Everything in this world is valued in terms of other things. Most people use their home currency as the unit which they measure everything in. It is the anchor, the base. A dollar is always worth a dollar, and everything else changes value. If you want to avoid risk, sell everything, hold dollars, and wait, because the dollar is the root, the North star around which everything else rotates, right?
Wrong.
Your home currency is the most practically useful root of value for you, because your debts are measured in it, and prices of goods and services in your country are sticky to it. But currencies move relative to each other.
Steve Forbes said at the Hong Kong Money Show in March of 2009: "Gold is, as much as possible in this imperfect world, steady in value. And when you see different prices, like different dollar prices, different pound prices, different yen prices for gold, that doesn't mean the price of gold has changed, it means the price of the currency has changed. Gold is the constant.... It's like the North Star, it's a fixture."
Not quite, Steve.
There are no fixtures. The best analogy I can offer is to imagine a set of objects in space, perhaps a sun and 9 planets and some moons. They all move relative to each other. Is there necessarily one object right at the center of gravity that doesn't move? Not necessarily. What if it's a binary star?
That being said, in the solar system the Sun is the closest thing we have to a central fixture. The North Star is the closest thing we have to a star that appears to not move. And gold is the closest thing we have to a fixture for the center of gravity in prices.
Why? Because unlike other industrial metals, gold is not mined and used up, and then mined again to replace the stockpiles... rather, it is just stockpiled. And the amount of new gold mined is almost negligible compared to the amount of gold stockpiled. Thus, it isn't subjected to supply and demand to any great degree like other commodities are. It is used a little bit in industrial processes, but relative to the quantity of gold, this effect is negligable. So if you must have some base to value things in, gold may be better than the rest.
However, the total value of gold is small compared to the total value of everything in the world. It is not some gigantic Sun in the middle of it all. It is only a small planet, perhaps even a small moon. Being such a small piece, it doesn't seem logical that it would be so immovable in relative value. It doesn't seem to have all the characteristics necessary to be a center of gravity for prices.
There is a more ideal solution, however it is not easy. Add up the value of everything in the world, in any base (US dollars would be fine). Then divide any asset's value in that same base, by the total value of everything in the world. I call this fraction of world value. Now you can see if the price of your asset is going up or going down, as a fraction of world value. The difficulty of this methodology is enumerating all the valuable assets across the entire world. I don't know if anybody actually does this, but if you are reading this and you are aware of such a calculation going on somewhere, please let me know.
If you don't care so much about the Jones's and what they've got, maybe all the assets in the world are not the relevant set of assets you care about. There is an even more ideal solution. If you could forsee everything you will ever buy, use, or need from now until your death, you could calculate the value of things as a fraction of that set of goods and services. Now, as prices of things go up or down relative to that, you can directly see if you are improving your situation or not. But this one, being so damn ideal, is simply impossible to calculate.
Right now we have an accounting squabble. The FASB under Fair Value accounting (mark-to-market accounting) claims that Mortgage Backed Securities marked to market are worth about 30c on the dollar. Banks claim that mark-to-market accounting is inappropriate for a long term held-to-maturity asset, and on a cashflow basis these are worth 60c on the dollar.
Wikipedia reports " If cash flow-derived value, which excludes market judgement as to default risk, but which may also more accurately reflect 'actual' value if the market is sufficiently distressed (rather than sale value) is used, the size of market-value adjustments under the accounting standard would typically be reduced. "
This is not the first time I have heard people refer to an "actual value", and it won't be the last.
There is no such thing. Values are subjective and personal, not objective. The reason that person A can sell a thing to person B at price P is because person B values it more than person A. If there was an objective "actual value" that everyone subscribed to, nothing would trade at all!
Allowing banks to value their own assets via their own methods is akin to asking them "would you like to be insolvent today?"