Vincent Youngs wrote:
>
> > If (USD) inflation fears and inflation are ignighted, say between March
> > and May 2001, the price level in the USA might rise say 4%. But if this
> > inflation is expected to persist, the price of gold will rise a hell of
> > a lot more than 4%! Perhaps 30%. Thus the real price of gold in terms of
> > US perchasing power has increased by more than one quarter, as has the
> > real effective exchange rate of the gold for money SOE. Like the stock
> > market, the price of gold is determined by *expected* events, the
> > outlook for the future, which can change drastically in a matter of
> > months given a few political events, a few statistics, a few
> > bankruptcies and a speech by the Fed chairman. The price level, however
> > takes a few years (at least) to adjust to an economic shock when the
> > nominal exchange rate is fixed, requiring a price level adjustment. The
> > cause of this difference is price rigidities particularly in the labour
> > market, property rental market and supply contracts. (By contrast stock
> > and commodity prices are perfectly flexible.)
> >
>
> This is a good point you make about price rigidities in labour markets,
> rental markets and supply contracts. If the price rigidities in these
> markets were loosened, the purchasing power of gold in these other markets
> would be less volatile. These price rigidities are mostly the result of
> State interference with a free market.
>
I do support the gold standard for small open economies, and I believe
that macro-economic policy should primarily focus on a) removing state
impediments to price flexibility and efficient price adjustment, b)
ensuring that the government, in its role in the economy (e.g. setting
of punishments/fines/restitutions for crimes), enables for efficient
price adjustment, where state sets prices, c) encouragement of or
support for (e.g. sponsoring academic research) to voluntary adoption of
pre-defined automatic (default) price adjustments to markets which would
otherwise suffer inefficiency from price rigitities and finally d)
removing state distortions to the price of land and capital (e.g.
taxation of nominal interest income) within the economy, and, in the
case of land, the avoidance of the creation of high price rent ratio
volitile assets by land allocation institutions.
Current state regulation of labour and property rental markets increase
transaction costs of negotiating prices and thereby reduces the ability
of transactors to minimise transaction costs by providing for price
adjustments. In the labour market, the provision of unemployment
benefits reduce the cost of unemployment on transactors, and thus the
incentive for transactors to negotiate prices and price adjustment
proceedures which minimise the social costs of unemployment. These
factors foster price regidities and associated inefficiencies when the
economy is hit by shocks. If the markets were fully liberalised, and
unemployment benefits and other distortions removed (or reduced), then
transactors would negotiate transaction cost minimising prices and price
adjustment proceedures and thus enable macro-economic shocks to impact
with a smaller dis-equilibrium in markets. Government could encourge
this sort of development by, for example, sponsoring academic research
on which forms of contracts and adjustment proceedures etc. minimise
transaction costs, or by funding statistics which could be used to
assist information flows for efficient price adjustments, e.g. automatic
price adjustments, indexation etc. These expenses could be justified as
public goods if the effects of dis-equilibrium in particular markets
imposes significant costs on participants in other markets.
> > > > Yes, deflation and inflation, when the nominal interest rate is fixed at
> > > > the world interest rate or a large economy currency interest rate, has
> > > > very large effects on asset prices. If the demand for fixed assets is
> > > > expected to grow in nominal terms by 5% p.a. along with inflation and
> > > > replacement costs, and the nominal interest rate is 5%, the that is the
> > > > same as a zero discount rate with price stability. An asset expected to
> > > > last 20 years will be worth 20 times the current annual hire. If the
> > > > interest rate stays at 5% but price stability is expected, the asset
> > > > falls to 13.09 years hire. If the price level is expected to fall 5%
> > > > p.a., the asset falls to 9.08 years hire. I guarantee that the property
> > > > market will crash in Ireland when the inflation ends and the deflation
> > > > starts and the nominal interest rate is about the same. Inflation and
> > > > deflation have consequences.
> > > >
> > >
> > > What do you mean by "annual hire"? How do you arrive at these figures of
> > > 20, 13.09, and 9.08 years hire?
> >
> > annual hire is just the 'rental' value of the building, which is the
> > 'rent' of the property less the ground rent of the land.
> >
> > The figures are calculates as follows:
> > P=sum{n=1 to 20):(((H1*(1+g)^(n-1))/((1+d)^(n-1)))
> > where P is the market price of the asset, n is the year, H1 is the Hire
> > vaue in year 1, g is the Hire growth rate, and d is the discound rate.
> >
> > This simplifies to
> > P=sum{n=1 to 20):(H1*((1+g)/(1+d))^(n-1))
> >
> > where d=g=0.05 the answer is simply:
> > P=sum{n=1 to 20):(H1)
> > =20
> >
> > Where d=0.05 and g=0 the answer is:
> > P=sum{n=1 to 20):(H1*(1/1.05)^(n-1))
> > =13.09
> >
> > where d=0.05 and g=-0.05 the answer is
> > P=sum{n=1 to 20):(H1*(0.95/1.05)^(n-1))
> > =9.08
> >
> > The easiest way to calculate these values is to use a spreadsheet.
>
> Thank you for explaining the method of calculation of asset values. The
> discount rate is the interest rate, I assume. Interest rates are higher
> for higher risk investments. If the price of gold denominated assets is
> seen as volatile, then lenders will charge a higher interest rate to
> compensate themselves for the risk of default. The higher interest rate
> should lower the price of the assets, and the volatility in their price as
> well. You suggested that a high property tax would stabilize property
> prices. The higher interest that lenders would charge achieves the same
> thing by a free market mechanism without the use of State coercion.
The discount rate is the (world) interest rate plus the risk premium on
the asset. You are correct to note that if macro-economic conditions
make asset prices volitile or highly sensitive to economic shocks, then
the risk premium (and therefore discount rate) on assets will be higher,
and asset prices will be depressed. With a floating exchange rate and
inflation targeting monetary policy, domestic interest rates (discount
rate on the asset of domestic currency) may be higher by what is called
a 'currency risk premium.' For example New Zealand real interest rates
have been well above the real interest rate on other currencies in the
last couple of decades. Politicians like ACT's Richard Prebble argue
that the currency risk premium times the borrowings of New Zealanders is
much greater than the seignorage revenues the Crown receives, and that
therefore New Zealand should adopt the USD as official currency, ending
the currency risk premium and exchange rate risks. His argument falls
when you consider that exchange rate stability could cost price
stability and asset price stability, increasing menu costs and
increasing the risk premium on domestic non-financial assets.
I have suggested not a property tax but a land value tax. The value of
improvements to land would be exempt from taxation, as they are the
fruit of human labour, rather than an artifact of the land tenure
system. Land value can be modeled as the discounted expected net rent on
land. Rent can be modelled as a fixed fraction of economic output, and
thus having an identical growth rate (the fixed stock of land makes the
typical site rent grow at this rate). Thus rent can be modelled as an
income growing at g per period, where g is a fraction, e.g. 0.05. Land
Value Tax (LVT) is modeled as simple a negative cashflow of T=t*P where
t is the LVT rate per period and P is the unimproved capital value of
the land at the beginning of the period (LVT and R (rent) are paid at
the end of the period). If we assume that g is expected to be constant
over time, and assume a constant discount rate, d, and a constant
expected LVT rate t, we can show that:
d=y-t+g where y is the Rent Yield Rate (=R/P). Mathematical proof of
this formula can be found at the end of this email. The next step is to
show that P can become arbitrarily large if t=0.
if g=d we have
d=y-t+g
y=0
y=R/P
P is therefore undefined (it can be shown that it get arbitrarily large
as g approaches d.
The Solow Growth Model indicates that under optimal or golden rule
savings rates, the interest rate equals the economic growth rate, thus
there is reason to believe the two rates can be the same.
It can be seen that as land value becomes large, so does its sensitivity
to changes in d or g or both. Thus when t=0 land value can be expected
to be both high and volitile. The volitility and sensitivity of P to
changes in d and/or g, increase d by a risk premium above the risk free
interest rate. This prevents land values becoming infinite, by keeping d
ahead of g at all times.
Making t>0 changes the situation entirely. In particular, if t is
sufficiently high (I recommend 20% p.a.), P approaches R/t (a large
reduction from R/(d-g)), and becomes insensitive to changes in d and/or
g. This means land becomes a stable asset, and the wealth effects of
economic shocks effecting d and/or g are all but eliminated.
The reduction in the wealth effect of a change either the discount rate
or the rent growth rate (or both) by the LVT is given by
1-((d-g)/(d+t-g))^2. For example, if the discount rate is 0.1 and rent
growth rate is 0.04 and the tax rate is 0.1 the reduction in the wealth
effect of a change in d or g or both is:
1-((0.1-0.04)/(0.1+0.1-0.04))^2
1-((0.06)/(0.16))^2
0.86.
Mathematical proof of this formula is provided as Appendix 2.
It can also be shown that when the optimal capital stock is accumulated,
so that the interest rate and the economic growth rate are equal, the
absence of LVT creates needless economic costs equal to R, the entire
rent of land. The argument is quite simple. If the economy and the rent
of land is growing at g, and the interest rate, i, is also g, and if y
is stable in the long run (but potentially volitle in the short run),
then each year holders of land expect to receive two returns: a) a
capital gain equal to P*g and b) a rental income of R. But if g=i then
the capital gain on land provides the holder of land with the same
compensation he would have received risk free in the bank (P*i). Thus R
is the additional revenue to the land holder, compensating him for risk,
principally in the form of volitile land prices. This risk and
volitility stems from macro-economic forces beyond the land holders
influence, and serves no economic function, it is simply a by-product of
the land tenure system and the macro-economic conditions. Imposing LVT
can all but eliminate the risk premium on land, and generate an economic
gain of almost all of R, and public revenue of R, which from my
estimates of the need for public revenue and the size of R is sufficient
for all public revenues, without the need for appropriating the fruit of
labour or distorting economic activity.
>
> > Its less costly to change the clocks and time one hour than it is to
> > reschedule every activity by an hour. The nominal exchange rate is the
> > clock, the activities scheduled are the prices in the domestic economy.
> > Changing one commodity price is much less than changing the price of
> > every good, service, wage and property rental. However, nominal exchange
> > rate volitility has its own cost.
>
> Is it really lest costly? The enforced time change is a big disruption to
> a lot of people and businesses that have no need to synchronize their
> working hours with the availability of sunlight. Why should the State be
> involved in the setting of clocks at all? If time standards were left to
> a free market, a standard would evolve without State coercion that would
> work at least as well as the State's solution, but probably much better.
The state needs to make use of time, as it does make use of money. It
must define when its laws come into effect and when they are repealed.
It must also specify acceptable means of payment for settling the
judgements of its courts. The original argument assumes it is desirable
to have daylight saving, as it does that there is a need for price
adjustment. The difference between the two is that the price of a freely
floating exchange rate is determined by the market, whereas the changes
in time that are daylight saving is proscribed by the state. But you
make a good point, that different activities require their own
adjustment for the seasons, and to legislate an (analogical)
'devaluation' imposes unexpected costs of its own.
>
> The same applies to money. The coercive State should get out of the money
> business altogether and leave it to the free market. In any case, unless
> the use of e-gold is prevented coercively, e-gold or a variant will
> replace all fiat money. In the absense of coercion, Gresham's law is
> reversed. Good money will drive out bad.
>
> ~ Vincent
I believe there is a role for the state in defining legal tender for
gold denominated debts, but I am yet to come to a conclusion as to what
it should uphold as acceptable settlement of gold denominated debt. I am
fairly sure how the state should go about dis-engaging itself from the
process of money creation and banking regulation, but more thinking and
research to do on legal tender for gold denominated debts. Current legal
tender laws specify coinage and notes that are legal tender for national
currency debts, for example, permitting the creditor to decline
excessive quantities of coins and insist on payment in fewer coins. This
standard therefore makes the ultimate means of payment and settlement of
debt the physical delivery of notes and coins. Because I believe that
physical notes and coins currency should be backed by gold denominated
debts as well as a primary liquidity reserve, in a Gold Standard
Currency Board arrangement, legal tender, if based on paper notes and
token coins would grant statutory monopoly on legal means of payment
production. I believe this type of currency should be a natural monopoly
(restructure central banks into gold standard currency board state owned
enterprises and privatise them I say) but not a statutory one (by
monopoly I mean dominant suppler rather than sole suplier). It seems
reasonable to specify only 100% physical gold backed currencies as legal
tender for gold denominated debts, otherwise risky (low value)
currencies would be tendered for gold denominated debts. However, 100%
physical gold backed currencies have their own problems which are
potentially distionary fee structures. Debtors could buy gold currency
that paid commission for buying it and charges fees for redemption. E.g.
if I could use 1 AUG of e-gold to buy 1 AUG of dodgygold and receive a
0.1 AUG commission of dodgygold. I would then tender this 1 AUG for a
debt I had, and the creditor would have to pay, say 12% to redeem his
dodgygold in physical gold or e-gold. So my thoughts at this stage for a
legal framework for AUG currency would be that the state register
approved 100% backed currencies as legally acceptable means of settling
AUG debts. The criteria for registration would be that the currency is
redeemable on demand at face value without fees in physical gold at a
registered office with a minimum redemption of no more than a specified
amount, and that the currency provider issue audited quarterly
statements demonstrating the actual backing of unencumbered metal, and
that it has systems in place to provide for continued full backing of
the currency. Legal tender for gold denominated debts would be required
to be in currency that does not expire within, say, three months, from
the date of payment, so that metal holding fees or other fees do not
devalue legal tender currency, giving payees time to redeem their
currency for physical metal, or for an alternative currency. People
could accept debt backed currency for gold denominated debts, but they
would not be required to.
David Hillary
The state would
Appendix 1.
The Value of Value-Taxed Land
Notation
Let time be divided into periods of equal length, beginning at period 0
and continuing to infinity. Let Ri be the rent payable for period i at
the end of period i. Let Ti be the tax payable for period i and the end
of period i. Let Pi be the value of the land at the beginning of period
i. Let g, d, t and y be a constants standing for the rent growth rate,
the discount rate, the tax rate and the rent yield rate respectively.
Information Given
Ri=R0*(1+g)^i
Ti=t*Pi
The value of an asset is defined as its discounted net income stream,
i.e. Pn=Sum{i=n to inf}:(Ii*(1+d)^(n-i-1)) where Ii is income received
at the end of period i and Pn is the value of the asset at the beginning
of period n.
Solution
Ii= Ri-Ti
= Ri- t*Pi
= R0*(1+g)^i- t*Pi
Pn=Sum{i=n to inf}:(Ii*(1+d)^(n-i-1))
multiplying both sides of the equarion by (1+d)^(1-n) gives
Pn*(1+d)^(1-n)=Sum{i=n to inf}:(Ii*(1+d)^-i)
Pn*(1+d)^(1-n)=Sum{i=n to inf}:((R0*(1+g)^i- t*Pi )*(1+d)^-i)
>From this we can state what Pn+1*(1+d)^(1-n+1) (=Pn+1*(1+d)^-n) is i.e.:
Pn+1 *(1+d)^-n=Sum{i=n+1 to inf}:((R0*(1+g)^i- t*Pi )*(1+d)^-i)
Taking the difference between Pn*(1+d)^(1-n) and Pn+1*(1+d)^(1-n-1)
gives:
Pn*(1+d)^(1-n) - Pn+1 *(1+d)^-n= (R0*(1+g)^n- t*Pn )*(1+d)^-n
multiplying both sides by (1+d)^n gives
Pn*(1+d) - Pn+1 = (R0*(1+g)^n- t*Pn )
adding t*Pn to both sides gives:
Pn*(1+d+t) - Pn+1 = (R0*(1+g)^n)
rearranging gives:
Pn+1 = Pn*(1+d+t) -(R0*(1+g)^n)
Given that the R/P=y and y is a constant we have:
Rn/Pn = Rn+1/Pn+1 and
Pn/Rn=Pn+1/Rn+1
Given Rn+1=Rn(1+g)
we have:
Pn+1=Pn*(1+g)
By substitution we have:
Pn*(1+g)= Pn*(1+d+t) -(R0*(1+g)^n)
Rearranging gives:
R0*(1+g)^n= Pn*(d+t-g)
But R0*(1+g)^n is Rn , so we have:
Rn= Pn*(d+t-g)
which gives:
Rn/Pn=d+t-g
But Rn/Pn=y, so we have
y=d+t-g which can be rearranged to give:
d=y-t+g, which you should recognise from the formula I originally
provided.
Appendix 2.
Value of land is give as:
P=R/(d+t-g) which for t=0 is:
P=R/(d-g)
For the untaxed land we have:
dP/d(d-g)= -2*R/((d-g)^2)
For the LVT land we have:
P=R/((d-g)+t)
dP/d(d-g)= -2*R/(((d-g)+t)^2)
The reduction in wealth effect by the tax is:
1-wealtheffecttaxed/wealtheffectuntaxed which is:
1-(-2*R/(((d-g)+t)^2))/( -2*R/((d-g)^2))
which simplifies to:
1-((d-g)/(d-g+t))^2
which is the formula provided in the text.
---
You are currently subscribed to e-gold-list as: archive@jab.org
To unsubscribe send a blank email to [EMAIL PROTECTED]
