Economic Myths - Two in one column

Our Homey-in-chief serves up a double helping:

THERE is much to like about what Bitcoin stands for: free-market money, safe from the grabbing hands of a state that cannot wait to debase, devalue and decimate whatever currency it gets its hands on, destroying hard-working savers. For years now, techies of a libertarian bent have been doing their best to devise a workable digital currency that is genuinely distinct from existing fiat (or paper) currencies, and that is separate from the mainstream banking and financial infrastructure.

Bollocks.

He manages to be wrong on several levels at the same time (perhaps the Homeys and Faux Libs do this for sport?):
- "Money" or "currency" is not a thing in itself. It is a unit of measurement. And what it measures is indebtedness between two parties, i.e. one party owes the other party money.
- Therefore "money" is only worth as much as the borrower's (the issuer's) willingness and ability to pay, therefore ALL money or currency is "fiat" currency. G-d I hate that expression.
- The "state" can grab money directly by levying taxes. Income denominated in non-domestic currencies (like Bitcoin) is taxable income just like income denominated in sterling or payment in kind (company car benefits, for example).
- The "state" can also grab money indirectly by allowing privileged monopolists to charge "rent". Unlike traditional tax and welfare, where the government is an intermediary which collects and doles out the cash, with "rent", the money goes directly from private pockets to private pockets, but without the government (or a stable nation-state) to underpin the whole system, these transfers would not happen.
- The reason why governments like to "debase, devalue and decimate" (i.e. stoke inflation) is to keep the housing bubble going, at least in nominal terms. For sure, they are transferring wealth away from "hard-working savers" but so are all landowners, that's inherent in the system. Funny how he never mentions that.
- It was the UK government which invented sterling, nobody is forced to use it in everyday life. When trading with each other, we can use anything we like as a currency. Your employer can replace part of your salary with 'free' accommodation and a company car. Businesses can barter with each other. So in those terms, the UK government is perfectly entitled to trash its own currency.
- Bitcoin is a fiat currency like anything else. The government could, if it wished, issue coins and notes, or bonds, denominated in Bitcoins. If people think the government is a reliable borrower, they will be happy to use those coins and notes or to invest in those bonds. So in that way, the government can gets its hand on Bitcoins like any other currency.
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Britain needs to move away from a rental model exclusively dominated by amateur landlords operating cottage industries to one where large, modern, professionally managed institutional property firms offer many thousands of properties for tenants. That is the future for Britain's generation rent and one way in which the crippling mismatch between demand and supply will be partially rectified.

Yes, it is true that large institutional investors might end up offering a better service and longer/more secure tenancies than small landlords, and superficially, supply ought to mean lower prices... but does it?

It's difficult to think of an analogy for how supply and demand actually work in the rental (or home buying) market; but ultimately it's like saying "Sticks are cold and fire is hot. So we can cool the fire down by adding more sticks." This is a useful analogy in another respect; the fire is the result of there being lots of stick together in one place; you cannot work out which stick the flames "belong" to by taking out one stick, observing that it stops burning and then replacing it and taking out another. In the same way, the rental value of urban locations is down to the sheer number of people and businesses in that small area.

1. The total rental value of UK land is quite simply the total size of all the value created in the economy minus the "basic minimum" which is the minimum return businesses require to stay in business, or the minimum lifestyle which people are prepared to accept. Everything else goes to rent, we just don't notice most of it because owner-occupiers don't pay rent to themselves in cash.

2. The relative rental values of different locations depend on how favourable they are, which means mainly rents are higher where wages are higher. And the more people there are, the higher wages are (denser population = agglomeration and more specialisation etc). Build more homes and business premises, you get more people and more businesses and rents go up. Even assuming a fixed number of people, if more homes become available (to buy or rent) then people will always trade up rather than down; they will trade up to higher wage areas and end up paying more rent.

3. In the absence of planning restrictions, towns would expand outwards until the outermost homes are in marginal sites with a zero rental value, i.e. where the distance from the centre cancels out the advantages of being near a town. Every location which is closer inwards than that has a positive rental value. So while you can keep rents down to zero at the margin, the bigger the town and the more people there are, the higher the rental values in the centre. Thought experiment: once London reached a population of 100,000, there was a complete ban on any new construction. So people would have ended up in Birmingham or Leeds or Manchester, so the rents which are currently being collected by owners of central London land would be collected by owners of central Birmingham etc land.

4. So people are paying rent to be near other people. So ultimately, "supply of" and "demand for" whatever it is you get when you pay rent (what do you get, really? Is there a name for it?) is the same thing. Even if newcomers are offered a special deal, like below market rent social housing, that will ultimately push up the rents for everybody else (which is good if you own land and disastrous if you don't).