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Understanding Real Economics – Part #5

February 29, 2012

What is the difference between PRICE and VALUE in our market economy today?

The concepts of ‘price’ and ‘value’ are very important to understand. Both of these concepts are subjective today, but ‘price’ appears objective as it is specified as a certain ‘number’. For example:  As of today, the ‘price’ of silver is $34.97. I personally, have a number of one ounce coins in my possession which I keep for various personal reasons. Why do I think that the ‘value’ of these coins will increase (in dollars) going forward? My view is that ‘value’ is subjective and that given our current chaotic financial system, there is going to be a growing DEMAND for these one ounce silver coins going forward. I base my perception on past history and the behavior of the markets when financial conditions become chaotic. ‘

The silver coins that I now own were purchased for a ‘price’ of much less than $34.97. My view is that our digital dollar will become less valuable in the MINDS of consumers going forward. As more people become AWARE of our mostly ‘worthless’ digital dollar, many will desire to exchange these units for a real thing like SILVER. This means (if I am perceiving trends correctly) that my one ounce silver coins can be sold for more than the current ‘price’ of $34.97. What this means is that the ‘value’ of these coins is likely to INCREASE later this year and in 2013 and 2014.

The important point to understand is that both ‘value’ and ‘price’ today are subjective concepts. Prices change from moment to moment in our realtime digital markets. Many of the coins I now possess were purchased at a ‘price’ of $9.00 -$11.00. Today, the price of a one ounce silver coin is at $34.97. And the ‘value’ of this coin is likely more than $40.00 (as coins generally sell for more than the spot price of silver). What we need to understand is that ‘price’ and ‘value’ are the two key concepts which underly all goods and services in a Capitalistic economy.

In my area of Tucson, Arizona, we have neighborhoods where houses are increasing in ‘value’ and other neighborhoods which are decreasing in ‘value’. Value is a human psychological concept which each of us perceives uniquely. You can go to: and get the estimated ‘value’ of your property (house and site) at this moment. You may agree or disagree with the ‘value’ that has been assigned to your property. But this ‘value’ is estimated and assigned based on prior sales (comparables) in your neighborhood. This ‘value’, however , is subjective and if you go to another website like: you may discover that your property has a different dollar number assigned. Why are these two sites showing different ‘values’ for your property?

The key concept to understand is that all ‘values’ in our marketplace today are SUBJECTIVE. There is no objective ‘value’ for your house or your silver coin (or any other item or good). VALUE is derived from the subjective mindset of each person and this means that every person will derive a unique ‘value’ for your property, good, or asset. This also applies to services and activities. VALUE is the key concept of Capitalism and everyone views ‘value’ differently (to a degree). This situation was not as prevalent prior to 1971 as it is today. Why?

Prior to 1971, our measuring unit (the dollar) was much more stable. This situation was caused by our ‘dollar’ being tied, backed, and convertible into a real physical commodity (gold). If we go all the way back to 1792 when our ‘dollar’ was defined as 371.25 grains of silver up until 1971, we can witness a relatively ‘stable’ price level for most goods and services. During much of this period we could say that ‘price’ and ‘value’ were basically similar and relatively stable over time. The price of a house or a bushel of wheat remained relatively constant (with minor price changes) for most of this 179 year period. Economists would say that our ‘dollar’ was stable and the purchasing power of this unit was relatively constant.

All this has changed since the closing of the gold window in 1971 by our then President, Richard M. Nixon. Since 1971 we have witnessed a decline in the purchasing power of our ‘dollar’ by some 90%. This means that ‘prices’ of goods and services have increased many fold during this 41 year period. We have witnessed house prices increase from an average of (say) $30,000 in 1971 to some $250,000 in 2008. What caused this change in ‘value’ for a house which was basically unchanged (with minor physical improvements and normal maintenance)? The CAUSE was the increase in the number of money ‘units’ available to BID for this house.

Prices increase as people obtain more money ‘units’ (via loans or other means) to BID for this house. Values increase even though the material house is basically unchanged. This is what is likely to happen for the commodity we call SILVER. The one ounce coin does not change in material composition or quality…but the ‘value’ changes as people BID for this coin. All this is subjective and psychological. If the emotions and thinking of people changes, this same one ounce silver coin could go to zero. What is a thing worth if no-one desires it? ZERO is possible if this situation were to emerge in the marketplace. Who knows what people will THINK after the collapse of our monetary SYSTEM?

In conclusion, VALUE and PRICE are both subjective today. Oil can go to $200/barrel and then back to $30/barrel (all within a few months). Gold can go from its current number of $1718 to $5000 and then back to $35 at some future date. Who knows what ‘values’ will emerge as people and money ‘units’ change going forward. If you want to make good and prudent investment decisions today, we need to understand the subjective nature of all ‘prices’ and all ‘values’. What will Bernanke and the other Central Bankers do in the coming months and years? If they flood the markets with trillions of money ‘units’ to destroy our dollar, we could witness hyper-inflation (a situation where my silver coin could go to $500 or more).

If the future is different because people have LESS money ‘units’ to freely bid for goods, we could see my silver coin go to $1.00 (the number defined by Thomas Jefferson in 1792 for our ‘dollar’). There is no way to forecast what will happen in the future. Our monetary SYSTEM is now in serious dysfunction. How will this situation play out in the coming months and years? My sense is that our digital money ‘units’ will evaporate into ‘money heaven’ at some future point. This is possible as these ‘units’ (now mostly digital units) are imaginary and meaningless when it comes to real economics. Value and Price are different today in most situations. Watch the markets to discern future trends. It’s all SUBJECTIVE today! Enjoy!

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