Monday, November 7, 2011

How Joe Lunchbucket Could Get Money for Capital Homesteading

One of the most common comments that comes up when talking about Capital Homesteading is, "It's a nice idea, but where are you going to get the money? You can't get money except by saving it yourself or borrowing it from somebody who has saved. You can't afford the interest payments on that. That's capitalism. The only other way is to redistribute, that is, take the money away from somebody else who has saved. That's socialism."

The answer? The belief that you can't get money for investment — to buy capital — except by saving it yourself or borrowing it or just taking it away from somebody who has managed to save is true . . . as far as it goes. This belief, however, assumes that the only way to save is to cut consumption and accumulate cash. This is what Kelso and Adler called "the slavery of past savings."

There is another way: Let the capital pay for itself out of its own future earnings. Anybody can "create money" by promising to pay for something he or she receives now in the future and having the promise accepted. It's called "credit." When it's used to purchase food, clothing and shelter (consumer goods) now and pay later, it's called "consumer credit," and it's pretty much the worst form of credit. When it's used to purchase capital that pays for itself out of future earnings, it's called "capital credit," and is the very best form of credit — and of creating money.

This is called "future savings." Instead of reducing consumption in the past or now to finance new capital, increase future production from new capital that you've promised to pay for out of future profits. You don't save to save now, produce later. You can produce now, and save later. In other words, get "credit." Credit is nothing more than a promise to repay a loan out of future profits.  You can use the promise itself as money to buy capital, then use what the capital produces to repay the loan. It's a lot easier and faster than saving now and then producing later.

It could work this way. Joe Lunchbucket gets a notice in the mail from the government that the Congress passed the Capital Homestead Act of 2012. A government survey of the capital growth needs of the economy has determined that in the coming year new and existing small and large for-profit companies want to sell $2.31 trillion worth of newly-issued, full dividend payout, full voting shares to meet their growth and modernization needs in response to the demands of their U.S. and global customers. The Act gives all financially sound companies a way to invest in new capital and create jobs to meet new customer demand for new and better products and services and even begin to construct and modernize new infrastructure through citizen-owned for-profit corporations.

The notice informs JL (that's "Joe Lunchbucket") that, as a new right of citizenship under the Act, like the political ballot, Joe has the right, if he chooses, to receive a free government-issued Capital Credit Card that for the coming year will entitle Joe to receive free of charge capital credit to purchase $7,000 worth of the newly-issued shares of "qualified" companies with interest-free "new money." The Capital Credit Card isn't money, but it allows Joe to get credit, another form of money, to buy capital that can pay for itself.

Joe will not be at risk if the loan cannot be paid off, because the loan will be insured by one of several "qualified" private capital credit insurance companies and reinsured by a for-profit capital credit reinsurance company established by many capital credit insurers. Joe's loan is to be entirely backed by the anticipated profits in the form of dividends on each of the "qualified" shares that Joe, with his advisors, decides he wishes to buy, with added backup from the capital insurance pool if the shares fail to earn a dividend. After the loan on each of the shares is repaid, Joe will receive dividends directly as "supplemental income" over and above income received from his work and all other sources.

The notice would also inform him that he should go down to his local commercial bank that is a member of the Federal Reserve System to set up in his name a "Capital Homestead Account" (CHA). Like an Individual Retirement Account ("IRA"), a CHA would be a "tax-shelter" for Joe to build up a growing accumulation of income-producing investments to meet his future consumption needs. Joe's CHA is designed to distribute dividend incomes during Joe's working career as well as when Joe retires or becomes disabled.

Joe's Capital Credit Card would authorize his CHA "tax shelter" to be the legal vehicle for receiving each loan to purchase "qualified" shares that Joe wants to buy from the market — and would allow Joe to defer taxes on the income used to purchase the shares until he takes the assets out of the CHA or dies . . . at which point the assets become income to Joe's heirs, not to the estate. The heirs, not the estate, pays taxes, unless the heirs put the assets into their own CHAs, in which case taxes are again deferred.

Each loan for buying shares would take the form of a promissory note backed with a "bill of exchange" that Joe "draws" or "issues." Joe's bill (which, like any bill, has to be paid) is backed in turn by the full stream of future profits paid out to Joe's CHA. These anticipated (but obviously uncertain) future profits would in turn be backed by the "future savings." These future savings take the form of the future capital goods and future consumer goods and services that the company issuing the shares expects to produce with the money the companies receive from the sale of shares to Joe's CHA.

The bank "discounts" Joe's bill of exchange (gives him less than the face value of the bill), issuing a promissory note in return. The discount covers the cost of the bank's own services and the risk premiums to be paid out of future dividends expected on the shares purchased by Joe's CHA. Each bank's promissory note is thus a form of asset-backed "money" over and above money issued by the government in the form of coins and official currency. Bills of exchange discounted by member banks of the Fed can be rediscounted in the financial markets or directly at the (re)discount window of the regional Federal Reserve Bank to be backed by the Fed's promissory notes: newly-issued currency or Fed demand deposit accounts under Section 13, paragraph 2 of the Federal Reserve Act. In other words, "money" is anything that can be used in settlement of a debt, and new capital credit can be created in ways that it can be repaid entirely with "future savings," making it possible for today's propertyless to own future capital.

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1 comment:

Ben Berry said...

"You don't save to save now, produce later. You can produce now, and save later." I'm not always able to follow the macroeconomic theory posts on this blog, but this is one of the clearest statements I've seen yet of Capital Homesteading. I'll be sharing this very straightforward article with my friends. Thanks.