Firstly, let's consider the "unsecured" credit circulating in the economy: our "working capital", if you will.
There is no need for a Central Bank to create credit/ deficit-based Money. In Hong Kong there is no Central Bank, but there is a Monetary Authority overseeing the creation of interest-bearing credit by private Banks
I advocate a different structure: ie a national Treasury issuing the necessary credit with a Government Guarantee under the management of "Credit Managers formerly known as Banks" under the overall supervision of a Monetary Authority.
No interest is payable in this model for the use of credit - which after all costs nothing to create - but a provision would be made into a default fund backing the Guarantee, together with an administration charge to the managers.
Secondly: lets consider "investment".
Currently our "equity" investment in our homes is not actually an "investment" - loans are not investments -it's secured credit created through mortgage loans. This credit created by Banks and Building Societies - over 70% of money supply - isn't actually circulating, but is "locked up" / invested in land and Bricks & mortar.
Such "static" credit inflates asset prices for sure, but cannot inflate retail prices, since it is not money in circulation. The failure to make the distinction between secured and unsecured credit is IMHO what disconnects "Monetarism" from the "Real World" and makes it the complete bollocks it is.
My case is that it is possible for residential property "Occupiers" to invest in properties simply by:
(a) buying shares in a Company that owns property (eg www.opromark.com) - ingenious, but clumsy, impractical and unscalable;
(b) by putting property freeholds in trust, and either "unitising" rentals in a "Trust" wrapper (similar to Canadian Income Trusts) or "partnerising" by using a simple new partnership-based legal wrapper such as the US LLC or UK LLP to create proportional "Equity Shares" in rental streams.
The result of the latter is essentially a new - simple - form of "Real Estate Investment Trust" or REIT.
Moreover, and equally importantly, the convention is that Governments must borrow to invest - and Gordon Brown's "Golden Rule" convention aims at managing such borrowing over an Economic cycle of infinite (politically decided) flexibility.
Complete bollocks.
A Government may retain ownership of an asset; decide a reasonable (and probably index-linked) "Capital Rental" rate of return on these assets; package these revenues either by putting them into "Companies" (aka "privatising") "unitising" using trusts (clumsy) or "partnerisng" them, and sell the resulting asset classes to pension funds gagging for index-linked revenue streams.
Since in such "asset-based" finance there is no need to repay Capital, merely to charge enough for depreciation/ maintenance of the asset (the land, for instance, that constitutes a large part of most such "investment" does not depreciate), the cost of finance to the "Capital User" "Occupier" is dramatically less. Finally, where does the credit come from to invest in these assets? Simple. It's created interest-free by the Treasury under the supervision of the Monetary Authority, and with the Government retaining "Co-ownership" of the asset - particularly land - to back the Guarantee. Implementation of a rational - disintermediated - Capital Monetary system like this is the "Opportunity" but it is not yet lost, it's yet to be tried..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Finally, where does the credit come from to invest in these assets? Simple. It's created interest-free by the Treasury under the supervision of the Monetary Authority, and with the Government retaining "Co-ownership" of the asset - particularly land - to back the Guarantee.
Implementation of a rational - disintermediated - Capital
Considering how much of the US and UK is spending money that doesn't exist, this can't be true.
Mortgages are considered investments for the simple and rather obvious reason that property values increase steadily. Even when there's a bust, most people don't lose money on property, even when the total value of the repayment on a mortgage is considered. Some people, and lose badly. But considered across the market as a whole, they're a minority.
Traditionally people didn't remortgage much. Now it's much more common, and people are effectively asking for some of the value of their property as cash before the mortgage expires.
Since the advance equity is spent rather than saved or invested, it ends up in the retail market. It's hard to be sure if it pushes up retail prices there. But considering we're talking about a significant proportion of GDP, it seems unrealistic to assume that it can't have an influence.
Some of that retail expenditure will end up as profit, which will either be reinvested by shareholders or will be used to justify a higher lending amount on an existing mortgage by company owners and possibly also company employees.
So I'd suggest the effect is clearly inflationary. In fact I suspect that a significant driver of the recent boost in UK inflation has been the property bubble, which has not only pushed up prices, but also create a lot of imaginary liquidity which is being spent like there's no tomorrow. (And financially, for people with 5-6 times mortgages, there may well not be.)
That is true.
And to that extent - through the "Equity Release" mechanism - money is created which goes into circulation and potentially could be "inflationary" if it were not the case that most consumer prices, courtesy of outsourcing to China, have been consistently declining.
Property prices only increase because they are being "bid up" by "Money" backed only by an 8% capital cushion.
The practice of fractional reserve banking therefore leads directly to asset price inflation and indirectly - in relatively small part, I would say - to retail price inflation.
But when such an asset price bubble bursts - as it has in the US - stagflation is the inevitable result. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
