"He who makes the money - makes the rules"

[hmkpoker]

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Quite a bit longer than your hypothetical gold-backed, non-multiplied currency that would be useless since it would be deflating so fast you couldn't *pay* someone to take out a loan in it.

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Assuming, erroneously, that mortgage systems of fixed currency would be identical to those we have now under a fiat currency.

Also assuming, erroneously, that the price of real estate would cost the same as it does today and would therefore need loans as badly, considering that half the impetus for buying real estate in the first place (inflation hedge) has been removed, and the demand affected accordingly.

[TomCollins]

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Quite a bit longer than your hypothetical gold-backed, non-multiplied currency that would be useless since it would be deflating so fast you couldn't *pay* someone to take out a loan in it.

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Assuming, erroneously, that mortgage systems of fixed currency would be identical to those we have now under a fiat currency.

Also assuming, erroneously, that the price of real estate would cost the same as it does today and would therefore need loans as badly, considering that half the impetus for buying real estate in the first place (inflation hedge) has been removed, and the demand affected accordingly.

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You might see negative interest rates as well. I have no idea if that would cause any problems. Deflation would definitely be very confusing at first, and I definitely expect a lot of people to make mistakes. "You mean if I take out 500 pieces of gold, I only have to pay back 400 in 5 years? SIGN ME UP"!

[bobman0330]

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You might see negative interest rates as well. I have no idea if that would cause any problems. Deflation would definitely be very confusing at first, and I definitely expect a lot of people to make mistakes. "You mean if I take out 500 pieces of gold, I only have to pay back 400 in 5 years? SIGN ME UP"!

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You can't see negative nominal interest rates, which is another problem with heavy deflation. You imply that the person you're quoting is making some sort of mistake, but he can bury the 400 gold pieces in his back yard and spend the extra 100 and be better off.

What actually would happen if the rate of deflation was higher than the market rate of interest for a given loan is that the loan would not be extended. Who needs loans though, in ACland everyone can afford to pay cash for their house or business.

[hmkpoker]

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Who needs loans though, in ACland everyone can afford to pay cash for their house or business.

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You do realize why real estate prices would fall rather than skyrocket under a gold standard, right?

[bobman0330]

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Who needs loans though, in ACland everyone can afford to pay cash for their house or business.

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You do realize why real estate prices would fall rather than skyrocket under a gold standard, right?

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I understand why you think they would, and you might or might not be right. Availability of mortgage loans is the least of my concerns about the gold standard.

[hmkpoker]

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I understand why you think they would, and you might or might not be right.

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No, I am right.

Real estate taken out on a long term FRM is, under our current system, an excellent investment. The price of a piece of real estate in a good area is expected to increase far above and beyond the return one would get with a savings account.

It is for this reason that so many rich people like to acquire it. The monetary supply will expand much faster than the real estate supply. Everyone needs a place to live, so real estate is understood to have a predictably high demand. Interest rates on a FRM are less than the rate of monetary devaluation; in thirty years, one's mortgage payment will look like his grocery bill.

More than a few people realize this. Rich people, everywhere, are buying property solely as an investment vehicle, and a very good one at that. Because of this, real estate has more value than just a place to live or work. The demand increases, and the prices skyrocket accordingly. Those wealthy enough to have bought the homes in the first place get richer (by virute of having access to the expanded money supply through the loan first) but those who are struggling to buy a place to live are left with more difficulty, since the escalated prices that helped the rich have hurt them. The money trickles down to them after the prices have gone up. This results in an increase of renting, where the poor pay the mortgages of the rich and are left with no equity, while the rich, as a result of the increased cash flow, don't have to work.

If you fix the monetary supply, land is not going to appreciate in value much. It is no longer a +EV move to take out a big FRM on a house you're not going to use. Someone planning on investing in real estate has to take the effect this will have on the market into account. Fewer people will be incentivised to invest in real estate. The demand goes down, and so does the price.

[bobman0330]

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Interest rates on a FRM are less than the rate of monetary devaluation

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It took me a while to figure out why you were wrong. Here it is. Bankers are actually not dumb enough to lend out money for less than the rate of inflation. Thanks to the fine work of the Federal Reserve, banks can accurately gauge future inflation and incorporate it into their mortgage interest rates.

It's certainly true that there's a large element of speculative investment in today's real estate market, but I think that's more attributable to low REAL interest rates than inflation.

EDIT: Even if you are right, your ridiculous assertion that most people could buy houses without loans is still very wrong.

[GMontag]

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Quite a bit longer than your hypothetical gold-backed, non-multiplied currency that would be useless since it would be deflating so fast you couldn't *pay* someone to take out a loan in it.

[/ QUOTE ]

Assuming, erroneously, that mortgage systems of fixed currency would be identical to those we have now under a fiat currency.

Also assuming, erroneously, that the price of real estate would cost the same as it does today and would therefore need loans as badly, considering that half the impetus for buying real estate in the first place (inflation hedge) has been removed, and the demand affected accordingly.

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First of all, people take out loans for many reasons, not just buying houses and real estate. I was mainly thinking of business loans when I wrote that post. With a deflating currency, business start-ups would decrease drastically as they no longer could get loans. It would also be much harder to get investors as you'd have to convince them that you'd beat deflation rather than just needing to be profitable at all (like you would in an inflationary or unchanging currency)

Second, you're wrong about real estate. Real estate is still a commodity with a static supply, and the demand would be growing because there'd still be hundreds of thousands (is it into the millions yet?) new people being born every day who are going to need a place to live. Prices would still rise over time. It wouldn't be quite as good an investment as it is now, but it would still be better than investing in dollars, so the investor demand would still be there as well.

[hmkpoker]

I don't quite understand what you're saying. My assertion was that the level of monetary expansion (i.e., the printing of more money, call it inflation or non-deflation or counterfeiting or whatever you want) through loan issuance is sufficient to make the purchase of real estate (without any intent of dwelling, using or renting) +EV for your money. The business cycle effect is obvious; those who get the newly issued money first benefit, and those who get is last get hurt.

I won't tell you that this means that loans are wrong per se, but it is clearly obvious that this type of investment does allow the rich to profit at the expense of those who cannot afford to take out loans.

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EDIT: Even if you are right, your ridiculous assertion that most people could buy houses without loans is still very wrong.

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In today's society, yes, I agree.

However, I assumed two things that I may not have communicated to you.

1) Under a fixed monetary supply, real estate prices HAVE to drop because the significant investment incentive has been destroyed. The degree to which they would drop would greatly determine how necessary the loans would be.

2) Land area is very limited in supply, but "homes" are not. Technology and capitalism work together to make things cheaper, hence the advent of condominiums; cheap dwellings that make use of limited space (for accordingly limited freedom) that are becoming increasingly popular with young homeowners. While land itself cannot escape its limited supply, building costs could be expected to fall under fixed currency (discounting adverse effects like restricted natural resources). This enables young homeowners a chance to build equity toward an eventually better home over time.

As it stands, buying a small condo in a decent area is difficult, but not impossible. I'm actually able to buy condos in some decent cities in this country with the money I've saved from the last two years, but that's obviously not the norm.

We are also unsure as to what vastly different socioeconomic norms would take place in such a society. No one here can say what loans would be like, or whether other methods of transaction (lease-sales and other odd things) would develop. (This cannot be used as an argument for people being able to buy homes without bank loans, it is merely a rejection of the notion that it would be impossible.)

I will admit that such a real estate strategy would require a great deal of prudence and savings that is clearly not demonstrated in a country where the average person has a negative net worth. It is impossible, for better or for worse, for the gold standard to occur unless the demand for a commodity-backed currency is widespread (a phenomenon that one could expect to be accompanied by an increase in fiscally conservative social values)

[bobman0330]

I'm still not sure whether I agree with your assertions about monetary expansion and the investment value of property. I suspect it takes a firmer understanding of economics than I possess to understand. I am quite confident that under a regime of reasonably steady inflation, real interest rates are what matter, and that inflation does not have a direct impact. One of the determinants of interest rates is money supply. But my instinct suggests that innovations like securitization and the general global abundance of capital right now have done more than government actions to keep interest rates low. I'm not sure.

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No one here can say what loans would be like, or whether other methods of transaction (lease-sales and other odd things) would develop.

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I'm not sure it's that mysterious. Weird transactional forms aren't going to change the underlying economics of the situation, which is that there isn't much money to lend, so it will be costly. Without loans, very few will be able to afford their own home, and those who can will have to save extensively to do so. It seems like landlordism would be even more prevalent than it is now.