Wednesday, July 17, 2013

Some (More) Questions About Future Savings


We recently received two questions about the monetary theory underlying binary economics, especially as it would be applied in Capital Homesteading.  The first question was whether future savings are any more secure than what backs the currency now.  The second question was how future growth actually backs a currency.

1) Security of future earnings.  Ironically, the currency in most countries is already backed by what, technically, must be considered “future savings,” that is, the present value of future increases in production, or future earnings.  The problem is that the issuers of the financial instruments that back the currency, and that are backed in turn by the present value of the future increases in production, don’t actually own the value they are monetizing, nor do they have a legal claim to it.

They are governments, and governments only legally have what their citizens grant in the way of taxes, and those taxes have to be collected before a government owns them.  A government does not own the earnings out of which the taxes are paid.  Depending on how angry the citizens become, they may not grant any taxes.  It has happened.  Then, the citizens might not even have the earnings with which to pay taxes — ultimately, all taxes are “income taxes.”

As Dr. Harold G. Moulton explained in The Formation of Capital, the demand for capital is derived from consumer demand.  The economic dilemma, as Moulton called it, is how do you have a successful investment if you have to cut consumption to finance new capital, and yet at the same time you need increased consumption to make the new investment feasible?  Moulton's answer is to finance new capital not out of the present value of past cuts in consumption ("past savings"), but out of the present value of future increases in production ("future savings").  That way, consumption is not harmed.

The problem that Louis Kelso addressed is how to sustain consumption power when most people have only their labor to sell, and human labor is being replaced by advancing technology.  The issue here is not how to reduce consumption, but where to get the wherewithal to consume in the first place.  The answer is to make formerly propertyless sellers of labor into owners of capital who will use their capital incomes first to pay for the capital, and then for their consumption needs — both of which count as consumption from the producers' point of view, and both of which ensure as far as humanly possible that consumer demand will be there to create a market in which producers can make the profits that provide the consumption incomes that sustain demand.

2) Future growth backing the currency.  As Benjamin Anderson pointed out, the first principle of commercial banking is to know the difference between a mortgage and a bill of exchange.  A mortgage is a financial instrument backed by the present value of existing marketable goods and services.  A bill of exchange is a financial instrument backed by the present value of future marketable goods and services.  Both can be used as money directly by offering them and having them accepted.  If not, they can be turned into currency or currency equivalents (e.g., demand deposits) by discounting or rediscounting (selling) the instrument at a commercial bank.  The bank issues a promissory note and uses the promissory note to back banknotes or demand deposits.  In this way the present value of existing and future marketable goods and services stands behind the mortgage or bill, which stand behind the bank's promissory note, which stands behind the currency or demand deposit.  The money supply is backed by assets.

What screws this up is when the government emits bills of credit backed by future tax collections that it doesn't own, and thinks they are creating assets by issuing liabilities (right).  In that case, the money supply is debt-backed, and you get the mess we're in today.

#30#

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