– Comparing Money Supply, Government Inflation Statistics, Property Prices, and Gold Prices for the Last 10 Years
“House prices double every ten years”, the old adage goes.
So why is this?
Well, we reckon the following chart pretty much answers the question.
The chart is taken from a very intersting website called tradingeconomics.com. They have all sorts of data from just about any country on the planet. Inflation, GDP, Debt. You name it, they have it.
Anyway this chart is constructed using Reserve Bank of New Zealand (RBNZ) data and shows the nations money supply over the past 10 years. If you note the start and end points you’ll see the money supply has almost doubled from around 130 Billion as of December 2002 to over 250 Billion a decade later.
Now depending on which branch of Austrian Economics you follow (if any!), it will affect how you view the “quantity theory of money”. It may be an oversimplification saying that the amount of currency in circulation has a direct and proportional relationship to the prices of goods and services, but nonetheless more digital currency units chasing about the same amount of goods is going to mean paying higher fiat dollar prices for said goods. (See this recent video interview with Professor Fekete for his take on the quantity theory of money).
And this may be an oversimplification too, but isn’t it a handy “co-incidence” that the money supply has doubled over the last 10 years, while this is the same period often cited over which house prices will double? Could it be that rising house prices are actually just a reflection of an increasing pool of money chasing the relatively fixed housing stock?
And how’s this for spooky?
Here’s a website that shows the change in NZ house prices over the past 10 years…
This 98.79% compares pretty closely to a calculation we just did based upon the data points for 31 Dec 2002 and 31 Dec 2012 in a house price index chart on interest.co.nz. We arrived at an increase of 94.3% in the house price index, so again almost double over the same 10 year period.
How does this compare to the NZ government CPI calculations?
So we crank up the trusty RBNZ inflation calculator (perhaps trusty is not the best term to use in the same phrase as a central bank, although we guess they can be trusted to reduce your purchasing power in the long run!).
Interestingly when we plug in $130,000 at the end of 2002 (to correspond to the $130 Billion in the money supply chart), today (or at least as of last quarter 2012), a basket of goods and services would “only” have cost $166,972 10 years later. So at percentage change of 28.4%, this is “only” just over a quarter more 10 years later. So this is significantly less than the doubling of the M3 money supply. It’s also significantly less than the doubling of the house price index over the same period.
So now let’s look at bank interest rate returns.
We haven’t done this as a statistical analysis but please indulge us and lets say NZ bank deposit rates have averaged about 5% over the last 10 years. A reasonable assumption we’d say.
We’ll ignore the fact that withholding tax is payable on the interest to keep it simple too. But if we use the RBNZ numbers above for CPI then over the 10 year period you’ll get a return of 2.5% a year. Or 28.4% in total.
So even with not taking withholding tax into account you still would only have eked out a 2.5% return and thats based upon the government statistics.
How does this compare to Gold in NZ Dollars?
Gold at December 2002 was priced at NZ$651. At the end of December last year it was NZ$2026 (granted it’s $100 per ounce lower than this right now but we’ll stick to comparing the same periods as money supply, housing, and bank returns).
So gold in NZ dollars has “risen” by 211% or gained over 3 times it’s value when measured in dollars since December 2002. Of course as always, we remind you that the correct way to frame this is that paper money is losing value rather than gold “going up”.
So what can we learn from this?
1. Don’t trust government CPI figures or the current talk of how inflation is so very low. As we have mentioned many times in the past the various statistical adjustments and substituting of one good for another when it gets too expensive seriously underscores the rising cost of everyday goods. As does the fact that the likes of flat screen TVs and computers which are constantly falling in price, are also included in CPI calculations, but we don’t buy them everyday.
2. Don’t leave your money in the bank long term. You’ll be getting a negative real return after the “real” rate of inflation is taken into account.
3. Real assets such as property and gold and silver are the way to go during the slow but steady death of money, rather than bank deposits.
4. Interestingly the above numbers show gold actually outperformed property over the past 10 years in New Zealand. Property went up almost 100% whereas gold went up over 200%.
What do you think? Is it just a coincidence that the NZ house prices have risen in proportion to money supply growth over the past 10 years? Show us you’re alive and leave a comment below!…