Money and inequality2x - The University of Vermont
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Transcript Money and inequality2x - The University of Vermont
Vertical money
• Gov’t forces us to pay
taxes; we must accept
money or go to jail
• Our economic production
backs money supply
Horizontal Money & Industrial
Capitalism
What if there’s a great lending opportunity, and
bank has already lent 19$?
Where do i (interest) and p (profit) come from?
More loans or more vertical money required.
ECONOMIC GROWTH
What if p<i?
Procyclical monetary system (positive feedback
loops)
Inherently unstable
Conventional Investment
Theory
Buy an asset if interest payments ≤ revenue from
asset:
What do people invest in
(USA)?
~$14 trillion in mortgages
Record margin debt poses risk for bull market
“The amount of money investors borrowed from Wall Street
brokers to buy stocks rose for a seventh straight month in
January to a record $451.3 billion”
The repurchase revolution
Companies have been gobbling up their own shares at an
exceptional rate. There are good reasons to worry about this
Since interest paid on debt is tax-deductible, whereas
interest earned on cash is taxable, by increasing its net debt
to finance buy-backs or dividends, a firm cuts its tax bill.
Most money is borrowed to buy existing assets, not to
create new wealth
Interest Bearing Debt in US
Financial Capitalism & Asset
Inflation
Current System: Financial
Capitalism & Asset Inflation
Current System: Financial
Capitalism & Asset Inflation
HEADLINE: Despite Drop in
Commodity Prices, Farmland Values
Rise
Rising asset prices
Most loans for mortgages, stocks,
other assets
Drains money from real economy
Companies buying back stocks
What determines asset prices?
P = asset price (e.g. land), R = income stream (e.g.
rent), r = opportunity cost of money (e.g. interest
rate)
t= annual tax on asset (e.g. land tax)
What determines asset prices?
Asset prices also increase w/ expected future value of asset E(Pt+1),
decrease w/capital gains tax tcg.
When asset prices are increasing, entire revenue stream can be
used to pay interest
Financial sector becomes new rentier sector
CREDIT AVAILABILITY IS KEY!
Expected future price increase, driven by speculative
demand in positive feedback loop
NYT Headlines: Welcome to the Everything Boom, or Maybe
the Everything Bubble
“Around the world, nearly every asset class is expensive by
historical standards.”
Interest Bearing Debt in US
Growth and Inequality or
Collapse
Debt is 360% of GDP and growing faster than GDP
Interest on total debt is likely to be 15% of GDP.
Direct transfer to lenders
Credit market debt,
net of gov’t
Factors promoting speculation
Inelastic supply
Supply increases little in response to price (land, fossil
fuels, food, minerals, etc.)
Small increase in demand = large increase in price
Oil production and oil prices from 2003 to 2010. Oil prices more than tripled
between January, 2005 and July, 2008, while total production increased by less
than 3%.
Factors promoting speculation
Inelastic demand
Demand decreases little in response to price (essential
and non-substitutable resources: fossil fuels, food,
land, minerals, etc.)
Small decrease in supply = large increase in price
Factors promoting speculation
Large pools of capital seeking higher returns
(inequality)
“Global FX volume reaches $5.3 trillion a day in 2013 –
BIS”
ALL THESE FACTORS CONVERGE IN A FULL AND
UNEQUAL PLANET
Current System: Financial
Capitalism & Asset Inflation
Bubble busts, banks capture assets,
stop issuing new money
Industrial economy must also
collapse
Working group projects
Hypothesis: Assets are owned by wealthiest
individuals; asset price inflation main cause
of wealth inequality.
Use Picketty’s time series on wealth
inequality, estimate coefficients
Working group projects
Hypothesis: Much of economic growth in
recent years is actually asset price inflation
Build model of economy with fixed
productive capital (land and built capital) and
fixed output; show how asset price inflation
can lead to increased GDP, even with no
increase in real output
Subtract asset price inflation from GDP,
estimate correlation between energy use and
GDP
Rethinking taxation
Not required for government revenue
Required to:
reduce resource use
back dollar
achieve desirable income distribution
adjust aggregate demand, reduce money supply
Fiscal Policy
Expenditures
Government can target money to address unemployment,
misery, poverty; provide public goods; restore natural capital
Taxation
Tax rent, natural resource extraction, waste emissions
Dramatic income tax increases, asymptotically approaching
100%
How much residual is enough for rich?
$5,000,000=99.9% tax rate
$1,000,000= 99.98% rate
Relative wealth
Marginal tax rates and
income share for top 0.1%