August 5, 2005
No, It's real money
John Derbyshire is 100 times the mathematician I am. I met him at Boulder Bookstore and got a signed copy of his book "Prime Obsession" which I recommend highly.
But I don't see how this brilliant mind doesn't grasp economics -- even with his Wall Street experience.
He regularly boasts of mowing his own lawn. I think that's virtuous if he enjoys it, but he wants everyone to discard the theory of Comparative Advantage and do their own gardening.
Today, he cheerfully reports a net worth with seven decimal places but thinks it unreal because it is illiquid:
John Derbyshire on Housing Boom on National ReviewWell, no, wait a minute, hold the bubbly. That million dollars is all faery gold, the sort that looks dazzling to the eye, but melts into thin air if you try to touch it. We need a house to live in. If we sold this one, we’d have to buy another one, and they don’t come much smaller or older than this. As for all those bulging mutual funds: I am reliably informed that if I were to actually attempt to cash in any of that “money,” Uncle Sam would come down on me like a wolf on the fold — aye, and Uncle George, too — so I had best not even think of doing so. It’s all faery gold. I must continue to drive a 12-year-old car, my garage is never going to get that makeover it needs, and if my kids are to go to college, I shall have to work till I drop.
Mr. Derbyshire: first, congratulations, you're doing better than I am! Secondly, call your banker. Both your retirement portfolio and your home on Long Island are very real assets and both can be collateral if you want to access some of the asset value of either, I am sure your banker would gladly hook you up with a loan for that new car.
If Polonius's advice rides too loudly in your British ear for the loan, may I suggest you sell out. You can move next door to me for ~230,000. I'll introduce you and Rosie to Phyllis and John across the street -- I think we'll all get together just fine!
I'll even pay you to mow my lawn...
You're 100 times the economist I am, but haven't some basics of macroeconomics changed in the last two decades? Consumer spending used to be a constant force in the economy, averaging in the low 90% of income range. Since about 1990 this has risen to neary 99%, but income is no longer based solely on salaries. With most of the middle class in the stock market through 401k's and in real estate through the spiraling value of homes, the old standard has shifted. In time of economic downturn consumer spending would often stabilize the economy. Now if a recession were to include the market, real estate, or both it could have an unprecedented effect on consumer spending, rather than being the old stabilizer it could actually further fuel the recession. We middle class folks are certainly better off, thus diversified, but it does change some of the old economic theory does it not?
Posted by: Silence Dogood at August 8, 2005 7:44 AMThe economy is certainly susceptible to a price shock in equities or real estate. We saw some of that when the NASDAQ tanked in 2001.
I would argue that the better diversification between people's capital and labor (human capital) assets would protect people in a downturn.
I am not trying to get my buddy overly-leveraged into the housing boom but I do reject his assertion that it is "faery gold" and not actual, valuable assets.
Posted by: jk at August 8, 2005 11:07 AM | What do you think? [2]