Thursday, January 22, 2009

The Real Price of Housing

Many non-economists tend to forget that riches are a matter of ratios. In other words, how much value does one person's labor/production command in comparison to that of another? This is a simple, yet extremely powerful point to consider--like air, or even sunlight--we tend to take it for granted, even though our existence revolves around it.

Most modern economists tend to believe deflation is a bad thing: they say, "when deflation hits, it causes a negative downward spiral, and government spending/false money are needed in the short-run in order to smooth everything out--the free market will be there when we get back."

There is one small problem with this type of thinking, and that is when an economist such as myself asks, "ok, so who gets the government spending/false money?"

We have seen exactly who gets the money today. Bankers that caused a real estate bubble, and even car manufacturers who caused an oil bubble, and to a certain extent, the mindless individuals known as the poor and generally ignorant American workers whom did not educate themselves enough and/or prepare themselves enough for a future without even more unemployment insurance than they had originally bargained for. Now do not be offended that I do not sugar coat my thoughts, because the truth is powerful, and it will set you free: for at the end of the day, the middle class, and the university systems, have certainly not been bailed out nearly as much--and without these two pillars--the economy will be in far worse shape in the future.

Once again, riches are about ratios.

How much power (monetarily, socially, or otherwise) do you get for your hard work?

If you are an electronics engineer especially, the answer is--not much.

Let's see why this is the case. Pretend you work for Intel. Even though your market is a duopoly (and a weak one at that given the state of AMD lately), you are still expected to double production every two years given Moore's law. If you do not, your customers will simply continue using their old computers for as long as possible--considering some computers run for well over five years, this is problematic; therefore, to solve this problem, you must give your customers more value from their purchase in the short-run than they would find from waiting to buy a processor in another two years.

In other words, even though your customers are expecting deflation, your business is still around.

So why do so many economists think deflation is a bad thing?

Dear reader, you've more than likely been living in a dream world. You see paper and you think it is worth something. Well, it can be worth something. I was on today, and I found this.

A $5,000 house.

Now, this is obviously a poor home compared to what many of us live in. But one must think of all the money (and labor) they would pour into a conventional home that costs, let us say, $100,000 at the moment.

Is such a $100,000 home truly twenty times better?

Well, a first-time home buyer would probably be convinced by society that they should pay interest for such a $100,000 home given the past (homes have usually gone up in value).

But what if the $5,000 home becomes 15% larger the next year, yet drops in price by $500 a unit thanks to mass production?

At that point, your home's value would fall, all else being equal, because it competes with the much cheaper dwelling.

And what if people begin to worry about expensive homes holding their value now?

At that point, more people will buy the paper homes.

In other words, homes would become consumption rather than investment.

If some engineers from various fields worked on these types of creations, and if they were created by better and better machinery every year, eventually, people would begin to think of a home as being useful in and of itself. This is what drives technology, and this is what drives the economy.

We have become so fixated on our belief that homes will increase in value, even though they haven't given us anymore pleasure per se, that we haven't realized how much we get for our labor every time we turn on our computers. While bankers have been bailed out for propagating the herd like mentality of irrational exuberance, our scientists and engineers have begun to suffer.

There is no such thing as overproduction in the long-run. In the short-run, we may all lose money in some ways, but we would gain it back in others. If nearly everyone went bankrupt from their home values plummeting today, we could buy a new home for virtually nothing after a few short months of cooperation.

Today we believe in Obama, but I am asking you to believe in yourselves.

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