Gyroscopic Investing

The basic workings of the fiat monetary system have big implications for PP investors. I think Warren Mosler has a great no-nonsense way of explaining it in this video:

http://www.youtube.com/watch?v=Z_DO0SpiYyY

I would skip to around 3:10 starting off. The videos really pick up speed and get super interesting as they progress through the end of part 5.

I've been reading Mosler occasionally for the past few months but this is the first time I've seen him on video. Thanks for posting.

My big issue is that he says that lack of spending or excessive spending (inflation) are due to inappropriate levels of total taxation and that the government should modify the amount of taxation as a way to prevent unemployment. To my mind it is the form of the taxation and not the overall level that matters most. If the government collected all tax in the form of sales taxes then that would require massive deficits in order to try and prevent unemployment. If they collected all tax in the form of an asset tax then IMO no deficit would be needed. The problem with deficits is that they get harvested and the effort to harvest them misdirects the economy and causes massive waste.

Pretty great stuff.

Though did anyone else's heart sink a bit when he mentioned axing long-term bonds?

stone wrote: My big issue is that he says that lack of spending or excessive spending (inflation) are due to inappropriate levels of total taxation and that the government should modify the amount of taxation as a way to prevent unemployment. To my mind it is the form of the taxation and not the overall level that matters most. If the government collected all tax in the form of sales taxes then that would require massive deficits in order to try and prevent unemployment. If they collected all tax in the form of an asset tax then IMO no deficit would be needed. The problem with deficits is that they get harvested and the effort to harvest them misdirects the economy and causes massive waste.

Stone, you've said this a lot, but would you mind explaining this out a bit (perhaps even in layman's terms)? I'm not sure I completely understand how collecting a significant tax would add to the deficit.

moda0306 wrote: Pretty great stuff.

Though did anyone else's heart sink a bit when he mentioned axing long-term bonds?

Yeah, I would definitely miss them — as would a lot of people. Hopefully the government would replace Treasuries with another government savings instrument that would give us the deflation protection we needed.

When the Clinton administration was setting up a plan to pay off the national debt by 2012, they realized that paying off the debt would mean that there would be no more US Treasuries being issued. And if there weren't any Treasuries being issued, it would cause some very big problems (i.e. no risk free assets). Here's a fascinating look at a secret memo (recently accessed by NPR, via the Freedom of Information ACT) about life after debt...

NPR: What If We Paid Off The Debt? The Secret Government Report

You can read the previously secret memo, here.

Gumby, I don't think I'm trying to say anything technical or sophisticated.

The point of deficits is supposidly to create spending and so create employment.

I'm just doubting whether asset taxes act like other taxes in terms of reducing private spending. If asset taxes do not reduce private spending, then the argument for deficits is gone. So balancing government spending with an asset tax is a balanced budget way to get as much employment as any MMT proposal could hope for.

Some people's spending is limited by how much income they get and how much they pay in servicing debt. If the government takes money from such people by taxation then, as he says, that shrinks the economy. If you look at the distribution of wealth then clearly much of it is held by people who have a growing surplus. Taxing that growing surplus will not reduce spending and so will not limit employment. Government spending ultimately filters through the system and finally comes to rest as asset prices. If tax is directed only at that end point then the cycle is complete and can continue in equilibrium.  Our current problem is because taxation is not limited to that end point. So the flow of value piles up into higher asset values whilst diversions from transaction taxes etc cause unemployment.

Does that make any sense?

Stone,

I need to absorb you ideas for a while but you really add a lot to the discussion from a direction that nobody else here really comes from.  While we're arguing fiat vs gold, or austerity vs MMT, or monetary vs fiscal policy, you always throw all of us back on our heels a bit with your completely independent view on all this.

I am simply amazed at how we can get into these 3-to-4 way "arguments" about stuff that has no 1-dimensional left/right aspect to it, and looks more like chess than the checkers we see in politics every day.

I am honored to be in the company of you folks.  I feel incredibly lucky to be able to have these debates the way we do, and it makes me even more comfortable with my favorite investing strategy to boot.

moda0306 wrote: I am honored to be in the company of you folks.  I feel incredibly lucky to be able to have these debates the way we do, and it makes me even more comfortable with my favorite investing strategy to boot.

Likewise for me too!

stone wrote: Gumby, I don't think I'm trying to say anything technical or sophisticated.

The point of deficits is supposidly to create spending and so create employment.

I'm just doubting whether asset taxes act like other taxes in terms of reducing private spending. If asset taxes do not reduce private spending, then the argument for deficits is gone. So balancing government spending with an asset tax is a balanced budget way to get as much employment as any MMT proposal could hope for.

Some people's spending is limited by how much income they get and how much they pay in servicing debt. If the government takes money from such people by taxation then, as he says, that shrinks the economy. If you look at the distribution of wealth then clearly much of it is held by people who have a growing surplus. Taxing that growing surplus will not reduce spending and so will not limit employment. Government spending ultimately filters through the system and finally comes to rest as asset prices. If tax is directed only at that end point then the cycle is complete and can continue in equilibrium.  Our current problem is because taxation is not limited to that end point. So the flow of value piles up into higher asset values whilst diversions from transaction taxes etc cause unemployment.

Does that make any sense?

Yes. Thank you. Like moda, I need to digest it some more, but that explanation helped a lot.

But, what about under a situation with full employment? Would the asset tax be enough to quell inflation and reduce the spending of those who finally have some disposable income but are still in the process of acquiring assets? Inflation and increased disposable income go hand in hand. I would think that the asset taxes wouldn't kick in for those accumulating assets until the spending to cause damage (i.e. inflation) had already been done.

stone wrote:

moda0306 wrote: I am honored to be in the company of you folks.  I feel incredibly lucky to be able to have these debates the way we do, and it makes me even more comfortable with my favorite investing strategy to boot.

Likewise for me too!

Same here!

Gumby wrote: But, what about under a situation with full employment? Would the asset tax be enough to quell inflation and reduce the spending of those who finally have some disposable income but are still in the process of acquiring assets? Inflation and increased disposable income go hand in hand. I would think that the asset taxes wouldn't kick in for those accumulating assets until the spending to cause damage (i.e. inflation) had already been done.

Remember, this is a balanced buget. There would be no deficit to sustain inflation. I wouldn't call it inflation if it isn't sustained. I'd call it a one off price adjustment. Say full employment was reached and yet more people could aford and wanted say personal emergency generators than supply could meet . The price of those would go up. Either they would then become unaffordable or people would stop making something else to make more of those or whatever. One way or another equilibrium would be reached. Without deficits what could not happen would be a sustained across the board increase in general prices. What got done and what got consumed would shift about but that would be a reflection of what people actually wanted. That's what we want isn't it?

Interesting. I see your point. Though, I suppose never-ending deficits are preferred by politicians because they make certain donor-friendly constituents happy. And sometimes a government needs to spend like crazy to finance a war, or a moon shot. Then the government must convince the population that they have to pay for that war/moon shot somehow — otherwise the public sector would have too much money floating around.

But, I do think you're on to something there. It's making more sense to me now.

I did some research on MMT and asset tax and it seems that the idea is most vocally supported by legendary anonymous blogger/commenter "beowulf."

Beowulf has become a highly regarded and beloved MMTer over the past year because he was the first to research and prove the platinum coin seignorage proposal on his personal blog.

If I remember correctly, I believe beowulf has claimed to have done freelance/contract legal research for the Treasury Department, so he's widely considered to be a legal expert when it comes to the inner workings of MMT.

In any case, beowulf has been floating the idea of an asset tax for awhile now. Here's what he says on an asset tax:

[quote=beowulf]The best way to deal with bloated (Finance, Insurance, and Real Estate) FIRE sector is the same way to deal with any activity lousy with negative externalities. Levy Pigouvian taxes on unwanted activity and use revenue collected to reduce taxes on desired activity (i.e. income earned in the real economy should be favored over income “unearned”? in the financial economy). The first rule of tax reform is it must be revenue-neutral. Regardless of party control, its simply impossible to garner voting majorities in Congress to support both reforming the tax code AND raising taxes. The simple Pigouvian tax shift would a financial transactions tax with revenue used to permanently cut FICA taxes.

More diabolically, Congress could also adopt James Bowery’s suggested “net asset tax”?, use short-term interest rate ( FFR/IOR rate is currently 0.25%) as tax rate on household net worth over an inflation-adjusted set threshold, Bowery suggests $300k, though $1 million or a $4.5 million estate tax threshold are more politically sellable (so, a 0.25% x $40T tax base = $100 billion.). Congress could make it Grover Norquist-compliant, while making the tax system more progressive, by using every dollar raised to cut income tax rates across the board. Congress could also perhaps give a tax credit for state land taxes paid. If that doesn’t push states into shifting other taxes onto a land value tax, nothing will.

The diabolical part about a net asset tax tied to short-term rates is the screwy CBO budget model which assumes 4.5% short-term rates from 2016 to the end of days (using ’11 GDP, 4.5% x $40T = $1.8T a year). It would take the CBO several years to figure out the Fed will never raise short-term interest rates. )
http://majorityrights.com/index.php/web ... ry_in_1992[/quote]

...and another comment on another MMT blog post, he says:

[quote=beowulf]Seems to me the fastest way out of the woods is by by taxing financial economy and untaxing real economy; replace payroll and income taxes (individual and corporate) with taxes on financial transaction and net assets. A “net asset tax”? could set tax rate on household net worth (minus large exemption) equal to short-term interest rate.
http://majorityrights.com/index.php/web ... ry_in_1992[/quote]

...and on another blog, he writes:

[quote=beowulf]Hate to say it, but the most progressive tax reform plan was offered by right wing (unbelievably right wing) writer James Bowery. Introduce an annual net asset tax (the estate tax is, essentially, a one-time net asset tax).
http://majorityrights.com/index.php/web ... ry_in_1992

Since wealth is far more stratified than income-- the Forbes 400 alone has a greater net wealth than the bottom 50% of the population-- even a flat tax on wealth would be very progressive. By tying, as Bowery suggests, the net asset tax rate to 3 month T-bill rate, it becomes rather powerful counter-cyclical tool that Congress could fire and forget since the Treasuries market itself (cough*Fed Funds rate*cough) would automatically adjust the tax rate. There is (these numbers are necessarily approx.) $58 billion in household net worth this year, of which top 1% ($5 million threshold) controls 35% or $20 Trillion. You could double these numbers by looking at top 10% ($1 million threshold) with $40T in household net worth. It almost goes without saying that public financing of campaigns is a necessary precursor for Congress to ever reform the tax code to make it more progressive.

So let's see, 3 month T-bills today only yield 0.01%. However the CBO projects for 2016 and every year thereafter a 3 month T-bill rate of 5% (CBO is surely wrong that rates will get that high but they won't figure that out for years). So a net asset tax on top 1% would raise a $2 billion this year but by 2016 (per CBO) would raise $1 trillion a year.

Bowery's original 1992 article on the topic
http://mysite.verizon.net/res10kjcq/ota ... Bowery.txt

His citizen dividend is nice as far as it goes, but its an idea that's been given fairly widespread support from everyone from James Tobin to Charles Murray. I highlighted Bowery's net asset tax proposal because its pretty unique and I think, damn clever.[/quote]

beowulf hits the nail on the head when he says that "public financing of campaigns is a necessary precursor for Congress to ever reform the tax code to make it more progressive." I agree 1000%. Former Stanford Professor and current Harvard Law Professor, Lawrence Lessig (and his non-profit, Rootstrikers) have been pushing for public financing of campaigns over the past few years.

http://www.rootstrikers.org/

As much as I would love to see public financing of campaigns and getting money out of politics, I fear it can't be done without a the population waking up and demanding it. The top 0.5% have a death grip on funneling money into politics, and as Lessig points out, the politicians are actually extorting that money from the top 0.5%.

For example, pharmaceutical companies may give millions of dollars to the campaigns of key senators and congressmen in exchange for favorable healthcare legislation. A few months later, those same politicians will reach out to those pharmaceutical companies and tell them that they need to give more money if they want said legislation to actually pass. It's a hellish symbiotic relationship that's strangling any and all progress in Congress.

Stone, if nothing else, I thought you'd find MMTer beowulf's comments interesting — particularly since he mentions Bowery's citizen dividend as well.

I wonder if you've been reading James Bowery as well? (I've never heard of him)

Here's my problem with NOT running deficits and instead trying to use redistribution to generate full employment.

The whole point of expansionary money supply (aka, NOT the gold standard) is not just to prevent self-fulfilling shocks, but to provide an ever-expanding money supply so growth doesn't in-fact mean deflation, and therefore simply hoarding gold becomes profitable, and therefore prevents the growth to begin with... aka, we want the right amount of money on our balance sheets to be the proper "grease" to the rest of the assets and our skills to generate economic activity.

Unemployment may be aided by the unstable nature of savings-strapped households losing jobs and therefore not spending, worsening the crisis, but trying to generate full employment simply by redistribution is going to prove fruitless over time, as EVENTUALLY if you redistribute enough money those people won't want to work, creating a moral hazard... the problem is that there is simply not enough money in the economy, not necessarily that the poor don't have enough (hypothetically).

You'll still have the problem of the same amount of money chasing more and more goods... creating deflation, too little money, and not giving the economy what it needs to grow.  One round of redistribution may get GDP up the 1-2% to generate full employment, but what about the next time you need to generate full employment with the same amount of money but more GDP increase needed?  Redistribute more?  And more and more exponentially as our economy is trying to grow?

Gumby, MASSIVE thanks for finding that MMT asset tax/citizens dividend link! I've now googled based on your links above and found:
http://www.economicpopulist.org/content ... ment-20284
and http://my.firedoglake.com/members/beowulf/
It seems a treasure trove!
I was entirely ignorant of James Bowery and Beowulf. I think (based on the wikipaedia entries about "wealth tax" and "citizens dividend") that they have been thought of independently many many times by a very diverse set of people BUT I hadn't realized that they had been integrated into a MMT style fiat monetary understanding.

I haven't been checking out the MMT sites since I started reading this forum. I sort of came here as a refuge from billy blog because I had found that depressingly closed minded. You have re-kindled my interest in MMT. Before, I thought they considered that MMT with a deficit prescription was a perfected project that simply needed to be evangalized and defended from examination.
Thanks again!

moda0306 wrote: The whole point of expansionary money supply (aka, NOT the gold standard) is not just to prevent self-fulfilling shocks, but to provide an ever-expanding money supply so growth doesn't in-fact mean deflation, and therefore simply hoarding gold becomes profitable, and therefore prevents the growth to begin with...

Remember, gold would also be subject to the asset tax just like stocks, land, cash and anything else. People would need to allocate to assets that earned enough income to pay for the asset tax. Otherwise the asset tax would erode their wealth.
I don't think that that amounts to a one off transfer from rich people to poor people as you fear. Instead it is an alteration to the inbuilt feedback loops underlying the economy. Once asset allocation is shifted to seeking earnings and avoiding asset price inflation bubbles (which would equate to more asset tax), that shift to productive use of resources would be what would avoid unemployment.
Deflation need not be bad. Computors deflate in price and yet the computor industry does great. What matters is if as you say deflation leads to hoarding of stores of value. The asset tax is by definition a tax purely on stores of value. IMO the whole point of an asset tax is to ensure that value is in the hands of those who know what to do with it rather than simply storing it up. On a macro scale, the quest to store value is ultimately futile anyway because in essence it boils down to a quest to store time .

Gumby wrote: ...sometimes a government needs to spend like crazy to finance a war, or a moon shot. Then the government must convince the population that they have to pay for that war/moon shot somehow — otherwise the public sector would have too much money floating around.

Irrespective of the financial jiggery pokery, waging a war entails enticing the population to put down what they were doing and instead make weapons and fight. The fact that the nation has decided to go to war in itself implies that a lot of that enticement could, should and would be in the form of appeals to jingoism etc. WWII was largely "financed" by such appeals to jingoism rather than by extra government spending. There was massive extra government spending and that did draw people out of unemployment and draw mothers into munition factories etc BUT IMO the main diver was appeals to the war effort. In the UK, capitalism was put on hold for WWII, food and fuel were rationed, land was appropriated by the state, people were put under emotional pressure to join in. IMO if the state is going to tell people that they have to work in a certain weapon factory and can only get certain food rations etc then having deficit spending is redundant- just pay people in food rations. War sucks whatever the financial arrangements.

Google is a quirky beast. If I put "mmt asset tax citizens dividend" in, then the top hit and only vaguely relavent thing is something I wrote on billy blog last Febuary. Nothing on here comes up and none of that beowulf stuff comes up

stone wrote: Gumby, MASSIVE thanks for finding that MMT asset tax/citizens dividend link! I've now googled based on your links above and found:
http://www.economicpopulist.org/content ... ment-20284
and http://my.firedoglake.com/members/beowulf/
It seems a treasure trove!
I was entirely ignorant of James Bowery and Beowulf. I think (based on the wikipaedia entries about "wealth tax" and "citizens dividend") that they have been thought of independently many many times by a very diverse set of people BUT I hadn't realized that they had been integrated into a MMT style fiat monetary understanding.

I haven't been checking out the MMT sites since I started reading this forum. I sort of came here as a refuge from billy blog because I had found that depressingly closed minded. You have re-kindled my interest in MMT. Before, I thought they considered that MMT with a deficit prescription was a perfected project that simply needed to be evangalized and defended from examination.
Thanks again!

Happy to help! I've never heard of James Bowery before. Here is his take on the Citizen's Dividend:

Citizen’s Dividends To Capture Parliamentary Governments

Unfortunately (as beowulf points out in various comments) Bowery has some very radical and disturbing views — such as those against the Jewish people.

http://wiki.majorityrights.com/evolutio ... _virulence
http://majorityrights.com/weblog/commen ... by_pesach/

Yikes.

...Anyway, beowulf is closely followed in the MMT circle. I've seen him mentioned and commenting on pragcap a lot. Here is the comment where beowulf explains some of his own background:

http://pragcap.com/qe3-treasury-style-g ... ment-63555

At the top of that same page, Scott Fullwiler introduces beowulf as a notable "frequent MMT commentator" responsible for researching and explaining Title 31 (for platinum seignorage).

And MMT blogger, Mike Norman, recently responded to beowulf's comments on a Land Value Tax.

http://mikenormaneconomics.blogspot.com ... -from.html

That was posted on Monday, so I suspect beowulf will be watching that page if you want to drop your two cents.

stone wrote: Google is a quirky beast. If I put "mmt asset tax citizens dividend" in, then the top hit and only vaguely relavent thing is something I wrote on billy blog last Febuary. Nothing on here comes up and none of that beowulf stuff comes up

Try these two Google links:

http://google.com/search?&q=beowulf+MMT ... set+tax%22

http://google.com/search?&q=beowulf+MMT+%22asset+tax%22

Gumby, it seems the only UK politician who gets MMT is a BNP candidate  :( . He seems to be the one and only BNP member who is not an up front white supremacist but he has choosen to be in their party:

http://www.thenorthernecho.co.uk/news/e ... _musgrave/

http://ralphanomics.blogspot.com/2011/1 ... as-in.html

The Nazi economic policy was essentially MMT. Of course that is no more relavent than Hitler being vegetarian.

stone,

I know you've tried to explain but I still don't buy that asset taxes prevent bubbles.

It seems to me that you think bubbles are not a result of people seeking fundamentals, but instead people going on debt-fuelled speculative binges.

1) Would the debt offset the asset tax base?  If so, I'd think an asset tax would contribute to speculative bubbles.

2) Would the asset tax be in place of a capital gains tax?  If so, you're bound to pay far lower in asset tax over the short time over a speculative bubble than you would have paid in a capital gains tax.  If anything prevents speculative bubbles, maybe it's having a transaction tax or elevated short-term capital gain tax.

I guess I'm wondering how a .25% annual tax (especially if the asset's value is offset by debt) would prevent speculation from taking place over 1-3 years and resulting in a 20%-???% increase in value.

People WANT the values of their assets to rise.  They work for this by growing their businesses or improving their homes or not driving their car like a rental... a tax will diminish that, but not completely by any means...

moda, what I was meaning was for all taxation to be in the form of a flat asset tax. In answer to a query before by Lone Wolf, I guesstimated that if all UK or US local and national tax was from a flat asset tax, then that would amount to about 7% of asset value per year. I'm not sure where the 0.25% you mention comes from. In the Netherlands, France, Japan and Switzerland there are currently 1%ish asset taxes. I'm just saying have all the tax as the asset tax.

Without corporation tax to pay or payroll tax or employees having to pay incometax etc etc, stocks would have far more remaining for dividend payments (that would be untaxed). If it was normal for stocks to pay 10% dividends or whatever would you be tempted to buy something overvalued that "might" give you an untaxed capital gain?

I agree that it is good for people to want value from their assets BUT to my mind the true measure of genuine value is income generation. An asset tax shifts people to maximise the potential income generation by their assets. Leverage is costly because the loans themselves are assets that must pay the tax.

Ok so let me get this straight...

You're basically igniting a "decay" on the value of assets, whether financial or real, so that they HAVE to be used productively simply to stay afloat.  This would have a tendency to keep people employed because NOT engaging in more economic activity leaves you with 93% of what you had last year...

And to be clear, is it a NET asset tax (where any debt would reduce your taxable assets)?  If so, I'm almost positive you'd see more speculation... if not, you're almost eliminating the use of debt as we know it because it's almost impossible to borrow money with a 6-8% business loan, build a factory, and pay 7% tax on the value of the factory without a deduction for the value of the loan you took on.

How does this significant push of people from safe assets (cash & gold) into risky assets that will beat the 7% tax help prevent speculation... It seems that while

I like the idea of an asset tax in some ways, but 7% seems crazy... It seems it would force people into ridiculously risky assets and would be for no other reason than the moral hazard you've created by taxing assets at such a high rate.  People couldn't just save their money to be prudent... they'd be constantly on the asset-treadmill trying to beat the 7% tax every year.

I always thought of an asset tax being a good idea as a supplument on wealth over $5 Million or so of about .5%-1%.

moda0306 wrote: You're basically igniting a "decay" on the value of assets, whether financial or real, so that they HAVE to be used productively simply to stay afloat.  This would have a tendency to keep people employed because NOT engaging in more economic activity leaves you with 93% of what you had last year...
And to be clear, is it a NET asset tax (where any debt would reduce your taxable assets)?  If so, I'm almost positive you'd see more speculation... if not, you're almost eliminating the use of debt as we know it because it's almost impossible to borrow money with a 6-8% business loan, build a factory, and pay 7% tax on the value of the factory without a deduction for the value of the loan you took on.

Moda your decay term is a perfect description of what I was trying to say. I meant gross assets not net assets. I agree that would cause a massive shift to equity financing rather than debt financing. It would essentially consign the FIRE sector to being something that served the real economy.

moda0306 wrote: How does this significant push of people from safe assets (cash & gold) into risky assets that will beat the 7% tax help prevent speculation... It seems that while I like the idea of an asset tax in some ways, but 7% seems crazy... It seems it would force people into ridiculously risky assets and would be for no other reason than the moral hazard you've created by taxing assets at such a high rate.  People couldn't just save their money to be prudent... they'd be constantly on the asset-treadmill trying to beat the 7% tax every year.

To my understanding our current system of 5.5% CPI (in the UK) and 0.5% base rate does little to make cash attractive. Gold is hardly a retail friendly asset with multi decade bear markets and >5% intra-day price moves.
If there were balanced budgets then inflation would not need to be guarded against. I suspect that a 50% cash:50% stocks portfolio would do fine at paying for itself against the asset tax. Like I said, I suspect dividends would be MUCH higher. Also because stocks would have less in built leverage (since debt would be tax disadvantaged) that would reduce stock volatility.

Reading some Beowulf posts, he seems to want to have a token asset tax linked to the T-bill rate as a way to get rich people to support low interest rates.
http://www.correntewire.com/the_choice_ ... nd_not_mmt

BUT as far as I can see, canny rich people want zero interest rates anyway as that gives a wonderland of speculative oppertunity

Looking again at MMT blogs, there seems to be a very nasty relish in building deceit and intrigue into the monetary system. People love the idea of some supposed elite insight. Hopefully I'm just being uptight and paranoid. To me though scrubbing away pointless bamboozlement would do a lot to create a just monetary system and economy.