Home construction maven Toll Brothers Inc. (NYSE:TOL) joined the choir of the footsore and cash-starved today by calling on government to make it all better. According to CEO Robert Toll, the U.S. government needs to “aid” the housing market, primarily by propping up home values.

His line of argument makes sense in the strange, warped world that has emerged in 2008: If you throw billions at the empty suits who made high-risk loans and the empty heads who committed to them, how about making it easier for those who are willing and able to take out a solid mortgage… by reducing mortgage rates and fees and by “providing incentives such as a buyer tax credit for the purchase of all types of homes.”

Just like the U.S. car industry: Have Uncle Sam help out with some cash so unionized car workers can keep making cars.

From a practical point of view, they all have a point. The government will end up paying through the nose one way or another. It’s either soaring unemployment benefits, welfare and chronically reduced tax revenues as people abandon unaffordable homes and get laid off from bankrupt companies.

Or it’s lending debile companies billions of dollars you’re unlikely to see again.

But lowering mortgages further from near-historic lows and increasing your mortgage interest tax deduction does not create demand for houses. Nor do government-subsidized parking lots full of brand-new Suburbans. Even though my father-in-law assures me that GM is now producing the best vehicles ever…

For the simple reason that people don’t buy homes or cars when they’re unsure that they have a job to go back to a week from now.

We’ve entered a vicious cycle: If consumers don’t spend, employers cut payrolls. Unemployed consumers spend even less… and eventually default on loans and mortgages, bringing down home values, stock valuations, business and industry.

Someone upstairs has bumped into the universal “reset” button. And throwing good money after bad will not stop the chain reaction.

As a culture, we’re getting an object lession in the meaning of value. As I wrote in my Hot Trading Secrets in 2005: “Value is defined by what someone else is willing to pay, or by what someone wants to receive at any particular moment.”

There is now the chance that nobody is willing to pay anything. Zero, as in yesterday’s Deutsche Bank projection of GM’s share price, is now a likely valuation for all kinds of assets.

And that’s on a good day!

Value exists merely as the subjective perception that you can arbitrage an asset to your own benefit. That the house you sign over your savings and the bulk of your cashflow for will be cheaper than renting and higher in price in the long term. That the new car will lower your transportation cost, open up job options, or is cheaper than hair plugs. That the stock you buy will be worth more in the future than you spend on it now.

In that regard, we’re not so much looking at the destruction of valuation… but a zeroing out of the core concept of value.

Nothing illustrates this better than the development of oil prices. Driven to $147 by the expectation that even historic highs would prove to be value propositions, oil’s steep downward trajectory now points at a complete destruction of value. Brent crude oil prices today sank under $55 a barrel, a 21-month low.

On the NYMEX, light sweet crude for December dropped $4 to $58.32, the lowest level since March 21, 2007.

Like with consumer spending and GM stock prices, the bottom for oil is as elusive now as it was a month ago. My predictions of $50 oil, which elicited howls of protest just a month ago, now look like they are on the conservative side. Oil at $30… or even at $10 a barrel now are more probable than oil at even $100.

Which means we will see parity between the dollar and the euro by April 15… and a steep plunge in gold prices. Based on the recent oil-to-gold ratio, $50 oil would peg the gold price at $375. $30 would mean gold at $225. And $10 oil could mean gold at $75.

Goldbugs will argue that oil-to-gold ratios work only on their way up. Or that historically, it was twice the 7.5 factor we’ve seen in recent years.

Alright. I deal. Here’s that best-case scenario: At 15, twice of the average of recent years, we get $750 gold at $50 per barrel of crude oil. Sounds reasonable. But that still leaves us with $450 gold at $30… and $150 gold at $10.

Unreasonable? Gold bugs have selective memories. But in the past 30 years, gold prices have spent far more years below $500 than above. And more years below $400 than above $700.

Who, after all, will buy gold jewelry when the Arab States tally up their monthly maintenance bills for indoor skiing resorts?

Source: GM’s Zero Valuation: Portent of things to come