ancestors would be in absolute shock if they saw this.
At first, our universally recognised money was bronze which encompassed most trading and value, then silver, then gold, now it is fiat (which means “by decree”) by decree. But it won’t last… mathematically, it can’t last.
The next and maybe last money ever will be Bitcoin as it is for the first time in human history, completely cryptographically unfuckable. Revolutionary.
Since it is based on merit, both mathematically and societally it has it all (characteristics of money: durability, portability, divisibility, uniformity, limited supply, and acceptability)
Bitcoin is rising much faster than nearly every asset including real estate for a reason.
What does that mean?
It means your real estate vs bitcoin is going down
What does that mean?
You and your assets are being demonetized.
Your real estate is going down in value vs the hardest, soundest and most unfuckable money of all time.
So, if you don’t want to be demonetized and lose money… BUY BITCOIN!!
There is no alternative.
Be aware, act accordingly
If you have read this far, you may as well give me a follow on Twitter @TheStoicCoiner.
I will give you a follow back.
Thanks for reading.