What is the limiting factor?

[pstarr]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Folks rightly assumed the cost of oil/gasoline/their-daily-commute would always be a minor cost of doing their life/business. Few folks questioned the conventional wisdom at the time (many here PO.com) that houses would always be worth more, would always increase in value relative to other things. They always had. For generations. But then something unexpected happened; the rising cost of transport in an ICE-dependent world ate into discretionary and then retail income. (This has been measured by the Oil Expense Indicator) That is why the housing bubble first popped in the new remote PUDs and developments in the Inland Empire and Exurbias. So to answer the question 'What is the limiting factor?' It's oil, or more specifically, oil to move the stuff of suburban life around.

[evilgenius]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Except that you could rent and put the difference you weren't paying toward a mortgage into an asset that paid a return which was derived from economic activity. During the housing spike saving in the US actually reached a level of zero. People were taking all of their money and putting it into a thing which when they got out of it they would have no profit because they would only have to buy another one. You have to live somewhere. In that sense it never made any sense to buy into the property ladder, unless you could be the landlord.

[SeaGypsy]

Even less so when borrowing with a 200%+ lifetime cost of debt.

[ralfy]

We're looking at more than a quadrillion dollars of total money supply vs. physical assets of a tenth of that. Something like a trillion dollars for the former triggered a credit crisis leading to over $30 trillion vaporizing worldwide. ZH states at least for the Eurozone we're looking at over $700 trillion that needs to be covered, but the amount that can be used for bailouts has been only around a tenth of that.

Thus, moving from one investment to another will not matter in the long run because all of them are part of the same financial market that requires more resources to keep a global capitalist system going. As I pointed out earlier, such a system requires increasing production and consumption of resources needed for more profits, with the former requiring more credit for increasing manufacturing and spending and the latter needed to feed returns on investment. Add to that financial speculation, including real estate bubbles and various forms of derivatives, and one should not be surprised if more credit crises takes place, and with that unemployment problems and high food and oil prices, all of which are taking place right now.

And when oil production starts dropping, that will make all of the other problems mentioned above look like a walk in the park. Couple that with the effects of increasing resource consumption, including both ecological damage and global warming....

[radon]

We're looking at more than a quadrillion dollars of total money supply vs. physical assets of a tenth of that. Something like a trillion dollars for the former triggered a credit crisis leading to over $30 trillion vaporizing worldwide.

Can you give a specific example where writing/issuing a derivative contract leads to additional money supply on a permanent basis?

[ralfy]

Can you give a specific example where writing/issuing a derivative contract leads to additional money supply on a permanent basis?

When the contract needs to be covered, money has to be created.

[pstarr]

Can you give a specific example where writing/issuing a derivative contract leads to additional money supply on a permanent basis?

When the contract needs to be covered, money has to be created.

Money is created by new loans. A contract is an obligation, it transfers money.

[SeaGypsy]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Except that you could rent and put the difference you weren't paying toward a mortgage into an asset that paid a return which was derived from economic activity. During the housing spike saving in the US actually reached a level of zero. People were taking all of their money and putting it into a thing which when they got out of it they would have no profit because they would only have to buy another one. You have to live somewhere. In that sense it never made any sense to buy into the property ladder, unless you could be the landlord.

I always saw the supposed limit of land as a manipulation of the market by planning regulation. there has never been a true land shortage, given how often the option to go up rather than out has been overlooked. In other words, the price was never based on reality, but on manipulated perception.

The people I have seen start with virtually nothing and make millions in the last few years have done so by a model very common to Asia: teaming up. When you get 10 working adults squeezing in to the cheapest unit in the city and pooling resources, buying houses then moving boarders in to pay the mortgage whilst again pooling resources to start businesses, pooling to bring in family members etc etc. By and large these families are Asian or African (here in Australia). Meanwhile the Anglos are stuck in the mugs game of nuclear families and single dwellings built at top $ funded by long term debt often at a ratio of income leaving just enough to scrape by if everything goes to plan.

There are likely to always be opportunities in this life, reduced as they may be. There is little point in grieving forever about the demise of what we have known and the loss of previously available options now gone or going. For our sanity and survival we need to be aware of the real problems we face culturally that we can actually do something about. One of the biggest is escaping the mentality of going down with the ship, getting with it on arranging lifeboats.

[ralfy]

Money is created by new loans. A contract is an obligation, it transfers money.

That obligation can be met by creating new loans.

[pstarr]

Money is created by new loans. A contract is an obligation, it transfers money.

That obligation can be met by creating new loans.

optionally but not necessarily.

[ralfy]

optionally but not necessarily.

That's why "shadow" derivatives are considered part of total money supply together with other types of paper.

[pstarr]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Except that you could rent and put the difference you weren't paying toward a mortgage into an asset that paid a return which was derived from economic activity. During the housing spike saving in the US actually reached a level of zero. People were taking all of their money and putting it into a thing which when they got out of it they would have no profit because they would only have to buy another one. You have to live somewhere. In that sense it never made any sense to buy into the property ladder, unless you could be the landlord.

What does rent-value derive from? The house (the underlying asset) must be in the right neighborhood, and have access to electricity, natural gas, security, services, and jobs. Not all house shares such services, consider homes in distressed ghettos, abandoned mining town, rust belt towns in West Virginia.

Likewise deserts, abandoned farm fields/towns, timbered hills are not suitable for modern suburban living, without additional services--roads, natural gas, electricity, sewage, and of course the same municipal services mentioned above (electricity, natural gas, etc.). Once all these 'enmities' are in order than voila! You have rentable property. Then you have an asset.

Pops in the original thread asked the question; what is the limiting factor? The answer as proven by Herman Daly is natural capital, not money, credit, or hedge funds. His example;

Consider: What limits the annual fish catch — fishing boats (capital) or remaining fish in the sea (natural resources)? Clearly the latter. What limits barrels of crude oil extracted — drilling rigs and pumps (capital), or remaining accessible deposits of petroleum — or capacity of the atmosphere to absorb the CO2 from burning petroleum (both natural resources)? What limits production of cut timber — number of chain saws and lumber mills, or standing forests and their rate of growth? What limits irrigated agriculture — pumps and sprinklers, or aquifer recharge rates and river flow volumes? That should be enough to at least suggest that we live in a natural resource-constrained world, not a capital-constrained world.

To Daly's list of natural capital I believe one can add (in this modern suburban world we live in) access to services, to more suburbia, that is created by oil. All of it, the infrastructure---roads, pipelines, transmission lines, gas stations, 'convenience' stores (really 'necessity' stores?). I always said on this forum peak oil caused the housing bubble to burst because it stole from these new housing developments their natural capital. The construction crews finished with basic services but were unable to add the necessary suburban capital. There just wasn't the money to drop in the schools, churches, Targets, Staples, Olive Gardens and other job-creators. Peak oil rendered the cost of municipal services too high, especially the cost of employment, transport and commutes to the new developments. Peak oil then depleted other natural capital around the world. It destroyed communities that previously had such assets.

[evilgenius]

Yeah, I see your point of view pstarr. I can see how you can take natural capital as the limiting factor. What I am saying is that it isn't. Instead what it limits is potential return on assets. So, what investing debt (debt which returns more than what gets borrowed) can chase as a group of investments together brings in a lesser return. This by itself can be taken as being the limiting factor, but I choose to see the relative amount of investment as that instead. I think that when it falls to a level below a certain point an economy contracts.

[pstarr]

Yeah, I see your point of view pstarr. I can see how you can take natural capital as the limiting factor. What I am saying is that it isn't.

So it appears you believe that money is a viable substitute for real things in the world. Then why not just print more for everyone? And then there would be more real stuff, right? Evil, if I were you I would slap myself on the face, hurry home, and check under my pillow for a present. The tooth fairy might have left you something special.