THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, October 8, 2009

"Show Me the Money," Part IV

Realizing that many of the misapplied economic solutions to the current economic crisis are rooted in redefinitions of basic concepts helps us understand the necessity of getting back to fundamentals, especially when it comes to money. Once we know that "money" is a means of conveying a property interest, we realize that you can't create money unless the new money is backed by the present value of existing or future marketable goods and services — that is, with hard assets of some kind, especially in the form of capital that generates its own repayment out of future earnings.

Thus, instead of allowing the State to monetize its deficits by creating money backed not by assets, but by its own debt, all money should be backed by private sector assets in the form of industrial, commercial, and agricultural capital. To restore the functioning of Say's Law of Markets, these assets should be broadly owned by people who will use the income the assets generate first to repay any acquisition loan, and then use the income for consumption, not reinvestment. In consequence, once Capital Homesteading has been implemented, the State will no longer be able to create money for non-productive uses. What, then, happens to the people who rely on government debt instruments to fund their retirement portfolio?

Cutting the government off from the central bank "money machine" will not harm holders of government debt, but in point of fact will benefit them to an extraordinary degree. Not being able to create money at will for its deficits, the State will be forced to go to the money markets and compete with everybody else for the limited (if admittedly huge) existing accumulation of savings. This will force the price — the interest rate — of existing savings up very high. Private sector businesses, of course, will act prudently and, even if they don't like broadened ownership, will go with it to get the interest-free new money for new capital formation, keeping prices down, even decreasing them as technological innovation steps up. Government, however, is a spending addict, and does not act prudently until and unless forced to do so. Consumers and government will bid up the price of existing money before they cut spending and start to reduce debt.

I predict we will see interest rates on existing accumulations of savings go up as high as 40 or 50% before the tax base is increased sufficiently by Capital Homesteading for the government to get its house in order and start paying down the deficit and cutting spending. This will take approximately 20-30 years from the date that the Capital Homestead Act is enacted, and accumulations start generating meaningful incomes. By that time, the tax base could effectively double, with the result that, when the deficit is paid off, the tax rate will be cut by at least two-thirds (given that entitlements are two-thirds of the federal budget). Within 40 to 50 years, the interest rate on existing accumulations of savings will fall to the "real" cost of capital — which is to say, to the "risk premium" and administrative costs associated with a loan.

The only market for existing accumulations of savings will be insurance pools. Because insurance pools should never be invested in that which the company is insuring (a lesson that the insurers in the recent meltdown forgot), government debt and precious metals might be the only available assets — and government debt will disappear. We could very easily end up with a currency backed by hard assets in the form of newly-financed capital, and insured by accumulations of gold and silver — a return to the gold standard that frees the economy from the constraints on growth imposed by a limited supply of specie (gold and silver), while denominated in something like energy units.

The key to the whole thing is to understand that Kelso and Adler put their finger on the main problem in the subtitle of the second book, The New Capitalists (1961): "A Proposal to Free Economic Growth from the Slavery of Savings." Convincing economists and policymakers that we do not need to be tied to existing accumulations of savings is going to be the hardest battle, given that the "slavery of savings" is an unquestioned assumption, tantamount to a religious dogma, of virtually every school of economics in the world today.