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

3. 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

4. Conventional Investment Theory  Buy an asset if interest payments ≤ revenue from asset:

5. 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

6. Interest Bearing Debt in US

7. Financial Capitalism & Asset Inflation

8. Current System: Financial Capitalism & Asset Inflation

9.  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

10. 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)

11. What determines asset prices?  Asset prices also increase w/ expected future value of asset E(P t+1 ), decrease w/capital gains tax t cg.  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.”

12. Interest Bearing Debt in US

13. 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

14. 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%.

15. 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

16. 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

17. Current System: Financial Capitalism & Asset Inflation  Bubble busts, banks capture assets, stop issuing new money  Industrial economy must also collapse

18. 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

19. 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

20. Rethinking taxation  Not required for government revenue  Required to:  reduce resource use  back dollar  achieve desirable income distribution  adjust aggregate demand, reduce money supply

21. 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

22. Marginal tax rates and income share for top 0.1%