great read on the future of housing/economy

[MH]

I am NOT an expert by any stretch – the following is more of a question than a statement:

While not a huge fan of gold for some of the reasons cited above – it is, after all, ultimately just one particularly fortunate box on the table of elements – doesn’t it at least have the advantage of being, by convention at least – universally accepted? Specifically, it doesn’t care about trade imbalances, fed rates, gov’ts inflating their way out of debt, etc. So, if one believes the dollar will ultimately need to fall in value, won’t gold provide as good of a hedge as any? While other currencies might be propped up by central bank gold (et al) should remain a universal currency, no?

Thoughts? I’m struggling to find ways to survive what I think will be an ugly fiscal period ahead (btw, looks like buying a put on FED was a good move!) and wonder if the small amount I’ve got in PMs is justified.

[Anonymous]

Let me tell you a horror story.

In early 1990s, when Soviet Union started to collapse, it was already a fairly free market there, so that general population could invest whatever savings they had in gold, RE, commodities, government bonds or just cash. The majority choose cash and bonds, since that was the only way to earn a little interest. Most of people were unaware of market concepts such as inflation.

When Soviet Union formally dissolved, newfound independent states started to print their own national currency. The last republics to do so were stuck with enormous amounts of Soviet paper rubles, which flown from neighbor states. Guess what happened to all the cash people had saved? It fell below its intristic value, since it wouldn’t even burn well (I tried). Inflation was so fierce, you could buy a piece of soap in the morning, and sell it again in the evening for 30% profit.

Let’s have a look at what happened to people’s assets:
– Cash became dirt, so those stuck with it lost everything. Affluent, respectable people, who worked hard their entire lives became poor almost overnight.
– One would think, during inflation Real Estate should have retained its value. Wrong. People became so poor, nobody could afford do buy homes. Home prices fell to unbelievable lows. You could buy a luxury 3 br. apartment in a nice location for an equivalent of U.S. $2000.
– Gold and jewelry. Of course, gold did not have any intristic value to the hungry, but it was the ONLY commonly available asset that had trade value outside the country. You could sell a golden ring and live off it for several months. The lucky few, who during the Soviet era invested in gold (and were frowned upon) became really rich. They could invest in real estate, buy businesses or just emigrate.

I think it’s really cute when people trust the currency of their country so much, that they consider it as valuable as gold. Believe me, Soviet people trusted their government even more than Americans do. It never crossed their mind, that their great and powerful country could ever collapse, and their substantial savings in rubles could become worthless.

I guess what I am trying to say is, the greatest difference between gold and almost everything else is that it is accepted anywhere in the world, and thus is almost completely resistant to any financial cataclysms.

[4plexowner]

Thank you for sharing, Real Buyer.

I believe one of the challenges that Americans face is that they trust their government too much. The idea that the government would intentionally debase the currency or kill a few Americans to start a war (USS Liberty, Gulf of Tonkin, Pearl Harbor, 9/11) is inconceivable to them.

They assume that their government is a benevolent force that will take care of them and would never do anything to intentionally screw them over.

I believe that most Americans will be very surprised when they realize that the American economy has become a farce and that their paper assets denominated in the US dollar have become worthless.

Got silver and gold???

[blahblahblah]

A question to the gold bugs on this site — don’t you worry that if the dollar really collapses, the government will force you to turn over your gold to them? After all, they’ve done it before…

[PerryChase]

Real Buyer, how are the people in the former Soviet states doing? I hear the the RE bubble there is several the magniture of San Diego’s (in relation to wages).

[Anonymous]

They assume that their government is a benevolent force that will take care of them and would never do anything to intentionally screw them over.

I am not implying that the government will intentionally cause any harm. However, some actions can benefit a part of population and another part will have to pay for it. Say, if our most bearish predictions come true, and 10 million people find themselves on the verge of losing their homes, won’t it be reasonable to expect the government to do something about that? I know, I know, they deserve it, but they still vote, don’t they? One way to address that is to let inflation loose. It will prevent the nominal values of the homes from falling, but what will that do to our savings?

[Anonymous]

Real Buyer, how are the people in the former Soviet states doing? I hear the the RE bubble there is several the magniture of San Diego’s (in relation to wages).

Most of the states recovered quite well. There are huge gaps between the rich and the rest, but generally the people are doing OK.
The housing prices soared, especially in large cities. I was considering selling my home for $10K before coming here in year 2000. Now it’s worth about $70K. Not sure if that’s a bubble though.I haven’t spent any time trying to understand the current market situation, so I just don’t know.

[blahblahblah]

It will prevent the nominal values of the homes from falling, but what will that do to our savings?

They’re in interest-bearing accounts, right? Your savings will be rising right along with inflation, as depositors demand appropriate returns from banks based on the situation at hand. You’ll still be getting “ahead” of those with no cash even though you’ll probably lose a bit to inflation. In a rising-interest rate environment, short-term instruments are the best bet.

[Author]

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