In this excellent YouTube video by investment/finance guru Raoul Pal, called The Exponential Age, Mr. Pal mentions that Koreans have a far better understanding of cryptocurrencies and blockchain technology than Americans do.
This is of course the only reason I married a Korean, as I am sure it will give me a huge leg up as the world economy shifts into the “exponential age.” 😊
But, I actually have a far more interesting takeaway from Mr. Pal’s video.
He explains the main reason why home prices are rising so quickly and why we are not in a housing bubble – and it is not what anyone thinks.
We are not in a housing bubble because nobody who thinks we are is taking “The Denominator” into account – according to Mr. Pal.
WHEN MONEY SUPPLY INCREASES, HOME PRICES INCREASE
The “Denominator” refers to the total size of the U.S. Money Supply.
And – when the total supply of money increases in our economy like it did last year at an all-time record rate, the value of housing expressed in terms of those monetary units (dollars) must increase too.
This is because the value of the housing market overall remains approximately the same relative to the total size of the money supply.
So, if the total money supply doubles, the value of the total housing market should eventually double too.
And – according to Mr. Pal, the price increases we are seeing are partially a function of the money supply increasing at record rates.
Suppose America only has 100 homes in the entire country and that each home is worth exactly $1,000, making the total value of the housing market $100,000.
Let’s then suppose that the government suddenly doubled the money supply and the economy was not growing fast enough to absorb all that new money.
What would likely happen is that the value of those homes in terms of dollars would eventually double to $2,000 each.
The houses would not be more valuable in terms of goods and services you could trade them for, but they would be worth twice as many dollars.
Anyway, this is what is happening now to some extent, according to Mr. Pal, as the “M2 money supply” (cash, checking, time deposits) grew 26% last year.
And, given that home prices have not appreciated anywhere close to 26% since last year, this would imply that we have a long ways to go and that we should not be worried about the very fast appreciation we have seen.
This also explains why housing (as a hard asset) is a great inflation hedge.
SO – IS THIS REALLY THE #1 REASON WE ARE NOT IN A BUBBLE?
What do you get when you cross an elephant with a rhino?
Hell-if-I-Know? Get it? 😊 (that was really funny in the 4th grade.)
Anyway, I have no idea if that is the “#1 Reason” but it does make for great clickbait.
And – it is probably a much bigger factor than most people realize in any case, so agents might share this blog with clients who are concerned that the housing market is overheating.
YOU WON’T REGRET WATCHING THE VIDEO
Lastly, I encourage everyone to watch the video above by Mr. Pal (former Goldman Sachs exec. and hedge fund manager and current crypto expert), as it is fascinating and very encouraging.
He believes crypto and blockchain technology will transform the world and usher in a golden age that will increase global GDP by severalfold, and most importantly, allow everyone (not just the rich) to get richer.
Pro-Tip: If you watch videos at 2x speed, you can get through them twice as fast (you’ll be a bit twitchy and talk really fast, and your wife will think you’re nuts, but it is worth it).
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