Canada's Housing Bubble

Feb 18, 2010 Marco A. Murillo

One of my favorite topics is economy 101, or better yet, 001! What is money? It's not a joke for sure, on the opposite, it can even be the cause of war.

Its so sad seeing "experts' of money matters like Bernanke crumbling before they can explain what is happening in the economic landscape of America. For all of us who still believe that there is a government's control on the economy, they should never be saying things like these, it only makes it worse. He is a very good example of a government technocrat who has lost the vision on how to steer the real economy.

Buried under masses of financial documents and complicated reports, authorities like Bernanke can no longer see that economy still obeys very simple rules. The most obvious failure to understand the real economy is the lack of ability to describe what money is. Let's go back to the basics; money is the value of work in the form of a note of debit issued by the purchaser of the work. This note of debit has been conventionally named money, but in a narrow sense, it is a common written and sealed agreement to exchange work production among the individuals of the same nation.

When individuals accept that money is proportional to work like this, is because they concluded that the true value of money has been set in the producing fields were agriculture takes place, in the ranch, the mill, or at the diary farm, so that we can assign a "real" value to work and transfer it into a document as units of money.

An example is like 40 liters of milk that took some 8 hours of combined work to be produced, and was priced by the "offer/demand" rule at $0.50 cents per liter by the wholesaler EX-WORKS or EX-FACTORY (INCOTERMS for the cost of a product outside the producing facility, and not including other fees before it reaches the end market).

A farm that produces 40 liters of milk a day receives a $20 dollar bill from a wholesaler who profits $50 by pasteurizing the milk, bottling it, delivering, and selling it to the market at a price of $1.75 per liter. The individuals in market consume the 40 bottles of milk and produce honey, cereals, flour, bread, electricity, and well, created a live-able community while all these lasts.

Why money? Simple, because while one farm produced milk, another farm produced honey, another one produced cereal, a mill produced flour,and a hydro plant produced electricity. Money allows work among the individuals of each site to be exchanged for products or services. Money under this context must be used wisely for once it goes, it only comes back by doing work for whoever has control over the circulating money. If there is no need for work, or for the products of work, there would be no money available.

If the milk farm has two workers, and each one produced 20 liters they got paid $10 so that each can buy materials for a home at $6, one can of honey at $1.05, one loaf of bread at $1.05, and save $1.90 for emergencies. Money is spent by each individual who exchange their work as money for other goods or services. Intrinsically for this example, money equals milk, honey, cereal, flour, building materials, and electricity, or the services associated to produce these goods.

When is the definition of money blurred? during inflationary periods or bubbles. When on top of the value of these basic products like milk, honey or bread, someone in the production chain inserts other unproductive costs like an expensive holiday vacations, or a week of unproductive life, then we get inflation. Because the cost of the holidays or laziness should be taken from savings, not transferred to another person who really works to produce goods. This is what is happening in the real estate market, home owners are looking for early retirement by selling their homes overpriced. The cost of early retirement being transferred to the home buyers. Ha!