goals for ecofinance compatible with steady state economy (no growth in throughput) cannot require...
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Money for a Finite Planet
Joshua FarleyCommunity Development and Applied Economics
Gund Institute for Ecological EconomicsUniversity of Vermont
Goals for Ecofinance
Compatible with steady state economy (no growth in throughput) Cannot require continuous exponential growth or
liquidation of NK
Must finance most important investments Green technology Ecological restoration Public goods
Eliminate speculation
Seigniorage for public sector, not banks
Countercyclical, stabilizing
Cannot promote short term thinking
Current System
Vertical money
$taxes$ destruction
$
$
profits
$
• Gov’t forces us to pay taxes; we must accept money or go to jail
• Our economic production backs money supply
• Gov’t spending limited only by biophysical constraints
Horizontal Money &
Industrial Capitalism
If central bank (CB) targets interest rate, no limit to lending; If CB enforces fractional reserve, firms use commercial paper (higher interest)
Where do i (interest) and p (profit) come from? More loans or more vertical money required.
ECONOMIC GROWTH What if p<i? Must liquidate assets, including NK Procyclical system
19x$
19$+i
19$+p19x$
$
What do people invest in (USA)?
~$14 trillion in mortgages
Economist: The repurchase revolution “Companies have been gobbling up their own shares at an
exceptional rate.” “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.”
Major buybacks in NYT THIS WEEK: Google, Whole Foods, Visa, Alston, KKR, CVS, Samsung, IBM
NYT: 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 $451.3 billion”
Most money is borrowed to buy existing assets, not to create new wealth
Actual system: Financial
Capitalism and Asset Inflation$
19x$ 19$
+p
19$+p
19$+i
19$+2p
19$+2p
19$+p + i
NYT: Despite Drop in Commodity Prices, Farmland Values Rise
Inflating asset prices outcompete returns on real investment
Credit availability determines asset prices
Financial sector captures all rent
Interest Bearing Debt in US
updated
Growth and Inequality or
Collapse Debt is 360% of GDP and growing faster
than GDP 5% interest? 18% of GDP?
Credit market debt,net of gov’t
Current System: Financial Capitalism &
Asset Inflation
Bubble busts, asset sales make prices plunge; banks capture assets, stop issuing new money
Industrial economy (Hedge investors) must also collapse
19x$
19$+i
19$+p
$
19$+p19$+2p
19$+2p
19$+p + i
Re-inflating Bubbles: interest
rates and QE
Desired System
Ecofinance: Vertical money finances
needed investments; tax pollution,
extraction, rent
$Taxes, AEAs
$ $
100% fractional reserve
19x$
19$+i
19$+p19x$
$
100% Reserve Demand deposits
Money belongs to investor, not bank Can’t be loaned Investor pays bank
Investment accounts Time deposits Loaned at interest: Bank is intermediary between
borrowers and lenders At risk: no insurance
Banks accounts Banks own money Loaned at interest
Transition
Gov’t time deposits (huge creation of vertical money) to back current loans
Interest payments to gov’t and withdrawals reduce money supply for private sector, free up biophysical space for gov’t spending i.e. reallocate between investments in private
and public goods
Requires controls on shadow banking, commercial paper
Advantages
Countercyclical
Restores gov’t control over interest rates