4

more than paid for itself.

This method of payment is extremely simple. There is no need to issue bonds or pay interest. Government just writes cheques to meet the cost. The reformists point out that by the time both interest and capital have been repaid on a bond there is more money in circulation and warn that the conventional method of funding by bonds tends to be more inflationary than their proposal.

I am not convinced that every project would be inflation free. The Humber Bridge has not brought the new economic activity to the south bank of the Humber that was expected. A failed project would result in inflation because there would be too little increase in economic activity to offset the new money printed.

A project such as the construction of a geriatric hospital would create little new economic activity because geriatrics are not 'economically active'. Inflation would be an even more certain result. Economics can be a dismal science!

The reformists would still print the money to pay for such projects, but would then gradually withdraw it from circulation again through increased taxation to correct the inflationary effect.

Borrow the money from a (foreign) banker

Money reformers also point out that commercial 'fractional reserve' banks simply 'create money out of nothing'. Their reserves are now only 5% or so of the money they encourage into circulation via cheques and credit cards. The other 95% is credit created by the banks and on which they charge interest.

Their reserves need not be increased when a loan carries no risk. Government will repay it, with interest, from taxpayers. They are therefore very willing to offer public loans (e.g. to PFI schemes). The new economic activity created by successful infrastructure will go via taxation to pay interest to the banks.

The situation is even worse if the bank is foreign owned. The repayments and interest are removed from their location of benefit to a foreign land. The bank is in effect an absentee landlord. This is the situation of third world countries which have borrowed from the rich.

Other factors - Exchange and interest rates

A site has a rental value that expresses the economic return that can be earned at that location. Its capital value is equal to the sum that would have to be invested at interest to bring in the expected future returns. The sale values of sites therefore depend on the prevailing interest rate. Company, individual and even country fortunes depend on the stability of capital values. It is these that central bankers such as Messrs Greenspan and George attempt to stabilise by manipulating interest rates. They attempt to counter changes in business confidence due to speculations such as the internet bubble.

Their efforts are complicated by the banks who can now move currencies from place to place in an instant. Exchange rates, interest rates, the level of taxation and confidence all have to be taken into account.

It is a pity that capitalised values now play such a dominant role. It is the annual earnings and rental values that are far more stable and a much better indicator of true economic health.

Brief References:

"Taken for a Ride" by Don Riley ISBN 1 901202 00 3

Centre for Land Policy Studies, 7 Kings Road, Mddx., TW11 0QB.

"What is Land Value Taxation?" see www.landvaluetax.org

"Why only in Fantopia" by James Gibb Stuart ISBN 0 947621 13 X

Ossian Publishers Ltd., 268 Bath Street, Glasgow, G2 4JR.

ENRONITIS: The Corporate Illness

James Gibb Stuart

I had a onetime business colleague who, becoming embroiled in other entrepreneurial distractions, brought in a contracts manager to look after his family company. The deal was that, as an incentive, the new man would be paid a percentage of turnover.

For a while everything went well. The turnover increased dramatically. The company was winning contracts far and wide, and the labour force was working to full capacity, under a manager who seemed to have the golden touch.

Only at the end of the financial year did my colleague experience some misgivings, when he was asked to sanction a large increase in corporate indebtedness.

It made him look more closely at the trading records since the new manager took over. He found to his dismay that most of the contracts on the order book were being carried out at less than cost.

Because the new manager had been given a turnover bargain, it paid him to get turnover regardless.

Index

Next

Back