vertical money gov’t forces us to pay taxes; we must accept money or go to jail our economic...
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Monetary Systems, Policy and Equity
Joshua FarleyCommunity Development and Applied Economics
Gund Institute for Ecological EconomicsUniversity of Vermont
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%