Satoshi's Sidewalk #20: Bricks of Gold, Part 2
The built environment can be manipulated into existence. Ignore the symptoms and go straight for the cause.
Quick recap from Bricks of Gold, Part 1: home prices denominated in gold haven’t changed much in a hundred years - 189oz to 182oz. During those years the gold price of homes has oscillated from sub 200oz to over 600oz back below 200oz again - not exactly stable. Measured in dollars homes went from 1.5x the median household income in 1928 ($2,500) to 5x in 2019 ($68,703). People aren’t paid in gold, but in dollars. The US dollar today is not the same as the US dollar in the 1920s. Nor are homes the same today as they were back then…
Bitcoin, bitcoin - the hardest of money
Use it to price things and signals won’t be funny
Bitcoin, bitcoin - magic internet money
Restrain central bankers with code your node’s running
Bitcoin does not fix the built environment directly. What bitcoin does fix is the systems which precede action in the built environment. These systems are the pricing mechanism and the supply of credit (savings). The power of prices and credit predetermine what is planned and built, which methods are used to build, and the materials used. In essence central banks control credit and, by doing so, heavily distort prices. More noise, less signal. Lucky for us, bitcoin obsoletes all other money.
In short, the cost of homes cannot be blamed on builders, planners, methods, or materials - but squarely on the current monetary system. Money is the medium and the medium is the message. Distort the money and everything on down the line becomes distorted.
Developers work within the restraints of governments and planners, who operate under the direction of laws, codes, and ordinances. Builders must work within the constraint of their budgets, which controls which methods and materials are used. Home buyers are constrained by their budget and the homes available in their market.
Governments and planners have gained power incrementally over the last 115-ish years to regulate every aspect of development and planning. Regulations must be enforced and enforcement has a cost. Inflationary fiat monetary policies are how this enforcement is paid for. Government is able to reap the rewards of inflation and increasing their outstanding debts at the same time. Inflation is the slow transfer of purchasing power from individuals to the government. Creating credit and taking on debt allows government (and its cronies, Cantillionaires) to spend the purchasing power before anyone else. This money was not created by an exchange of value between individuals but by other means - thin air. Fractional reserve banking is part of the problem but is generally not possible without a central bank to back stop the stupid.
Through the above mechanism local governments are able to ratchet up the restrictions over time. As mentioned in Part 1, government compliance is a little over 30% of the overall cost of a home. Developers are limited in their actions to the cost of capital - interest rates. As interest rates are lowered, developers are able to build projects which otherwise are not buildable. Less durable and less expensive materials are used to make the numbers work. Riskier methods of construction are used (I’m looking at you, mid-rise buildings with post-tension floor slabs). These actions result in a lower quality end product - which can be dressed up or hidden completely with nicer design finishes. Time does not respect these decisions.
This is what the home buyer is working with and doesn’t even know it.
How does this play into prices? I’m glad you asked.
The developer and builder, plans in hand, go out into the marketplace to “value engineer” building materials. This process includes finding cheaper alternates, revising plans for faster build times, and or removing materials altogether. Are there times when value engineering is necessary and effective? Yes. Are there times when “you probably shouldn’t value engineer that thing” and value engineer it anyways? Yes. This process is a result of prices and price discovery.
Our fictitious developer’s fictitious building, which would not have otherwise been built, has gone to bid in the marketplace. These bids are reflected in the market as increasing demand (remember, many other developers and builders are now actively seeking construction goods in the marketplace due to lower interest rates). Demand for materials rises and prices adjust. Some materials, let’s say quartz countertops, are bid and bought up to maximum production capacity - and then a little bit further. A premium gets attached to the price by those demanding quartz. The developer who would have liked to use quartz now must find an alternate - typically granite. If granite becomes too expensive via the same process, now the choice falls to cultured marble. And then tile (ew), and then to vinyl. On and on until the final substitute good is reached.
The demand for goods to construct buildings is artificially elevated by credit creation. The credit created spurs human action which spurs demand and is reflected in prices. Prices are discovered and set by buyers and sellers in a hugely complex system of information in the marketplace (mandatory read: The Use of Knowledge in Society).
Now, apply this above thought exercise to all the other aspects of constructing a building: lumber, drywall, copper, fixtures, concrete, steel, Caterpillar tractors, Ford trucks, hammers, nails, tape measures, fuel, Big Gulps(!), and then the labor inputs required by developers, builders, consultants, subcontractors, and the time spent going through political and governmental processes. The web of goods demanded and prices to be discovered go right through the roof! (heh)
Bitcoin prevents time, labor, and material from being misallocated to projects which otherwise would have been built.
The pricing mechanism cannot be polluted with noise created by credit-induced actions. Bitcoin removes the noise and allows the signal to flow.
Credit cannot be expanded beyond the quantity of bitcoin available to lend. There are and will only ever be 21 million bitcoin.
Governments cannot enforce what they cannot afford to enforce. Inflation cannot rob individuals of purchasing power by central bankers if there is no Control+P. Developers cannot build (or buy!) financialized real estate. Home owners cannot use credit drawn from the aether to finance an already financialized home.
Fix the money, fix the credit supply, fix the pricing mechanism, fix the built environment.