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Back to the Land

by ChrisCook Thu Oct 6th, 2011 at 05:11:00 AM EST

This article concerns the policy area where fiscal and monetary converge, and proposes the re-basing of domestic credit/money as a land-based currency.

Most existing fiat money is people-based - ie relies upon an IOU issued by an individual to a credit intermediary aka a bank - but it is land-backed - ie backed by a legal claim over land.

If you think about it, the bank's insistence upon the security of a mortgage implicitly recognises that land is productive in its own right - ie it has a value in use over time. The sale price of land is in essence the capitalised value of the future use value of the location and the capital invested/embedded in it and around it.

While the monetary system recognises the true basis of money, the fiscal system and the mainstream economics which rationalises it, does not do so for ideological reasons. For the most part the fiscal basis of taxation is the use value of Labour over time - which in my analysis may usefully be deconstructed as a combination of energy/manpower, and the intellect with which this energy is put to best use. The use value of land is pretty much ignored, since taxation of privileged property rights is anathema to the privileged who own, govern and manage the country.

John Law proposed a land-backed monetary system. That is to say that credit creation by banks would be secured by the income generated by leases over land.

I propose land basis for domestic currency and energy basis for international currency. Simply put a Land Rental Unit is a Unit issued by a custodian and redeemable in payment for rental value. So a Unit redeemable in payment for £1.00's worth of rentals may be sold for 80p and this gives a return of 25% upon redemption: but of course the rate of return depends upon exactly when the Unit may be redeemed, or if not redeemed then exchanged for other money's worth.

Back to the Land

Hong Kong as Financial Platypus
The discovery of the platypus in Australia created something of a dilemma for zoologists.  Some said that as a furry warm-blooded animal the platypus should be classified as a mammal: others held that because the platypus reproduces by laying eggs then it should be classified as a bird or a reptile. The solution was to create a new classification especially for the platypus.

Hong Kong is also in a class of its own as a monetary platypus which uniquely has no Central Bank as a lender of last resort.  Supervised by the Hong Kong Monetary Authority, Hong Kong's banks clear payments among themselves 'real-time'.

Hong Kong is also a fiscal platypus, uniquely gathering a large proportion of government income from the use value of land.  Very few countries have used land rental value as a fiscal basis to the same extent as Hong Kong, and those few which have - such as Denmark - have typically levied a local tax on land rental values.

Hong Kong gathered income through the creation and sale of long leases of public land.  The resulting 'Crown Rentals' collected from property developers had the effect of reducing the amount of taxation to be collected from Hong Kong's entrepreneurial businesses and citizens.  However, over the years the amount raised from the sale of long leaseholds has been reduced considerably - to the advantage of developers - through decreasing the discount rate applied in calculating the lease  premium.

Hong Kong is, like the platypus, an evolutionary oddity, with a track record of rapidly evolving its monetary and fiscal architecture in response to external circumstances.  This is due in no small part to an extremely flexible and talented cadre of officials in the relevant policy making institutions.

From 1935  to 1972 the Hong Kong dollar was pegged to sterling through a currency board arrangement, but the US dollar gradually supplanted sterling as a global reserve currency, and in late 1974, after a brief flirtation with a US dollar peg, Hong Kong let the HK$ float against other currencies without any formal intervention.

Since 1983, after a crisis in confidence, the HK$ has once again been pegged to the US$ within the Linked Exchange Rate System (LERS) which has two mirror image - strong side and weak side - defences against capital inflows and outflows:

Strong side defence at 7.75 HK$ - Upward pressure on HK$ > Currency Board sells HK$ > monetary base expands > interest rates fall > downward pressure on HK$.

Weak side defence at 7.85 HK$ - Downward pressure on HK$ > Currency Board buys HK$ > monetary base contracts > interest rates rise > upward pressure on HK$.

Decline of the Dollar
The  US Federal Reserve Bank responded to the credit crisis in 2008 by reducing dollar interest rates to zero, and by printing $trillions and using them to buy financial assets.  These monetary policies have had two adverse effects on Hong Kong.

Firstly, risk averse investors - NOT speculators in search of a transaction profit -  have been making financial purchases of commodities using vehicles such as Exchange Traded Funds. These inflation hedgers have perversely caused the very inflation they sought to avoid, and Hong Kong citizens have been particularly hard hit in respect of essentials such as food and energy prices.

Secondly, the low interest rates necessitated by the peg have exacerbated property price inflation.  Several international investors take the view that the Hong Kong $ is undervalued against the $ by around 30% and are placing major financial bets to that effect.  In their view, the question is not whether or not the peg arrangements will be changed, but when; and - the $64 billion question - to what?

Triffin's Dilemma
The economist Robert Triffin identified that where a global reserve currency is backed by interest-bearing debt - such as the US dollar, and sterling before that - then the result is that the issuer of that reserve currency will eventually become unsustainably indebted to the rest of the world.

In order for China to become the global reserve currency, and suitable for a Hong Kong currency peg, it would mean that China would not only have to cease its mercantilist export policy but also reverse this into a massive trade deficit.

Such a cosmic shift in Beijing's business model is sufficiently unlikely that the well publicised bet of Bill Ackman's Pershing Square Capital - that the Hong Kong $ will appreciate and adopt a Renminbi peg - appears to be an extremely long shot.

But if Ackman's thesis is accepted that the dollar peg is no longer sustainable, what other basis for the currency might there be?

Swiss Roll
The global tidal wave of money in search of a safe haven has forced the Swiss Franc (CHF) to levels which gravely threaten Swiss exports.  The Swiss National Bank  recently surprised the financial world by capping the appreciation of the CHF against the Euro at a level of €1.20.  But the innovation which blew away the speculators was   the announcement by the SNB that it would defend the cap simply by creating CHF and exchanging this money for foreign assets (and hence currency) without conventionally backing ('funding') this money with government debt.

The Swiss thereby demonstrated that on the 'strong side' they could defend the CHF against appreciation by printing - or even threatening to print - infinite amounts of CHF and exchanging these for foreign assets or currency.

The monetary orthodoxy is that this will cause inflation in Switzerland.  This is true only to the extent that the overseas holders of the currency are permitted to buy Swiss assets such as real property and stocks. Overseas holders of CHF do not typically spend them on Swiss domestic consumption to potentially cause retail price inflation.

This unorthodox monetary action by the Swiss blew away the myth that money must necessarily be backed by debt. The truth is that both central and private banks are simply middlemen - credit intermediaries - between people and government.   Modern fiat money is backed by the ability to use it to pay taxes, which in most countries are largely levied upon productive people rather than productive assets.

A simple but radical monetary and fiscal evolution for Hong Kong now enters the realm of the Adjacent Possible: land-based money.

Back to the Land
Land backing for bank created money is not a new idea. The remarkable Scottish gambler and adventurer, John Law, proposed a land-backed currency for Scotland in 1705, based upon central bank credit creation and backed by loans secured against leases.  

Unfortunately, when he applied his monetary expertise in France in 1719 he created not only the first recognisably modern central bank - the Banque Royale - but also the first asset price bubble driven by bank credit.  The land rights owned by his Mississippi Company over a third of the US land mass were not then worth what they are now, and Law ruined himself and France in the Mississippi Bubble.

The absence of a Central Bank in Hong Kong opens up the possibility of a more direct - 'Peer to Asset' - approach.  As freeholder, the government could declare a new ground rental on the unimproved value of Hong Kong land and then base the HK$ on this value simply through the creation and issue of credits redeemable in payment for HK$1.00's worth of rental.

The first fiscal effect of this ground rental would be to reduce speculative development pressure. Secondly, the resulting HK Rental Pool may then be distributed equally to all Hong Kong citizens as a Land Dividend. The effect of this would be of a net fiscal transfer from those with above average exclusive use of Hong Kong's scarce land, to those with below average use.

Finally, under suitable management by service providers and supervision by the Hong Kong Monetary Authority, this new source of HK public credit would be available to finance new infrastructure.  Such public investment would increase the ground rental value of the relevant land and enable the public credit to be retired and recycled out of the increase.

This Land Dividend would reduce the financial pressure on Hong Kong's poorest citizens and would do so through a pre-distribution of future wealth rather than a re-distribution of existing wealth.  Properly executed - and Hong Kong's executive are more likely than most to succeed - this fiscal policy should be Win/Win: the rich would in future receive a smaller share of a larger pie.

The monetary effect of a land-based HK$ would be of a currency with exchange control hard-wired into it.  Overseas holders could exchange the HK$ for other value with HK residents and businesses, but they would never be able to redeem it against HK rentals unless they resided in Hong Kong.

This simple and radical concept of a land-based Hong Kong Dollar would see the evolution of Hong Kong's two monetary and fiscal platypi into a new and resilient 21st century financial animal, still in a class of its own.

(Reproduced here by kind permission of Asia Times)

I see this proposal leading to one of two results: Law's bubble or feudalism.  I don't consider either to be particularly desirable.
by rifek on Wed Oct 19th, 2011 at 02:40:14 PM EST
If you would kindly explain how it is that a currency redeemable in payment for land rentals would cause a bubble in land prices compared to a currency which is not so redeemable, then I'd be interested in your logic.

As for feudalism, where on earth do you get that from? What makes you think that investment in future land rentals would give an investor the rights of a feudal landlord?

Throwaway and ill-thought responses like that do you no favours.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 19th, 2011 at 07:12:40 PM EST
[ Parent ]
Well, I may be missing everything, which I usually am, but I think that any time you back your currency with a particular commodity, you're heading for a problem, and the type of problem depends on access to the commodity.  In the late 19th century, the US government effectively tied its hands in addressing the serial recessions of the era by holding to a gold standard when there wasn't enough gold to go around, and a lot of what was available was being hoarded.  The situation didn't improve until the influx of bullion from the Yukon and Alaska strikes, and it wasn't really resolved until we abandoned gold and started backing the currency with the economy in general, which everyone had access to and a stake in.

If a state is actually going to redeem currency with real estate, there either has to be enough to go around to cover broad redemption, or redemption needs narrowed down, probably a lot.  If you go with a narrow system, a few holders would have real redemption rights, subject to use and commons rights held by everyone else.  Hence my feudalism reference.  If you go with broad redemption, you need a lot of fractional interests and derivative instruments that will be traded around but that are ultimately limited because the amount of real estate is limited (Even the US ran out of land to give away, and it didn't really take that long.).  Hence my fear of a bubble, especially when the derivatives get loose and it all starts going the same way mortgages did.

My other concern with broad redemption is that it will become narrow, which seems to be the tendency.  Mere mortals get shoved out by ever bigger players.  Witness the banking industry and securities markets, or on the real estate side, tribal lands here in the US after P.L. 280 and termination policies or council housing in the UK after Thatcher.

by rifek on Thu Oct 20th, 2011 at 01:42:57 PM EST
[ Parent ]
Land is not a commodity: it is a factor of production or source of value. Location, and the capital invested in it. has a use value over time, aka rental value. The fact is that two thirds of 'fiat' money in existence is people-based (the loan is to the owner, not the land) and is backed by a claim over land - a mortgage.

If you think about it, the sale price of land & buildings which backs mortgages is effectively the net present value of future rentals.

If you have a state issuing currency then this currency is redeemable in payment for taxes.  The problem is that very little tax is actually levied on unearned income from land, and most of it is levied on earned income from labour.

But if one were to have land-based currency this would not be through the ability to redeem it against ownership of land but rather against the rental value of land. This is actually quite straightforward to do, by having land held by a custodian (which could be the existing owner) and enabling the issue of units redeemable in payment for (say) £1.00's worth of rental value.

If the Unit is issued at 80p the result is a return of 25% upon redemption: but what determines the rate of return is the time of redemption, and this may depend on many things.

The broadening of redemption may be achieved through paying dividends of units within communities; enabling occupiers to pay rentals in 'sweat equity', and so on.

Also, note that land-based currency would be just one - geographically fungible  - currency. Others could include currencies backed by energy, and by Labour.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Oct 20th, 2011 at 10:04:02 PM EST
[ Parent ]
Sorry, Chris, I'm just an old peasant.  When I see "land-based", I think land.  What you're describing there is backing the currency with an income stream, which seems more modernly orthodox and flexible.
by rifek on Thu Oct 20th, 2011 at 11:59:11 PM EST
[ Parent ]
But the main income stream Chris is talking about is a land rental value stream.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Oct 21st, 2011 at 02:49:10 AM EST
[ Parent ]
True dat

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Oct 21st, 2011 at 08:27:10 PM EST
[ Parent ]
And this is apparently where I'm getting confused.  The US$ is already significantly backed by land-based revenue streams, which is what the ability to buy into a REIT or other real estate holding entity is.  What is this proposal adding?  REITs for government land?
by rifek on Sat Oct 22nd, 2011 at 12:05:06 PM EST
[ Parent ]
It seems to me that what you are proposing is simply a needlessly convoluted way to shift taxation from labour to rental value, by requiring the sovereign - or some proxy for same - to take all land into custody and rent it out, thus substituting its new rental income for the current tax income.

The incidence of taxation is an expression of political power. If you have the political power to move to a monetary system that requires the state to collect and/or tax away a greater proportion of the rental value land than it does today, then you also have the political power to just tax landowners (unless you wish to assume that landowners are stupid - for which there may be a case to be made).

And if you do have the power to tax landowners, then taxing them will be superior to your proposal, because your scheme will not break down gracefully if power swings back to the landholders: A reprivatisation of the land will allow landholders to hold the monetary system hostage until you go off the land standard. That encourages a positive feedback loop going in the wrong direction, to borrow one of ATinNM's stock phrases.

You're basically proposing a fiat system in a cheap tuxedo and with an open back door for takeover by landholders as well as banksters.

Do. Not. Want.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 24th, 2011 at 05:42:58 AM EST
[ Parent ]
Who said anything about the custodian being the sovereign?  A plague on sovereigns.

That may be the case for Hong Kong, but their system is defective in many ways: it just happens to monetise (indirectly via the government as intermediary) far more land value than virtually anyone else.

Which I think is a Good Thing tax-wise.

What I am proposing is essentially a loan direct to the land, not to the owner.

The difference is that in this loan, no money is paid for the use of money, but rather, money is being paid for the use of the capital invested in a particular location, both publicly and privately.

I can demonstrate conclusively that - as should be intuitively obvious - a funding cost that does not include compound interest is lower than one which does.

Also, I think that a currency redeemable in payment for such a rental payment would be generally fungible in a location.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Nov 1st, 2011 at 09:33:46 AM EST
[ Parent ]
Who said anything about the custodian being the sovereign?

Managing the monetary system is a sovereign function, because the sovereign is the only economic actor within its jurisdiction that is solvent by fiat rather than balance sheet.

Making a monetary system without a sovereign that's actually sovereign is - eh - not wise, as the EU has been quite instructively demonstrating for the next best thing to three years now.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 3rd, 2011 at 06:20:53 AM EST
[ Parent ]
Note to self: Perhaps deflation can be modeled as a bubble in legal tender.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 24th, 2011 at 04:52:58 AM EST
[ Parent ]

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