Simple problem, impossible solution.
Value is invested, labour is added, and the product ends up consumed. Not immediately of course. There is always a lapse of time between the first investment and the final consumption. And, sometimes, invested and added value will pile up year after year for a decade or so before consumption can begin e.g. the Eurotunnel 1986-1994. Another particularity of infrastructures, real estate and land property in general, is that they receive rent for a time span that is far longer than the time needed to restitute their original cost. The practice of rent is as old as property, and the notion then extended to money and, ultimately, to all forms of investment. Income that is not consumed is paid rent.
Rent (or interest, or dividends) is a part of the value consumed, whose payments last long after the investment and added values have been restored. If the rent is consumed, it is merely a transfer of consumption from the lease holder to the renter, from the borrower to the lender, or from the employee to the share holder. If the rent income is not consumed, it is paid rent. As a consequence of this, not only is there insufficient consumption but the unconsumed incomes get larger and larger, as do the unconsumed rents. The short term solution is to grant consumers credit and mortgages. This increases their consumption for a while, but they end up paying more and more rent, which is not consumed. And, at some point, the insufficient consumption can no longer be compensated, growth stops and the investment bubble is deflated. “And the harder they come the harder they fall, one and all”.
Getting a return on the income one does not spend seems traditionally moral but, inevitably, it results in boom and bust. A phenomenon that is repetitive, and seems to adopt a variety of time spans, and sometime they all deflate together. So, is the present situation, not to mention the dreary future of stagflation, a fatal part of the human condition, something mankind will have to drag itself through knowing that two or three generations hence it will be happening all over again? Can the Protestant ethic be transgressed? Undoubtedly, private property cannot be tampered with. The subject makes people fidgety, uncomfortable, aggressive and ultimately violent. Supposing, however, that unspent incomes cannot be invested and thereby increase unspent incomes. Supposing incomes must be either spent or redistributed as taxes and wages, or simply as less rent. Could this be morally defended, by giving the wealthy the opportunity to show empathy and citizenship, and a generous compassion for others, for their cities, their nations and the whole wide world? (1)
Visibly they don’t like the idea, and then they begin to laugh. Who will invest if they don’t? Where will growth come from, if they don’t invest their savings? Who will create jobs?
The monetary creation that must accompany a growth in exchanges is essentially credit. [And, when credit overreaches itself and has to contract, quantitative easing by central banks is a puny attempt at taking up the slack by circulating more cash. However, and this may have been the intention from the start, quantitative easing has allowed governments to increase their borrowing at affordable rates of interest. In effect, governments are “printing” money to pay their expenses. How long can that last?] Credit can mediate all exchanges, investments as well as consumption. In the past credit has favoured both, but its preference goes from one to the other. Business finances are a mix of shares, bonds and credit. Sometimes incomes invested in shares and bonds predominate, sometimes credit predominates. Credit mediates transactions as well as does money, but it is not money. It is a guarantee that real money is forthcoming. And this guarantee has a price that can be exorbitant, usurious. And the only organisations that can grant credit widely and regularly are banks. Banks where everyone has an account and where money moves virtually from one to the other. This existing virtuality can be extended to include the not-money of credit, while clearing houses keep an account of transactions between accounts held in different banks.
All money is virtual but credit is more so than income, which brings up the question of property. The property rights of credit only come into play when there is a default. An entrepreneur owns his company and can expand or sell it, as long as his credit is good. A chief executive runs his company for its owners, who may sell it as a whim, or when investments have been sacrificed for dividends that went elsewhere, and the company is obsolete. Credit has another advantage: as monetary creation it should be a social service, subject to public scrutiny and provided at cost price. Credit should be granted to new and expanding businesses, thereby increasing employment and consumer demand. However, credit’s evanescence means it is granted briefly and must be renewed frequently, and can be interrupted at short notice, which leads back to the nature of credit and its ownership. Can a bank own something it does not possess? (2) And why claim back monetary creation that is in circulation, if not to demand more remuneration. The new money is in the system fuelling growth. The investment is transferring its value to production and is getting it back, ready to be invested anew. Let the credit be owned by the company and become part of its capital. But then, who owns the company? Should it be the prime mover, that individual who got things started, who had the idea and put it into practice. No doubt that person should be privileged, but very few enterprises can be undertaken by a lone individual. From the outset other people will be concerned and active. Why is it that their share of ownership seems so preposterous? An ownership that cannot be sold, as there are no more unspent incomes. Its function would be to choose investment strategies and decide who earns what.
By now they are hilarious and tears are streaming down their joyful faces.
Demonstrably, Utopianism is an eminently laughable matter.
1. Probably in the “Grundisse” (the Penguin edition is an excellent read), Marx noted that wealthy citizens of imperial Rome had to spend their incomes on feasting, building, art works and public games, for lack of investment opportunities. That situation had been superseded by the unlimited investment opportunities of the Industrial Revolution.
2. Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress. http://en.wikipedia.org/wiki/Basel_III
Rent (or interest, or dividends) is a part of the value consumed, whose payments last long after the investment and added values have been restored. If the rent is consumed, it is merely a transfer of consumption from the lease holder to the renter, from the borrower to the lender, or from the employee to the share holder. If the rent income is not consumed, it is paid rent. As a consequence of this, not only is there insufficient consumption but the unconsumed incomes get larger and larger, as do the unconsumed rents. The short term solution is to grant consumers credit and mortgages. This increases their consumption for a while, but they end up paying more and more rent, which is not consumed. And, at some point, the insufficient consumption can no longer be compensated, growth stops and the investment bubble is deflated. “And the harder they come the harder they fall, one and all”.
Getting a return on the income one does not spend seems traditionally moral but, inevitably, it results in boom and bust. A phenomenon that is repetitive, and seems to adopt a variety of time spans, and sometime they all deflate together. So, is the present situation, not to mention the dreary future of stagflation, a fatal part of the human condition, something mankind will have to drag itself through knowing that two or three generations hence it will be happening all over again? Can the Protestant ethic be transgressed? Undoubtedly, private property cannot be tampered with. The subject makes people fidgety, uncomfortable, aggressive and ultimately violent. Supposing, however, that unspent incomes cannot be invested and thereby increase unspent incomes. Supposing incomes must be either spent or redistributed as taxes and wages, or simply as less rent. Could this be morally defended, by giving the wealthy the opportunity to show empathy and citizenship, and a generous compassion for others, for their cities, their nations and the whole wide world? (1)
Visibly they don’t like the idea, and then they begin to laugh. Who will invest if they don’t? Where will growth come from, if they don’t invest their savings? Who will create jobs?
The monetary creation that must accompany a growth in exchanges is essentially credit. [And, when credit overreaches itself and has to contract, quantitative easing by central banks is a puny attempt at taking up the slack by circulating more cash. However, and this may have been the intention from the start, quantitative easing has allowed governments to increase their borrowing at affordable rates of interest. In effect, governments are “printing” money to pay their expenses. How long can that last?] Credit can mediate all exchanges, investments as well as consumption. In the past credit has favoured both, but its preference goes from one to the other. Business finances are a mix of shares, bonds and credit. Sometimes incomes invested in shares and bonds predominate, sometimes credit predominates. Credit mediates transactions as well as does money, but it is not money. It is a guarantee that real money is forthcoming. And this guarantee has a price that can be exorbitant, usurious. And the only organisations that can grant credit widely and regularly are banks. Banks where everyone has an account and where money moves virtually from one to the other. This existing virtuality can be extended to include the not-money of credit, while clearing houses keep an account of transactions between accounts held in different banks.
All money is virtual but credit is more so than income, which brings up the question of property. The property rights of credit only come into play when there is a default. An entrepreneur owns his company and can expand or sell it, as long as his credit is good. A chief executive runs his company for its owners, who may sell it as a whim, or when investments have been sacrificed for dividends that went elsewhere, and the company is obsolete. Credit has another advantage: as monetary creation it should be a social service, subject to public scrutiny and provided at cost price. Credit should be granted to new and expanding businesses, thereby increasing employment and consumer demand. However, credit’s evanescence means it is granted briefly and must be renewed frequently, and can be interrupted at short notice, which leads back to the nature of credit and its ownership. Can a bank own something it does not possess? (2) And why claim back monetary creation that is in circulation, if not to demand more remuneration. The new money is in the system fuelling growth. The investment is transferring its value to production and is getting it back, ready to be invested anew. Let the credit be owned by the company and become part of its capital. But then, who owns the company? Should it be the prime mover, that individual who got things started, who had the idea and put it into practice. No doubt that person should be privileged, but very few enterprises can be undertaken by a lone individual. From the outset other people will be concerned and active. Why is it that their share of ownership seems so preposterous? An ownership that cannot be sold, as there are no more unspent incomes. Its function would be to choose investment strategies and decide who earns what.
By now they are hilarious and tears are streaming down their joyful faces.
Demonstrably, Utopianism is an eminently laughable matter.
1. Probably in the “Grundisse” (the Penguin edition is an excellent read), Marx noted that wealthy citizens of imperial Rome had to spend their incomes on feasting, building, art works and public games, for lack of investment opportunities. That situation had been superseded by the unlimited investment opportunities of the Industrial Revolution.
2. Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress. http://en.wikipedia.org/wiki/Basel_III
posted by le Lézard at 7:32 AM
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