Predictions For 2022 - Prediction 3 – Gold Heads Towards $3,000 An Ounce

Prediction 3 – Gold Heads Towards $3,000 An Ounce

Part of the basis for this prediction was that, with rising inflation, the price of production of gold would rise. Inflation did rise during 2021, but the imposition of repeated lockouts and lockdowns, whilst liquidity was again diverted into speculation in assets, limited its extent. It is set to rise much more in 2022, as economies open up once more. The introduction of tapering of QE, still means that the amount of liquidity injected increases, but just at a slower pace. Only Quantitative Tightening will actually reduce it, and so inflation is going to continue to be fed, and, as economic activity expands, so more of it feeds into commodity price inflation rather than asset price inflation.

In the fourth long wave cycle (1949 – 1999), gold hit its high, relative to other commodities, in 1961. But, its highest money price came in 1980, at around $800. What does this mean? Well, if you measure the prices of other commodities in quantities of gold, then, in 1961, less gold was required as an equivalent of all these other commodities in aggregate. There are a number of reasons why that might be the case. Firstly, to get at gold becomes increasingly difficult. The drive to explore for new sources of gold itself depends upon the price of gold having risen considerably so as to make such exploration worthwhile. Its worth noting that, after the gold price rose sharply from its cyclical lows of around $250 an ounce in 1999, new exploration began to take place on a large scale in Central Asia.

Without new fertile mines, expanding gold production tends to suffer from short-run increases in marginal costs. It becomes necessary to mine at ever deeper levels, for example. In South Africa, gold mines are now so deep, that a large cost is involved just in energy to cool the mine so as to make work possible. Direct energy costs for all gold mines account for around 20% of total costs. Increased energy costs are thought to account for about 50% of increases in gold production costs. This is consistent with Marx's long wave analysis in Theories of Surplus Value, Chapter 9, and his explanation of how this relates to the long term movement in primary product prices, with the opening up of new sources of supply.

By contrast, the supply of other commodities can be increased quickly, whilst producing not rising, but falling short-run marginal costs, and certainly falling medium-run and longer-run costs. So, in 1961, as the long wave cycle entered its Summer Phase of expansion, increased production led to falling costs, whilst gold production, which continued to occur from existing mines, faced higher costs. During the 1960's, and 70's, however, increased liquidity from central banks, primarily led by the US Federal Reserve, to finance the Vietnam War, and the large expansion of the US welfare state, created increasing levels of inflation, in other words, a serious devaluation of money tokens. As a consequence the money prices of all commodities rose by large amounts, and, in order to try to protect profits, by allowing firms to continue to raise prices in response to rising costs, and particularly rising wages, which squeezed profits, central banks continued to increase liquidity, until they made a sharp reversal under Volcker, as inflation reached levels that threatened to destabilise the system.

The money price of gold, therefore, could rise hugely, during the 1970's, whilst its price relative to other commodities declined.

But, there is another reason why gold prices rise, and that is speculation itself. In conditions where people fear that currencies are being devalued on a weekly or even daily basis, they seek security once more in a money commodity such as gold, rather than the increasingly worthless paper money tokens. Its why, in 1971, Nixon made it illegal for individuals to hold physical gold bullion, at the same time that he closed the gold window and ended the nominal link of the Dollar to gold. It then becomes just another aspect of speculation in assets. But, as set out in relation to Prediction 1, such speculation is influenced by numerous subjective factors in the short-term.

For example, Libertarians and adherents of the Austrian School, although they like gold and silver for these reasons, have, more recently, been attracted to Bitcoin and other cryptocurrencies. They like them, because they see them as alternatives to fiat currency, or money controlled by the state. The fact that cryptocurrencies have no value – they are not commodities in their own right, as is gold and silver, for example – does not bother then, because they do not consider that value exists other than as market price, itself purely determined by the interaction of supply and demand. Of course, there are many others who like cryptocurrencies for similar reasons. Criminals, and anyone wanting to hide their money, as well as all of the kleptocratic regimes, across the globe, that have multiplied alongside the growth of populism, in the last few decades, also like the ability to acquire such assets, free from the eyes of authorities. That in itself causes the demand for such assets to rise, especially when promoted, as such, by the populists, and various media outlets that cater for them. Like all Ponzi schemes, and bubbles, the consequent spike in prices become themselves the justification for further speculation, at least until the bubble bursts.

Rather than speculation in gold and silver, therefore, over the last year, speculators have had other options be it crypto, or meme stocks, not to mention tech stocks, which are now in a bubble even bigger than that preceding the 2000 Tech Wreck. A reversal of these other asset prices, as inflation and interest rates rise in 2022, is, therefore, likely to see a reversion to the traditional safe haven for such speculation, in gold, at a time when, its production cannot be increased significantly without large increases in costs.

Back To Prediction 2

Forward To Prediction 4

Review of Predictions For 2021 - Prediction 4 – Gold Heads Towards $3,000 An Ounce

Prediction 4 – Gold Heads Towards $3,000 An Ounce

Again, the prediction itself failed to materialise, but the arguments behind it remained valid. As I described last year, these “predictions” are not really predictions at all, in the conventional sense, but only a description of existing material conditions, and the processes unfolding from them. As with the other predictions, the fact that governments, everywhere, again imposed lockdowns, restricting economic activity, and at the same time, introduced additional liquidity, which flooded into asset prices, explains why the process described was again waylaid.

Yet, it has simply created the conditions, whereby, the process itself will simply be exacerbated. Part of the argument set out was that, rising inflation will cause the price of production of gold to rise. Across the globe, inflation is rising sharply, and as central banks have put themselves way behind the curve as they have tried to keep asset prices inflated, they run the risk of allowing inflation to run out of control. Sharply rising inflation, means that the prices of all inputs from materials and energy, used in gold production, themselves rise. The price of production is this cost of production, plus average profit, and as money profits will also rise along with inflation, that means the price of production of gold, as of other commodities will rise.

Those rises did not feed through last year, but look set to do so in the year ahead, and as the ability of governments to continue to hold back economic activity using COVID as an excuse shrinks further, unless they resort to more overt methods of Bonapartism to do so, and to hold down wages, as they allow prices and profits to rise sharply, then that will intensify in the year ahead.

We have seen central banks everywhere having to start to raise policy rates, and reduce QE, and even to talk about QT. That combined with rising inflation means that all of the arguments set out last year as to why speculators will seek to abandon paper assets, and worthless assets such as Bitcoin, and move to assets with real value such as gold, silver and so on will intensify.

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Forward To Review of Prediction 5

Predictions For 2021 - Prediction 4 – Gold Heads Towards $3,000 an ounce

Prediction 4 – Gold Heads Towards $3,000 an ounce 

Some years ago, I noted that the price of production of gold was around $1200 an ounce. Significant movements of its market price, are a function of a number of factors. Firstly, gold is a speculative asset. The rise in its price to $2,000, about 50% above its price of production, was an illustration of speculative demand, as a hedge against a number of other factors. To an extent, it amounted only to a process of mean reversion, counteracting the long period before 1999, when its market price was below the price of production. As I've pointed out before, given this nature of gold as an asset, and even as a commodity that is not consumed – every bit of gold ever mined is still in existence – this means that its supply is never determined solely by new production, but also by the extent that existing owners of gold, in its many forms, are prepared to sell it. 

Speculative demand for gold is driven by concerns to hedge against inflation, or to provide a safe haven in turbulent times. With currencies being destroyed at a rapid pace as a result of QE, it might have been thought that this would have been perfect conditions for the speculative demand for gold to increase. However, the money printing has been of a specific kind not seen before in history on such a scale. In previous times, money printing has been undertaken to monetise the debts of governments, and has gone to pay for spending. In the last thirty years, and particularly the last twenty years, and even more particularly the last ten years, the money printing went to directly finance the purchase of financial and property assets. 

Gold, as with other assets such as art, wine, classic cars, vinyl records and so on, benefited from that, as did Bitcoin and other cryptocurrencies. But, these are not liquid markets in the same way as are the bond and equity markets. Moreover, it has been the bond market that the central banks have directly stood behind, pushing up prices so as to provide significant, capital gains for speculators. So, all of the money printing went to boost those financial and property assets far more than gold. Only when those assets have looked vulnerable, as in March last year, has gold resurged, but then as soon as central banks stepped in to inflate those asset prices, gold fell back. 

In addition, all of the money printing has not led to inflation for the simple reason that the money was directed into the purchase of financial assets and property, and not into financing consumption. On the contrary, by fuelling speculative bubbles, the money printing drove money out of general circulation, and into these asset markets, in the process, thereby, alongside measures of austerity, acting to depress economic growth, and creating disinflationary and even deflationary pressures. A look at the way stock markets have risen is an indication of that. But also, in the latter part of last year, asking prices for houses also rose sharply, egged on by government polices removing stamp duty. All that, despite the fact that lockdowns have created economic chaos, and are likely to lead to widespread unemployment, means that many of those that have gone into debt now, will find themselves homeless, when a combination of unemployment and rising interest rates makes it impossible for them to pay their mortgage, at the same time as the price of their house crashes. 

But, those same lockdowns, and the response to them of governments everywhere, by going into astronomical amounts of debt, reverses the situation prevalent in the last thirty years. Over the previous period, austerity restricted debt issuance. Similarly, companies used profits, or borrowed in bond markets, so as to buy back shares, and inflate their prices. Houses sold by homeowners, as rates of owner-occupation tumbled, were bought at inflated prices by Buy-To- Let landlords, and syndicates bought up property, not even to rent, but simply to obtain capital gains. The supply of debt instruments was constrained, whilst the demand for debt instruments was inflated, causing asset price bubbles to inflate incessantly. Now, governments must issue debt on a vast scale to cover their spending to cover furlough schemes, loss of tax revenues, increases in benefits, not to mention the trillions of Dollars of spending they will have to undertake to bail-out of large numbers of big core and strategic industries, laid low by the effects of lock downs. At the same time, those big companies themselves are engaging in large-scale borrowing. They are now issuing shares in rights issues at a third of the current market price of existing shares. 

Households have been kept afloat during lockdowns via furlough schemes, and because governments have persuaded landlords and mortgage providers to give payments holidays. They have persuaded banks to make loans to small businesses backed by government guarantees, but which the banks themselves expect to see default. And, as all these schemes end, households and businesses will be faced with making good the debts incurred in the intervening period. They will have to do so, just as many of them face redundancy, and unemployment. Whether it is the government, large businesses, small businesses or households, borrowing and debt is set to soar way above current levels that are already at astronomically high levels. Defaults on debt alone are likely to cause interest rates to rise, but it is the large scale government and corporate borrowing that is going to be most notable in causing asset prices to fall and interest rates to rise. 

All of the liquidity that has been pumped into the system, now in conditions where asset prices are crashing, is going to lead to it flooding into general circulation. Much of it, now, has already been pushed in that direction. The borrowing has been directly to fund expenditure, not to finance speculation. Already, lockdown adjusted price indices are showing inflation rising sharply. And, this is significant in relation to gold. 

A certain anchor for the gold price must always be the price of production, because if its market price rises substantially, additional production can always be undertaken. The price of production is not currently much above the $1200 an ounce referred to previously. The reason for that is simple. Price of production is cost of production plus average profit. Advances in technology and so productivity act to reduce the cost of production, but in nominal terms, it rises as a result of commodity price inflation. In other words, the cost of production is made up of things such as the wear and tear on all the fixed capital used in mining, as well as the auxiliary materials used, including things like energy costs, and it comprises wage costs. Because, for the reasons set out earlier, commodity price inflation has been constrained, there has been no large increase in the cost of production for gold, so also its price of production has not changed much either. 

But, precisely because those conditions have now changed, we are going to see the cost of production of gold, as with other commodities rise. As all of the liquidity pumped into circulation to fund consumption begins to slosh around the global economy, it will fuel inflation. The money prices of machinery, energy, and all of the wage goods bought by workers will rise significantly. There will be an inflation of the cost of production of gold, as with other commodities, and so the price of production of gold will rise too. 

In the fourth long wave cycle the price of gold, relative to other commodities, peaked in 1961, about the point at which the Spring Phase of the Cycle turned into the Summer Phase. However, the Dollar price of gold peaked in 1980, having gone from its fixed price of $30 an ounce to $800 an ounce. This latter price move was due entirely to inflation, to the destruction of the value of the Dollar and other currencies. The Spring Phase of the fifth long wave cycle began in 1999. If it had lasted the average for such phases, it would have ended around 2012. However, the 2008 financial crisis, and the actions of states following it, have put it into hibernation. Nevertheless, the gold price moved from $250 in 1999, to just under $2000 in 2011. The big inflation induced rise in the price of gold occurred between 1971 to 1980, i.e. ten years after its peak against other commodities. 

We might expect to see a similar thing now. Certainly, we have all the ingredients with an unprecedented amount of liquidity already in circulation, and more planned by every central bank, ready to fuel unproductive consumption and cause inflation to spike higher. We have global trade wars, and currency wars, with a financial crash set to upend global financial and currency systems, much as happened in the 1970's, when Nixon closed the Gold Window, and ended Dollar convertibility to gold, sparking a period of global currency crisis. So, as inflation rises, due to liquidity being pumped now into funding unproductive consumption, that will directly increase the cost of production of gold, and its price of production. In addition, the crash in asset price bubbles, will provide an incentive for speculators, and those seeking a safe haven in a stable store of value to buy gold, creating a new speculative demand. 

The combination of a 20% increase in the price of production, plus additional speculative demand, is likely to see gold break sustainably above $2,000 an ounce, and march upwards towards $3,000.

Back To Prediction 3

Forward To Part 5

Gold Price Crash Confirms Conjuncture

Today, the price of gold has fallen 6%. In the last two days it has fallen by around 12%. Since its peak of $1943 an ounce in September 2011, it has fallen by around $550 an ounce or about 30%. That confirms the predictions I have been making recently that Gold had peaked, and would be unlikely to see any large rise again unless we were to see a massive rise in inflation, or a potential collapse in the global money system, similar to that which looked possible in the 1970's. It confirms the view I expressed recently that The Long Wave Summer Has Begun.

In Volume II of Capital, in his analysis of fixed and circulating capital, Marx sets out some preliminary analysis of the way in which fixed capital that has varying durations, and turnover periods, has an effect on the economic cycle. His analysis is necessarily only tentative at that stage, but he makes further comments in correspondence with Engels that he was aware, as were other economists of the time, that much longer economic cycles existed than just those of the normal business cycle. The first real systematic work on analysing these Long Wave cycles was done by the Russian economist and statistician Nikolai Kondratiev. He set this out in a number of works during the 1920's.

In his 1926 work, he also sets out the long wave periods and describes the technological and other objective factors, which play a part in them.

Dating Of Long Waves
Author	First Upswing	First Downswing	Second Upswing	Second Downswing	Third Upswing	Third Downswing
Engels		1825-42	1842-68	1868...
Tonelli			1852-73	1873-97	1897 - 1913
Bresciani-Turroni			1852-73	1873-97	1897 - 1913
Van Gelderen			1850-70	1870-95	1895...
De Wolff		1825-49	1850-73	1873-95	1895...
Trotsky	-1781	1851	1851-73	1873-94	1894-1913	1913...
Kondratiev	1780/90 – 1810/17	1810/17 – 1844/5	1844/5 – 1870/5	1870/5 – 1891/6	1891/6 – 1914/20	1920..

Source:Louca

As I've set out elsewhere - Konratiev's Long Waves - Kondratiev and others like Schumpeter have described the role of the Innovation Cycle, and the introduction of new base technologies within the Long Wave Cycle, but the Innovation Cycle itself is not an independent variable. The drive for new base technologies is driven by a number of objective factors within Capitalism itself, for example, the fact that existing techniques, and technologies eventually become exhausted, both in terms of raising productivity, and in terms of the commodities produced using them, become mature, and then suffer from a falling rate of profit. Additionally, the Long Wave operates via a feedback loop on to the demand for primary materials, the development of which require very long lead in times. For example, from when a new boom creates sufficient demand to create high enough copper prices, to encourage new supply, it takes around 12-13 years to look for appropriate sites, to begin development of the mine, and for it to reach optimum production.

Extending Kondratiev's schema, we have the Third Down swing running from 1920 to 1945. Its generally thought, however, that the new boom can be more properly dated from around 1949, as the effects of WWII, delayed its onset. That Long Wave Upswing runs from 1945/9 – to 1974. It began to run out of steam in the late 1960's, and the conjunctural shift to the Long Wave Autumn was marked by the onset of the “Second Slump” in 1974. The ensuing Long Wave Autumn that runs from 1974-1987, is marked by the typical shift into more deep seated class struggles, as the previous accommodations can no longer be achieved. Its culmination, in Britain is the defeat of the Miners.

The Long Wave Winter that ensues sees the development of new base technologies, and a rising rate of profit, through the late eighties and 90's. The Downswing lasts in total from 1974-99. After 1999, the new base technologies that have found their way into new productive techniques, and new commodities, in the form of computerised machines (CAD/CAM, the revolution in banking, and other services i.e. the basis of Neo-Fordism etc) and a wide range of microchip and mobile technology products (PC's, software, computer games consoles, mobile phones, flat screen TV's, computerisation of vehicle engine technology, the Internet, and so on ad infinitum).

The Long Wave upswing begins in 1999, and should run to 2025-30. Its Spring Phase has already seen a massive increase in global growth based on these new commodities and productive techniques, as well as in fixed capital formation, both of which doubled during the first decade of the new century. During that ten years, more patents were applied for than in all previous history, and the production of goods and services during that period was equal to 25% of the total goods and services produced in the whole of human history!

The Spring Phase ran from 1999 to 2012/13. As with all previous such phases, this massive growth phase brought forth a sharp rise in primary product prices, which led to furious growth of supply of these products, along with the introduction of a range of new technologies to both produce and use them more efficiently. Against all the prognostications of the catastrophists and Malthusians, not only did the global economy grow dynamically, but neither the oil nor the gas, nor any other such products ran out.

In fact, quite the opposite, new materials such as graphene have been developed, which offer a range of uses that will save on both energy and material usage.

New technologies like “fracking” now mean that the US is likely to once again overtake Saudi Arabia as the world's largest oil producer. It has already cut US gas prices by around 80!!!

The Long Wave Boom has brought development to the last continent on the planet – Africa. Growth in several African economies has continued at a strong pace even during the North Atlantic debt crisis. Several economies in Africa have been able to move towards large scale industrial farming to take advantage of high world food prices, thereby providing a ration and progressive alternative to the misery of the subsistence farming that has caused millions of people in Africa to live on the edge of starvation in the past.

Some of those economies will now suffer as primary product prices fall as the global economy moves into the Long Wave Summer, but a number have already learned the lessons of the past, and have used their new wealth to provide education and training, and develop their own infrastructure, so that they are able to move available social labour-time towards industrial production, as well as primary production.

That shift is partly what the gold price crash is telling us. Along with the crash in gold prices, silver and copper and other industrial metal prices fell sharply. The spark for that has been the slow down in growth in China, which today acts as proxy for global growth prospects. However, that should not be interpreted as in any way giving comfort to the catastrophists.

In July last year - A Reply To Paul Smith - I replied to the catastrophist warnings of Paul B. Smith. Paul had argued that growth in China was not real, and was in any case about to fall to 4.5%. Like all the other warnings of the catastrophists that the end of the world was nigh, the day came and went, and the world kept turning. Chinese growth has slowed from its average 10% p.a. experienced during the Long Wave Spring, but only to around 7-8%, which is still rapid by any measure, and more sustainable.

In fact, that kind of shift is typical of the shift from the Spring to Summer Phase. It means continued healthy growth, a growing volume of profit, but slowing productivity, and rising unit costs, leading to a fall in the Rate of Profit.

What the fall in gold and other prices signifies is that the supply of primary products has now risen to be able to meet demand, productivity growth is slowing, so unit costs are rising, and the rate of profit will begin to fall having risen during the Long Wave Winter and Spring. The volume of profit continues to rise, but a greater proportion of it is required to meet the needs of capital investment. The demand for capital rises relative to its supply, so interest rates rise.

Productive Capital soaks up a greater proportion of available surplus value, by issuing new corporate bonds, and by issuing new shares. The increased supply of both shares and bonds, causes share and bond prices to fall. Productive Capital also seeks to borrow more money-capital, again driving interest rates higher. No amount of money printing can change that fundamental relation of the demand and supply of capital, because all QE can do is to create more money tokens not more CAPITAL. That is why despite additional money printing since last year, the money drugs have not worked to stimulate new economic activity. They have mostly resulted in a slow down in the velocity of money, and in the sustaining of asset price bubbles. It is why the price of gold has crashed despite the Bank of Japan announcing that it was about to double Japanese money supply.

Markets are beginning to reflect that underlying economic reality, though many participants in those markets probably do not really understand why. That is that however much money is printed, the changing balance of demand and supply of capital means interest rates are going to rise. That means asset prices are going to collapse, and because they have been sustained in a huge bubble, they will probably collapse very hard. The fall in the price of gold presages a very big, very sharp fall in the prices of other assets, be they shares, bonds, or property. The longer it is before that happens, the bigger and harder the fall will be.

What Gold Is Telling Us

I've been watching the price of Gold for more than ten years. For Marxist economists, Gold holds a special place. It is real money, as opposed to the paper tokens and credit that circulate in its name. Yet, in modern economies it is the latter, which appear as money, whereas Gold has been reduced to the role merely of a commodity used for jewellery production, or hoarded by investors as a hedge against risk. Even the role Gold formerly played as money in settling international debts has largely been replaced by the dollar as global reserve currency. A while ago, when asked, in that regard, why Central Banks continued to hold Gold in their reserves, Federal Reserve Chairman, Ben Bernanke, said it was largely for historical reasons.

But, using Gold prices is difficult for these reasons. The prices of any commodity, including Gold, differ from the Exchange Value of these commodities. That is for two reasons. Firstly, under Capitalism, because Capital moves to where the Rate of Profit is highest, Supply increases in these areas, and falls where its lowest, so that equilibrium prices necessarily differ from Exchange Values. This is what Marx describes in the so called Transformation Problem. The resultant prices, he calls Prices of Production, which are Cost prices plus the average rate of profit. But, secondly, as Marx describes there and elsewhere in Capital, there is no automatic mechanism, which means that demand and supply will be in equilibrium. On the contrary, it will more often not be in equilibrium. As a result whenever Supply is greater than the Demand for any commodity, at its Price of Production, the current market price will fall below it, and vice versa. In, the former case, the lower profits should cause Capital to be withdrawn reducing Supply, and thereby raising prices and profits accordingly. But, in practice, there are many reasons why this may not happen, so Supply does not fall. By the same token, more Supply may be withdrawn than needed, causing an imbalance in the other direction.

With Gold, because all of it that has ever been produced still exists, this can cause even greater fluctuations. Compare it with say shirts. If too many shirts are produced, then a reduction in Supply of shirts will quickly restore that situation. Every day, some old shirts are thrown away, meaning new ones are needed to replace them. That is not the case with Gold. If too much is produced, and its price falls that has no effect on the Gold that still sits in bank vaults etc. or in the form of jewellery. It still sits there weighing on the market as excess supply. In fact, if people think that a fall in its price might continue, many people who own Gold, might even try to sell it, increasing the Supply of Gold for sale, pushing its price down lower. For the same reason, if the price of gold is rising sharply, owners of gold might be more inclined to hold on to it, and others might join them. Because very little new gold is produced each year compared to what already exists, Supply cannot increase fast enough to satisfy the new demand, so the market price rises above the price of production. I described this in my post Gold Price Of Production Argument last year.

I began watching Gold, just after the turn of the century, because its movement is indicative of the progress of the Long Wave Boom. Like most other primary products, the price of Gold reached its low point in 1999, which also marked the end of the previous Long Wave downturn, and beginning of the current Long Wave Boom. It had fallen to just $250 an ounce, compared with its price today of around $1700 an ounce. The increase in price reflects two factors. Firstly, the Long Wave Boom has massively increased demand for primary products. The prices of these during the Long Wave downturn, were below their actual Prices of Production. The increase in demand has corrected that. Secondly, there has been a huge amount of money printing. That means that paper currency has been devalued relative to Gold, and other commodities.

A couple of years ago, I wrote that my gauge of when it was time to sell Gold was when all of the Gold for cash shops began to close down, and people began to want to buy gold rather than exchange it for bits of paper. That was the equivalent of what people said in relation to the Tech Bubble of 2000, when they said that when the cab driver started giving tips on the next Tech share it was sign to sell. In fact, not long after I wrote the article in July 2011, my landlord told me that her son had been advised by his Financial Advisor to buy some gold, and I said to he that that was probably a sign that it was getting close to the time to sell! A month later, having reached $1923 an ounce Gold crashed, falling to around $1500 an ounce. In the year since, it has not moved much, until the announcement by the ECB to start printing money via the OMT, and the decision of the Federal Reserve to give an open ended commitment to keep printing money until unemployment in the US falls significantly. But, having done so, and despite all that money printing, the price of Gold is falling again. Having almost got back up to $1800, it has sunk back to $1700, and looks set to continue falling.

I think this tells us a lot. What it immediately tells us, I think, is that the policy of money printing by Central banks has now decisively hit the buffers. That is also the message from Bank of England Governor Mervyn King. Money printing works by both making the cost of borrowing cheaper, and by providing banks with money that they can lend. This increased borrowing then puts the additional money into circulation, buying goods and services. The intention is that this additional demand for goods results in increased supply, and increased employment. But, if the increased money printing causes demand to rise faster than supply can expand to cover it, prices rise. There is inflation.

Part of the reason for the increasing price of Gold has been a belief that excessive money printing over the last 20 years or so, would cause inflation, or would cause a devaluation of the value of currencies. But, although there has been inflation during that period, and there are signs in Britain of inflation rising once again, as fuel and food prices climb significantly, inflation has not been excessive over that period compared to the past. As I've previously described, the main reason for that has been the impact of large volumes of very cheap commodities imported from China. But, although consumer price inflation has not been excessive, all of the money printing has caused large amounts of inflation. It has caused large-scale asset price inflation. In fact, most of the damage from that was caused in the 1980's and 90's, according to some of the analysis I have been doing recently.

It was during that period when money printing and financial deregulation caused massive increases in share prices, and in property prices, and in Bond Markets. Even though the bubbles that blew up in these markets have corrected at various points – the 1987 Stock Market Crash, the 1990 property Market Crash, the 2000 Tech Wreck, the 2008 Stock Market Crash – these corrections have usually been rapidly reversed as a result of even more money printing. The 1987 Stock Market Crash saw the biggest one day drop in share prices, exceeding that of the 1929 Wall Street Crash. Yet, Stock Markets rose more than enough over the next year to recover it. House prices collapsed by 40% in 1990, and they did not recover until 1996, but from 1997 until 2008 they multiplied there existing astronomical levels by even more unsustainable amounts. Although, they fell in 2008 by around 20%, the slashing of interest rates, meant they more or less recovered that fall in 2009/10, before beginning to fall again. Stock Markets have also more than recovered their astronomical levels from the falls of 2008. The S&P 500 has risen by around 40% in just the last year!

But, what the inability of Gold to rise above its 2011 high, despite all of the increased money printing, seems to be saying is that this process has finally come to an end. In the last year Stock Markets have risen on the back of the promise of more money printing, but when the Federal Reserve actually delivered on QEIII, markets responded with a shrug of the shoulders, as I set out in QE etc. Spells Desperation. Now Stock Markets have begun to sell off, though we have not yet seen the kind of October Crash that could easily mark such a conjuncture. As set out in that blog, the real question markets are now asking is, what next? That question has been emphasised by the fact that the Eurozone economy has gone into technical recession, the UK is in a double-dip, and although tomorrow's data might show some growth, that might only be a prelude to a triple dip, when then next set of figures are released in January! US economic growth is anaemic, and the big increases in profits that US firms have been making in the last couple of years, appear to be petering out. China continues to grow at around 7.5%, but even its economy has slowed during the current cyclical slowdown. The problem is that although, it appears as a cyclical slowdown for China and other newer economies, for the Eurozone, UK, and US, it looks more structural.

In order to change that the huge bubble in asset markets needs to burst. All bubbles continue to inflate so long as there are more people prepared to pump more money into them – what investors call the “bigger fools”. It is the way any Ponzi Scheme works. Although, no real increase in value occurs, prices continue to rise, because the earlier investors get paid out in income or capital gains made possible by the money paid in by those who come after them. But, eventually, there are no bigger fools to perpetuate the scam. Then prices fall. And they fall fast. All of the uncertainty of the last couple of years has caused firms to slow down their investment, unsure as to whether there would be a market for increased output. Profits have gone into deposit accounts, or into supposed safe havens such as the Bonds of countries like the US, UK and Japan, who can always print money to cover their debts. But, that has caused a massive Bond Bubble. It seems unlikely the prices of these Bonds can rise much more. Big investors work on the basis of probabilities. Bill Gross, who manages the biggest Bond Fund in the world, is a former Poker World Champion. When the price of anything has risen beyond certain limits, the probability is greater that it will fall rather than rise. That is what causes people to decide to sell under those conditions, before they get trampled by the herd. 

The price of Gold is falling, despite more money printing, for the same reason that Stock Markets can no longer make headway, for the same reason, that Bond Markets appear to have reached their limits, and for the same reason that property prices are falling. It is the same reason that all of the money printing is not causing massive inflation, nor prompting increased economic activity. That is that the money being printed is not being converted into currency. In order to stimulate economic activity, just as in order to act to depreciate the currency, or cause inflation, the money printed has to be demanded by someone, it has to be borrowed, and spent. All of the Government's measures to try to get the banks to lend are failing because no one wants to borrow, other than those who need to borrow to stay afloat, and to whom the Banks, therefore, do not want to lend. That is why despite official interest rates, those who need to borrow to stay afloat are having to resort to pay day loans, or other forms of expensive credit.

No one in their right mind, even if they could raise the required deposit, would want to borrow large amounts of money to buy a house under current conditions, when its clear that the only way house prices can go is down. Increasingly, investors will see even “safe” Bonds, as not being safe, and seek to put their money into cash itself. With economic activity declining, and Stock Markets at the highs they reached at the peak of the Boom, there is equally no reason to put money into shares, including into things like Pension Schemes that invest in Bonds and Shares. But, with the likelihood then that money will be taken out of circulation, the case for investing in Gold also collapses. Only if there is a co-ordinated strategy of fiscal expansion at an international level, that directly pumps some of the money printing into the economy, would that change.

A look at the situation in the US is indicative of this. There house prices have fallen by between 66% and 75%. You can now buy a six bedroom, luxury house in Florida for around £70,000! But, the effect of this collapse of prices down to more realistic levels is that the demand for houses has begun to increase. On the back of that, business for some house builders has also begun to turn round, which also means business for shops supplying furnishings etc. increases too. Some big US investors like Wilbur Ross, have begun to buy houses, and rent them out. On the back of similar falls in house prices in Ireland, Ross has also begun buying houses in Ireland on a similar basis. He says that he will look at buying Spanish Banks when the collapse of Spanish property prices occurs. A report on CNBC yesterday, said that Spanish house prices need to fall by around 50% from current levels, whereas land in Spain needs to fall by around 85%. This is much more than is currently accounted for in the stress tests on Spanish Banks, which is why Ross is waiting for that collapse before he invests in Spanish Banks.

But, this kind of collapse in Stock Market, Bond market, and Property Market prices is a precondition for beginning to quickly deal with the situation in the real economy. Then there will be an incentive to invest in real productive capacity, rather than the insane belief in money for nothing created by these asset markets. Mervyn King seems to have come to a similar conclusion.

Robert Peston writes,

“Here is his stark and gloomy warning: 'I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems.'

He continues: 'Only then will it be possible to return to a more normal provision of vital banking services so crucial to an economic recovery'.”

In that context, King argues the policy of the banks in forbearing the loans of those who cannot repay could end up being a mistake similar to that of the 1930's. The banks are allowing people to continue in arrears on their mortgages and loans, not out of any sense of social conscience, but because they want, as long as possible to avoid a collapse in property prices, which would bankrupt them. They hope that something might turn up that allows people to repay those debts. Instead, things are getting worse. One in three people now run out of money before the end of the month. Pay Day Lending is increasing, and real wages are falling as pay rises fail to keep up with price increases. When that collapses it will be even worse for the banks than if they simply cut their losses now.

Marx, Gold and Money

As background information to my blogs on Marx's Capital, I am posting this article written several years ago, which looks at Marx's analysis of Money set out in his Contribution To A Critique Of Political Economy. In Chapter 3 of Capital, dealing with Money, Marx refers to this analysis on many occasions, which provides more details and data than in Capital itself. So, this is intended to do likewise.

The Division of Labour is the precondition for exchange. In primitive co-operative communities the Division of Labour arises (firstly between men and women) and production is increased accordingly, but without trade occurring. The male hunters do not trade their products with those of the females, but the whole produce is a collective produce to be shared out equally. Trade only begins as a peripheral activity between tribes rather than within them. However, once trade between tribes commences, then, together with the establishment of classes within society, trade begins to take place within the society too. A precondition for trade within the society is the establishment of private property as a replacement for communal or collective property.

With trade of goods being peripheral, often it amounts to little more than bridal gifts, there is no need to consider in depth the question of exchange values of the goods exchanged. At best all that is required is a rudimentary system of barter. However, when trade begins to develop within each society rather than between different societies, and when the goods exchanged begin to be produced for the purpose of exchange rather than simply being surplus production i.e. they become commodities, the question of how much of one commodity should exchange for another becomes an issue. All historical record, from societies all over the world, demonstrates that the basis of this calculation was the amount of time required to produce each commodity.

This basis of calculating the rate of exchange also provides the basis for setting aside one commodity, which can act as a universal equivalent. If I take the sequence A = 2B, B = 3C, C = 2D I can replace these individual rates of exchange with the single A = 2B, 6C, 12D. The underlying relationship of each commodity based on the labour-time required for its production can now be subsumed under the relationship of each commodity to the universal equivalent A. The exchange value of each commodity can now be expressed as so much A. A does not have to be physically present for this calculation to occur it is merely an abstraction – it has become a unit of account. This is the first stage in the development of money.

Benjamin Franklin described the situation,

“By labour may the value of silver be measured as well as other things. As, suppose one man is employed to raise corn, while another is digging and refining silver; at the year’s end, or at any other period of time, the complete produce of corn, and that of silver, are the natural price of each other; and if one be twenty bushels, and the other be twenty ounces, then an ounce of that silver is worth the labour of raising a bushel of that corn. Now if by the discovery of some nearer, more easy or more plentiful mines, a man may get forty ounces of silver as easily as formerly he did twenty, and the same labour is still required to raise twenty bushels of corn, then two ounces of silver will be worth no more than the same labour of raising one bushel of corn, and that bushel of corn will be as cheap at two ounces, as it was before at one ceteris paribus. Thus the riches of a country are to be valued by the quantity of labour its inhabitants are able to purchase.”

And “trade in general being nothing else but the exchange of labour for labour, the value of all things is, as I have said before, most justly measured by labour.”

Ben Franklin “A Modest Inquiry into the Nature and Necessity of a Paper Currency” pp 265 and 267.

Franklin should have pointed out that, of course, the particular labour of the silver miner and the grain farmer are as different as the silver and the grain they each produce. It is not this particular labour that is the measure, but generalised social labour in the abstract. And what determines the average amount of this labour that is socially necessary – competition.

Once commodity A is accepted as the unit of account it is a simple step forward for this unit to become universally accepted in exchange for any other commodity, in other words, for it to become the medium of exchange. The process does not require the intervention of the State or government to bring this about it arises naturally in the course of development of exchange. This did not always happen e.g. using gold as the standard of value, but silver as the medium of exchange. Only when the standard of value, and the medium of exchange are the same can it truly be considered money. The introduction of a medium of exchange abolishes all the limitations on trade imposed by barter, and in its turn provides a great stimulus to the development of trade.

The question then arises how much of this medium of exchange is required. This depends upon the amount of commodities being traded, their prices, and the relation of these prices to the value of the medium of circulation.

The Economist July 10th 1858 gives the output of the mint as 1855 £9,245,000; 1856 £6,476,000; 1857 £5,298,858, and says that during 1858 the mint had scarcely anything to do. The different figures were due to the varying quantities of commodities in circulation in each year.

“Much will be manufactured when it is wanted; and little when little is wanted.” it said.

(A Contribution to the Critique of Political Economy, Karl Marx p 106.)


And in Holland, after the discovery of gold in California, its gold currency was replaced with silver currency which meant that 15 times more silver was required than gold. Although, the velocity of circulation of the medium of exchange will affect how much needs to be put into circulation, and different denominations circulating in different spheres will have different velocities – an increase in velocity reducing the amount and vice versa – changes in the velocity are determined by technical considerations, which mean that this does not have a marked effect in the short term. In short the quantity of gold or silver coins put into circulation is determined by the quantity of commodities to be circulated, and the relative values of those commodities. So, for example, after the discovery of new gold mines, the relative value of gold fell and consequently more had to be put into circulation.

Once in circulation coins made from precious metals soon begin to deteriorate either as a result of normal wear and tear or from clipping. This has caused some considerable problem and debate because it means that a contradiction arises between the coin as unit of account, and as medium of exchange. As unit of account a 1 oz. gold coin has a relative value as against other commodities based upon its weight. This value, as has been demonstrated, is based upon the labour time required to produce an ounce of gold, and the labour time required to produce the commodity against which it is being exchanged, say a bushel of wheat. But if the nominal value of this coin is set at 1 bushel of wheat, but as a result of clipping or wear and tear its weight is reduced to .8 ounces then clearly the actual value of the coin in gold is less and should in terms of its actual gold value only buy .8 bushels of wheat rather than 1. If the coin continues to purchase goods at its nominal value rather than the value of the gold it now contains then in effect the coin has become nothing more than a token for the nominal value of the gold it is supposed to represent. But despite the fact that these coins had become mere tokens whose actual value was much less than their nominal value they continued to circulate, which then provided the basis for replacing coins made from gold, and silver first with coins made from copper and other metals, and subsequently with paper. As Benjamin Franklin put it again,

“At this very time, even the silver money in England is obliged to the legal tender for part of its value; that part which is the difference between its real weight and its denomination. Great part of the shillings and sixpences now current are by wearing become 5,10, 20 and some sixpences even 50% too light. For this difference between the real and the nominal you have no intrinsic value; you have not so much as paper, you have nothing. It is legal tender with the knowledge that it can easily be repassed for the same value, that makes three pennyworth of silver pass for a sixpence.” (Remarks and Facts Relative to the American Paper Money, 1764 p 348)

The determining factor was not the actual metal value of the coin vis a vis its nominal value, but the quantity of coins put into circulation. Provided no increase in the coins put into circulation occurred the debased coins would continue to operate as tokens of the full value. The important point here is that it was not the coin, which constituted money, but the gold, which the token represented. The value of money i.e. gold (or silver if silver was the money commodity) remained the same provided its cost of production did not vary, and consequently provided the coins issued as tokens representing this gold were not increased the value of the tokens would remain the same. If however the number of tokens (even gold tokens of less weight than their nominal value) was increased then the value of these tokens would be decreased proportionately. The Bank of England took action to ensure that coins of inadequate weight were withdrawn. By law a sovereign, which had lost more than 0.747 grains of weight ceased to be legal tender.

“When the decline of the metal content has affected a sufficient number of sovereigns to cause a permanent rise of the market price of gold over the mint price, the coins retain the same names of account but these henceforth stand for a smaller quantity of gold. In other words, the standard of money will be changed, and henceforth gold will be minted in accordance with this new standard. Thus, in consequence of its idealisation as a medium of circulation, gold in its turn will have changed the legally established relation in which it functioned as the standard of price. A similar revolution would be repeated after a certain period of time: gold both as the standard of price and the medium of circulation in this way being subject to continuous changes so that a change in the one aspect would cause a change in the other and vice versa.”

(A Contribution to the Critique of Political Economy, Karl Marx p 110.)

“Thus the English pound sterling denotes less than one-third of its original weight, the pound Scots before the Union only 1/36, the French Livre 1/74, the Spanish Maravedi less than 1,000th, and the Portuguese Rei an even smaller proportion. Historical development thus led to a separation of the money names of certain weights of metals from the common names of these weights.” (ibid p 72)

The inflation of prices does not arise as a result of an increase in the supply of money, but from an increase in the number of tokens circulating which represent money. A confusion exists because of the nature of theories concerning the determination of value, and because of a concentration on the role of money merely as a means of circulation. Suppose the value of gold remains constant i.e. its cost of production does not change. More gold coins are put into circulation than are required to circulate the given amount of commodities in the economy at their given values. This increased money supply does not result in an inflation of prices because if it did the value of gold as a commodity would itself rise above the value of gold as medium of exchange – 1 ounce of gold would trade for more than a 1 ounce gold coin.

This is because the value of gold both as commodity and as money is determined not by demand and supply (though its price may be in the short term) as the neo-classical school maintain, but by the labour time required for its production. A surplus of gold coins would consequently not result in an increase in the prices of other commodities, but in the surplus of those coins being withdrawn from circulation and hoarded as stores of value either in the form of coins, or by being melted down and sold as bullion.

Ricardo who began by correctly defining the value of money in terms of its cost of production fell into this trap because he equated the total amount of gold with the total issue of currency forgetting that gold has a separate life as a commodity to that as coin. It is this separate life, which makes it different to paper. Unfortunately, on the basis of Ricardo’s incorrect analysis and evidence to Parliament the 1844 Bank Acts were passed which exacerbated the crisis of 1857, and the crisis in its turn led to these Acts being suspended. The analysis of paper currency has been read back on to gold currency incorrectly so that the correct concept that an increase in tokens causes inflation has been interpreted as an increase in real money causes inflation. As Marx put it,

“It is thus evident that a person who restricts his studies of monetary circulation to an analysis of the circulation of paper money with a legal rate of exchange must misunderstand the inherent laws of monetary circulation. These laws indeed appear not only to be turned upside down in the circulation of tokens of value but even annulled; for the movements of paper money, when it is issued in the appropriate amount, are not characteristic of it as token of value, whereas its specific movements are due to infringements of its correct proportion to gold, and do not directly arise from the metamorphosis of commodities.”

(ibid p 122)

Marx demonstrates what really happens with the issue of coins as opposed to paper money.

“Thus for example in England copper is legal tender for sums up to 6d. and silver for sums up to 40s. The issue of silver and copper tokens in quantities exceeding the requirements of their spheres of circulation would not lead to a rise in commodity prices but to the accumulation of these tokens in the hands of retail traders, who would in the end be forced to sell them as metal. In 1798, for instance, English copper coins to the amounts of £20, £30 and £50, spent by private people, had accumulated in the tills of shopkeepers and since their attempts to put the coins again into circulation failed, they finally had to sell them as metal on the copper market.”

(A Contribution to a Critique of Political Economy, Karl Marx p 113)

“The circulation of commodities can absorb only a certain amount of gold currency, the alternating contraction and expansion of the volume of money in circulation manifesting itself accordingly as an inevitable law, whereas any amount of paper seems to be absorbed by circulation.”

(ibid p 122)

“Gold circulates because it has value, whereas paper has value because it circulates. If the exchange value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity prices, whereas commodity prices seem to rise or fall with the changing amount of paper in circulation.”


(ibid p 121-2)

House Price Crash

As Homer Simpson might say “We obey the laws in this house, including the law of gravity.” Yet, oddly house prices seem to have been ignoring the law of gravity. The reason they have been doing so, is because they have been, like those other objectives that rise rather than fall – in a bubble. But, bubbles always burst. This particular bubble has been blown up over a period of at least 30 years, and arguably for more like 40 years. In fact, it could even be argued that that the bubble first began to be inflated with the loose money policies of Tory Chancellor, Reggie Maudling, back in 1960.

The size of the bubble, indicates the size of the pop when it bursts. All the indications are that is not too far away. One of the indications that smart money investors use in determining the health of companies that want to invest in is what the “insiders” are doing. In other words, are the Directors of the company, buying or selling shares in the Company they work for. As, Moneyweek point out we have something similar with the Housing Market. A record number of Estate Agents are putting themselves up for sale!!!

Moneyweek is not some fly by night outfit whose views can be ignored. The Editor is Merryn Somerset Webb, a former Stock Market trader, who writes for the Financial Times. It is connected to the Agora Publishing group, which publish a number of subscription only investment newsletters, including the Fleet Street Letter, which has been going since the 1930's, and whose Editors have included people like William Rees-Mogg.

Certainly, given the choice of taking on board what they think house prices are going to do, or listening to the increasingly demented ravings of the Daily Express, which never fails to claim that house prices are rising by double digits, I'd prefer the former. But, in any case, the basic facts tell us that house prices are due to fall massively.

Firstly, house prices measured against long-term averages are hugely over priced. The OECD says that, in the UK, house prices are 40% above their long-term average, measured against household income. But, as I have previously pointed out, that 40% over pricing means that the correction must be much greater than that.

If house prices spend several years above the average level, then, by definition, for the average to be re-established, they have to spend several years, by a corresponding amount, below the average. As the OECD graph shows, for example, in 1990, house prices were 20% above the average, but in that year they fell by 40%, so that, as the graph shows, they spent several years at up to 20% below the average. They only recovered their 1990 level in 1996.

But, there are reasons to believe that the situation may be even worse than that. This average is related to average household income, but we know that average household income is falling. It is expected to have fallen by 7% during the current year, and with inflation rising, wages frozen, and unemployment about to soar, that is likely to worsen. Average household disposable income, which is decisive, when people are thinking about being able to move home, is going to be falling even further, as the effects of benefit cuts, for example for Child Benefit, and Tax rises are taken into consideration.

In other words, even if house prices remained constant, this over priced condition would be bound to worsen. The extent of it can be seen by the late age – 37 - at which people now buy their first home, by the number of people who cannot even save the amount needed for a modest deposit of between 10-25%, and the number of people, around two-thirds, who now say they believe they will never be able to afford to buy a house.

Yet, in many ways the conditions currently existing, are some of the best that a housing market could expect to have!

Demand

For one thing, demand for housing has been pumped up. Cultural changes have led large numbers of people to believe that they should have their own home. This is manifest in various ways. For one thing, after WWII, there was a large rise in home ownership, and a decline in renting, which had been, essentially, the only form of house tenure for the working-class until that time.

The idea, that everyone should aspire to be a home owner, was one that took off in Britain, during the 1960's, and onwards, in particular, a situation that is not common across most of Europe, where long term renting is the norm. From the 1960's on, until around 25 years ago, rising real wages, along with rising house prices, appeared to make house buying a one-way bet. An average semi-detached house in 1960 costing £2,000 would today sell for around £150,000. But, even by 1970, the £2,000 mortgage taken out in 1960, would appear rather small, due to the rise in inflation and wages. With inflation rising by double digits per year, during much of the 1970's and early 1980's, the £2,000 Capital sum of the mortgage was rapidly shrunk to nothing, whilst the house it had bought had already risen in price, as a result of that inflation, and more, due to excessive money printing, by much more than that, giving the appearance of a huge increase in wealth – which was, of course, merely an illusion.

Its no wonder then that many people saw no option but to get on this merry-go-round of apparently free money that came from just buying a house. Other cultural changes meant that young single people sought to obtain this benefit too. In the post-war era, and into the 1960's, it was common for young married couples to live with their parents until they saved enough for a deposit on a house. Moreover, single people lived at home in the main. A number of factors have led to many single people leaving home at an early age, and thereby creating an additional demand for housing. The factors set out above, are one reason for that, as was the increasing availability of credit, and mortgages during the 1980's, without the need to demonstrate the kind of income levels that were required until then.

Another factor over the last 20 years or so has been the increasing numbers of people going to University.

In Europe, most people going to University, go to their local University, and remain living at home. They tend only to move away when they do a higher level degree. In Britain, there has always been a culture of going to Universities in some other area. In the past, this could be accommodated on Campus, but the much larger numbers of students now mean that an entire industry has developed, of landlords buying up properties, near to Universities, in order to rent them out to students. This has created a sizeable additional demand for housing.

Another source of demand has come during the 1990's, and early 2000's from the number of migrants coming to Britain. Many of these have come as individuals, and so the actual demand for housing units is proportionally greater than for housing families.

During the 1990's, the availability of cheap credit, with no questions asked, led to another new demand for housing. As in the US, where “flipping” - buying a house, speculatively, in order to sell it quickly, for a profit, in a rapidly rising market – took off, even amongst some better off workers, a new breed of speculator arose, who bought houses, or flats, in order to rent them out, then using the rental income as the means to take out yet further mortgages, to buy additional properties i.e. buy-to-let.

But, of course, the biggest factor, which means that the housing market has the best conditions it could expect, is the very fact of the cratering of interest rates that was brought about as a consequence of the Credit Crunch, and the measures taken by the Government and Bank of England in response.

Its estimated that the average mortgage holder has been given around £7,000 p.a., in their pocket, as a result of the slashing of interest, during that time. Of course, the other side of it is that pensioners, and anyone else with savings, has seen their earnings from those savings disappear, as a result of the same low interest rates.

Supply

But, if the housing market has been supported by new types of demand, it has also been supported by the conditions of Supply too. With the Cuts to Public Spending that began in the 1970's, came reductions in Council House Building. Thatcher reduced housing supply in the 1980's by selling Council Houses, whilst refusing to allow Councils to use the Capital receipts from the sales to build new houses. That continued throughout the 1990's, and effectively no new Council houses have been built since.

Marx theorised the consequences of a Monopoly of land ownership in his Theory of Rent.

The absurdity of the property market in Britain is that all residential development is squeezed on to just 10% of the land mass, with the other 90% remaining in the hands of the great landed estates such as the Duchy of Cornwall. This monopoly, which is also reinforced by planning laws that protect it, in relation to the Green Belt etc. artificially raises the price of building land, and thereby of house prices, and of rents. It is also what leads to the development of the huge cancer-like growths of City conurbations, that leads to congestion, ill-health, and all the social problems that go with it. As Marx and Engels argued in the Communist Manifesto, a rational socialist society would abolish the distinction between town and country.

But, the other aspect of rapidly rising house prices, has, in the way Marx set out in his Theory of Rent, fed back into rapidly rising land prices, as land-owners find that they can use their monopoly, to force builders to share their excess profits with them, in the form of higher land-prices (Capitalised Rent). That means that house prices, forced up by rising monetary demand, do not feed through fully to increased Supply by house builders, because the excess profits they would have made, are siphoned off by landowners.

Moreover, the large builders, who acquire large amounts of land, and store it in their own land banks, then have the same incentive as any other landowner i.e. they have an incentive to sit on it, rather than building on it immediately, because they believe that the price of the land will rise, and so the houses they eventually build on it, will be more expensive, and bring them additional profits!

So, despite the massive rise in house prices, there has been no corresponding rise in Supply, which once again disproves the claims of orthodox economics about the way in which the market is supposed to automatically meet the needs of consumers in response to price signals.

Falling Demand

But, these conditions of Demand and Supply are not set in stone. It is easy to see how even small changes, that are likely, will mean that the favourable conditions, that have existed for house prices, could easily, and quickly, reverse. For example, the longer people feel they are unable to buy a home, the more they get used to renting, the more the culture of home ownership will itself be undermined. There are many advantages to renting, especially for people who need to be mobile in search of employment, and who do not then need to sell their house.

Even more, in unstable economic times, renters do not have to worry about whether their mortgage payments might double over night, whether the market price of their house might drop by 20%, leaving them in negative equity, and in danger of being repossessed etc. Moreover, unlike the 1960's, 70's and 80's when inflation meant that rising wages quickly eroded the real amount of the Capital Sum, and shrank mortgage payments, wages today are stagnant, and real wages falling, and there is no chance that the Capital Sum will be inflated away. And, far from monthly mortgage payments being shrunk, there is only one way that interest rates can go from here, and that is up. Mortgage payers could find, in the next few months, that even modest rises in interest payments will double their monthly mortgage payments. All of those factors will increase the attractiveness of renting over buying bringing about what economists call a shift in the demand curve for buying, meaning that demand for buying will shrink at every price.

Its possible too that the increase in University Tuition Fees, and other costs of going to University, may result in a reduced number of people doing so.

Alternatively, they may feel that if they are going to pay such levels of fees they will seek out better quality Universities in Europe and elsewhere, in which case the housing demand will shift to this other country. Alternatively, the higher costs may result in more students going to a local University, and continuing to live at home, more in line with the European model. In any case, it is clear that students, coming out of University, with massive levels of existing debt, will be in no position to think about adding to it in the form of a mortgage, for many, many years. In all these cases the demand for housing is reduced.

In respect of migrants, that influx was due to the rapidly growing economy of the late 90's, and early 2000's, and the possibility for it, opened up by the accession of Eastern European countries to the EU. But, as recent data has shown, Britain has much worse Benefits than many other EU countries. With a British economy going into recession, and at the same time with the economy of Poland, and other Eastern European economies growing strongly, its likely that the migration will be reversed. Rather than providing additional demand, then, its likely that this reflux of migrants will cause a marked reduction in housing demand.

In respect of the buy-to-let merchants, this could quickly turn from being a source of demand for housing to being a source of cheap supply. The Landlords, of previous times, usually owned the properties they rented out. This meant that they were able to weather ups and downs in the economy, because they were not dependent upon the Rents, to cover mortgage payments on the properties they owned. But, the Buy-To-Let Landlords are different. Their existence is much more precarious. If either Rents fall, occupancy falls, or mortgage payments rise they can be wiped out. The Liberal-Tories are introducing changes to Housing Benefit, which will reduce payments, in expensive parts of the country, such as London, which is where much Buy-To-Let activity has taken place. This means that some tenants will be forced out of London, because they will not be able to make up the difference in the rent. That means occupancy rates could fall. It also means that downward pressure will be applied to Rents as a result. But, in addition, interest rates, whatever the Bank of England decides to do, will rise, because Banks and Finance Houses are finding it increasingly difficult to borrow. That is why

, George Osborne, in his speech announced that Government will replace the Capital Markets and finance Corporate Bonds directly, and guarantee the sub-prime business loan SIV. It is why, Cameron wanted to encourage people to pay off their debt, but found that ran up against the need for people to keep spending. That means the mortgage payments on these buy-to-let properties will rise sharply at the very moment when occupancy rates, and rents are falling. Either the Landlords will see the writing on the wall, and begin to sell up, before they go bust, or else they will go bust, and their properties will be repossessed, and sold off cheap by the Bank. In other words, a source of demand will become a source of additional cheap supply.

Rising Supply

But, other changes suggest that Supply may also increase. Firstly, there are already more than 700,000 empty homes in Britain. So long as you expect house prices to rise you have an incentive to hold on, and wait for a higher price. But, even if house prices stagnate, for a considerable period, let alone drop, the more the owners of these properties will begin to feel they are holding on to a wasting asset, the more the fear of making a loss will take hold, and the more they will be likely to want to realise the asset, by selling it quickly. In addition to this 700,000 properties, there exists planning permission for a further 300,000 houses, which builders have not acted upon. In other words, there is an overhang of more than 1 million houses already on the market.

With the number of additional houses needed per year estimated at around 250,000, that means that there is already 4 years supply of houses available, even if no further housing were to be built. By comparison, the Spanish housing market, which is seeing price falls of around 60% only has an overhang of 1.5 million homes.

Other changes may mean that the Supply of houses rises further, but even now the available Supply of houses is, in fact, much higher than the 1 million stated above. For one thing, if there is a change in culture, with fewer people going to University, fewer young individuals feeling they need to have their own house/flat etc., and more young individuals continuing to live with their parents, then this not only means a fall in demand, it means that if those individuals move back home, there will be, at the same time, an increase in Supply. However, there is an even greater potential for there being a large increase in Supply without a single house being built in Britain.

In Ireland, the construction and property boom, has left vast numbers of houses lying empty. House prices have fallen by 60%. One of the advantages of being in the EU is that British people can now take advantage of lower property prices, higher wages, and so on, that exist in other EU countries. Over the last 20 years, we have seen an increasing number of people retire to Spain and other countries. As the Government never tires of telling us, we have a rising number of retired people in Britain. It would be surprising, indeed, if an increasing number of retired British people did not take advantage of this facility. The TV is filled with all sorts of property programmes of the “Move To The Country” variety.

How long can it be, before such programmes begin to illustrate, to British people, the massive savings they could make, by selling up here, and buying a house in Ireland for a fraction of the price. It would also have the advantage of being no further away, for many people, than moving to Scotland or Wales. In addition, there would be no problems of learning a different language. All that plus continuing to benefit from the same Pension, and Benefits etc. as living in the UK.

When, people begin to twig the possibilities that such moves offer, then it could be expected that this existing massive supply of cheap property will quickly attract, large numbers of people towards it. The more these other EU housing markets are seen as being as much sources of housing supply as the UK housing stock, the more the calculations of Supply and Demand needs to be reviewed. The ability of workers to move to cheaper housing elsewhere is restricted by availability of employment, and consideration of relative wage levels. But, that does not apply to retired workers. They do not have to limit their decision on where to live by where they can obtain employment. It is no different than in the US, where many workers retire to the sunshine of Florida. And, because under EU Treaties, UK citizens are entitled to continue to receive the same Benefits and Pensions they are entitled to here, wherever they live in the EU, they are not limited by considerations of income either. On the contrary, there is an incentive to move to a country where the cost of living is lower, and those Pensions and Benefits will go further.

Its not just the EU that offers this kind of opportunity. If you move to the US, you can continue to receive your Pension, but the State Pension will not be uprated in line with inflation.

But, as I demonstrated recently, the 60% collapse in US house prices means you can now by a luxury 6 bedroomed house in Florida, for just £70,000!!!

Government Policy

The Government has been desperately trying to shore up house prices for some time – as did the previous Government, through its various ridiculous schemes (scams) such as shared equity and so on. They know that, in conditions where private debt, in the UK, stands at £2 Trillion – more than twice the Public Debt, which they insist has to be paid off – a severe drop in house prices would be very bad news for the Banks, whose Balance Sheets depend upon the nominal values of the properties against which they have made loans.

If a Greek default would collapse much of the international financial markets, a serious number of defaults on all this private debt would be likely to spell its death knell. But, all these desperate measures begin to look like sticking their finger in the dyke.

What is more, the other policies being pursued by the Government are having unintended consequences. The austerity programme, as set out above, in cratering the economy, is also creating the conditions for cratering the housing market. It was the onset of recession in 1990, which collapsed the housing market.

Rising unemployment means falling housing demand; rising inflation, through money printing, and low interest rates, means a falling pound and rising inflation; cuts in Housing Benefit means lower rents for Landlords, and, therefore, lower income against costs, encouraging them to Capitalise their rents by selling their property. But, the other policies announced recently by the Government, are likely to exacerbate that.

The Liberal-Tories are proposing encouraging more Council House sales via increasing discounts under Right To Buy. Unlike, the 1980's, because they are desperate to come up with a policy for growth, they are proposing that, for every house sold, Councils should build a new one, using the Capital receipts. This has a double effect. In building new houses, this means that housing supply rises. But, in offering much bigger discounts on sales, this means an immediate sharp, downward pressure on house prices in the immediate area. Previous discounts were up to around 60%. If it becomes possible to buy houses at those kinds of discounts, then that will force other sellers, in that area, to sharply reduce the prices of their houses, or they will not be able to sell.

The Liberal-Tories are also proposing to allow builders to acquire Council owned land to build new houses, without paying for the land until the houses are sold. Again this has two consequences. Its likely that Councils would be under pressure to sell the land cheaper than private landowners would be prepared to accept. This means downward pressure on land prices, which form a considerable element in builders' costs. Secondly, it means that, in order to obtain this benefit, of lower priced land, for which they do not have to pay, until they sell the houses, they have to actually build the houses, rather than sit on it, as a land bank. So pressure will be put on house prices from both angles – reduced land costs, and rising housing supply.

Finally, the Liberal-Tories are proposing to change the planning laws in favour of a presumption in favour of development. This is a crack in the long-standing monopoly of land, which has kept land prices artificially high, and acted to restrict the expansion of housing supply. It has, not surprisingly, caused a backlash from the landed gentry, and their supporters. The campaign has been conducted through the pages of the Telegraph, and that means it may yet be reversed. But, the Tories are emphasising that the real intention is to allow these very local communities to have control over development themselves. In reality, as they say, a small village seeing the possibility of maintaining its viability, through the building of just a few extra houses, may see the advantages of that, provided they can be convinced that they are not going to open the door to vast new estates being built within their midst. Even one or two houses built in every village in the country would add a considerable number of extra houses.

Advantages

And, there may be advantages in this for the Liberal-Tories, such that they outweigh the objections of their rural supporters. Its likely that they may calculate that their dyed in the wool support, in the countryside, will continue to vote for them anyway.

Meanwhile, to win an election, they need to win sufficient support in the urban areas. Its not just the OECD figures that show house prices as being 40% overvalued. The figures produced by the Nationwide, some time ago, show that on a different metric, prices adjusted for inflation, are around four times, the long run average price!!!. That has a significant distorting effect on the economy, because of what it implies for the Value of Labour Power.

As Stephanie Flanders reported some time ago, Fathom Consulting has produced a report, where they argued that collapsing the housing market would have significant economic benefits.

“How, you might ask, could a sharp fall in house prices possibly help the economy? It would help because it would get it over with. Like many economists, the authors of the report, Danny Gabay and Erik Britton, believe that the British economy will not truly put the crisis behind it until it has fixed the banking system and dramatically lowered the amount of private sector debt weighing on the economy.

Unlike some of their peers, they think that a correction in house prices is a crucial part of that process in Britain, and it has barely begun...

If you buy the Fathom view, policy-makers in the US and UK are making exactly the same mistake, only we're creating zombie households instead, who can only stay afloat because the cost of servicing their mortgage has fallen through the floor. As a result, banks don't have to face the fact that their mortgage-based assets are worth much less than they were at the peak of the boom - and the country can't move on.”

Asset Prices

It is usually, if not always, the case that when an asset price bubble bursts, it is followed by the bursting of other such bubbles. In part, that is because periods of loose money leads to the prices of all assets being bid up. But, by the nature of such bubbles, the asset class that seems to rise most, then sucks in further money. When it pops, the money flows into the next best asset, and so on. That was seen with the Stock Market Bubble, which then saw money flow into the property bubble. Its attempted to pop several times, but has been kept inflated by the massive additional funds pumped into it via massive money printing and near zero interest rates, and by the fact that, because people live in houses, their attitude to them is different to their share holdings.

But, when people hold on to unrealistic prices, for such assets, for too long, it only means that the crash is that much more dramatic when it occurs. It is a Black Swan event, as Nicholas Taleb describes them, the kind of occurrence that becomes all the more shocking for the simple reason that no one expects it, no one has seen anything like it before in their lifetime.

Stock Markets recovered some of the losses they inccurred in the Crash of 2000, though the NASDAQ, which fell 75%, from its high of over 5,000 in 2000, is still languishing at less than half that level. Yet, after 2000, companies returned to high levels of profitability, which is the basis upon which share values are calculated, so it is not entirely that those share prices have simply been reflated, as part of a new bubble. No such change in the fundamentals of housing has occurred.

In fact, if anything, the general rise in productivity, the improvements in technique, that lead, over time, to the fall in price of all commodities (in real terms) means that houses, like every other commodity, should become cheaper, not more expensive. The rise in prices can only be explained in terms of a bubble.

As I've set out previously, the massive money printing that has taken place over the last 25 years, has resulted in a series of these asset price bubbles being inflated, whilst general commodity price inflation has been low, due to cheap supplies, from China and elsewhere. Now that is reversing. Not only is credit tightening – either through deliberate State policy, or because of a Credit Crunch arising out of the contradictions caused by previous credit excess – but, consumer price inflation is rising, because China is no longer the source of ever cheaper commodities.

It has suffered inflation too, the wages of its workers are increasing rapidly – in some cases with wage demands of 50% - and the Yuan is rising against the dollar, and other western currencies. That is a double whammy, of rising import costs, that is heading towards Britain, at a time when wages are being squeezed. The more money people have to allocate towards paying for their food, and energy, the less they have to bid up house prices. As with any Ponzi scheme, once no “bigger fool” can be found, to pay the higher prices, the whole pyramid collapses.

At the same time that share prices are collapsing, house prices are falling rapidly too. Much more than the official figures suggest. The official figures, much quoted in the media, only relate to asking prices, but what is important is the actual selling prices of houses. As the BBC reported recently, there is a massive gap between asking prices and selling prices.

“At £236,597, average asking prices are still far higher than selling prices.

The average UK selling price, as calculated by the Department for Communities and Local Government (DCLG) is £203,528.

This suggests that sellers or their estate agents are over-valuing homes by 16%.

The reality gap is even greater when asking prices are compared to house prices as calculated by the Halifax or the Nationwide.

The Nationwide says the average house now costs £168,205, while the Halifax says they cost £163,049.

That puts the reality gap at 41% based on the Nationwide's figures or 45% on those from the Halifax.”

That mirrors what has happened in other countries, where house prices have collapsed. In Spain, for example, it is still common for selling prices to be 30% below asking prices, even though, asking prices have fallen massively. A look at some of the UK Estate Agent websites, which provide details of selling prices compared to asking prices and so on demonstrates that. For example, Primelocation. Their figures, for actual houses, show that drops in asking prices of between 10%-30% are already common, and selling prices are already standing in about the same relation to asking prices. According to the BBC figures, there could already be as much as a 40% difference between asking prices, and selling prices, so it is no wonder that many people continue to ask unrealistic prices when they put their houses up for sale. That is why according to Rightmove, 70% of houses put off for sale remain unsold, and estate agents are seeing the houses on their books rise to new levels.

But, while these assets are falling, Gold is rising.

Gold is real money, it has an intrinsic value, determined by its price of production, the fact that it has to be found, mined, and processed, and no one will do that unless they can make a profit from doing so. For more than two decades, its price fell below this Value, because there was no demand for it to fulfil its historic role as Money, because that was being done by the dollar. The market price fell to about a quarter of its value, as all the excess Gold overhung the market. Now, the excessive printing of paper Money and Credit, has led to it being devalued. Rising inflation, and a currency war between countries, trying to depreciate their currencies even further, together with rising risk and uncertainty, is leading once again to a demand for Gold, which is why its price is soaring. But, where Governments have attempted to keep the price of houses artificially high, they have attempted to keep the price of Gold artificially low. That is why Gordon Brown, and the Central Banks of other countries, sold off large amounts of Gold, when its price was rising. They do so because, if Gold rises in price, it begins, even more, to take on, again, the role of real Money, and, thereby, undermines the current system, based on paper money, and the ability of Governments to manipulate it for their advantage.

The rise in the price of Gold has not yet led to it being seen as an important asset, however, in the way shares, or property have. On the contrary, the investment pundits continue to advise against it, in the main, whilst millions of ordinary people are encouraged to hand over their valuable gold in return for worthless bits of paper, by the rash of “Gold4Cash” merchants, that have sprung up on every High Street.

A good measure of when Gold is in a bubble, will be when those shops close because no one will sell their Gold to them, and when instead the people who are now selling their Gold, are clamouring to buy it. But, as that process unfolds, as with the collapse of every other asset bubble, it will be people clamouring to sell their houses – especially all those Buy To Let Landlords – who will be seeking to get money from those house sales in order to put it into Gold, to protect themselves.