vertical money gov’t forces us to pay taxes; we must accept money or go to jail our economic...

Monetary Systems, Policy and Equity

Joshua FarleyCommunity Development and Applied Economics

Gund Institute for Ecological EconomicsUniversity of Vermont

Joshua.farley@uvm.edu

Vertical money

$taxes

$

$

profits

$

• Gov’t forces us to pay taxes; we must accept money or go to jail

• Our economic production backs money supply

Horizontal Money &

Industrial Capitalism

What if there’s a great lending opportunity, and bank has already lent 19$?

Where do i (interest) and p (profit) come from? More loans or more vertical money required.

ECONOMIC GROWTH What if p<i? Procyclical monetary system (positive

feedback loops) Inherently unstable

19x$

19$+i

19$+p19x$

$

Conventional Investment Theory

Buy an asset if interest payments ≤ revenue from asset:

What do people invest in (USA)?

~$14 trillion in mortgages

Record margin debt poses risk for bull market “The amount of money investors borrowed from Wall Street

brokers to buy stocks rose for a seventh straight month in January to a record $451.3 billion”

The repurchase revolution Companies have been gobbling up their own shares at an

exceptional rate. There are good reasons to worry about this

Since interest paid on debt is tax-deductible, whereas interest earned on cash is taxable, by increasing its net debt to finance buy-backs or dividends, a firm cuts its tax bill.

Most money is borrowed to buy existing assets, not to create new wealth

Interest Bearing Debt in US

Financial Capitalism &

Asset Inflation

19x$

$

19$+p

Current System: Financial

Capitalism & Asset

Inflation

19x$

19$+i

19$+p

$

19$+p

Current System: Financial

Capitalism & Asset

Inflation

HEADLINE: Despite Drop in Commodity Prices, Farmland Values Rise

Rising asset prices Most loans for mortgages, stocks,

other assets Drains money from real economy

Companies buying back stocks

19x$

19$+i

19$+p

$

19$+p19$+2p

19$+2p

19$+p + i

What determines asset prices? P = asset price (e.g. land), R = income

stream (e.g. rent), r = opportunity cost of money (e.g. interest rate)

t= annual tax on asset (e.g. land tax)

What determines asset prices?

Asset prices also increase w/ expected future value of asset E(Pt+1), decrease w/capital gains tax tcg.

When asset prices are increasing, entire revenue stream can be used to pay interest Financial sector becomes new rentier sector

CREDIT AVAILABILITY IS KEY!

Expected future price increase, driven by speculative demand in positive feedback loop

NYT Headlines: Welcome to the Everything Boom, or Maybe the Everything Bubble “Around the world, nearly every asset class is

expensive by historical standards.”

Interest Bearing Debt in US

Growth and Inequality or

Collapse Debt is 360% of GDP and growing faster

than GDP

Interest on total debt is likely to be 15% of GDP. Direct transfer to lenders

Credit market debt,net of gov’t

Factors promoting speculation

Inelastic supply Supply increases little in response to price

(land, fossil fuels, food, minerals, etc.) Small increase in demand = large increase in

price

Oil production and oil prices from 2003 to 2010. Oil prices more than tripled between January, 2005 and July, 2008, while total production increased by less than 3%.

Factors promoting speculation Inelastic demand

Demand decreases little in response to price (essential and non-substitutable resources: fossil fuels, food, land, minerals, etc.)

Small decrease in supply = large increase in price

Factors promoting speculation

Large pools of capital seeking higher returns (inequality) “Global FX volume reaches $5.3 trillion a day

in 2013 –BIS” ALL THESE FACTORS CONVERGE IN A FULL

AND UNEQUAL PLANET

Current System: Financial

Capitalism & Asset

Inflation

Bubble busts, banks capture assets, stop issuing new money

Industrial economy must also collapse

19x$

19$+i

19$+p

$

19$+p19$+2p

19$+2p

19$+p + i

Working group projects

Hypothesis: Assets are owned by wealthiest individuals; asset price inflation main cause of wealth inequality.

Use Picketty’s time series on wealth inequality, estimate coefficients

Working group projects

Hypothesis: Much of economic growth in recent years is actually asset price inflation

Build model of economy with fixed productive capital (land and built capital) and fixed output; show how asset price inflation can lead to increased GDP, even with no increase in real output

Subtract asset price inflation from GDP, estimate correlation between energy use and GDP

Rethinking taxation

Not required for government revenue

Required to: reduce resource use back dollar achieve desirable income distribution adjust aggregate demand, reduce money

supply

Fiscal Policy

Expenditures Government can target money to address

unemployment, misery, poverty; provide public goods; restore natural capital

Taxation Tax rent, natural resource extraction, waste emissions Dramatic income tax increases, asymptotically

approaching 100% How much residual is enough for rich?

$5,000,000=99.9% tax rate $1,000,000= 99.98% rate

Relative wealth

Marginal tax rates and income share for

top 0.1%