Yesterday we
looked at what many people in power (both politically and financially) think of
as “tax reform.” We discovered that
there is a big problem when you’re trying to reform the labyrinthine tax code —
it doesn’t matter which country, pretty near every one of them is a complete
mess.
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| Backwards everything do just. Me understand to easy it's. |
That is, under
the influence of Keynesian economics, the world’s tax systems are being
manipulated to try and make them do what the world’s commercial banking systems
and central banks were invented to do: fund private sector growth. At the same time, we realized that banks are
being manipulated to make them do what the world’s tax systems are supposed to
be doing: fund government operations.
In other words,
we discovered that — as with most things Keynesian — everything is
bass-ackwards. High wages bring
prosperity? No, prosperity brings high
wages. Inflation causes full
employment? No, full employment can
cause inflation . . . if you’re screwing with the monetary system.
Which brings us
to today’s topic: monetary reform. From
what we saw yesterday, it is clear that there is no way a rational tax reform
is going to get anywhere without a rational monetary reform, just as no
rational monetary reform is going to get anywhere without a rational tax
reform.
. . . and neither
will get anywhere unless the problem of maldistribution of ownership can be
solved.
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| Money is anything that can be accepted in settlement of a debt. |
Fortunately, all
three tie in together.
First, What is
money? Money is anything that can be
accepted in settlement of a debt, “all things transferred in commerce.” Money is the “medium” by means of which I
exchange what I produce for what you produce.
So what happens
when a non-productive entity starts issuing money, that is, promising to
deliver what it doesn’t produce in exchange for what others do produce? If it’s a private individual, it’s called
“counterfeiting,” i.e., illegally
making promises for other people to keep out of what they produce.
If it’s the State
doing it, of course, it’s completely different.
In that case, it’s not counterfeiting, but “Modern Monetary Theory,” and
the money is a “non-repayable debt the nation owes itself.” The State makes promises that productive
people are forced to keep.
Come to think of
it, “counterfeiting” and “Modern Monetary Theory” aren’t all that much
different when you stop to think about it, except that one is legal, and the
other isn’t. Except that the other isn’t
legal, either, if we’re talking about the United States which removed the power
to create money from the Constitution. . . .
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| Louis Kelso and Mortimer Adler |
Anyway, what
we’re looking at today is not what’s wrong, but how to fix it. And how can we do that?
We can do it by
killing two birds with one stone.
The Big Question
in any proposal for expanded capital ownership is where to get funding. The answer, as Louis O. Kelso and Mortimer J.
Adler pointed out in their two collaborations, The Capitalist
Manifesto (1958) and The New Capitalists
(1961), is in the science of finance.
The rule in
corporate finance is never buy anything that doesn’t pay for itself within a
reasonable period of time, these days around three to seven years, depending on
the type of capital. That doesn’t mean
the debt will be paid off in three to seven years, or that the cash will be
replaced, but that the capital will generate profits sufficient to breakeven on
the purchase price in that amount of time.
For example, a
widget-making machine (everybody in the finance textbooks makes widgets; there
must be one heck of a market for them) generates profits of $20,000 each year
and costs $100,000. What is the “payback
period”? Payback = Cost divided by
annual profits, so $100,000 / $20,000 = 5 years.
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| Be sure to google "Payback PERIOD Images," or watch out. |
Does that mean
the machine is paid for in five years?
No, it means “it pays for itself” in five years, a different concept. Given a ten-year acquisition loan with zero
interest (we’re too lazy to do a proper loan amortization schedule just for
this example), the machine will be paid for in ten years at a rate of $10,000
per year, leaving the owners to divvy up $10,000 per year in profit for the
first ten years of operation, and $20,000 per year after that.
Now, instead of
taking out a loan, or using company cash reserves, suppose the company issued
new shares to raise the money to purchase the machine? And sold the shares to people who previously
owned no shares, and who purchased them on credit, paying off the share
acquisition loan using the $20,000 per year in profits generated by the
machine?
Right there
you’ve solved the problem of people who own no capital by making them capital
owners.
Now suppose that
instead of lending money out of existing accumulations for expanded capital
ownership, the commercial banks tied in with the central bank created new money
so people without shares and without savings but with the opportunity to
purchase new shares could do so. If all
earnings were paid out as dividends (after being made tax deductible at the
corporate level) and the new shareholders were permitted a tax deferral on all
dividends used to service the acquisition debt (treated as ordinary income if
not used for that purpose), then new capital owners could be springing up all
over the place, and — per this example — own the machine in five years.
It would also
start shifting the backing of the money supply from government debt (which
produces nothing except more debt) to private sector assets . . . which was the
original intent of central banking.
Eventually, the tax base would be rebuilt to the point where the
government could fund everything out of taxes, and avoid debt completely,
except for short term borrowing out of existing savings to make up for
temporary tax collection shortfalls. And let's call it "Capital Homesteading."
Oh, yeah. Adopting a monetary standard that actually is
a standard would make some sense so that the value of the currency doesn’t keep
changing all the time. Silver lasted for
a few thousand years, gold for about a century . . . why don’t we try the
Kilowatt Hour or something objective like that?
It’s at least something to think about.
#30#