I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
In my physiocrat mentality I don't understand how real-world wealth gets destroyed, outside of war and Acts of God.
But that graph is counting "valuation" as wealth.
Ie. the prices Casey Serin was paying with OPM in 2005-2006 multiplied by all houses across the country to get the valuation estimate for housing.
B.100 of Z.1 shows $22.7T valuation of real estate in 2006, down to $16.4T as of 1Q12.
$6T of wealth just vanished, $20,000 per capita.
But are we poorer or richer having "lost" this "wealth"?
In a scientifically rational system, one would think our GNP would result in a monotonically rising measure of wealth, of capital formation, as we build more new things than the old things decay or are consumed.
Doomers and other bunker mentalities cannot see this dynamic, such as it exists in the real world, but I can.
But I also see how we let valuations and rent flows dominate our reality.
McLuhan made the observation that "fish did not discover water".
We, too, cannot see the flows that we are immersed in.
Things don't have to be this bad. The system itself is stopped up, almost as bad as pre-Perestroika soviet economy was.
In my physiocrat mentality I don't understand how real-world wealth gets destroyed, outside of war and Acts of God.
I think it all comes down to valuation, flows, and leveraged debt.
If it costs $150k to build a house and I pay $200k with $1 and borrow the other $199,999 then it doesn't take much of a drop in valuation to mess up overall net worth.
If I build a factory and it cranks out profitable products then most reasonable people would put a large valuation on it. What happens when a competitor builds a factory right next to it though? The valuation drops. And here's the really bad news. What happens when ten competitors build their factories in China? Falling valuation and as you say the "flows are all wrong".
I also find it interesting that we build new infrastructure but we often don't come up with the money to maintain it. In theory, it is possible to build more than we can maintain.
I think of this as a homeowner. If I was given a 20,000 square foot home then there's no way I could keep it. I could not afford to maintain it and I could not afford to heat it. Further, the property taxes alone would do me in.
I bring this up because malinvestment is also something to consider. Our policies generate plenty of that. We keep trying to pour more money into the illusion.
http://1.bp.blogspot.com/_HebsTgwxlY4/TCpQaInkJOI/AAAAAAAAASI/8OCvNZgV_-E/s1600/head+and+shoulders.jpg
ReplyDeleteTroy,
ReplyDeleteWhat's the worst that could happen?
In my physiocrat mentality I don't understand how real-world wealth gets destroyed, outside of war and Acts of God.
ReplyDeleteBut that graph is counting "valuation" as wealth.
Ie. the prices Casey Serin was paying with OPM in 2005-2006 multiplied by all houses across the country to get the valuation estimate for housing.
B.100 of Z.1 shows $22.7T valuation of real estate in 2006, down to $16.4T as of 1Q12.
$6T of wealth just vanished, $20,000 per capita.
But are we poorer or richer having "lost" this "wealth"?
In a scientifically rational system, one would think our GNP would result in a monotonically rising measure of wealth, of capital formation, as we build more new things than the old things decay or are consumed.
Doomers and other bunker mentalities cannot see this dynamic, such as it exists in the real world, but I can.
But I also see how we let valuations and rent flows dominate our reality.
McLuhan made the observation that "fish did not discover water".
We, too, cannot see the flows that we are immersed in.
Things don't have to be this bad. The system itself is stopped up, almost as bad as pre-Perestroika soviet economy was.
Our flows are all wrong.
Troy,
ReplyDeleteIn my physiocrat mentality I don't understand how real-world wealth gets destroyed, outside of war and Acts of God.
I think it all comes down to valuation, flows, and leveraged debt.
If it costs $150k to build a house and I pay $200k with $1 and borrow the other $199,999 then it doesn't take much of a drop in valuation to mess up overall net worth.
If I build a factory and it cranks out profitable products then most reasonable people would put a large valuation on it. What happens when a competitor builds a factory right next to it though? The valuation drops. And here's the really bad news. What happens when ten competitors build their factories in China? Falling valuation and as you say the "flows are all wrong".
I also find it interesting that we build new infrastructure but we often don't come up with the money to maintain it. In theory, it is possible to build more than we can maintain.
I think of this as a homeowner. If I was given a 20,000 square foot home then there's no way I could keep it. I could not afford to maintain it and I could not afford to heat it. Further, the property taxes alone would do me in.
I bring this up because malinvestment is also something to consider. Our policies generate plenty of that. We keep trying to pour more money into the illusion.