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?”
“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.
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.
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