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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
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(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
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%