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>
> Bruce,
>
<<SNIP>>
> So lets say I have a house which cost me 10000$ bought 1970. Now I
> sell this house to you for a 1.000.000. And since you don't have the
> million your must borrow it.
>
> And now you want to tell me that I SAVED 950.000 dollars because now
> I can put the money into the same bank that you borrowed the money
> from ?
>
Exactly, just like when a company withdraws money from their business
account at the XYZ Bank & Trust and pays their employees, who in turn take
this money and re-deposit it at the XYZ Bank & Trust in their own accounts
(or is this a sign of "checking account inflation" in your eyes?).
As long as you sold your house in a free and open market, and I can prove to
a lender I have the income to afford a mortgage on a $1,000,000 house
(someday, maybe...:)), there is absolutely nothing "fake" about the wealth
bestowed upon you, the seller.
This is the way real estate has worked in the US since the American
Revolution, and it has the most consistent, most stable track record of any
investment in the world. To say that wealth created through real estate is
fake because it's accomplished with borrowed money is to imply that Donald
Trump's net worth is really zero. I'll trade my net worth for his any day
(and I've got a feeling you would too).
> ASSET INFLATION IS NOT SAVING.
>
I completely agree, but that's not what we're talking about here. Asset
inflation is caused when consumers/investors are allowed to artificially bid
up the value of assets using money they did not earn in the free
marketplace. This can come from the use of leverage, or the over-printing
of currency by the government (above the level the economy's rate of
production justifies). This is not what is happening in the US stock
market. People are bidding up the price of stocks using real money from the
income they're earning in the free market. This is why there is no "bubble"
about to burst.
Although a considerable amount of leverage is used to purchase real estate,
this is only because of its phenomenal track record, and because homeowners
who default on their loans face the risk of becoming homeless, and therefore
have a significant incentive to only borrow what they can afford. The rules
concerning what a person can buy relative to their income are also fairly
rigid. Real estate prices have not been rising because of inflation, but
because society has placed an inherently greater and greater priority on
home ownership. Their rising incomes, earned in the free market, have given
them the financial ability to act on that demand.
To say the creation of wealth through real estate is purely through
inflation is to say that all increases in income are from inflation. The
question is, why is wealth created through real estate appreciation any
different than wealth created from income appreciation? Both real estate
prices AND income levels have dropped at certain times in US history, but
the long term track record of both is up, up, up.
> I can agree with you that the calculation of savings ratio might not
> be correct - but this doesn't change the fact that it is on a record
> low not just relative to other countries but HISTORICALLY to America
> itself and according to WHATEVER calculation method you take.
>
To compare the current measurement of the US savings rate to the past, you
have to adjust the data for the following changes:
The increase in the payroll tax from less than 1% in the 1940's to over 13%
today.
The new rule of classifying mutual funds distributions as capital gains
rather than dividend income.
The fundamental shift by corporate America over the past few years to favor
capital gains (through stock re-purchases) over the more historically
popular dividend payments.
The increase in the percentage of home ownership among the American
population.
Needless to say, the BEA doesn't make these adjustments, but if they did,
you'd find that the savings rate today is most likely HIGHER than it was 40
years ago. The reason the US has fallen in rank relative to other
countries is that these economic changes have not taken place there (yet).
I don't know where you live, Gerrit, but when your corporations adopt a more
stock-option based compensation system for your CEOs, your going to see a
noticeable drop in your dividend payments, but a greater increase in your
capital gains. The result of this is that your savings rate in the
"official" rankings will fall.
> I think you guys over there have removed yourselves a bit from
> reality. Or as a stockbroker friend of mine was claiming: "The
> American market will go up as long as they don't find
> anything from Greenspan on that skirt."
>
Are you kidding? That would be GREAT news. At least then we'd know the guy
actually has a pulse...
Till next round,
Bruce
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