Modern Money Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont Joshua.farley@uvm.edu

What is Money? Medium of exchange Store of value Unit of account Island of Yap and Fort Knox This is all inadequate. I’m still learning. Many, many plausible theories

Modern Money Where does money come from? Why do we accept it? Vertical money (government created) Horizontal money (bank created) Industrial economy Financial/speculative economy How do we design a sustainable monetary system?

$ $ $ $ Vertical money profits taxes Gov’t forces us to pay taxes; we must accept money or go to jail Our economic production backs money supply $ $ taxes $ destruction $

Current System: Horizontal Money & Industrial Capitalism $ Current System: Horizontal Money & Industrial Capitalism 19$+i 19$+p 19x$ 19x$ 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

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

Current System: Financial Capitalism and Asset Inflation $ 19$+p + i 19$+i 19$+p 19$+p 19x$ 19$+2p HEADLINE: Despite Drop in Commodity Prices, Farmland Values Rise Rising asset prices Most loans for mortgages, stocks, other assets Drains money from real economy Companies buying back stocks 19$+2p

Interest Bearing Debt in US

updated

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 Check out the similarity between the debt (previous slide) and the GDP share of the US financial industry

Current System: Financial Capitalism & Asset Inflation $ Current System: Financial Capitalism & Asset Inflation 19$+p + i 19$+i 19$+p 19x$ 19$+p 19$+2p 19$+2p Bubble busts, banks capture assets, stop issuing new money Industrial economy must also collapse

Theory of Money in Mainstream Economics Money facilitates barter, no other role Evolved from mythical barter economy Models banks as intermediary between lenders and borrowers Basically neutral Largely ignores debt

Goals for the Needed Monetary System Ecological sustainability Compatible with steady state throughput (can’t be based on exponential growth, or else interest payments must flow back to debtors) Finance investments in ecosystems/green technology Just distribution Benefits of seigniorage must flow to public sector Efficient allocation Must not promote booms and busts (instability) Appropriate balance between public and private goods

Sustainable System: Vertical money, 100% fractional reserve, green taxes $ $ Taxes, AEAs $

Characteristics of desired system: Money Creation Spent on public goods Easy to target unemployment, misery, poverty Central bank purchases state/municipal bonds Decentralizes money creation, fiscal policies Loaned into existence Can be deposited in banks that service community, available for banks to lend Money destruction Auctioned Environmental Allowances set according to ecological constraints Tax unearned income May need net creation to cover currently unpriced transactions, or net destruction as we reduce throughput

Characteristics of desired system: Countercyclical (negative feedback loops) Society as a whole benefits from seigniorage Not dependent on growth