Monday, June 22, 2015

How Long?


Last week we got a very good question from a faithful reader.  It involved how long before we would start to realize the benefits of a Capital Homesteading program one it is enacted, and some of the details.  Pretty quickly, all things considered, as you’ll see from our response.  First, however, the question:

“1. In my thinking about the onset of effects of CHA [Capital Homestead Act] legislation, I wonder how soon after such passage will economic effects be logged. I refer to such data as is presented in the annual Economic Report of the President.

“2. I assume that there will be some projects available from the get-go, that the low interest rate will release, which will take a year to begin operation and another year to begin to pay a dividend.  During that first year, is there an estimate of the added investment that will enter the economy above the expected amount?  I recall that you/someone has stated that good (strong) effects might be evident in as little as 2 years. Where in the economy would that be?

“3. When earnings is available for payment, unless some portion is not applied to payback of the CHA Loan, there will 7 to 9 years of little or no effect in the economy.  It seems that somewhere in the past, a proposal of 50 percent loan payback/dividend was made.  Is this reasonable, as it would lengthen the payback interval?  Also, should any portion (10-20%) of the earnings be retained for R&D/cash flow purposes, or is that part of the original business plan?”

Let’s take these one at a time.  And let’s also be extremely conservative — just in case we retain a few critics who haven’t been answered.

1. The immediate effects of a CHA should be felt within 18-24 months — but not because of the dividends, but the effect on (if you'll excuse the expression) “job creation.”

This is because forming a couple trillion dollars worth of new capital will result in new jobs, which will trigger new demand as workers spend their income, and thus more jobs to meet the new demand.  The direct effects of a CHA will be felt within 7-9 years . . . the length of time (estimated) needed to repay the first round of new capital completely and apply the full stream of dividends to consumption instead of debt service . . . which will create yet more demand and thus (again pardon the expression) result in more job creation.

2. We’ll be very cautious and assume that the first year of a Capital Homesteading program will focus first on the enormous number of projects that must be undertaken regardless of the cost of financing.  (Strictly speaking, Capital Homesteading “pure credit” financing would be interest-free, although not cost-free — but that’s a technicality we don’t need to address today.)  This appears to be around $2 trillion.

Next in line would be those projects that have been in abeyance due solely to lack of available financing at a reasonable cost.  We could consider this “additional investment” — but is it really?  We’ll assume it is, since it’s above the bare minimum.  We don’t have any solid figures for this, but let’s assume that it’s roughly half of the amount of the “must be undertaken” projects, or $1 trillion.  Just to be ultra-conservative, we’ll include in that replacement capital that managers have realized will be cheaper financed with pure credit and the cash they’ve been retaining for replacement that belongs to the shareholders can be paid out to the shareholders.

So, to answer the question, we’re estimating — hypothetically — that the additional new capital increment would increase the amount of new capital formation from $2 to $3 trillion.

3. As we have seen, the economic benefits of a Capital Homesteading program would begin immediately, as soon as the workers forming the new capital get paid.  Once the initial loans are paid back, there would be another infusion of consumption income into the economy due to freeing up cash formerly used for debt service.  This would increase by the same amount every year, everything else being equal.

All the loans would have to be paid back, in full, for the system to work, with capital credit insurance and reinsurance to repay the loans for failed projects.  As for working capital and R&D — those are, technically, a capital item and an expense, respectively.  If more cash is needed for operations, the company should issue new shares, not retain earnings.

#30#

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