{"id":93494,"date":"2019-07-12T12:46:10","date_gmt":"2019-07-12T19:46:10","guid":{"rendered":"https:\/\/lifeboat.com\/blog\/?p=93494"},"modified":"2019-07-12T18:06:51","modified_gmt":"2019-07-13T01:06:51","slug":"cars-gold-houses-toys-stock-what-gives-value","status":"publish","type":"post","link":"https:\/\/lifeboat.com\/blog\/2019\/07\/cars-gold-houses-toys-stock-what-gives-value","title":{"rendered":"Cars, Gold, Houses, Toys & Stock: What gives value?"},"content":{"rendered":"

\"\"<\/a>
The title of this post is intentionally misleading. We frequently discuss the traits that lead to value here in the Lifeboat Blog. But today, I was asked a more nuanced question: \u201cWhat things will hold their value?<\/em>\u201d<\/p>\n

And there is a ulterior motive in being a columnist for Lifeboat. Analyzing the dynamics of durable value leads to some surprising conclusions about the money supply and what a society chooses to use as money. We\u2019ll get to this at end of this post.<\/p>\n

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We know that value comes from supply and demand<\/a><\/span>. There are no exceptions. But, we have not addressed the properties that make an asset hold value over the long haul. Let\u2019s consider some examples\u2026<\/p>\n

Cars<\/b><\/p>\n

\"\"<\/p>\n

In an affluent, mobile society, most people desire personal, point-to-point transportation \u2014 and so there is clearly a demand for automobiles.<\/p>\n

But style & technology change rapidly and automobiles deteriorate with use and weather. After 8 to 10 years, their cost and maintenance rise dramatically, and owners lust for a new model. So cars don\u2019t get our award for assets that hold value.*<\/p>\n

Popular Toys<\/b><\/p>\n

In the 1970s, the Cabbage Patch doll from Calico Industries, and later, Tickle Me Elmo in the 1990s created a buyer frenzy that rivaled a lemonade stand in the desert. Shoppers fought each other to grab a limited supply. Clearly, demand was very high. The one shown below is listed at Ebay this week with a starting bid of $5,000. Other, less popular styles can be found for $4.99.<\/p>\n

\"\"At first, this demand was driven by clever marketing and crying children in the week before Christmas. Demand was driven by a parent\u2019s love. But at the peak of frenzy, demand shifted to buyers without children who felt certain that they could profit from selling the dolls that they snatched up first.<\/span><\/p>\n

But the demand was not durable. Fads driven by frenzy don\u2019t hold value for the long haul\u2014especially when a manufacturer can simply turn the spigot back on.<\/p>\n

Stocks & Bonds<\/b><\/p>\n

\"\"A share of stock represents ownership in a corporation. A municipal bond represents a lien against a city\u2014or the fees generated by an infrastructure project.<\/p>\n

In both cases\u2014especially bonds, which are a limited promise\u2014no one expects value to last forever. It is a time-sensitive bet with the intention of expiration, redemption or exchange. So, these things also fail our criteria for durable value.<\/p>\n

Houses & Real Estate<\/b><\/p>\n

\"\"Like cars, homes require ongoing maintenance. But, most people weigh the maintenance cost against the benefit of having shelter, rather than comparing it to their gain or loss in value.<\/p>\n

On the other hand, real estate value fluctuates in the long run due to things that are difficult to predict \u2014 population density, demographics, and quality-of-life issues related to infrastructure: weather, seismic events, politics, and access to health care and education.<\/p>\n

Some real estate rises enormously in value over 50 or 100 years. Yet, we have seen boom-and-bust cycles that wipe out substantial wealth. So, real estate does not cut it in our contest for durable value.<\/p>\n

Gold<\/b><\/p>\n

The allure of gold and other precious metals is that their supply is capped \u2014 or limited by slow and predictable growth. The asset is difficult to find. It is acquired only from natural phenomena.<\/p>\n

\"\"<\/a>So, if we can also make it fungible, divisible, portable and difficult to counterfeit, then it meets most of Aristotle\u2019s requirements for a functional currency. Theoretically, this can lead to widespread demand.<\/p>\n

Gold certainly has exhibited its ability to hold value throughout thousands of years. But it is not so easily tested and divided in the field, and the impression that it has intrinsic value<\/i> is an illusion. That\u2019s because the fraction of gold acquired by investors dwarfs the amount actually needed for dentistry, electronics and even jewelry. In this modern era, even gold is becoming a house of cards, because its value is built upon speculation and emotion.<\/p>\n

Oil (aka \u201cblack gold\u201d)<\/b><\/p>\n

\"\"With the rise of the automobile and power plants that burn fossil fuel, oil became a reserve currency of the 19th and 20th centuries. But there are two problems with it holding value over the long haul.<\/p>\n

First, unlike gold, oil is a consumable in every market. Therefore it is difficult to think of it as an asset. Also, we now live in a century in which energy and transportation is rapidly switching away from oil, while at the same time, new technology is making it cheap to acquire new oil. This (along with a history of violent political theater) dramatically deteriorates its potential as a store of value in coming years.<\/p>\n

Money<\/b><\/p>\n

The supply-demand dynamics of money is widely misunderstood. More than 2,300 years ago, Aristotle defined the properties of a functional currency<\/a><\/span>.<\/p>\n

Earlier, we stated that all value comes from supply and demand. But, it is fair to ask \u201cWhat creates the demand?<\/i>\u201d or \u201cWhat backs the expectation of future demand?<\/i>\u201d Surprisingly, even if we limit our scope to just one country (USA), the value of government-issued currency has been tied to different things over time:<\/p>\n