Vertical money 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

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

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

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(P t+1 ), decrease w/capital gains tax t cg.  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 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

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%