> If (USD) inflation fears and inflation are ignighted, say between March
> and May 2001, the price level in the USA might rise say 4%. But if this
> inflation is expected to persist, the price of gold will rise a hell of
> a lot more than 4%! Perhaps 30%. Thus the real price of gold in terms of
> US perchasing power has increased by more than one quarter, as has the
> real effective exchange rate of the gold for money SOE. Like the stock
> market, the price of gold is determined by *expected* events, the
> outlook for the future, which can change drastically in a matter of
> months given a few political events, a few statistics, a few
> bankruptcies and a speech by the Fed chairman. The price level, however
> takes a few years (at least) to adjust to an economic shock when the
> nominal exchange rate is fixed, requiring a price level adjustment. The
> cause of this difference is price rigidities particularly in the labour
> market, property rental market and supply contracts. (By contrast stock
> and commodity prices are perfectly flexible.)
>
This is a good point you make about price rigidities in labour markets,
rental markets and supply contracts. If the price rigidities in these
markets were loosened, the purchasing power of gold in these other markets
would be less volatile. These price rigidities are mostly the result of
State interference with a free market.
> > > Yes, deflation and inflation, when the nominal interest rate is fixed at
> > > the world interest rate or a large economy currency interest rate, has
> > > very large effects on asset prices. If the demand for fixed assets is
> > > expected to grow in nominal terms by 5% p.a. along with inflation and
> > > replacement costs, and the nominal interest rate is 5%, the that is the
> > > same as a zero discount rate with price stability. An asset expected to
> > > last 20 years will be worth 20 times the current annual hire. If the
> > > interest rate stays at 5% but price stability is expected, the asset
> > > falls to 13.09 years hire. If the price level is expected to fall 5%
> > > p.a., the asset falls to 9.08 years hire. I guarantee that the property
> > > market will crash in Ireland when the inflation ends and the deflation
> > > starts and the nominal interest rate is about the same. Inflation and
> > > deflation have consequences.
> > >
> >
> > What do you mean by "annual hire"? How do you arrive at these figures of
> > 20, 13.09, and 9.08 years hire?
>
> annual hire is just the 'rental' value of the building, which is the
> 'rent' of the property less the ground rent of the land.
>
> The figures are calculates as follows:
> P=sum{n=1 to 20):(((H1*(1+g)^(n-1))/((1+d)^(n-1)))
> where P is the market price of the asset, n is the year, H1 is the Hire
> vaue in year 1, g is the Hire growth rate, and d is the discound rate.
>
> This simplifies to
> P=sum{n=1 to 20):(H1*((1+g)/(1+d))^(n-1))
>
> where d=g=0.05 the answer is simply:
> P=sum{n=1 to 20):(H1)
> =20
>
> Where d=0.05 and g=0 the answer is:
> P=sum{n=1 to 20):(H1*(1/1.05)^(n-1))
> =13.09
>
> where d=0.05 and g=-0.05 the answer is
> P=sum{n=1 to 20):(H1*(0.95/1.05)^(n-1))
> =9.08
>
> The easiest way to calculate these values is to use a spreadsheet.
Thank you for explaining the method of calculation of asset values. The
discount rate is the interest rate, I assume. Interest rates are higher
for higher risk investments. If the price of gold denominated assets is
seen as volatile, then lenders will charge a higher interest rate to
compensate themselves for the risk of default. The higher interest rate
should lower the price of the assets, and the volatility in their price as
well. You suggested that a high property tax would stabilize property
prices. The higher interest that lenders would charge achieves the same
thing by a free market mechanism without the use of State coercion.
> Its less costly to change the clocks and time one hour than it is to
> reschedule every activity by an hour. The nominal exchange rate is the
> clock, the activities scheduled are the prices in the domestic economy.
> Changing one commodity price is much less than changing the price of
> every good, service, wage and property rental. However, nominal exchange
> rate volitility has its own cost.
Is it really lest costly? The enforced time change is a big disruption to
a lot of people and businesses that have no need to synchronize their
working hours with the availability of sunlight. Why should the State be
involved in the setting of clocks at all? If time standards were left to
a free market, a standard would evolve without State coercion that would
work at least as well as the State's solution, but probably much better.
The same applies to money. The coercive State should get out of the money
business altogether and leave it to the free market. In any case, unless
the use of e-gold is prevented coercively, e-gold or a variant will
replace all fiat money. In the absense of coercion, Gresham's law is
reversed. Good money will drive out bad.
~ Vincent
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