“You Hit on a Point Most Don’t Understand — Price Is Subjective, Not Mechanically Determined”

Yesterday’s blog entry set forth the text of an e-mail that I sent to Mark Gunther, of the blog The Angry Grapes: Chronicling the Great Depression 2.0. Set forth below is the text of Mark’s April 12 response.

Rob:

Feel free to post my comments.

I have trouble with the following comment.

“If we all want to double our wealth, we can just vote prices up to double fair value. If we want to triple our wealth, we can just vote prices up to three times fair value. Why not do so?

One has to find a buyer for a stock, if you want to sell at an inflated price. If what you say is so easy, buy a stock and demand 3 times what you just paid for it. What we saw in 1999 and 2007 and what we are seeing now is inflation in the price of paper assets. Said another way, we are seeing the purchasing power of the currency fall. Money and credit printed by the Fed is flowing into paper assets because there are few investment opportunities in the real economy.

Your argument could apply to the real estate market as well.

But a doubling of prices can only occur with a sharp expansion of cheap credit and an ebullient psychology of market participants. The greatest economist ever, Ludwig von Mises wrote about this extensively.

I suggest a reading of Friedrick Von Heyak as well. He clarified Mises work and captured a Nobel Prize in economics for his theory of the credit cycle which drives the business cycle and asset prices.

I do not expect real estate prices to come back to their hay day prices until the purchasing power of the currency really takes a hit, which is what the Fed is trying to engineer.

You do hit on a point that most people do not understand. Price is subjective, not mechanically determined. Carl Manger wrote extensively about how prices are set in a free market over 100 years ago.

Keep plugging.

Have a great day.